|Source: Doug Henwood.|
The Rate Of Profit (3)
The Organic Composition Of CapitalIn Part 3, I showed that estimates of the rate of profit are wrong because they do not include a major element of capital, i.e. the circulating constant capital. Often they are just estimates of the rate of surplus value, at best they are estimates of surplus value measured against the variable capital, and fixed capital. As a consequence, although they overstate the rate of profit, they understate the rise in the rate of profit over the last 30 years arising from the significant reduction in value (and in some cases physical quantities) of constant capital used in production.
The reduction in the value of this constant capital arises from a number of factors. Some of that has been mentioned in relation to the “Moral Depreciation” of the fixed capital. If we look back at the 1980's slump, it was the start of the Long Wave Winter Phase. During that period, global growth slows to below its average level, so the demand for inputs of various kinds, including materials falls. However, in the preceding boom phases of the Long Wave, particularly in the Spring Phase, high levels of demand for materials pushes up primary product prices. We have seen exactly the same thing in the current boom, as prices for materials, foodstuffs etc. rose sharply after 1999.
The following Chart illustrates the situation with copper.
Trends In Copper
“As a result of booming demand, operating profits in the copper industry have grown dramatically – operating margins up from 8% in 2001 to 38% in 2005. So why does copper supply not increase faster, as the industry clearly has plenty of cash to invest? To answer this question, we need to look at the basic economics behind investment decisions in the copper industry. Much of the added value in production of copper arises in the mining stage: only 25% of added value is in smelting / refining but the rest is in extraction and processing of copper ore. Thus the key supply constraint is the limited number of mines. When copper demand was lower, there was a surplus of production capacity and additional supply could be added simply by increasing throughput from existing mines. But supply cannot be increased indefinitely without additional copper production capacity, i.e. new mines. Despite the prevailing very high level of copper prices, copper supply from mines has not risen as fast as might be expected.
Copper Industry Investors Look at Long Term Prices
The economic theory is that when prices rise due to higher demand, supply will increase as it becomes possible to operate marginally economic mines at a profit due to the higher prices. The problem in practice is that copper is supplied from facilities that require huge investment in the mine and supporting infrastructure, and a major investment decision is required. A short-term rise in copper prices – even when sustained over several months - does not necessarily change industry investors’ perceptions of the long-term copper price. Mining companies will not invest in a project unless their expectations of long-term prices are at a level where the project becomes attractive.”
This is precisely the kind of phenomena of how and why firms build cash hoards when they are making large profits that Marx describes in Volume II of Capital. It also demonstrates why there is no mechanistic reason that capital, which is making large profits, and enjoying high prices for its commodities, necessarily is compelled to immediately invest those profits to accumulate. For a copper mine, the process from the initial prospecting, to completion and opening of the mine takes seven years. For the mine to reach its optimal operating level requires several years longer than that. In short, it can be around 12-13 years, before the effects of a Long Wave Boom, in producing levels of demand that cause prices and profits to rise, result in the necessary increase in supply. By the same token, a look at the movement from its previous peak (2004 $) of $3 per lb. to its trough in the late 90's of around $0.75 per lb. shows what happens when that increased supply comes on stream, and then faces a slowing demand, as the boom ends.
Global oil consumption rose from 63 million barrels per day in 1980, to 85 million barrels per day in 2006. That is an increase of 35%. But, between 1980 and 2012, Global GDP increased from $18.8 Trillion to $71.8 Trillion (1990 dollars). That is an increase of 282%! Even allowing for the 6 years difference in periods that means that global GDP rose by around seven times the increase in oil consumption. That is also despite the huge growth in the number of cars in places like China, which is now the biggest car market in the world. The reason that oil consumption has increased by only a fraction of the increase in global economic growth is because huge advances have been made in the efficiency of oil use. That is why in the 1970's a four fold increase in oil prices sparked a global slump, but from the late 90's a ten fold increase in the price of oil has not.
But, this revolution in the way oil is used is merely one example, of a process that has occurred across the global economy. On the one hand, an inability to increase supply quickly has pushed prices of primary materials higher, on the other this transformation of usage has meant that unit costs have fallen. As I have pointed out elsewhere - The Tendency For The Rate Of Profit To Rise – it is not just that there has been this revolution in the way materials are used. As always happens, in order to reduce costs, capital finds cheaper, better alternative materials to use. It replaced cotton and other natural materials, in the past, with synthetic materials like nylon, polyester etc. for example. About ten years ago, I became convinced of the Peak Oil Thesis, but I have never accepted the Malthusian conclusions that some draw from it. Capital uses science and technology to use oil more efficiently, and via things such as fracking, is able to extract more of it. I will come back to the consequences of this for the rate of profit later.
But, today, the revolution in technology and in the patterns of production and consumption that it has partly brought about, has itself changed the whole structure of demand for constant capital. As I point out in the post linked to above,
I pointed this out in a response to Paul Cockshott some time ago – Reply To Paul Cockshott.
I gave the following example.
We know that the output of Department II is equal to the traded output of Department I because both outputs exchange for each other and is equal to 1 billion hours. Whenever, then the output of Department II exchanges entirely for the traded output of Department I we know that to be the case, and we can calculate the value of Department II's output from it, provided that we assume that the labour employed in Department I is entirely simple labour.
What then do we have. We have a fall in population of 900,000 people. Yet we have the total output value of the economy remaining constant 10 billion hours from Department I, 1 billion from Department II. We also have the output of Department II remaining constant despite employment in Department II falling to a tenth its previous level. The basis of this is that the labour employed in Department II is no longer simple labour, it is complex labour each unit of it being the equivalent of ten units of simple labour.
By the same token, wages paid to this complex labour, with a constant rate of surplus value, will be ten times more than that paid to simple labour. This means that not only has output remained constant with a falling population, but average wages will have risen - because wages paid per person in Department I remain constant whilst, wages paid in Department II will have risen tenfold.
This, of course, assumes that the organic composition of capital in Department II has remained constant, i.e. all of the constant capital used in TV production amounts to exactly that previously used by 10,000 Music Halls. I would suggest, however, that this constraint is unrealistic. It is an unrealistic constraint to place on Marx in respect of a rising organic composition of capital leading to a tendency for a falling rate of profit, because empirical evidence showed that industrial production DID and does necessitate such a rising organic composition. I would suggest it is an unrealistic constraint for the scenario I am depicting of modern technological production, and the expansion of high value service production leading to a falling organic composition of Capital and tendency for the rate of profit to rise, because empirical observation DOES show on an extended scale the same kind of transformation given in the example above.
To give another example, take Manchester United. If we use current prices, let's say back in 1980, the product of one hour of abstract labour had a value of £100. On a Saturday, Manchester United's eleven players play for 2 hours to a crowd of 40,000, each paying £50, meaning the product of them is £2 million, or approximately £200,000 per player, giving £100,000 per hour. So each player's labour, as complex labour, is equivalent to 1000 hours of abstract labour.
Imperialism and The New International Division Of Labour. Back then, Services accounted for 57.2% of the UK economy. Today, they account for 78.2%. Back then industry accounted for 40%, today it accounts for just 21%. By nature, service industry tends to have a lower organic composition of capital, though neo-fordism is revolutionising that too. But, many of the areas of that production, are themselves based on high-value production, using very complex, high value labour. It is not just in Britain, where this transformation has taken place, and even in many rapidly developing economies, services already form a large part, often the majority of the economy.
Of course, this is like most things under capitalism a contradictory process itself. For example, to go back to the film industry, the porn industry has been a multi-billion dollar business. But, as I wrote a while ago, it has found itself getting screwed – Porn Free. That is because, thousands of people across the globe have been making their own porn, and uploading it to the net. Nobody will pay for porn when they can get it for free. But, even here the point is that this development has only been possible, because the cost of constant capital itself has been massively reduced by the factors described earlier. A decent film camera will set you back £20,000, but if the image quality isn't vital, then you can do the filming on a DVC costing a few hundred pounds, or even just your mobile phone, or digital camera.
But, there are more instances of the opposite movement, and as things like gene technology begin to develop a whole series of new high value products that trend will continue. In later parts, I will, however, argue that it will continue under different conditions than those of the last 20 years.
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