Friday, 9 May 2014

The Law of The Tendency For The Rate of Profit To Fall - Part 6

A Relative Reduction In The Quantity of Fixed Capital (1)

At the heart of the process which leads to a tendency for the rate of profit to fall is a rise in the organic composition of capital (based on a rise in the technical composition due to technological change). Although, the division of labour can bring about such a change, generally, once we move beyond manufacture to machine industry, such a rise can only come about on a significant scale as a result of a change in technology. If simply the scale of production is expanded so that more machines, more material, and more labour is employed, then as Marx describes, this does not signify any change in the organic composition of the capital, each expands in the same proportion. As Marx points out, such expansion of capital does characterise long periods, interspersed with other long periods when rapid technological change occurs, and it is in these latter periods that the technical composition changes, thereby providing the basis for a change in the organic composition.

“Growth of capital, hence accumulation of capital, does not imply a fall in the rate of profit, unless it is accompanied by the aforementioned changes in the proportion of the organic constituents of capital. Now it so happens that in spite of the constant daily revolutions in the mode of production, now this and now that larger or smaller portion of the total capital continues to accumulate for certain periods on the basis of a given average proportion of those constituents, so that there is no organic change with its growth, and consequently no cause for a fall in the rate of profit. This constant expansion of capital, hence also an expansion of production, on the basis of the old method of production which goes quietly on while new methods are already being introduced at its side, is another reason, why the rate of profit does not decline as much as the total capital of society grows.” (Capital III, Chapter 15)

In other words, a change in the organic composition can only arise if the productivity of labour rises, and that occurs on a significant scale, only because new, better machines are introduced. But, by definition, a better machine replaces several, less efficient, machines, so on this basis the physical quantity of machines, of fixed capital, is reduced, at least relative to the level of output, and, therefore, relative to the circulating constant capital, the material processed.

In addition, although the quantity and value of fixed capital, and particularly machinery, grows, as labour productivity grows, - and indeed in the case of machinery is a means of the growth of that productivity – it does not grow as rapidly as labour productivity. The higher labour productivity, as well as scientific development, ensures that better machines are produced that do the work of many older machines, that they last longer, and that their value, particularly measured against their output falls sharply.

Even where more fixed capital is employed, therefore, the value of that fixed capital can fall bringing with it a corresponding rise in the rate of profit. But, alongside that rise, in the productivity of labour, and of the machines comes a huge expansion of the raw material processed.

“The value of raw material, therefore, forms an ever-growing component of the value of the commodity-product in proportion to the development of the productivity of labour, not only because it passes wholly into this latter value, but also because in every aliquot part of the aggregate product the portion representing depreciation of machinery and the portion formed by the newly added labour — both continually decrease. Owing to this falling tendency, the other portion of the value representing raw material increases proportionally, unless this increase is counterbalanced by a proportionate decrease in the value of the raw material arising from the growing productivity of the labour employed in its own production.” (Capital III, Chapter 6, p 108-9)

But, this relative fall, in the physical quantity of fixed capital, used in production, is itself marked by a contradiction. On the one hand, the quantity of fixed capital falls relative to the laid-out circulating constant capital, the materials, but it increases both absolutely and relative to the advanced circulating capital. That is again due to its revolutionising role in raising labour productivity. In other words, this rise in productivity continually increases the difference between the advanced capital and the laid-out capital, as a result of the increase in the rate of turnover of the capital. What makes this contradiction even more significant is that, as the proportion of fixed capital rises in relation to the advanced capital, so any reduction in its value, arising from the very same processes it brings about, has an increasing impact on raising the rate of profit itself.

For example, suppose capitalist production is at an early stage. There is:

Fixed Capital £1,000

Material £1,000

Surplus Value £1,000.

The rate of profit is 1000/3000 = 33.3%. If the fixed capital suffers a 20% depreciation then the rate of profit becomes 1000/2800 = 35.7%.

However, because fixed capital accumulates and functions for long periods, whereas the circulating capital is constantly reproduced, and advanced, its absolute value rises relative to the advanced circulating capital, even as its quantity and value falls relative to the laid out circulating capital. This is manifest by it transferring a smaller and smaller value to the end product. In other words, the ratio of fixed capital to laid out circulating capital falls because more material is processed in a year. But, given amounts of material are processed in shorter and shorter periods, so less circulating capital is thereby advanced.

Suppose we then have:

Fixed capital £100,000

Material £30,000

Variable Capital £20,000

Surplus Value £20,000.

The rate of profit is 20000/150000 = 13.33%. If the fixed capital is then depreciated by 20%, the rate of profit is 20000/130000 = 15.38%. In the first case, the rate of profit rose by 7.2%, as a result of a 20% depreciation of the fixed capital. In the second case it rises by 15.38%. In fact, the annual rate of profit in this latter case would be significantly more than in the first case, because the reason that the value of the fixed capital rises, here relative to the circulating capital, is that it is a rise in relation to the advanced capital, not the laid-out capital. In other words, it is a reflection of the fact that the rate of turnover of capital has risen, and the increase in the rate of turnover is itself a function of the rise in productivity brought about by the increase in the fixed capital relative to circulating capital. If the circulating capital turns over 4 times here compared to once, the actual laid out capital would be £120,000 material, and £80,000, variable capital.

If we calculate the annual rate of profit to take this into account, as Marx does, then it is s x n/C. That is £20,000 x 4 = £80,000 divided by £100,000 fixed capital + £30,000 material + £20,000 variable capital = £150,000, less the 20% depreciation = £130,000. In that case, 80/130 = 61.54 %. In other words, the total effect arising from the increased organic composition of capital, and from the increase in the advanced fixed capital is that the annual rate of profit rises by 84.8%!

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