Saturday, 22 October 2016

Capital III, Chapter 49 - Part 5

What is true here for the farmer is true for the whole economy, in that for all capitals that comprise Department I, the producers of constant capital, a portion of the value of their output is effectively never traded, because it must always go simply to reproduce their own constant capital. The fact that, in reality, Department I is made up of a multiplicity of different capitals, each of whom sell their output to each other, as well as to Department II capitals, who require constant capital, to produce consumer goods, does not change this fact, when the totality of these exchanges is taken into consideration.

That becomes clear, if instead of being blinded by this multiplicity of individual sales, this overall social exchange is considered, by treating all capitals involved in producing means of production as though they were a single capital, and similarly treating all the capitals producing consumer goods. In that case, the actual situation can be seen clearly, by looking at the overall exchange between these two capitals as follows.

Department I

c 4000 + v 1000 + s 1000 = 6000

Department II

c 2000 + v 500 + s 500 = 3000.

Of Department I's output of 6000, 4000 is not traded, but is used solely to replace the 4000 of constant capital value used in its own production, constant capital which was itself produced in previous years. Only 2000 of the constant capital produced by Department I (equal to the new value created by labour during the year) is exchanged with Department II, and appears as its constant capital. The total value of Department II output, of 3000, therefore, constitutes the society's consumption fund, annual product, or national income.

This annual product of 3000 is purchased by the workers in Department I, who spend their £1,000 of wages, the workers in Department II, who spend their £500 of wages, the capitalists and landlords of Department I, who spend their £1,000 of profits, interest and rent, and the capitalists of Department II, who spend their £500 of profits, interest and rent.

The other £4,000 of total output value is accounted for by the £4,000 of constant capital consumed in the production of constant capital, which is reproduced as part of the current production, and simply replaces that consumed, to ensure that production continues on the same scale.

The only way in which the total output value could be equal to the annual product is if no constant capital was consumed in the production of constant capital. In other words, to go back to the example of the farmer, miller and baker it would require that the farmer used no constant capital in the production of the wheat. Alternatively, it would require that the constant capital used by the farmer was produced by some other capital that itself used no constant capital in its production.

That essentially is the position put forward by Adam Smith, who sought to avoid the problem by simply pushing back the question of the provision of the constant capital to some other supplier. But, as Marx points out, try as he might, Smith could not find any original starting point where the production occurs purely on the basis of the expenditure of labour without constant capital.

“The difficulty is two-fold. On the one hand the value of the annual product, in which the revenues, wages, profit and rent, are consumed, contains a portion of value equal to the portion of value of constant capital used up in it. It contains this portion of value in addition to that portion which resolves itself into wages and that which resolves itself into profit and rent. Its value is therefore = wages + profit + rent + C (its constant portion of value). How can an annually produced value, which only = wages + profit + rent, buy a product the value of which = (wages + profit + rent) + C? How can the annually produced value buy a product which has a higher value than its own?” (p 834-5)

Leaving aside the question of the fixed capital, only a portion of whose value enters the value of the annual output as wear and tear, and so considering only the circulating constant capital.

“This entire portion of constant capital consumed in production must be replaced in kind. Assuming all other circumstances, particularly the productive power of labour, to remain unchanged, this portion requires the same amount of labour for its replacement as before, i.e., it must be replaced by an equivalent value. If not, then reproduction itself cannot take place on the former scale.” (p 835)

Northern Soul Classics - Love Runs Out - Willie Hutch

Friday, 21 October 2016

Friday Night Disco - That's The Way Love Is - The Isley Brothers

Capital III, Chapter 49 - Part 4

A confusion arises because it appears that the value of this annual product does include the value of the constant capital consumed. In other words, if we look at the value of final output, it appears to consist not just of the new value created by labour [I (v+s) + II (v+s)] but, also of the value of all of the intermediate production – production of materials, components, machinery, energy etc. - required as inputs for this final production.

The confusion is then compounded by the fact that each of these commodities that comprise the intermediate production, are themselves the result of a production process that involves not just the creation of new value, as a consequence of labour expended, but also itself involves the use of a range of commodities which themselves comprise intermediate production.

Assume a fairly straightforward series of such processes. A baker produces 10,000 loaves with a value of £10,000. This value breaks down as follows:

New value produced by labour £2,000

Flour £8,000

Of the new value produced, £1,000 is paid as wages to the bakery workers, and £1,000 comprises surplus value, which is divided into profits, interest and rent.

If we look then at the flour, with a value of £8,000, this comprises the constant capital of the baker, and forms part of the intermediate production of the society. Of this £8,000 of value:

£2,000 new value produced by labour employed in milling

£6,000 constant capital in the form of wheat bought from the farmer.

Of the £2,000 of new value produced, £1,000 is paid as wages, and £1,000 goes to surplus value, and is divided again into profit, interest and rent.

Finally, of the £6,000 of constant capital this comprises wheat bought from the farmer. This again breaks down as:

£2,000 of new value produced by agricultural labour.

This £2,000 of new value is again divided £1,000 of wages and £1,000 of surplus value. But, what about the other £4,000 of value of the wheat?

The total value of production available for consumption in the form of bakery products is £10,000, but the total amount of new value produced by labour, and divided as revenue between wages, profits, interest and rent is only £6,000! If we take the total national income £3,000 as wages and £3,000 paid to capitalists and landlords, its clear that there is not enough national income to buy the total value of national output.

There is a shortfall of £4,000. A look at the above figures shows why this is the case. Of the farmer's production, which is the first element of intermediate production, only £2,000 of the value of output of £6,000 comprises new value, i.e. the value produced in this year. So, where does the other £4,000 of value in this production come from?

Quite simply, as with the baker and the miller this additional value comes from the constant capital used by the farmer. In other words, the farmer's output of wheat does not spring magically from just the expenditure of labour, creating new value this year. It also requires inputs at least in the shape of seeds, but in reality also fertiliser, machinery and so on. In other words, constant capital. But, this constant capital used in the production of the farmer is not output created this year, nor is it value created this year. The seeds and other constant capital the farmer uses in their production this year, is comprised of commodities produced last year, and in previous years!
The Physiocrats were ahead of Adam Smith, Marx says, because they recognised that the starting point for understanding national output, and social reproduction is last years' harvest/production.  They recognised that a part of the value of this year's production comprises the value of the circulating constant capital produced last year (and previous year's), and so provides no part of this year's incomes (National Income).  They also recognised that for the same reason the materials produced last year, and used this year in production, must be physically replaced, on a like for like basis, out of this year's production.  In this way, they avoided Adam Smith's "absurd dogma" that the value of output (c + v + s) can be resolved into revenues (s + v).  An absurd dogma that continues today in the idea that National Output equals National Income/Expenditure.
The reality is that the total value of output of £10,000 could not possibly all be comprised of revenue (wages, profits, interest and rent), and thereby consumed, because a portion of the total value of this output comprises not just new value produced, but also the value of constant capital (not fixed capital, but circulating constant capital, plus wear and tear) which is itself the consequence of production not this year, but in previous years. Not all of the total value of output can be consumed, because an equivalent portion of this output value must be set aside solely to replace this constant capital, produced in previous years, and used in this year's production.

If we were to restate the example, therefore, starting with the farmer we would have the following:

Value of wheat produced £6,000 made up

c 4000 + v 1000 + s 1000.

Of the farmer's production, £4,000 of the value is not sold, but as seeds is used to replace the seeds used in its production, and which were themselves the product of last year's harvest, not this year's production. The farmer then sells the remaining £2,000 of wheat to the miller. The miller's output then has a value of £4,000 made up of:

c 2000 + v 1000 + s 1000.

The miller then sells this £4,000 of flour to the baker whose value of output is £6,000, made up:

c 4000 + v 1000 + s 1000.

The baker's output constitutes the value of the society's consumption fund. It is equal to National Income and Expenditure, or the national annual product. In other words, it is equal to the new value created by labour during this year.

The baker's £6,000 of bread is bought by the worker's who spend their £3,000 of wages, and by capitalists and landlords who spend their £3,000 of profits, interest and rent.

But, its clear that although the society's consumption fund, its national product, and national income and expenditure is equal to £6,000, the total value of this society's production during the year was £10,000. This comprised the value of its national output, as opposed to its national income, or consumption fund.

The total value produced by the farmer was £6,000, and the miller added £2,000 of value to this making £8,000, whilst the baker added a further £2,000 of value to this making £10,000.

To be clear, the difference here is not accounted for by fixed capital, which only passes part of its value, as wear and tear, to the final commodity-capital. The difference does not arise because fixed capital is produced, in previous years, and only part of its value is consumed this year. The difference here does not comprise the fixed capital of the farmer, but his circulating constant capital, in the shape of his seeds.

Back To Part 3

Forward To Part 5

Thursday, 20 October 2016

Profit, Rent, Interest and Asset Prices - Part 8 of 19

When the rate of profit is high, the demand for money-capital will be high, but that same high rate of profit also means that the realised profits assume the form of potential money-capital. Firms may utilise it internally for accumulation, or else they may throw it into the money market. So, the supply of money-capital may also rise, causing the rate of interest to remain low, or even fall. Only when the demand for money-capital begins to outstrip the supply will interest rates rise. There is a constant interrelationship pulling in different ways, as was the case described above in relation to the rate of profit, accumulation of capital, demand for labour-power, movement in wages, and consequent changes in the rate of profit.

Here, rises in the rate of profit lead to a higher demand for money-capital for capital accumulation, but the higher rate of profit increases the supply of money-capital too, when interest rates do rise, the higher rate of interest causes the owners of money-capital to supply more of it, whilst industrial-capitalists seek to demand less of it, as higher interest payments reduce the ability for industrial capital to accumulate. As Marx describes all these interrelations, in Capital III,

“To this confusion — determining prices through demand and supply, and, at the same time, determining supply and demand through prices — must be added that demand determines supply, just as supply determines demand, and production determines the market, as well as the market determines production.”

(Chapter 10)

The basis for the increased supply of money-capital, when interest rates rise is clear. The profit produced by productive and commercial capital is divided into a number of different revenues. Landlords obtain rent from the productive and commercial capitals for the land that is leased by them; the owners of shares or bonds, obtain interest on the money-capital they have loaned; the functioning capitalists obtain profit of enterprise. Part of these various revenues must always be used by the recipients as revenue. In other words, as Marx points out in Capital II, simple reproduction always remains at the heart of capitalist reproduction, because the individual capitalists, and other appropriators of surplus value, must consume to reproduce themselves.

This too is a contradictory process. On the one hand, as capitalism develops, the capitalists begin to get a taste for the high life, and standard of living of previous ruling classes. On the other hand, the demands of competition mean that individual private capitals must accumulate capital from profits, rather than consume it unproductively, in order to retain and expand market share, so as to survive.

“It must never be forgotten that the production of this surplus-value — and the reconversion of a portion of it into capital, or the accumulation, forms an integrate part of this production of surplus-value — is the immediate purpose and compelling motive of capitalist production. It will never do, therefore, to represent capitalist production as something which it is not, namely as production whose immediate purpose is enjoyment or the manufacture of the means of enjoyment for the capitalist. This would be overlooking its specific character, which is revealed in all its inner essence.”

(Capital III, Chapter 15)

On the other hand, the continual revolutionising of technology and production that raises productivity and makes possible this increased rate of expansion, also reduces the value of commodities. The reduction in the value of commodities not only reduces the value of the constant and variable capital, so that any given mass of surplus value will buy more of those commodities, but it also reduces the value of all those commodities that the capitalists and other exploiters consume unproductively. Consequently, the proportion of the revenue that must be allocated to this simple reproduction is reduced, enabling that revenue to be transformed into additional money-capital.

When interest rates are high, they are more likely to convert their revenues into money-capital loaned to industrial capitalists for productive purposes. So, the supply of money-capital would rise pushing down on interest rates.

When interest rates are low, the owners of this potential money-capital are more likely to consume their revenues, be they in the form of rent, interest, or profit of enterprise, unproductively, whether it is buying more luxury goods, or engaging in financial speculation and other forms of gambling. Or they may utilise these revenues directly themselves as productive-capital so as to produce profit. In that case, the supply of money-capital would be reduced, pushing up on interest rates. 

“It would be still more absurd to presume that capital would yield interest on the basis of capitalist production without performing any productive function, i.e., without creating surplus-value, of which interest is just a part; that the capitalist mode of production would run its course without capitalist production. If an untowardly large section of capitalists were to convert their capital into money-capital, the result would be a frightful depreciation of money-capital and a frightful fall in the rate of interest; many would at once face the impossibility of living on their interest, and would hence be compelled to reconvert into industrial capitalists.” 

(Capital III, Chapter 23, p 378)

Considered globally, for example, huge reserves of potential money-capital have been accumulated in sovereign wealth funds. A lot of the money that flows into these funds comes from rents received by oil or other primary product producing countries. A proportion of those funds goes as actual loanable money-capital. In other words, it buys newly issued bonds or shares, which provides money-capital to businesses across the globe, which is then metamorphosed into productive or commercial capital. But, another portion has also been utilised for speculation, that is simply buying up, at inflated prices, existing bonds and shares, and other assets.

These sovereign wealth funds, in turn, as owners of fictitious capital, also obtain revenues in the shape of interest. They receive payments of coupon interest on the bonds they own, and dividends on the shares they own. This revenue, as interest, can also be utilised either as actual money-capital, that is metamorphosed into productive and commercial capital, or else can again be used for speculation, to again buy up existing bonds and shares, thereby pushing those prices higher once more. In addition, a country like Norway, which has a very large sovereign wealth fund, built up from the rents from oil production, may also utilise the revenue stream it produces to finance government expenditure to cover things such as pensions, and other welfare payments.

Similarly, countries like Norway, Russia and Saudi Arabia, utilised the rents they received from oil and other primary production to directly finance state expenditure. When primary product prices were high, these rents could finance this expenditure whilst leaving large surpluses available to be built up within the sovereign wealth fund. As primary product prices have collapsed – itself a consequence of previous capital over-accumulation, resulting from high prices and profits in those sectors – although the states continue to obtain rents, those rents have shrunk, and a greater proportion of them is required to finance state spending – consumption/revenue – leaving a smaller proportion available for conversion into money-capital. In the case of Saudi Arabia, it has gone from being a huge provider of potential money-capital, to being a borrower of money-capital, so as to finance its state spending.

But, the main form of wealth for private capitalists today, of the 0.001% of the population in each country, is that of fictitious wealth, of fictitious capital in the shape of shares and bonds, and property. Although, the astronomical inflation of these asset prices has caused a corresponding drop in yields on these assets, for that tiny minority that own these assets on such a huge scale, the actual amount of revenue they obtain is still huge. Take someone like Bill Gates with a personal fortune of around $40 billion. Even if he obtained a yield of just 1% p.a., on those assets, it would mean a revenue of $400 million a year, way beyond what any individual could rationally require, even with the most lavish of lifestyles.

In a global population of 7 billion the top 0.001% amounts to around 70,000 people with a similar amount of fictitious wealth as Bill Gates, and similar levels of revenue, or around $28,000,000,000,000 ($28 trillion of income). By comparison, global GDP, i.e. the new value created by labour, during the year, is around $70 trillion. These individual private money-capitalists, therefore, have huge annual revenues at their disposal in the form of interest and rent, which can be utilised either for unproductive consumption, for speculation, or else to be converted into actual money-capital. A marginal decision one way or the other to convert this revenue into money-capital, rather than to use it unproductively for consumption or speculation, therefore, can have a significant impact on the supply of money-capital.

Capital III, Chapter 49 - Part 3

By tightening down the definition to the realised surplus value, Marx ensures the division of the total annual social product must thereby be divisible into these revenues of wages, profit (interest plus profit of enterprise), and rent – we could for completeness add in taxes.

In other words, the total annual social product is equal to the amount of new value created by labour, during the year. This new value is now defined only in terms of that labour-time which is socially necessary, and thereby realised in the total of prices for that commodity-product. Irrespective of the total amount of actual labour performed during the year, therefore, the total social working day is divided into two components – that portion required to reproduce the labour-power, and the remainder thereby comprising surplus labour, and surplus value.

This forms the revenue of the society. The necessary labour component of the total social working day funds its equivalent in wages whereas the surplus component funds its equivalent in profits, interest and rent.

“The entire remaining portion of the working-day, the entire excess quantity of labour performed above the value of the labour realised in his wages, is surplus-labour, unpaid labour, represented in the surplus-value of his total commodity-production (and thus in an excess quantity of commodities), surplus-value which in turn is divided into differently named parts, into profit (profit of enterprise plus interest) and rent.” (p 834)

But, this appears to create a problem, as previously discussed in Capital II, which is, if the annual product is divisible into just wages, interest, profit and rent, what about the value of the constant capital used in that production. If the value of a commodity, and therefore, the total commodity-capital, is made up of c + v + s, how then can this be bought by just v + s (wages, profit, interest and rent)? 

The simple answer, as set out in Capital II, is that it can't, and isn't. The annual product only comprises the new product, and does not include the value of the constant capital. The only commodity-product which is bought is equal to this new value, which is equal to the sum of revenues – wages, profit, interest and rent – v + s – and which consequently is equal only to the labour expended, this year, in Department I and II, and consequently includes no value of constant capital, even though it appears that the value of constant capital has been taken into account, as “intermediate production”. In fact, this intermediate production value is only equal to the value of new labour performed in Department I, i.e. I(v+s) = II(c).

As Marx says in Capital II, Chapter 20,

“It must be noted in the first place that no portion of the social working-day, whether in I or in II, serves for the production of the value of the constant capital employed and functioning in these two great spheres of production.” (p 431)

The value of the total output for the year, however, is equal to C + V + S, not just V + S. Of the total output value, the value of C is not traded. It does not form a part of revenue. This portion of the total output value, goes to reproducing the constant capital consumed. Nor is this changed by the fact that with expanded reproduction, a portion of S is used, not as revenue, but for the purchase of additional constant capital. This is a purchase of commodities to be used as productive-capital rather than for consumption. But, this is in addition to the portion of total output value that goes simply to reproduce the consumed constant capital.

“Evidently, therefore, the value of the constant portion of capital is not reproduced in the annually created value of product, for the wages are only equal to the value of the variable portion of capital advanced in production, and rent and profit are only equal to the surplus-value, the excess of value produced above the total value of advanced capital, which equals the value of the constant capital plus the value of the variable capital.

It is completely irrelevant to the problem to be solved here that a portion of the surplus-value converted into the form of profit and rent is not consumed as revenue, but is accumulated. That portion which is saved up as an accumulation fund serves to create new, additional capital, but not to replace the old capital, be it the component part of old capital laid out for labour-power or for means of labour. We may therefore assume here, for the sake of simplicity, that the revenue passes wholly into individual consumption.” (p 834)

Wednesday, 19 October 2016

Capital III, Chapter 49 - Part 2

“The total working-day of the labourer is divided into two parts. One portion in which he performs the amount of labour necessary to reproduce the value of his own means of subsistence; the paid portion of his total labour, the portion necessary for his own maintenance and reproduction. The entire remaining portion of the working-day, the entire excess quantity of labour performed above the value of the labour realised in his wages, is surplus-labour, unpaid labour, represented in the surplus-value of his total commodity-production (and thus in an excess quantity of commodities), surplus-value which in turn is divided into differently named parts, into profit (profit of enterprise plus interest) and rent.” (p 833-4)

If the worker, here is considered as a collective social worker, and the working day as a single social working day, this is again tautologically true.

Marx here is tightening down his definition. On the one hand, he restricts the definition to what may be called an ideal type of capitalist production. So, he uses a definition similar to that developed in the Grundrisse, where Labour excludes Capital and Capital excludes Labour, except here he defines Labour as only labour performed within the context of capitalist production. So,

“Aside from this labour, the labourer performs no labour, and aside from the total value of the product, which assumes the forms of wages, profit and rent, he creates no value.” (p 834)

In other words, Marx here is tightening his analysis of production down to an analysis of capitalist production, and thereby excluding all of that production of value, which he clearly understood to continue to occur outside of that realm. For example, a considerable amount of domestic production continues, in practice, to occur, even today, and all of that production is value creating, even if the product is not marketed.

At the same time, Marx tightens down his definition, because he is no longer equating the total of price/value with the total of labour-time. By defining the surplus value in terms of the realised surplus value, rather than the produced surplus value, Marx brings his analysis closer to the real world.

There are a number of reasons why the value of commodities are not equal to the actual labour-time expended on their production, besides the fact that prices of production differ from values. For example, the value of a commodity is determined by the amount of socially necessary labour-time required for its production, not the amount actually expended on its production. Besides the fact that, for every single commodity unit, the amount of labour-time actually expended on its production will vary compared with that expended on every other individual commodity unit, and so from the average amount of labour-time, even this average amount of labour-time will only count as socially necessary if the total amount of labour-time expended on producing this class of commodity was necessary. In other words, if there is inadequate demand, for this quantity of the commodity, at this price, then some of the labour expended was not socially necessary.

"This point has a bearing upon the relationship between necessary and surplus labour only in so far as a violation of this proportion makes it impossible to realise the value of the commodity and thus the surplus-value contained in it. For instance; let us assume that proportionally too much cotton goods have been produced, although only the labour-time necessary under the prevailing conditions is incorporated in this total cloth production. But in general too much social labour has been expended in this particular line; in other words, a portion of this product is useless. It is therefore sold solely as if it had been produced in the necessary proportion. This quantitative limit to the quota of social labour-time available for the various particular spheres of production is but a more developed expression of the law of value in general, although the necessary labour-time assumes a different meaning here. Only just so much of it is required for the satisfaction of social needs. The limitation occurring here is due to the use value. Society can use only so much of its total labour-time for this particular kind of product under prevailing conditions of production.”

(Capital III, Chapter 37

Marx describes this condition of disproportion in setting out his theory of crisis in Theories of Surplus Value, Chapter 17, where he writes of such a condition of overproduction arising, as a result of revolutions in technology.

“(When spinning-machines were invented, there was over-production of yarn in relation to weaving. This disproportion disappeared when mechanical looms were introduced into weaving.)”

Some of the other reasons were set out above, such as the inability to pass on input costs and so on. By defining surplus value in terms of the realised surplus value, rather than produced surplus value, Marx removes this problem, in relation to the total social production. Whatever proportion of the total social working day may have been wasted, for example, in production that was not required, commodities which found no or inadequate demand, is manifest in a proportion of surplus value that is not realised.

Take the example of workers producing Sinclair C5's. Setting aside the labour-time involved in the production of the constant capital, 1,000 workers may work for 2 million hours producing them. They are paid a total of £20 million in wages, which are required to reproduce their labour-power. The commodities they buy with these wages require 1 million hours of labour to produce. Put another way, the value created by these workers is equal to £40 million, divided £20 million of variable-capital and £20 million of surplus value. But, this value of £40 million is only theoretical. If none of the C5's are sold, they have no value, the labour-time expended on their production was wasted. Although the workers performed 1 million hours of surplus labour, none of it could be realised. In fact, if none of the machines could be sold, the other 1 million hours of labour expended, would have to be deducted from the total social surplus labour-time.