Thursday, 29 May 2014

The Law Of The Tendency For The Rate of Profit To Fall - Part 12

The Fall In The Value Of The Circulating Constant Capital (2)

In Part 10, it was shown that the process which lies behind the tendency for the rate of profit to fall, i.e. a rise in the social productivity of labour, induced by technological change, causes the demand for raw materials to rise, and thereby causes their prices to spike. This may or may not result in a rise in the price of the commodities into which those materials enter. It will depend upon how much their price rises, and how much the rise in productivity, reduces the amount of living labour absorbed in the final product.

But, it is, in fact, the sharp rise in material prices, consequent upon a sharp rise in their demand, caused by this new technology, which is one of the causes of crises, as opposed to the falling rate of profit. As Marx describes, in Capital III, Chapter 6, and in Theories of Surplus Value, the sharp rise in demand for materials causes their market price to rise way above their price of production. As a consequence, this rise in price cannot be passed on in the price of those commodities into which those materials enter, as inputs, because the higher price of these commodities meets consumer resistance, which causes demand to fall. In order to maintain the level of demand, producers are forced to absorb some of the rise in material prices out of their profits. If falling demand causes the market price to fall far enough, the market price falls below the cost of production so that the capital consumed cannot be reproduced.

But, these periodic crises of overproduction are also the means by which this situation is resolved. In the longer term, in periods of sustained growth, the high prices of raw materials will encourage investment, which will bring down these prices too. In fact, they may as a result, experience sharp falls in value alongside a significant increase in their own supply, creating then a glut of these materials. This cycle of around around 20-25 years, when material prices are falling, due to over supply, followed by around 12 – 15 years when they rise sharply due to under supply, followed by a period when they are relatively flat, can be seen in every long wave cycle. The cycle for copper is particularly clear in that regard.

The process described for the reduction in value of fixed capital, also then applies to the primary products that make up part of the circulating constant capital, but is only visible over this longer period, on the basis of averaging out the periods when the market price is above, and those periods when it is below the price of production. But, not all circulating constant capital consists of primary products. An increasing amount of the circulating capital is itself the result of the capitalist production process. This is more so the case, as capital seeks to replace natural products with synthetic products precisely in order to overcome these lengthy periods when natural production cannot be easily increased. Marx details some of those methods, whereby capital uses science to provide chemical and other processes either to speed up natural processes, or to replace natural products. Even, in respect of natural products, Marx refers to Bakewell's sheep that were bred so as to be ready for slaughter much sooner, and the use of crop rotation so that the production time was reduced etc.

As well as a crisis of overproduction causing some firms to go bust, whose devalued capital is then picked up by others, the very process described in Chapter 11, shows why these capitals with a high organic composition, will have every incentive to try to bring about a reduction in the value of their constant capital, even more than their variable capital.

This is particularly the case given that this rise in wages can result in a rise in the demand for and supply of their own commodities, so that even if prices fall, the mass of profit on them may rise.

Under a regime of prices of production, it appears to capitalists that their profits arise simply from the difference between their selling price and their cost of production. This is emphasised by the fact that a general rise in wages leads to a falling price of the commodities produced by capitals of the higher composition. For these capitals, the main component of their cost of production is the constant capital, and so it appears that the most effective means of raising profits is to reduce this cost.

Consequently, as Marx points out, although the technical composition of capital rises, the organic composition does not rise in the same proportion, because the value of the circulating constant capital falls, and because the quantity of fixed capital falls relatively, whilst its value falls also.

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