Tuesday, 18 February 2014

How The Storms Reduce The Rate of Profit and Raise The Rate of Interest - Part 2

“When speaking of the destruction of capital through crises, one must distinguish between two factors.” (TOSV2 p 495)

One is the form of physical destruction described in Part 1, and Marx goes on to say that this is not beneficial, because having been physically destroyed, it can no longer act as capital, can no longer, therefore, extract surplus value from labour, but it is the second form, the destruction of its value that is beneficial for capital.

“A large part of the nominal capital of the society, i.e., of the exchange-value of the existing capital, is once for all destroyed, although this very destruction, since it does not affect the use-value, may very much expedite the new reproduction.” (TOSV2 p 496) 

To understand this take a firm as follows:

It has fixed capital in the shape of 10 machines each worth £1,000. It has circulating constant capital, in the form of materials, worth £1,000, and it employs labour-power (variable capital) with a value of £1,000. Its rate of surplus value, s', is 100%, so it produces £1,000 of surplus value realised entirely as profit.

If the machines have a lifespan of 10 years, they transfer 10% of their value to the end product each year, a total of £1,000. So,

c 2,000 + v 1,000 + s 1,000 = 4,000.

The rate of profit is calculated on all of the capital that must be present, which here includes all of the £10,000 of fixed capital. Therefore,

c (10,000 + 1,000) 11,000 + v 1,000 = £12,000.

The rate of profit is then s/c+v = 1000/12000 = 8.33%.

Now assume one of the machines is destroyed in a fire. It has to be replaced. But, the value of the machine does not pass into the end product, because its use value has not gone into it. Put another way, if this firm tried to recoup this loss by raising its prices, it would not be able to sell its products, because other firms would sell this product at a lower cost. This particular firm has had to advance additional capital, to replace the destroyed machine, but this capital never takes part in the production of value or surplus value. This can be looked at in different ways. For example, the firm might borrow an additional £1,000, and use this to buy a replacement machine. Ignoring the interest on this loan, for now, its rate of profit would then be

Original Capital Advanced:

£10,000 in Machines,

£1,000 Materials

£1,000 Variable Capital 

= £12,000

Additional Capital Advanced


Total Advanced Capital £13,000

Surplus Value £1,000, Rate of Profit £1000/£13,000 = 7.69%.

On this basis, the firm's profit is diminished for all future years, of the loan, because the capital it has advanced to production remains the original 10 machines, even though one has been destroyed, plus the additional machine, it each year continues to own only because it continually has to renew the loan it took out for its purchase. But, the value of its output continues to be based not on the use of 11 machines, but only of the actual 10, which are employed.

But, the correct way to look at it, is really from the same perspective as that used in examining the position of Robinson Crusoe. In other words, the profits obtained by the firm are just the money form of its surplus production. For example, if the firm were itself a producer of the same machines as the one destroyed, one of these machines, that it would previously have sold, it now has to use simply to replace the destroyed machine, the revenue from that sale is thereby completely lost, and the firms profit destroyed with it.

In other words, the firm has made a capital loss, rather than a trading loss. Its not actually that the value relations have permanently changed so as to make its potential for creating surplus value less. The value of each machine, and of the material, and of labour-power remain as they were before. But, the capital loss suffered, can only be made good from its surplus value, unless it borrows money for the purpose, which simply means that instead of replacing the machine immediately from its surplus production/value, it spreads that cost over the longer period of the loan, repaying the loan each year out of the surplus value. In the first case, the surplus production and value is effectively reduced to zero, and with it, the rate of profit, but it then returns to its previous level in future years. In the second case, the firms profit, and rate of profit is effectively reduced each year, by the amount of the loan repayment and interest upon it.

Suppose that the firm having initially provided the money-capital required to produce the 10 machines out of the pocket of the productive-capitalist, borrows the money-capital required to purchase the materials and labour-power, each year from a money-capitalist. This money-capitalist then supplies each year £1,000 to buy materials, and £1,000 to cover wages. They supply this £2,000 at a rate of interest of 5%. Each year, the £1,000 of value of the materials is reproduced in the value of the machines produced by the firm, and the labour-power employed, produces £2,000 of new value, £1,000 of which reproduces the value of the labour-power consumed in the production process. Each year, the firm takes this £2,000 of reproduced value, and hands it over as repayment of the loan to the money-capitalist, along with £100 of interest, deducted from the firm's own profits.

When the machine is destroyed, the productive-capitalist now requires additional capital to replace it. Even if they produce this machine themselves, they still require this additional money-capital, to cover the fact that in the meantime, until it is produced, their sales are reduced, and they still need to buy materials and pay wages. So, the productive-capital, must now borrow £3,000 rather than £2,000. If, the former rate of interest represented some kind of equilibrium point, at which the supply of money-capital equalled the demand for money-capital, then this increase in demand for money capital will cause the money-capitalist to demand a higher rate of interest. If, we move from the example of the firm here, to its extension to a similar physical destruction of capital on a national scale, then we might have a situation here, where such a 50% increase in the demand for money-capital caused a 50% rise in the rate of interest. It might be more, or it might be less than that, depending upon the elasticity of demand for and supply of money-capital.

What applies for the individual capital here applies to the aggregate social capital, as I will set out in Part 3.

Back To Part 1

Forward To Part 3

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