Friday, 12 July 2013

The Rates Of Profit, Interest and Inflation - Part 5

The Rate Of Profit (4)

The Rate Of Turnover Of Capital

Most estimates of the Rate of Profit are not how he
did it.
In previous parts, I have argued that most estimates of the rate of profit are wrong For a number of reasons. These estimates are usually based on the US, which is a mature economy, in significant relative decline. It is then not a good representative of the condition of global capital. Secondly, these estimates are not estimates of the rate of profit, but usually only of the rate of surplus value. They do not include the circulating constant capital, and so, although they overstate the actual rate of profit to that extent, they understate the change in the rate of profit, over the last 30 years, because they do not take account of the diminution in value of that circulating capital, resulting from a huge rise in productivity. Nor do they take account of a diminution in the relative quantity of circulating capital, at least in some of the most important sectors, arising from a change in the structure of production and consumption, and the introduction of new materials, more efficient use of existing materials etc. Finally, they are wrong because related to the latter point they fail to take account of the fact, that in some of the most important, and most rapidly developing sectors of the economy, it is not constant capital which is the most important contributor of value, but the employment of significant quantities of highly skilled, highly valued, complex labour. As a result, in large sectors of the economy, there is not a tendency for the rate of profit to fall due to a rising organic composition of capital, but the exact opposite!

In this part I want to show that these estimates most grossly underestimate the rate of profit because they fail to take account of an aspect that Marx and Engels specifically detailed as having a crucial role upon it. That is the consequence of the rate of turnover of capital.

Marx first details the consequence of the rate of turnover in relation to variable capital, and the effect on the rate of surplus value in Capital Volume II – Chapter 16. He, and Engels elaborate on this in relation to the rate of profit in Volume III – Chapter 4 (NB.  In fact Engels wrote the whole of Chapter 4. )

In analysing the effect of turnover on the creation of an annual rate of surplus value Marx examines the circuit of capital, breaking it down into the production period and circulation period. The production period includes the working period – essentially the time when workers are actually employed in production – and the production time, which includes the actual time that a commodity requires before it can become commodity-capital ready for sale. The production time differs from the working period, because some commodities like wine have to stand without any labour being expended upon, or like crops have to simply grow before they can be harvested. The circulation period is comprised of two components. Firstly, there is the time required between money-capital being in place, and it being able to acquire means of production and labour-power. If materials have to be bought from a long distance, for example, it may be necessary to hold larger stocks to account for any delays or stoppages in supply. That means more money capital has to be available to purchase this larger productive supply. Secondly, there is the time that it takes between the commodity-capital being ready for sale, and the sale taking place, and the proceeds of the sale being available as money-capital to once more buy productive-capital.

In short, any individual capital must have sufficient money-capital available so that it can maintain production on a continuous basis throughout the whole of this process. This is the capital it must ADVANCE. But, its clear that the capital that has to be advanced, is different from the capital that is LAID OUT over say a year. The difference depends upon how quickly the capital is turned over, which is the inverse of the period of turnover. In other words, if a capital turns over 10 times in a year, its period of turnover is a tenth of a year.

For example, suppose I have a business producing and selling ice cream. Assume I can acquire the necessary materials immediately, so there is no circulation time there. I produce enough ice cream that I know I can sell every day. The materials cost me £100, and my wages amount to £20. I lay out this capital at the start of day one, and produce the ice cream first thing in the morning. During the course of the day, I sell all the ice cream, which brings in £140, producing, therefore, £20 of surplus value. The rate of surplus value here is 20/20 x 100 = 100%. The rate of profit is 20/100 + 20 = 16.66%.

At the end of the day, I have my original capital of £120 returned to me, and can now use it to buy my constant capital and labour-power ready for the next day. However, if we assume there are 350 working days in a year, over a year, I will have laid out 350 x £100 for constant capital = £35,000. I will also have laid out 350 x £20 = £7,000 for variable capital. The total capital laid out in the year amounts to £42,000, even though I have only ever advanced £120! The advanced capital has kept returning to me to be laid out over and over again. The only capital I needed to start and continue this business was just £120.

Looking at the surplus value. It equals 350 x £20 = £7,000. Measured against the total wage bill for the year of £7,000, this represents a rate of surplus value still of 100%. Similarly, measured against the total capital laid out of £42,000, it represents a rate of profit of 16.66%.

But, of course, as Marx points out this is a false picture, and one the capitalists are more than happy to present via their accountants, and accountancy practices. This indeed, is how the firms accounts would be presented, and how their rate of profit would be calculated. But, it is precisely on this basis of the laid out (variable) capital that the estimates of the rate of profit for the economy are calculated. The reason it is wrong, as Marx points out is that the capital actually advanced is only £120! If the surplus value is measured against the capital advanced rather than laid out, you get completely different figures.

The variable capital advanced is £20, and the surplus value is £7,000. On this basis the rate of surplus value is 7000/20 x 100 = 35,000%!!! The rate of profit is 7000/120 x 100 = 5833.33%!!! This rate of surplus value is what Marx calls the annual rate of surplus value. It is equal to the rate of surplus value multiplied by the number of times the capital turns over – here 350. Similarly, rate of profit is actually equal to s x n/c+v, where no is the number of times the capital turns over.

The significance can be seen if we compare this situation with some different capital, which only turns over once in a year, but with the same organic composition. That is it must every day lay out £100 for constant capital and £20 for variable capital. Again for simplicity we will assume that there is no circulation time, so that it is able to immediately obtain the productive-capital it requires, and can sell its commodity-capital, and obtain payment immediately upon completion of production.

In that case, in order that this capital can commence business, and continue production, it really must have available £42,000 of money capital. Every day, it draws £120 of this capital and pays out £100 for materials and £20 for labour-power. At the end of the year its variable capital advanced amounts to £7,000, and with exactly the same 100% rate of surplus value, it produces £7,000 of surplus value.

The point is that if the rate of turnover of capital increases, then the annual rate of surplus value rises proportionately, and so does the rate of profit. Anything that reduces the turnover time of capital increases the rate of turnover, and thereby raises the rate of profit. There are several ways this turnover period can be reduced. Firstly, any increase in productivity will mean that a given quantity of production will be produced in a smaller amount of time. This reduced the working period of the capital. Secondly, in industries like agriculture, the production time can be reduced by growing a series of crops that can be rotated, so that one is planted as another is harvested etc. In some chemical based industries the use of alternative chemicals can reduce the production time e.g. Marx cites the use of new chemical dyes. Thirdly, the circulation time can be reduced by a variety of methods. Productive capital can sell its commodity-capital to wholesalers who specialise in distribution, and ensure that money-capital is returned to the productive capitalist much sooner than if the producer had to sell it themselves. They can utilise money-capitalists so that they only have to obtain money-capital when they want to buy productive capital. Improved transportation means that not only can inputs be bought in smaller more frequent batches, reducing the amount of productive-supply that has to be held, but commodity-capital is shipped to markets faster, so it is sold faster. Similarly, anything that speeds up the process of payments – e.g. improvements in banking and financial services, use of new electronic methods of payment etc. will ensure that once commodities are sold, they are converted once more into money-capital ready to be utilised to buy productive-capital once more.

If we look at the last 30 years, it is clear that there have been dramatic improvements in all of these areas. The introduction of robotics in production has revolutionised productivity levels, as has the use of new Japanese style production techniques based on flexible specialisation, Toyotism, or neo-fordism. Moreover, along with these has gone the introduction of Just In Time, which is not just a system of stock control, but involves the adoption of similar methods throughout the production process. It revolutionises the levels of productive supply large and medium sized enterprises need to hold, slashing the time of the first stage of the circulation process. But, this same process means that outputs are also more frequently shipped in smaller batches on a regular basis, made possible also by a revolution in transport via containerisation, logistics etc.

But, production times have been slashed for another reason. The shift away from industrial production towards service industry means that commodities no longer have to go through a production process per se, before being shipped, and then consumed. As Marx sets out in Volume II in relation to transport, the very act of production is also and immediately the act of consumption! When someone goes into an expensive restaurant, or even an inexpensive restaurant, the act of production and consumption are essentially simultaneous. Moreover, the conversion of the commodity-capital into money-capital, is also almost immediate, taking only as long as the cash to be banked, or credit card processed. When someone goes to see Robbie Williams live on stage, or Manchester United play on a Saturday afternoon, the production and consumption are literally simultaneous. The instances of this kind of transformation are numerous and significant.

Given that in the last 30 years, services have gone from being 57.2% to 78.2% of the British economy, the importance of this shift can be appreciated. Even where production and consumption are not simultaneous, the changes wrought during that period mean that the production and circulation period has been reduced significantly for other reasons. The Internet means that today, music does not have to be produced on a physical media, shipped all around the globe, and then to record shops, before being bought, paid for, and those payments finding their way back to the producer. Today, a song, film, computer game or other artistic piece of work can be produced, and made immediately available on the Internet, available to be downloaded and consumed immediately, and by the same token can be paid for online, the payment processed almost immediately.

But, also in the last 30 years, the development of financial services and banking has massively speeded up the circulation period. The development of international clearing systems, the establishment of a vast array of futures markets for commodities and so on have again revolutionised these transactions, speeding money-and commodity capital on its way throughout its circuit.

Quantifying some of the changes I have listed here and in previous posts would require far more resources than I have available. But, I think from what has been outline it can be seen that the omission of the circulating constant capital significantly misstates the rate of profit, just as it understates the rise in the rate of profit, due to the factors outlined previously. Similarly, a failure to take into account the rate of turnover seriously understates the rise in the rate of profit, and its absolute level.

I have no way of ascertaining the actual rate of turnover of capital, or even accurately determining how it might have changed. Consequently, I have used a proxy, which if anything, and particularly over the last 30 years, understates the rise in the rate of turnover. I have used the average annual increase in productivity, which most estimates put at around 2%. It is the best proxy available, because the rise in productivity directly affects the working period, and important elements of the circulation period, i.e. transport times.

To illustrate the effect I have used Doug Henwood's estimate of the pre-tax profit rate as a base. I have extrapolated data from his chart, and plotted the rate of profit based on five yearly data points. I have used smoothing so that the more erratic movements are removed, which means that the actual trends in the movement are more readily seen. I began by then adjusting these profit rates in line with a 2% p.a. cumulative increase in the rate of turnover, starting with a base rate of turnover of 1 in 1950. I then realised that, in fact, the changes in productivity growth would likely be greater during periods of Long Wave Winter and Spring, for the reasons I have described earlier. So I plotted a second line in which the rate of turnover was increased by 2.5% during those periods, 2% during the Summer phase, and 1.5% during the Autumn Phase. In fact, it made little difference.

As can be seen the result is dramatic. According to Henwood's chart, the rate of profit currently is around 7%. On an adjusted basis to take account of changes in the rate of turnover, it would, on this basis be three times higher, i.e. the rate of turnover today would be three times greater than it was in 1950, with a consequent effect on the real rate of profit.

If, the other factors I have listed are taken into account, I think there can be no doubt that over the last 30 years there has been a significant rise in the rate of profit. That increase in the rate of profit has been reflected in the development of whole new, dynamic capitals in China, India and other parts of Asia and indeed the globe, as well as the development of a number of huge companies that did not even exist 30 years ago, or if they did were essentially only in embryo, such as Microsoft, Apple, Google and so on. Since the start of the new Long Wave Boom it has been reflected in a sizeable increase in global GDP, which doubled in the first decade of this century,a s did global fixed capital formation. The rise in the rate of profit over the last 30 years has been reflected in the development of huge cash hoards on company balance sheets, and in sovereign wealth funds, alongside that significant increase in capital accumulation. The same forces that contributed to this huge rise in profitability also brought about a massive increase in productivity reflected in the huge expansion in the volume and range of use values produced, and in a momentous reduction in the values of those commodities. That reduction did not result in a large scale global deflation, only because capitalist states during that period massively devalued their currencies by the expansion of credit money. But, it is the massive hoards of potential money-capital, not the money printing that is the cause of the 30 year down trend in global interest rates.

As Marx points out, money held as a hoard is not money-capital. It is only potential money-capital. These vast money hoards do not represent an overproduction of capital, as some have tried to say, for that reason alone. They are no more an over production of capital than are the normal money hoards that businesses accumulate to cover the normal circuit of capital, to cover the depreciation of fixed capital, or to build into sufficient quantity to be used as actual capital accumulation. They do not represent some kind of crisis of capitalism, but the very reverse, an indication of its massive expansion, dynamism, and potential for future growth, as and when these money hoards are put to working in the purchase of productive capital.

In the next and final part in relation to the Rate of profit, I will look at what the turn of the Long Wave cycle means for the rate of profit from here, and what it means for the use of these money hoards, and consequently for interest rates. I will then in future parts look specifically at interest rates, and then the implications for inflation.

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