Tuesday, 25 February 2014

Capital II, Chapter 14 - Part 3

As well as the selling time, the extent of transit time for commodities also affects the buying time. That is the time required to obtain the money, and be able to use it to replace the productive capital. Just how much the Internet, and modern financial services have speeded up this process, and thereby raised the rate of turnover, and consequently rate of profit, can be judged by the example Marx gives.

“Suppose a commodity is shipped to India. This requires, say, four months. Let us assume that the selling time is equal to zero, i.e., the commodities are made to order and are paid for on delivery to the agent of the producer. The return of the money (no matter in what form) requires another four months. Thus it takes altogether eight months before a capital can again function as productive capital, renew the same operation. The differences in the turnover thus occasioned form one of the material bases of the various terms of credit, just as overseas commerce in general, for instance in Venice and Genoa, is one of the sources of the credit system, properly speaking.” (p 255-6)

If we assume that the production time of these goods was one month, that is a total turnover time of nine months, or put another way, the capital turns over 1.33 times a year. Without any change in the production time, this same commodity if it were sold over the Internet, could today with modern payment systems developed by the financial services industry, have a circulation time approaching zero. Instead of the capital turning over 1.33 times a year, it would turn over 12 times a year. The consequence of that on the rate of profit is dramatic. The rate of profit is calculated as s x n/c+v.

If s = 1000 and c+v = 10,000, then it would originally have been (1000 x 1.33)/10,000 = 13.33%. However, it becomes (1000 x 12)/10,000 = 120%!

Marx notes that alongside this a further problem is that the longer the selling time, the greater the risk of prices changing in the intervening period. It is not just credit that develops to deal with this situation. The financial services industry developed to provide other solutions to this problem, e.g. the development of futures markets, whereby sellers could enter into contracts to sell a given quantity of a commodity at some future date, at a given price. Likewise, buyers enter into similar contracts to buy. Alternatively, they may take on futures options, whereby they pay a premium to have the option to buy or sell a given commodity at a particular date, but do not have to exercise that option, if prices have changed adversely.

The turnover time can also be increased as a consequence of capitalist development, on an ever larger scale. For example, if a buyer only wants a few metres of linen this might be produced in a day, sold to them, and the productive capital reproduced shortly after. However, if as a result of capitalist development, a large merchant requires 10,000 metres of linen, then, even with the greater productivity, this might require two weeks to produce and ship to them. Payment will only be made when the full shipment is received. The development of neo-fordist production systems, such as flexible specialisation, can be a way around this problem, because they use new technology to obtain the benefits of Fordist mass production, with the advantages of flexibility provided by small batch production.

Back To Part 2

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