Thursday, 12 June 2014

The Law of The Tendency For The Rate of Profit To Fall - Part 16

The Fall In The Value Of The Circulating Constant Capital (6)

Ricardo and Malthus believed that the price of food must rise because its production could not keep pace with the rise in demand for it. For Ricardo this forms the basis of his Theory of Differential Rent, which is also the basis of theories of marginal productivity. Ricardo, believed that it was natural that the land actually in cultivation must be the most fertile land, because farmers would naturally tend to cultivate that land first which was most productive. If production was to be increased, this meant that they would then have to bring into cultivation land which was not so fertile. The more fertile land would then produce higher profits, which meant that landlords could charge a rent on this land, based on its higher fertility. Marginal productivity theory makes the same assumption, so that it assumes that production must be being conducted at the most efficient/profitable levels, so any increase in demand, must mean that less efficient/profitable production has to be introduced to make up the additional supply, so prices rise.

But, Marx demonstrates that this assumption is false. There may be a piece of land, which currently is not very fertile, because it is poorly drained, for example. But, if demand rises, and this land is brought into cultivation, and the farmer invests capital for drainage, it may turn out that this land is actually more fertile than land previously in cultivation. It simply required a higher level of demand to justify production on a larger scale, and the necessary expenditure of capital. Similarly, it may be the case that land that is cultivated over a period of time, and benefits from the application of fertilisers etc. may absorb these investments of capital so as to bring about a permanent improvement in its fertility. Another example, may be that very fertile land has not been cultivated, because of its remoteness from markets. The plains of the United States, were very fertile, but remained uncultivated for millennia, until the development of the US in the 19th century, and rising demand for food, made their cultivation worthwhile. As Marx demonstrates in Capital II, improvements in transport have the same effect.

The same has been true of all manufactured products. Rather than the marginal cost of production rising as the volume of production rises, it has continued to fall. The more things are produced on an ever larger scale to meet increasing demand, the more the cost of production per unit falls, reducing the market value of those products. A look at the prices of things such as pocket calculators, or mobile phones demonstrates that. But, for precisely that reason all of the commodities that form the circulating constant capital of firms continually falls for the same reason.

As stated earlier, this process may not be immediately apparent in the case of some commodities. For manufactured commodities there are always short-term fluctuations based on changes in demand and supply. So, for example, things such as computer chips continually fluctuate between periods when they are in short supply and over supply, and so periods when their price is high or low. Things like shipping tend to go through a similar cycle. The demand for shipping rises as trade improves, shipping companies commission new, ever larger carriers, which when they are built then often exceed requirements for a period until demand once more catches up. The longer the period required to adjust supply, the more this will be the case. It is theorised in orthodox economics by Kaldor's “Cobweb Theorem”.

But, it is most apparent for natural products. Agricultural products require minimum times for the planting of crops, breeding of herds etc. To expand production beyond certain limits, new farms need to be established, which in the case of the above example, means opening up whole new territories in the US etc. We see the same today, with the increased global demand for food leading to the development of massive new agricultural developments in Africa, operated on an industrial scale. But, the same applies to mineral production. Production from existing mines and quarries can be increased, but because these will tend to be already partly mined out, increasing production from them, may indeed be more costly, pushing prices higher. Only to the extent that new techniques are developed, such as “fracking”, or new machines are developed that can extract minerals more efficiently, can this be offset.

But, to the extent that new farms, mines and quarries are developed in virgin territory, these will tend to be more fertile to begin with, and the improved methods of extraction etc. means that the production costs will be much lower than for existing production. In the longer term, therefore, the value of these commodities will fall, thereby reducing the value of the constant capital, and raising the rate of profit.

But, there are other, often more short-term means by which these costs of constant capital may be reduced. For example, foreign trade may bring in the required commodities from other economies where the production cost is already much lower. That was the case with the scrapping of the Corn Laws, which also saw many other import tariffs removed, thereby providing British manufacturers with an ample supply of cheaper materials to process.

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