Capital Consumes Itself

No Surplus Value Created in Department I

The proposition developed above See: Labour Power v Horse Power based on Marx’s analysis that slave labour cannot produce Surplus Value, any more than machine labour or animal labour – all can produce a surplus of Use Values i.e. they consume a certain amount of use values, but through their activity produce a greater volume of use values – says that in determining Exchange Value what is being measured is not simply average socially necessary labour-time – the average labour-time taken to produce something by a slave is “socially necessary” if society is taken as being all humans – but the average labour-time that must be taken by those that participate in the process of exchange. If some group does not participate in the process of exchange then their labour-time cannot be taken into account in the calculation. This is the importance that the introduction of wage labour has for Exchange Value obtaining its mature form under capitalism. Marx says,

“In production based on slavery, as well as in patriarchal agricultural-industrial production, where the greatest part of the population directly satisfies the greatest part of its needs directly by its labour, the sphere of circulation and exchange is still very narrow; and more particularly in the former, the slave does not come into consideration as engaged in exchange at all. But in production based on capital, consumption is mediated at all points by exchange, and labour never has a direct use value for those who are working. Its entire basis is labour as exchange value and as the creation of exchange value.

Well. First of all
the wage worker as distinct from the slave is himself an independent centre of circulation, someone who exchanges, posits exchange value, and maintains exchange value through exchange. Firstly: in the exchange between that part of capital which is specified as wages, and living labour capacity, the exchange value of this part of capital is posited immediately, before capital again emerges from the production process to enter into circulation, or this can be conceived as itself still an act of circulation. Secondly: To each capitalist, the total mass of all workers, with the exception of his own workers, appear not as workers, but as consumers, possessors of exchange values (wages), money, which they exchange for his commodity. They are so many centres of circulation with whom the act of exchange begins and by whom the exchange value of capital is maintained. They form a proportionally very great part -- although not quite so great as is generally imagined, if one focuses on the industrial worker proper -- of all consumers. The greater their number -- the number of the industrial population -- and the mass of money at their disposal, the greater the sphere of exchange for capital. We have seen that it is the tendency of capital to increase the industrial population as much as possible.”

Marx – Grundrisse p 419.

The question arrived at then from this is what about those goods that workers do not participate in the Exchange of – Producer Goods. The conclusion we should draw from the above analysis is that NO SURPLUS VALUE CAN BE CREATED IN THIS DEPARTMENT. The reason. Only capitalists buy Producer goods, and Capitalists can always acquire such goods at a cost less than the labour-time actually required for their production. They can do this by themselves producing them, and employing labour for this purpose that is paid less in wages than the value of its output.

Yet, this is counter-intuitive. We know that Capital producing these goods DOES make a profit. But we have come across this earlier. The slave owner produces no surplus value, yet the Capital of the slave owner receives its share of total profit. It is nothing more than the averaging out of the rate of profit. But a look at the actual relations shows that the proposition is valid, counter-intuitive or not.

Enterprises are in reality composites. Different departments of an enterprise undertake different pieces of work. A large enterprise might require the labour of solicitors for instance. The enterprise might employ a firm of solicitors to do this work. If it does so this firm of solicitors will seek to make an average rate of profit on the Capital they employ. The enterprise buying these services will have to meet the cost of this profit in the cost it pays for these services. If the enterprise is big enough, it might then decide to employ its own solicitors. It will then employ the same Labour Power as the firm of solicitors, but when it processes its accounts it will not add a profit figure for these services when it charges them to the business. The same is true say of engineering services that a firm needs for maintenance of its plant etc. A look at Marx’s Grundrisse explains what is happening. Marx goes into some length to describe the process whereby Capital is objectified Surplus Value. The enterprise that buys in these services from another enterprise has to objectify the Surplus Value created by the first enterprise in its own Capital. By taking over this operation the firm reduces its Capital requirements by reducing its costs, and by an equal amount to the Surplus Value no longer produced.

The consequences are significant.

Take two firms one in Department I, the other in Department II.

Department I
C = 100, V = 100, S = 100 Total 300, R = 50%

Department II buys the output = 300.

C = 300, V = 100, S = 200 Total 600, R = 50%

I am assuming price formation through transformation here to equalise R at 50%.

If either firm takes over the other we would instead have.

C = 200 (Made up of 100C + 100V in Department I), V = 100, S = 200 Total 500, R = 66.6%.

What has happened? Department II now acquires its Constant Capital without having to cover the profit of the firm in Department I, i.e. for 200 rather than 300. Its outlay on living labour for the transformation of these use values into their final form remains the same, and the surplus created by this labour also remains the same. However, this same level of Surplus Value is now related to a smaller outlay of Capital in total – 300 as opposed to 400 – and so the RATE of Profit rises from 50% to 66.6%. The consequence is that although the total amount of Exchange Value (Capital) circulating in the economy has fallen, although in correspondence the total volume of Surplus Value has fallen the rate of profit has risen.

Why? The conclusion can only be that previously the enterprise in Department I obtained its share of Surplus Value (its average rate of profit) by draining surplus value away from Department II – just as in fact an enterprise using slave labour drains surplus value from enterprises employing wage labour. The higher Rate of Profit now enjoyed should encourage other enterprises to enter this sphere of production, but the higher rate can ONLY be achieved if they too subsume production of their inputs into their own operations.

The clear conclusion is that Capitalism generates a powerful impetus towards vertical integration of enterprises, precisely because the calculation of Exchange Value for Producer goods by Capitalists alone (Capitalists who can always produce these goods at Cost themselves by entering production of them), means that competition amongst them will drive Exchange Value down to a level where Surplus Value disappears. If Capital continues to operate as a separate entity in this sphere and thereby receives average profit, it can only do so by draining Surplus Value from Department II.

But, as with other aspects of Capitalism there are countervailing tendencies to this law. Marx sets out how Capital which begins as a combination of Money Capital, Productive Capital and Commercial Capital, divides up into these three elements as separate spheres of activity. The reason is quite simple – specialisation. The whole basis of the Division of Labour is that specialisation on one aspect of the production process allows savings to be effective. If we go back to our original examples of solicitors and engineers it is quite possible that a large firm of solicitors or of engineers can even including its profits provide a service to our firm in Department II at a lower cost than the firm could do itself at cost. The reason is again simple. A specialist law firm can service the needs of many companies, and can thereby be of a size that enables it to enjoy economies of scale that a legal department within a single enterprise could not obtain. Yet it is clear that in many spheres where large amounts of Capital are involved, where the minimum size of operation is large there are good incentives for such vertical integration, and we can think of the oil companies as a good example, where this applies both backwards and forwards – backwards into the exploration, and drilling of the oil itself by the oil refiners, and forwards to the actual distribution and resale of the finished product.

There seems to be a contradiction here though. We have said earlier that what is significant is the calculation of necessary labour-time by those participating in the Exchange process, and it is the fact that wage workers as opposed to slaves participate in this process determining Exchange Value in accordance with the Labour-time required for production. Yet were a worker to be able to produce the finished product they would – unlike the capitalist – have to lay out the actual labour-time for the production of the Constant Capital that is used up in the finished product. This figure would be greater than the Exchange Value now calculated, because this Value now does not include the Surplus Labour-time of the workers in Department I – surplus only in the sense that it was provided over and above what they were paid for, not surplus in terms of the amount of labour-time required to produce the given amount of use-values.

This is true, but Capitalism is full of such contradictions. The reality of this contradiction has been explained earlier. The calculation of “Socially Necessary” can only be from the standpoint of those participating in the calculation. The reality is that those participating in this calculation are not homogenous – they divide into workers and Capitalists – we could also include Landlords – and the basis of calculation as we have seen of the two groups is different. The calculation of capitalists MUST always result in them having a LOWER calculation of Exchange Value than does the worker, for the reasons previously outlined i.e. they can always obtain a commodity at its cost, precisely because they can employ means of production, including the Labour Power of the worker. The worker cannot.

As Marx points out above the more production is production for the needs of workers, because workers form a larger component of demand “The greater their number -- the number of the industrial population -- and the mass of money at their disposal, the greater the sphere of exchange for capital” and as Marx sets out in the Grundrisse Capital IS Exchange Value in its mature form. It is for this reason that Marx sets out the situation were Capitalists able to do without workers, if they could organise all production to be by machines. In that eventuality there would be no surplus value. There would however, be an awful lot of surplus use values.

Capital Consumes Itself

But this is important too for the conclusions to be drawn from the above. In addition to the drive towards vertical integration outlined above, Marx also outlines the necessary drive of Capital not only towards concentration in general, but also towards the increase in the Organic Composition of Capital, towards the increase in the proportion of total output that is accounted for by Constant Capital in relation to Variable Capital i.e. to those commodities bought solely by Capitalists as opposed to workers. The conclusion we would have to draw from the above is that this process means that Capital increasingly devours itself, because an increasing proportion of production becomes a production not of Capital qua Exchange Value, but of Means of Production simply as Use Value. Consequently, society must drive towards the production of the social surplus not as a surplus of Exchange Value, but of Use Value. If we look at previous societies where this was the case we can get some idea of the type of production we would then expect to see as a consequence. A society which produces its social surplus in the form of use values will tend as the surplus rises to see this surplus increasingly in the form of luxury goods, precisely because those that have control over the social surplus will be driven to exchange their proportion of this surplus with others from within the same group, and there is no purpose to simply producing a Surplus of Means of Production. The surplus must take the form of products, which those that own the Surplus can consume. There is a limit to how much this can be simply more of the same, it must become a wider range of luxury goods. In short we would expect to see an increase in conspicuous consumption at the expense of productive consumption, mirroring the fact that use values without Exchange Value cannot be converted into Capital, and so have to be converted into consumption. The alternative is that USE Values in the form of wage goods which lack an Exchange Value lie unsold, and a crisis of overproduction arises, with Capital being destroyed in proportion – and often beyond. Such was the basis in the past for the Pharaohs to build the pyramids or the excesses of the Roman Patricians. Its not necessary to look far today to see the extent to which Capitalists increasingly put their wealth into such conspicuous consumption in the form of yachts costing hundreds of millions of pounds, or private jet airliners etc rather than into productive investment to see a similar picture.

The question then is to analyse this other Department of Production that meets the consumption needs of Capitalists, what is sometimes called Department III, the production of Luxury Goods.


Dept III

In short we can make the same comments about the products in Department III as for those in Department I. But with an important difference. In general Producer goods can only ever be Producer Goods – there is the obvious overlap in the sense of say hand tools which can be used in Production or which form a portion of end consumption, or materials that can be consumed productively or unproductively. But in general say a steel mill is a Producer Good. But the same is not necessarily true of “Luxury” goods. What were once considered such e.g. motor cars are now considered ordinary consumption goods, wage goods. To the extent that such a good moves from being a Luxury Good only bought by Capitalists to becoming a wage good, the basis of the calculation of its Exchange Value must change. The more workers buy this good the more must its Exchange Value be determined by actual socially necessary labour-time. Its Price of Production moves further towards this pole, and away from its mere cost of production. That is to follow Marx’s statement above the more such goods are drawn into “the sphere of exchange for capital”, as opposed to the sphere of exchange for revenue.

The concept used above that workers "Value" the commodities they buy in accord with some calculation of how much Labour-time they would expnd to produce them themselves is clearly unrealistic. A Capitalist can look at the books of some other sphere of production (say of an input) and fairly easily decide whether they can save money by producing this good for themselves rather than buy it. A worker cannot other than in the cases for example where say you calculate how long it would take to paint your house, how much you could earn in that time, and compare it against the price asked by a professional decorator for the work. But no worker can calculate how much labour time it would take for them to produce say a car (nor could a capitalist for their own consumption for that matter) in order to compare this with the market price i.e. to calculate an Exchange Value based on required Labour time. This is as unrealistic as the claims of Neo-classical theory that the consumer in deciding to buy a Mars Bar in reality calculates how much utility could be derived from spending the 30p in each of the billions of other ways possible in order to determine that they are maximising this utility!!!!! In the final section, therefore, I will look at the application of these ideas in relation to demand and supply.

See also: The Tendeency of the Rate of Profit to Rise