Nick begins by setting out the position in relation to
pre-production, reproduction costs. That is the reproduction costs
of inputs at the point they enter production. The problem with this
approach is set out by Marx in Capital Volume I. Marx in describing
the way Constant Capital enters the Value of the final product says
that, although some of these inputs may have been produced some time
before, the labour required for their production should be treated as
though it were part of the same production process as that of the
final product, merely an earlier stage of it. He writes,
“If
a definite quantity of labour, say thirty days, is requisite to build
a house, the total amount of labour incorporated in it is not altered
by the fact that the work of the last day is done twenty-nine days
later than that of the first. Therefore the labour contained in the
raw material and the instruments of labour can be treated just as if
it were labour expended in an earlier stage of the spinning process,
before the labour of actual spinning commenced.” ( p 182-3)
But, Nick says that he does not agree with either of these methods of
valuation. Instead he proposes Valuing the inputs on the basis of
the average paid for them by Capitalists.
He says,
“Now I
would argue (in opposition, I think, to Kliman’s position) that it
is the aggregate price paid by capitalists for inputs (in other
words, the historic cost) that determines the value of the constant
capital transferred to the aggregate price of the output - and
therefore forms the basis of the calculation of the rate of profit.”
But, it is
fairly obvious what is wrong with this position. Suppose Cotton is
the input in question. The capitalist bought 1000 kilos at its
Value, let us say £1000. Now, a new spinning machine is introduced,
which doubles the productivity of cotton spinning. Now, 1000 kilos
falls in Value to £500. But, on Nick's argument there are now two
market Values for cotton. There is the actual Market Value for
cotton, determined, as Marx says the Value of all commodities is
determined, i.e. on the basis of the labour-time required for their
production, because this, after all, is the price that all cotton
producers will be selling their cotton at, and there is Nick's Value
for cotton, which is the Value to be applied to all of the cotton in
stock, previously bought by Capitalists. But, it not only breaches
Marx's Theory of Value, to have identical commodities on the market
that have different Values, it is also simply not logical.
Were any of
these capitalists to go bust, and to have their stock valued for
selling – either as break-up value, or as part of the firm as a
going concern – what would they be able to sell their cotton stock
for? Would they be able to sell it, at the historic cost they paid
for it? Would they be able to sell it even for the aggregate of the
prices they and all other Capitalists had paid for it? No, of course
not. Any Capitalist looking to buy this cotton stock, would at most
be prepared to pay only what the current price of cotton is in the
market. And, that is indeed its Exchange Value or later Price of
Production . Nick may be right that, depending upon market
conditions, individual capitalists may seek to pass off the higher or
lower prices they paid for that cotton in the prices they charge for
the commodity it goes into. But, that is to confuse prices with
values in the way that orthodox economics does. Again, that is
something Marx says we should not do if we want to have an accurate
analysis of Capital, and its reproduction. Marx says, in Capital I,
Chapter 8
“The
definition of constant capital given above by no means excludes the
possibility of a change of value in its elements. Suppose the price
of cotton to be one day sixpence a pound, and the next day, in
consequence of a failure of the cotton crop, a shilling a pound. Each
pound of the cotton bought at sixpence, and worked up after the rise
in value, transfers to the product a value of one shilling; and the
cotton already spun before the rise, and perhaps circulating in the
market as yarn, likewise transfers to the product twice its, original
value. It is plain, however, that these changes of value are
independent of the increment or surplus-value added to the value of
the cotton by the spinning itself. If the old cotton had never been
spun, it could, after the rise, be resold at a shilling a pound
instead of at sixpence. Further, the fewer the processes the cotton
has gone through, the more certain is this result. We therefore find
that speculators make it a rule when such sudden changes in value
occur, to speculate in that material on which the least possible
quantity of labour has been spent: to speculate, therefore, in yarn
rather than in cloth, in cotton itself, rather than in yarn. The
change of value in the case we have been considering, originates, not
in the process in which the cotton plays the part of a means of
production, and in which it therefore functions as constant capital,
but in the process in which the cotton itself is produced. The value
of a commodity, it is true, is determined by the quantity of labour
contained in it, but this quantity is itself limited by social
conditions. If the time socially necessary for the production of any
commodity alters — and a given weight of cotton represents, after a
bad harvest, more labour than after a good one — all previously
existing commodities of the same class are affected, because they
are, as it were, only individuals of the species, and their value at
any given time is measured by the labour socially necessary, i.e.,
by the labour necessary for their production under the then existing
social conditions.” (p202-3)
Note, this
last comment – under the then existing social conditions, not the
average of the current conditions, and the conditions existing when
previous units of the commodity were produced. In reality, as Marx
says, its only in conditions where there is a large quantity of
unsold product already in the market, that was produced with the
lower priced cotton that this would press on prices of the finished
product in a downward direction. Aside from that, different
Capitalists do not know what each paid for their inputs, so it would
be impossible to price according to some average figure.
I have some
practical experience in this regard. A long,long time ago when I was
18, I worked for a small company producing protective clothing. It
was my job to do everything from buying cloth, to finding and bidding
for contracts, to costing and invoicing. Whenever, I bid for a
contract, the first thing I did was to work out how much cloth was
needed, and then get a current price for that cloth. The costing was
done on that current price no matter how much cloth we had in stock,
and what we'd paid for it. There is no other sensible way to
proceed. You do not know what other bidders have in stock, or what
prices they have paid. If you price on the basis of cheap cloth in
stock, then you will not be able to reproduce the material used up,
at current prices. If material prices have fallen, and you price on
the basis of the cloth in stock, you will be undercut by others who
have bid at current prices. Marx knew all this from Engels' own
practical experience, which is why he uses current replacement cost
for valuing capital, not historic prices. Its competition, and the
need to reproduce Capital consumed at current prices that forces the
Value of the end commodity to reflect the replacement cost not the
historical cost of Capital.
I have some
practical experience in this regard. A long,long time ago when I was
18, I worked for a small company producing protective clothing. It
was my job to do everything from buying cloth, to finding and bidding
for contracts, to costing and invoicing. Whenever, I bid for a
contract, the first thing I did was to work out how much cloth was
needed, and then get a current price for that cloth. The costing was
done on that current price no matter how much cloth we had in stock,
and what we'd paid for it. There is no other sensible way to
proceed. You do not know what other bidders have in stock, or what
prices they have paid. If you price on the basis of cheap cloth in
stock, then you will not be able to reproduce the material used up,
at current prices. If material prices have fallen, and you price on
the basis of the cloth in stock, you will be undercut by others who
have bid at current prices. Marx knew all this from Engels' own
practical experience, which is why he uses current replacement cost
for valuing capital, not historic prices. Its competition, and the
need to reproduce Capital consumed at current prices that forces the
Value of the end commodity to reflect the replacement cost not the
historical cost of Capital.
So, to coin
a phrase, I don't agree with Nick, when he says,
“So, if
every single producer of K has paid 1,000 for C, it does not matter
if the price of C subsequently changes before, during or after the
commodity (or aggregate output) has been produced: competition will
ensure that K will reflect the price that was actually paid for C.”
Let us see what the implication of that would be. The original
example I gave in my article was,
C 1000 + V 1000 + S 1000 = K 3000
Let us assume that we are talking here about a condition of simple
rather than expanded reproduction. In other words, the Capitalist
needs all of the 1000 S to cover their own consumption needs. So,
they begin life with M 2000, which they convert into means of
production C 1000 and Labour Power V 1000. Now, as a consequence of
a change in the cost of producing means of production they rise to
2000. However, Nick argues that if all Capitalists bought at 1000,
this is the Value that will be transferred into the final product,
and will determine its Value. So, he argues we will continue to
have:
C 1000 + V 1000 + S 1000 = K 3000.
If he sells at its Value he will convert this into M 3000. Out of
this, he will take out his 1000 S to cover his own consumption needs.
He will begin the next production cycle once again with £2000, as
indeed will all the other Capitalists who, like him, bought at £1000.
So, the next cycle begins,
M 2000 – C 2000 ooops. Sorry, all the money has gone having bought
the means of production at their new Value, leaving no money to
purchase Labour Power to convert it into final product! And, on the
basis of Nick's argument its not just the one Capitalist in this
perilous state, but all of them! Unless, some kind stranger comes
along to bail them out, they will go bust, not because they were
unprofitable, but because they ran out of cash due to bad management.
That's no way to run a business, Nick.
Nick also makes a fairly fundamental mistake, which he shares with
other TSSI theorists when he says,
“Capitalists would receive K 4,000
as the aggregate price of their commodities when they had only paid C
1,000 + V 1,000 for the inputs. Surplus value would have doubled
without any additional labour-time being applied to the production
process. It appears to me that Arthur unwittingly demonstrates
against the‘current cost replacement’ theorists the very charge
he levels against the TSSI.”
He like the TSSI is, in fact, guilty of
money illusion. It once more comes back to a question of time. Nick
fails to recognise that the Value of the Money, he uses to measure
with, has changed between t1 and t2. The basis
of the mistake, and the illusion, is not to recognise that the
Exchange Value of the Money (£4,000) received from the sale of the
final commodity is not the same as the Exchange Value of the Money
(£2,000) paid out for the inputs. Nick and other TSSI adherents
seem to forget that Money is a commodity too. Its Exchange Value is
expressed in the Use Value of all those commodities for which it acts
as Equivalent Value. Put another way, in just the same way as the
Exchange Value of 1000 kilos of cotton can be expressed as £1,000
(say 1 oz of Gold), so the Exchange Value of 1 oz Gold (£1,000) can
be expressed as 1000 kilos of cotton! Here Gold (Money) is the
Commodity acting as Relative Form of Value, whereas it is Cotton
adopting the role of Equivalent Form. In other words Cotton is
acting as the Money Commodity.
If, the Value of cotton doubles,
because the time required for its production doubles, then 1000 kilos
of cotton is now (2oz Gold) £2,000. But, by the same token, the
Exchange Value of Gold (Money) has halved measured in terms of
cotton. Now, 1 oz Gold (£1,000) only equals 500 kilos of cotton.
Marx describes this relation in the
first three Chapters of Capital Volume I.
So, in the circuit M – M1.
A first requirement is to ensure that the Value of Money at M is
measured in the same terms as M1! But, it is precisely
this which Nick and the TSSI fails to do. If, the Exchange Value of
Cotton has doubled between M and M1 then in order to
compare like with like, the cotton price of Money has to be halved!
Once that is done, it is clear that the magical profit out of nowhere
that Nick thinks has been achieved disappears. If we stop thinking
of Capitalist production in comparative static terms, whereby, the
process is stopped at the end of each cycle, then this becomes clear.
What has happened?
The capitalist began with £2000. He
bought £1000 of cotton (1000 kilos), and he bought Labour £1000.
The Labour produces a Surplus Value of £1,000. The cost of
producing cotton doubles after he has bought it, but before his final
product has been sold. I have shown above, what disastrous
consequences ensue, if he does not seek to recover this new
production cost in the final product. But, let us see if Nick's
magical profit really exists, if the capitalist transfers the new
Value into the final product.
The circuit is M £2000 – C 2000
(1000 Cotton, 1000 LP) – C1 3000 – M1, 3000
but, after the Cotton is revalued:
M 2000 – C 3000 (2000 Cotton, 1000
LP) C1 4000 – M1 4000.
Let's break this down further. The
2000 Cotton consists of 1000 kilos. In order to continue production,
which after all is what Capitalist production seeks to do, the 1000
kilos of cotton used up in production, has to be replaced, ready for
the next production cycle. This 1000 kilos has to be bought out of
the 4000 M1 . But, 1000 kilos now costs £2000, not
£1,000. Put another way, if we calculate M1 in terms of
its original Value measured in cotton £4000 is actually worth only
£2000, in which case, the £2000 now required to buy the 1000 kilos
of cotton is only worth £1000. The Value of Labour Power has not
changed, so the Value of Money measured in terms of Labour Power
remains the same. So, if we use Constant Values for Money rather
than nominal money prices, we have laid out £1,000 for cotton, and
£1,000 for Labour power, we have £1,000 of Surplus Value, giving in
constant money terms a price for the final product of £3,000.
If we continue the production cycle,
and view it now in nominal money terms, we can see that this is
correct. In Period 2, we have:
M 4000 – C 3000 (1000 kilos Cotton,
2000 + Labour Power 1000) - C1 4000 - M1 4000.
Nick's additional Profit has
disappeared, once we assume Capitalist production as it really exists
as a continuous process, like a motion picture rather than as a
series of still pictures. Period 2 starts in exactly the same
position for this capital as Period 1 did, with 1000 kilos of Cotton,
and with the necessary Labour Power to process it. If Nick were
correct, that my and Marx's method of Valuing Capital, in the
production process, were wrong, and that it leads to the additional
profit he thinks exists, what has happened to it? Where is the
additional expansion of Capital in the form of more cotton and Labour
Power, that should have resulted from it?
An even clearer example of this
argument was provided in the debate on Michael Roberts Blog some
months ago. Replying to an argument put by Bill Jeffries, Kliman in
a comment (11.57 a.m., 19th January 2012), said,
“You buy a bond for $10,000. Your
investment is $10,000. You get $500 interest at the end of 1 year.
But meanwhile, the price of the bond has fallen to $500. Your rate of
return isn’t $50/$50 = 100%. It’s -90%. In other words, your
assets (bond + interest) are worth only 10% of the value that you
invested.”
This is very interesting for a number
of reasons. Firstly, it demonstrates the point I made in my original
article in response to Nick. Using the concepts of the TSSI, Labour
is not necessary to create Surplus Value at all!! Here, the rate of
return is claimed to be -90%, because the Value of the Bond has
fallen. But, by the same token had the Value of the Bond risen, it
would equally be the case that this represented a positive return.
That is a Surplus had arisen solely as a result of a change in Value
of the asset. This example, of course, takes us completely outside
the remit of Marx's analysis of Capital based on commodity
production. It takes us into the favoured realm of the Neo-Classical
School, and particularly of the Austrians, whose examples frequently
use financial market transactions, and whose supporters are
disproportionately drawn from that sphere.
But, Kliman's Bond argument is just a
more easily understood version of Nick's argument in relation to the
revaluation of Constant Capital. It displays all the same
characteristics in relation to a concern with the fortune of
individual Capitalists as opposed to Capital itself, it relies on an
analysis that views time as divided into discrete blocks rather than
an analysis of Capital as an on going continual process, and it makes
precisely the same mistake, in that it fails to recognise any change
in the Value of money having occurred between t1 and t2.
I pointed out the inadequacy of Kliman's argument in that regard in
that debate. I wrote,
“But, even were we to take the
example given it does not entirely fit the requirement AK wants of
it. If we look at the position in the way a Marxist rather than a
neo-classicist would then for Capital as a whole, we would find that
a fall in the price of the Bond from $10,000 to $500 provides them
with an excellent investing opportunity. Now each Capitalist will
make a 100% return on each $500 investment they make in these now
much cheaper Bonds, and so the overall “Rate of profit” on such
investments will soar!
Setting aside the typo here of $50,
which should read $500, the argument is the same. If the Exchange
Value of the Bond has fallen from $10,000 at t1, to $500
at t2, then by the same token the Exchange Value of Money
has equally changed when measured against such Bonds! At t1
$10,000 = 1 Bond, at t2 , $10,000
= 20 Bonds. The Exchange Value of $10,000 has risen 20 fold relative
to Bonds!
What is odd to me is that Kliman
actually made this argument, because in his book, he does recognise
this, and argues that part of the reason for what he sees as the
continuation of a falling rate of profit in the US, is precisely the
fact that US Capital was not devalued, that other Capitalists were
not able thereby to come in and buy it up cheap, and thereby enjoy a
higher rate of profit on it. He writes,
“But, since so much less capital
was destroyed during the 1970's and early 1980's than was destroyed
in the 1930's and early 40's, the decline in the rate of profit was
not reversed.” ( p 3)
Nick says,
“Arthur argues that my approach
amounts only to a subjectivist study of capitalists rather than an
objective study of capital. But Marx make clear that aggregate prices
equal aggregate values, aggregate profits (and interest and rent)
equal aggregate surplus value and the aggregate rate of profit equals
the aggregate value rate of profit. Marx’s economics is rooted in
the world of real capitalists.”
But, the above demonstrates that Nick's
analysis does amount to a subjectivist study of Capitalists rather
than an objective study of Capital. Nick's example, and the argument
he draws from it only makes sense if it is viewed from the
perspective of the individual Capitalist, and not from the
perspective of Capital as a continual and continuing process of
production. Once the requirement for actually reproducing the
consumed Capital is introduced, Nick's additional profit disappears,
and were we to actually price the output in any of the ways, Nick
proposes, including his hybrid solution suggested later, we end up
with insufficient funds raised in the sale of the final product to
guarantee that the Capital can be reproduced at current prices.
Nick's analysis is, in fact, an exercise in Comparative Statics. It
sets up individual cycles of production and analyses them as discrete
events rather than part of a continual process of production.
Of course, Nick could come back and
argue that were this particular Capitalist to shut up shop at the end
of this particular cycle, they would walk away with £4,000 rather
than the £2,000 they had actually laid out for the cotton, and
labour power. In that case, Nick could argue, the Capitalist really
has made a £2,000 profit, and the rise in the price of cotton is of
no concern to them, because the Capitalist will be spending his
£4,000 on caviare and champagne. That indeed is the basis of
Kliman's Bond argument above. But, this merely emphasises the point
about it being a subjectivist analysis of the fate of individual
Capitalists rather than an objective study of Capital! Marx himself
provides his own retort to this kind of analysis. He says, in Volume
III, Chapter 15,
“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.”
But, let us
grant to Nick that his individual Capitalist does indeed, sell up.
In order to do so he must sell his Capital to some other Capitalist.
The other Capitalist had his Capital in Money Form in the Bank. Our
Capitalist sells up the Capital, making a £1,000 Capital Gain on the
cotton. But, by the same token the Capitalist who buys this Cotton,
has made a £1,000 Capital Loss on their Money Capital. One
capitalist's Gain is another Capitalist's Loss, so that from the
standpoint of Capital as opposed to the standpoint of the individual
Capitalists it is all square. And, that is precisely what would be
expected, because as Marx demonstrates, Surplus Value is, and can
only be created within the production process. All the Distribution
process does, is to move that Surplus Value around between different
Capitalists.
Marx's study is rooted in the world of
real Capital, as opposed to Capitalists. So, for example in Volume
I, Chapter 2 he writes,
“In
the course of our investigation we shall find, in general, that the
characters who appear on the economic stage are but the
personifications of the economic relations that exist between them.”
(p 89)
“Of
course, it is also possible, that in C-M-C, the two extremes C-C, say
corn and clothes, may represent different quantities of value. The
farmer may sell his corn above its value, or may buy the clothes at
less than their value. He may, on the other hand, “be done” by
the clothes merchant. Yet, in the form of circulation now under
consideration, such differences in value are purely accidental.” (p
149)
Capital
Vol. I, Chapter 4
He
makes the same comment in Volume III.
“Since,
therefore, supply and demand never equal one another in any given
case, their differences follow one another in such a way — and the
result of a deviation in one direction is that it calls forth a
deviation in the opposite direction — that supply and demand are
always equated when the whole is viewed over a certain period, but
only as an average of past movements, and only as the continuous
movement of their contradiction. In this way, the market-prices which
have deviated from the market-values adjust themselves, as viewed
from the standpoint of their average number, to equal the
market-values, in that deviations from the latter cancel each other
as plus and minus. And this average is not merely of theoretical, but
also of practical importance to capital, whose investment is
calculated on the fluctuations and compensations of a more or less
fixed period.”
Its
precisely because aggregate prices must equal aggregate values, that
where market price does not coincide with the Price of Production
(which Marx demonstrates occurs because Demand and Supply are not in
balance) not only does this tend to equalise itself for each Capital
over time, but at any one time, the aggregate of market prices in
excess of Prices of Production, has to be cancelled by the aggregate
of market prices below the Price of Production. It is precisely
because of this that Marx basis his analysis on Exchange Values, and
then on Prices of Production, when they replace Exchange Value as the
basis of Market prices, and not on the short term market variations
from them.
As
I said at the beginning central is time. I think Nick and the TSSI
has a syllogistic concept of time. Where Marx argues that every
commodity on the market for sale, or waiting to be productively
consumed, at the same moment, has the same Value, determined by the
labour-time required for its reproduction, Nick wants to have a range
of Values for those commodities, dependent upon when they were
bought. Where, the Exchange Value of one specific commodity –
Money – does change over time, however, Nick wants to treat it as
fixed.
The
same thing is essentially the case with Nick's view of Capitalism,
which fails to take account of the changes that have occurred within
it, when it comes to understanding the way crises are manifest. That
is one reason, he fails to recognise that it is quite understandable
why, from the 1980's onwards, the Rate of Profit was able to rise, as
a consequence of a devaluation of Capital, (Nick seems to think that
the Rate of Profit can only rise if S rises, forgetting that it is
also determined by changes in C+V) in the US, and why accumulation of
capital in new sectors of production does not necessarily involve
huge investments in Constant Capital. A look at the reality of
Capital viewed, as it must, as a global system, demonstrates that
there is far from any “Failure”. It has been growing faster, and
more dynamically in the last ten years than it has done at any time
in its history, and that despite the worst Financial Crisis in
history.Back To Part 4
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