Thursday, 15 May 2014

The Law of The Tendency For The Rate of Profit To Fall - Part 7

A Relative Reduction In The Quantity of Fixed Capital (2)

In Part 5, it was described how the basis of the tendency for the rate of profit to fall rests upon an increase in the organic composition of capital, which in turn rests upon a rise in the productivity of labour, which in turn rests upon technological changes in relation to the fixed capital. But, those very same changes must mean that the physical quantity of fixed capital falls, relative to output and relative to the laid-out circulating constant capital. Those same changes mean that the value of this fixed capital is also reduced. That reduction in value of the fixed capital is a result of “moral depreciation”.

If a new machine is introduced, which is twice as productive as existing machines, then, as set out in Capital I, the result is to cut the value of existing machines in half. Because the value of the machine is reduced by 50%, the amount of value it transfers to commodities, via wear and tear, is also thereby cut by 50%. For the new machine, because it is twice as productive as the old, the amount of value it transfers, via wear and tear, to each commodity unit is already half what the previous machine transferred. But, similarly, these same rises in productivity mean that the value of fixed capital itself continuously falls. And, as was described previously, the larger the proportion of the advanced capital that fixed capital represents, the more any reduction in its value, results in a rise in the rate of profit, because it has a greater effect on reducing the value of C, the total advanced capital.

The point made by Marx that what is involved is a growth in the technical composition of capital, i.e. in the quantity of material processed by a given quantity of labour, is important. The basis of the rise in the organic composition is an improvement in productivity, brought about by improvements in technology and technique. Better machines raise labour productivity. A spinning machine with 36 spindles instead of 4 will spin 9 times as much cotton, but it will still only require one worker to mind it. The worker, therefore, produces 9 times as many use values in a given amount of time as they did previously.

Suppose previously the situation was this.

Machine £1,000 with 10% wear and tear.

Cotton £1,000

Labour-power £1,000

Surplus Value £1,000.

So, c (100 + 1,000) 1100 + v 1000 + s 1000 = 3100.

The rate of profit is the surplus value divided by the capital advanced. Because the machine has to be wholly present, all of its value is advanced. So, 1000/3000 (1,000 + 1,000 + 1,000) = 33.3%.

Now if we assume the new machine also costs £1,000 we have:

c (100 + 9,000) 9100 + v 1000 + s 1000 = 11,100.

The capital advanced is £1,000 machine, £9,000 cotton, and £1,000 labour-power = £11,000.

The rate of profit is then 1,000/11,000 = 9.1%.

In fact, the situation is not really this straightforward. Some economists have wrongly presented Marx's theory of the falling rate of profit as being about the increase in the quantity and value of fixed capital relative to the labour employed. This is false. In fact, Marx says the opposite. As was seen from the quote in Part 5, according to Marx, it is not just labour-power that falls relative to the circulating constant capital, i.e. the material processed, the fixed capital falls relative to it too.

That is obvious in the example above. A spinning machine with 36 spindles is capable of replacing 9 machines with only 4 spindles. It reduces the number of workers, in this case, as a result of first reducing the number of machines. In fact, in value terms here the reduction in the value of the fixed constant capital is likely to be greater than the reduction in the value of the variable capital, because its likely to be the case that the technological improvements that make it possible to produce a machine with 36 rather than 4 spindles, will also have reduced the cost of producing the machine as well. That is before taking into consideration that this more technologically advanced machine may require higher skilled labour to operate and maintain it.  One worker may have replaced 9, but the complex labour of this 1 worker may produce twice as much value as 1 of the previous workers.

Previously then, we might have had 9 machines costing £9,000, minded by 9 workers paid wages of £9,000, and producing surplus value of £9,000, a rate of profit of 33.3%. Assuming that the new technology is applied generally across the industry, this is replaced by a single machine costing £1,000, minded by 1 worker, producing a surplus value of £1,000. Its not the rise in the fixed capital that constitutes the rise in the organic composition, but the rise in the relative quantity of material now processed. Marx described this in Capital III, Chapter 6, where he points out that because the fixed capital is produced by industry, improvements in productivity cause its value to continuously fall. So, not only does one machine replace many, causing the quantity of fixed capital to fall relatively, but rising productivity reduces the value of fixed capital as well. By contrast, the materials processed are more frequently the product of agriculture and other primary production, where improvements in productivity are more difficult to obtain in the short term.

Its not just that improvements in technology mean that one machine replaces many. If fewer machines are required to process the same or even a greater quantity of material, then the factories in which this smaller number of machines and workers are situated can also be smaller. The epitome of this was the quip in the 1990's, as developments in microprocessors proceeded, that this or that technology company had been so successful that they were moving to smaller premises.

On the one hand, therefore, the relative fall in the quantity of fixed capital employed acts to reduce the value of C, and, therefore to increase the rate of profit. The rise in social productivity that is the necessary consequence of this technological development, also reduces the value of each element of fixed capital (and indeed of circulating-capital) thereby reducing the value of C further, and causing the rate of profit to rise further. A further point here, but which will be dealt with at more length later, is that this same rise in productivity raises relative surplus value, and thereby increases the rate of profit further still. On the other hand, however, this relative fall in the quantity of fixed capital to circulating constant capital is a reflection of the extent of the increase in the latter relative both to the fixed capital, and to the variable capital. That means that the value of C rises, as the quantity of material processed increases, relative to v. Unless the rate of surplus value rises, that means that it also, therefore rises relative to s, which causes the rate of profit to fall.

However, as demonstrated in Part 5, this picture is, in reality false, because although, the laid-out circulating constant capital rises sharply in relation to the fixed capital, the advanced circulating constant capital remains constant or falls relative to the fixed capital. This one machine produces as much as nine old machines, or put another way, it produces as much as one old machine, in a ninth of the time. It is as though, the rate of turnover of the circulating capital had increased nine-fold. 

Suppose the same amount was spent on machines as previously, but now the old output is produced in a ninth of the time, which constitutes the turnover period. We would then have for each turnover period:

Surplus value £1,000, Machines £9,000, Materials £9,000, Variable Capital £1,000. The annual rate of profit, as opposed to the rate of profit, is then Surplus Value £1,000 x 9 = £9,000, divided by C = £9,000 + £9,000 + £1,000 = £19,000 = 9,000/19,000 = 47.37%.

In other words, the consequence of the rise in the organic composition, resulting from the introduction of the new machines, is not a fall in the annual rate of profit, but a rise from 33.3% to 47.37%. The reason is that the same process that causes the rise in the organic composition, and relative fall in the quantity and value of fixed capital, also causes the rate of turnover to rise. The same process has, in fact, also released £8,000 of advanced capital, because previously £27,000 had to be advanced per turnover, whereas now only £19,000 is advanced. It will later be shown why any individual capital has an incentive to use this released capital to invest in additional machines, and increase its capital and output, rather than to simply continue producing at the same level, with fewer machines and workers.

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