Tuesday, 8 April 2014

Capital II, Chapter 15 - Part 18

5) The Effects of a Change of Prices

There are a number of ways in which a change of prices can have an effect, where there is no change in the working period or circulation period.

  1. A change in market price may reflect a change in the value of the commodity, or it may simply be the result of a change in demand and supply.
  2. A change in the value of the commodity may be due to a change in the productivity in its production, or it may be a result of a change in the value of the constant capital used in its production.
  3. It is necessary to distinguish between the effects of a change in prices on newly invested capital, and on reproduced capital. 

Suppose that the value of constant capital and variable capital, used in the production of a commodity X is halved. Where, in the previous examples, a circulating capital of £100 per week had to be advanced, this now falls to £50. Assuming the same 9 week turnover period, a capital could now start business with only £450, whereas previously £900 was required.

The immediate consequence of this is that £450 of money capital that was previously required, has been released. This £450 could be used to double the scale of operation, or it could be utilised in some other branch of production, or it could circulate within the money market, via which it may become productive capital or else be used for speculative purposes, buying bonds, shares or other assets in the secondary markets. To the extent that this released money-capital circulates, it represents an increased supply of money-capital, putting downward pressure on interest rates.

If the scale of production remains the same, then the value of that production also falls in half. Consequently, at the end of the turnover period, in week 9, instead of £900 of capital being returned, only £450 is returned. But, this is now sufficient to purchase the necessary productive capital at its lower price.

By contrast, if the price of the circulating capital rose by half instead of £100 per week, £150 per week of capital would be required. With the same turnover period, a capital of 9 x £150 = £1,350 rather than £900 is required for a capital to commence business. This money-capital has to be withdrawn from the money market, thereby bringing about an increase in the demand for money-capital and putting upward pressure on interest rates.

“If all the capital available on this market were then already engaged, there would be increased competition for available capital. If a portion of it were unemployed, it would pro tanto be called into action.” (p 290)

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