Thursday 27 August 2015

Capital III, Chapter 13 - Part 14

Looking at the rate of profit at the level only of the individual commodity/industry, therefore, Marx says,

“Outside of a few cases (for instance, if the productiveness of labour uniformly cheapens all elements of the constant, and the variable, capital), the rate of profit will fall, in spite of the higher rate of surplus-value, 1) because even a larger unpaid portion of the smaller total amount of newly added labour is smaller than a smaller aliquot unpaid portion of the former larger amount and 2) because the higher composition of capital is expressed in the individual commodity by the fact that the portion of its value in which newly added labour is materialised decreases in relation to the portion of its value which represents raw and auxiliary material, and the wear and tear of fixed capital. This change in the proportion of the various component parts in the price of individual commodities, i.e., the decrease of that portion of the price in which newly added living labour is materialised, and the increase of that portion of it in which formerly materialised labour is represented, is the form which expresses the decrease of the variable in relation to the constant capital through the price of the individual commodities.” (p 226-7)

However, Marx points out that even at the level of the individual commodity, if we calculate the effect on the basis of the price of the commodity, we will again be led into error, because of the difference, demonstrated previously, of calculating the rate of profit on the laid-out capital rather than on the advanced capital. In other words, a failure to take into consideration the rate of turnover of capital, which itself must rise alongside the same causes that raise the organic composition.

The rate of profit that Marx is referring to here is s/c+v, which is the same as the profit margin, which can also be written as p/k, where p is the profit, and k is the cost of production. This is made clear by Marx in Theories of Surplus Value, Chapter 16, where he writes,

"{Incidentally, when speaking of the law of the falling rate of profit in the course of the development of capitalist production, we mean by profit, the total sum of surplus-value which is seized in the first place by the industrial capitalist, [irrespective of] how he may have to share this later with the money-lending capitalist (in the form of interest) and the landlord (in the form of rent). Thus here the rate of profit is equal to surplus-value divided by the capital outlay."

But, Marx and Engels specifically distinguish between the "capital outlay", and the capital advanced. The capital advanced, is the capital advanced for one turnover period, whereas the capital outlay is the total amount of capital laid-out during the year. As Engels describes in Capital III, Chapter IV, and as Marx himself refers to in Chapter 13, the rate of profit is calculated on the laid-out capital, whilst the real rate of profit, or annual rate of profit is calculated on the advanced capital. Two completely different figures and sets of conclusions arise from these different rates of profit, as will be demonstrated.

If the rate of profit is calculated on the basis of the cost-price of commodities, p/k, i.e. on the basis of the laid-out capital, for the year, then the rate of profit can only be the same as when calculated on the basis of the advanced capital if the advanced capital is only turned over once during the year. This is very unlikely. Moreover, the cause of the rise in the technical composition of capital, which brings about a rise in the organic composition of capital, is the rising social productivity of labour. But, it is that same rise in productivity which continually reduces both the production time and the circulation time of capital, thereby continually increasing the rate of turnover of capital, and the annual rate of profit along with it.

Engels gives three examples to demonstrate. In the first, a capital of £8,000 produces 5,000 pieces, sold at £1.50 each. The cost price of each piece is £1, leaving £0.50 as profit. The assumption Engels makes here is that the circulating capital is turned over just once during the year, so the laid out capital is £1 x 5,000 pieces = £5,000. If we calculate the rate of profit on this laid out capital, it is then equal to the profit (5,000 pieces x £0.50 = £2,500) divided by the laid out capital of £5,000. It is then 2500/5000 = 50%. But, the total advanced capital is not £5,000 but £8,000, presumably because, although Engels does not specify it, the firm employs a further £3,000 of fixed capital. If we calculate the rate of profit on the total advanced capital, it is then 2500/8000 = 31.25%.

In the second example, the capital rises to £10,000, and symptomatic of the rising social productivity of labour, the capital produces twice as many pieces – 10,000. The commodity has a cost price of £1, and is sold at £1.20 per piece giving a profit per piece of £0.20. The laid out capital is then 10,000 x £1 = £10,000, and the profit is 10,000 x £0.20 = £2,000. The rate of profit calculated on p/k is then 2000/10,000 = 20%. The total advanced capital, in this case, was also £10,000, and so the rate of profit, calculated p/C is also 20%.

In the final example, the total advanced capital is £15,000. Again reflecting the growing productivity of labour, this larger capital produces now 30,000 pieces in a year. The cost price per piece is £0.65, giving a total laid out capital for the year of £19,500. In other words, the laid out capital here is greater than the advanced capital, by £4,500. The reason for this is that the circulating capital turns over more than once during the year.

In other words, of the firm's £15,000 of capital, £10,000 may be in the form of fixed capital, with just £5,000 of circulating capital. It is only the circulating capital plus the wear and tear of the fixed capital that goes into the cost price of the commodity. In that case the laid out capital of £19,500 may represent approximately three turnovers of this advanced circulating capital.

The profit per piece is £0.10 which means the total profit is 30,000 x £0.10 = £3,000. The rate of profit calculated on the laid out capital is then 3000/19500 = 15.38%. But, calculated on the advanced capital of £15,000 3000/15000 = 20%.

In other words, the higher the rate of turnover of capital, the higher the annual rate of profit. But, we know that the same processes that lead to a higher technical composition of capital also result in this higher rate of turnover of capital, and therefore, a higher rate of profit. We know too as Marx sets out that these same processes lead to a relative reduction in the proportion of fixed capital to circulating constant capital because these processes mean that in addition to the devaluation of fixed capital, via moral depreciation, technological development means that one new machine replaces several older machines etc. As the proportion of fixed capital to circulating constant capital falls, so this gives a powerful boost to the rate of turnover of capital, and, therefore, to the rate of profit.

This reality is usually missed in calculations of changes in the rate of profit, because the rate is usually calculated on the basis of the laid out capital, p/k, rather than on the advanced capital, p/C, or more correctly s x n/C, where s is the surplus value for one turnover period, n is the number of turnovers during the year, and C is the advanced capital for one turnover period.

When this continuous increase in the rate of turnover of capital is taken into consideration, it can be seen why it acts as a necessary and powerful force leading to a rise in the annual rate of profit.

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