The value of a commodity is made up of the value of the constant capital used for its production, and of the new value created by labour power, which is divided between the variable capital and the surplus value – c+v+s. However, a portion of c is made up of the wear and tear of the fixed capital used in the production process. In other words, a portion of the value of the factory, the machines and so on that are not completely used up in that process, is transferred to the value of the end product, and recovered in its price, when sold. However, precisely because the fixed capital whose wear and tear is transferred, is not itself replaced, often for many, many years, this means that these sellers take money out of circulation, but do not throw that money back into circulation as buyers.
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| The value of wear and tear of equipment is passed on to the value of the consumer goods produced in Department 2, and sold to Department 1 workers and capitalists. But, the equivalent of that value may not be spent by Department 2 capitalists, buying Department 1 commodities, for many years, when they need to replace their machines. So, a disproportion is created. |
In other words, Say's Law that every sale is also a purchase, clearly does not hold. If we divide Capital into two parts, Department 1 and Department 2, with Department 1 providing Means of Production, and Department 2 providing Means of Consumption, then its clear that Department 2 can be selling large amounts of goods, to Department 1 capitalists and workers, part of whose value is made up of large amounts of wear and tear, but who do not spend the proceeds, from those sales, buying means of production, from Department 1, to anything like an equivalent extent, because the fixed capital does not have to be replaced for many years.
Instead of buying fixed capital each year to an equivalent amount of the value of the wear and tear, Department 2 become sellers, but not buyers, and by that means the difference between what they sell, and what they buy is accumulated as money hoards – The Formation of a Hoard.
What is the importance of this? Quite simply, that with the formation of such money hoards, capital is able to avoid the necessary disproportion, and overproduction that would inescapably result from a situation where there is more selling than buying. If Department 2 needs 10 machines, then Department 1 needs to produce 10 machines or there will be under production of machines, and Department 2 will not be able to function. But, if having bought those machines, Department 2 needs no machines next year, then, even if Department 1 simply produces on the same scale, it will have overproduced machines. Marx comments,
“The opposite case, in which the reproduction of demises of fixed capital II in a certain year is less and on the contrary the depreciation part greater, needs no further discussion.
There would be a crisis — a crisis of over-production — in spite of reproduction on an unchanging scale.”
As Marx describes here this crisis of overproduction is not one resulting from any extension of production or resulting from any tendency for the rate of profit to fall. In fact, because the situation described is one of simple reproduction, there is absolutely no accumulation of capital taking place, no change in the organic composition of capital to bring about any such falling rate of profit!!! It is, in fact, as he describes, actually a crisis caused by under consumption from the standpoint of Department 2, i.e. for whatever reason, Department 2 has not needed to replace as much of its fixed capital as usual, and so has bought less. In fact, Marx elsewhere describes how such overproduction need not be any kind of over production of capital, but only an over production of commodities, an eventuality that the economists, basing themselves on Say's Law denied.
For example, suppose Britain buys, as it did, cotton not from capitalists, but from slave producers based in the Southern United States, or alternatively, as it did, from peasant producers based in India, just as it bought many commodities, such as foodstuffs, from peasant producers in Ireland and from Europe. Because slave production and peasant production is not capitalist production, there can be no question of an over accumulation or overproduction of capital. Slave producers and peasant producers do not employ capital, but simply means of production. In fact, for slave production, the slaves themselves are also merely means of production. These producers could continue to produce their commodities at exactly the same level as they have done previously, but again, if Britain, for whatever reason, reduced its demand for their cotton, they would nevertheless be left with an overproduction of cotton, which they could not dispose of on the market.
The same is true of labour-power. As Marx points out, labour-power is a commodity sold by the workers, but it is not capital. The worker produces his labour-power, but does not do so as capital. It is not something the worker produces as self-expanding value i.e. from which they can obtain surplus value! In fact, Marx spends some time discussing the confusion of Adam Smith, Ricardo and others on this matter, because they confused Variable-Capital, which is capital, and functions as capital in the hands of the capitalist, and labour-power, which is merely a commodity in the hands of the worker. If for whatever reason, capital does not need the available labour-power in the market, that is not a crisis of capitalism (though it may well be a crisis for the workers unable to sell their commodity), it is not an overproduction of capital, merely an overproduction of the commodity labour-power. In fact, whenever such over production of labour-power exists, rather than it being a crisis for capital, it usually constitutes an opportunity to buy that commodity beneath its value, and thereby to make an additional profit. An overproduction of capital, as Marx points out, is always an overproduction of commodities, because commodities are the “cells” of capital, but an overproduction of commodities is not necessarily an overproduction of capital, for the simple reason that not all commodities are capital!
Nor are such disproportions limited to capitalism. Marx makes clear that they will affect Socialism too, but without being the source of problems it is for capitalism.
“Once the capitalist form of reproduction is abolished, it is only a matter of the volume of the expiring portion — expiring and therefore to be reproduced in kind — of fixed capital (the capital which in our illustration functions in the production of articles of consumption) varying in various successive years. If it is very large in a certain year (in excess of the average mortality, as is the case with human beings), then it is certainly so much smaller in the next year. The quantity of raw materials, semi-finished products, and auxiliary materials required for the annual production of the articles of consumption — provided other things remain equal — does not decrease in consequence. Hence the aggregate production of means of production would have to increase in the one case and decrease in the other. This can be remedied only by a continuous relative over-production. There must be on the one hand a certain quantity of fixed capital produced in excess of that which is directly required; on the other hand, and particularly, there must be a supply of raw materials, etc., in excess of the direct annual requirements (this applies especially to means of subsistence). This sort of over-production is tantamount to control by society over the material means of its own reproduction. But within capitalist society it is an element of anarchy.
This illustration of fixed capital, on the basis of an unchanged scale of reproduction, is striking. A disproportion of the production of fixed and circulating capital is one of the favourite arguments of the economists in explaining crises. That such a disproportion can and must arise even when the fixed capital is merely preserved, that it can and must do so on the assumption of ideal normal production on the basis of simple reproduction of the already functioning social capital is something new to them.”
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| Some "Marxist" economists claim that the Great Recession was caused by the falling Rate of Profit, even though, even in a relatively declining US economy, it has been rising for around 30 years! |
It is not just the economists of Marx's day that had a problem with this concept. There are not a few “Marxist” economists of today who will brooch no alternative cause to capitalist crises other than The Law of the Tendency of the Rate of Profit To Fall, even if they have to perform logical acrobatics to claim that it is falling even when its rising! Yet, here is Marx describing a crisis of an overproduction of commodities, where there is not even expanded reproduction! Indeed, an overproduction of commodities even under Socialism! Worse, shock, horror an overproduction that is absolutely inevitable for such a socialist society, and one that reflects its control “ over the material means of its own reproduction.”
Capitalism deals with that problem by several means, as Marx describes. Firstly, the establishment of money hoards means that, in Department 2, some individual capitals can be sellers and not buyers, whilst others are buyers, but not sellers. If say, the fixed capital lasts 2 years, before needing to be replaced, half the Department 2 capitalists are buyers, and the other half money hoarders. If the total number of machines in Department 2 is 10, then 5 need to be replaced each year. Department 1 can consistently produce 5 machines a year, under simple reproduction to be sold to Department 2. With the money it receives from that sale, Department 1 capitalists and workers can buy Department 2 consumer goods keeping everything in balance. But, half of the Department 2 capitalists who sell those goods to Department 1, will not have bought fixed capital that year. They will have been sellers but not buyers, and as a consequence, they will have hoarded the difference as money. With that money hoard, they will then be able to be buyers of fixed capital the next year, without needing at the same time to sell an equivalent amount of commodities to Department 1. The same principle applies if fixed capital lasts on average 10 years, and only 10% is replaced each year.
Marx's analysis of how the process of accumulation of capital occurs is based on exactly the same principle. It seems impossible, Marx says, for all capitalists to realise their surplus value in money simultaneously, and then to hoard it. It would mean all of them being sellers, but not buyers. But, its not impossible at all, Marx says. He uses a thought experiment. If gold is money, and all capitals had to exchange their commodities only with a gold producer, they would all realise their surplus value simultaneously in gold, and, therefore, in money. The total social surplus value would exist as a money hoard of gold.
The reality of capitalist production, as Marx describes is that such money hoards arise at numerous points throughout the total social capital, both for the purpose of depreciation funds to replace fixed capital, and to amass the required amounts of surplus value for new investments to occur, and simply because at any particular time, capital may realise more surplus value as a money hoard than it can effectively invest, or because utilising that money hoard within the circuit of money, as revenue – to buy commodities (unproductive consumption), as loanable funds (e.g. the loans from China to finance US consumption), or to be used as fictitious capital (speculating in shares, bonds, property etc.) appear to capitalists as a more effective use of their funds than using them as capital.
And, of course, as Marx sets out, all the time, capitals that have realised their surplus value in money, allocate this money across all of these range of alternative uses. Even where it is used as productive-capital, there is absolutely no reason, Marx says, why it has to be used to accumulate the existing capital. Frequently it is used to start some other separate business, or may simply be used as loanable funds lent out to some other capital that has insufficient funds of its own to expand currently.
Just as with the case of the replacement of fixed capital, effected by the use of such money hoards, so the existence of these money hoards are an essential component of the way capital is accumulated. In fact, it is not just hoards of money that are necessary for this process, as Marx sets out. The process of accumulation can only take place, if besides these money hoards there are also available stocks of commodity-capital (i.e. the end products, be it of consumer or producer goods), and of productive-capital. A factory, cannot begin business unless it first has a money hoard to buy means of production, and labour-power. It cannot begin or continue business unless it is able to buy those means of production and employ labour-power, which means that there must exist stocks of means of production to be bought, and means of consumption to provide for the workers to be employed. There must already exist productive-capital producing replacements for that commodity-capital, because capitalism is a system based on continuous production, and consumed stocks need to be continually and simultaneously replaced.
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| The Chicago Mercantile Exchange, and others like it, across the globe, trade the vast stocks of commodity- capital that capitalism needs to ensure that production can continue uninterrupted, and so that capitals that seek to expand can find a ready supply of means of doing so. The bigger Capital becomes, the more rapidly its expanding the larger those stocks need to be. |
In other words, there must be other capitals, producing these commodities, and those capitals themselves will require their own money hoards, and their own stocks of materials etc, as will all of the firms that supply them and so on. Moreover, the more capitalism develops, as Marx describes, the larger the scale of its operations, the larger the money hoards need to be, the larger the stocks of unsold commodity-capital retained as inventories, or as productive supply needs to be so that production can continue without interruption, let alone that those capitals that seek to expand their operations, find a ready supply of the commodities they need to do so, and that their additional worker can consume for their subsistence.
Just as over production has to be a necessary condition for a socialist society to function smoothly, so must it be for Capitalism too. But, unlike socialism where over production of means of production can simply be undertaken in a planned manner, under capitalism it has to be counterbalanced by an equivalent accumulation of money hoards. The more rapidly, and the greater degree of accumulation, the larger need be the money hoards. But, the limiting factor is the rate of profit. Without a high rate of profit capital cannot grow rapidly, because the necessary money hoards are not created.
The importance of this is that looking at the global economy over the last 20 years, China can be seen as occupying the role of Department 2 above. It has been the chief supplier of consumer goods into the global economy. It has been a seller, but not a buyer – in fact, it has been a buyer on a massive scale too, but it has sold far more than it has bought – and thereby accumulated huge money hoards. One of the ways that capital usually avoids disproportion is that the money hoards accumulated by some firms can also be loaned out to the other firms who are in need of accumulating and expanding their capital. But, in fact, China has loaned out its surplus money to the US, in particular, not so that US firms could use it to accumulate, but in order that the US could continue to consume, indeed consume increasingly Chinese consumer goods.
It shouldn't be taken from this that it has been a one way trade, however. China has also been a massive buyer. It needed to buy masses of those Department 1 goods, in order to keep its Department 2 functioning. Large numbers of economies in Latin America and Africa, whose economies are based on Department 1 production of materials, have benefited considerably from the expansion of Chinese capital. But, China also bought lots of Department 1 goods in the shape of machinery and tools from economies like Germany and Japan. In fact, China has been running a trade deficit with Germany.
But, although the accumulation of these money hoards, and of these increasing numbers of stocks of commodity-capital provide a means by which capital can avoid disproportions between the different sectors, and the crises of overproduction, or under production that would necessarily arise, they are no guarantee of doing so, as Marx sets out in the quote above. The money hoards are the means by which Department 2 can buy without selling, having previously sold without buying, but there are any number of reasons why those money hoards will not be spent, and will instead simply continue to accumulate.
In fact, Marx points out the series of exchanges between the different sections are so complex when analysed at the level of all the individual capitals that there are no shortage of points at which this proportion can break down. The existence of large money hoards, and of stocks of commodity-capital, is not an indication of a crisis of capitalism. On the contrary, it can be a sign of the exact opposite. It is when the actual accumulation of capital itself slows down, when the replacement of fixed capital is prolonged etc. that a crisis of disproportion arises, which in turn leads to a crisis of over production in Department 1.
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