Tuesday, 15 July 2014

Wallace and Dobbs – The Wrong Prophets

“Cracking dialectics Grommit.”

“Comrade Bough presents one of the most confused and confusing arguments imaginable. He attempts to argue that, for instance, chapter 9 of Capital, volume 3 - ‘Formation of a general rate of profit (average rate of profit) and transformation of the values of commodities into prices of production’ - refers to a different rate of profit than in chapters 13-15 on the LTRPF.”

In fact, there is nothing confused or confusing about it at all. But, then its not surprising that Wallace and Dobbs find it to be so, because as was shown recently -  Calculating The Rate of Turnover and Annual Rate of Profit they found the fairly simple matter of the rate of turnover of capital, and the annual rate of profit to also be “complicated”, “problematic” and “tricky”. Its not a question of the wrong profits, but of their apparent inability to understand basic Marxist concepts. In fact, I can't even give them full marks for being able to read simple English, because nowhere in the section they are attacking does it say anything about a different definition in Chapter 9 from Chapter 13!

Throughout Capital Volume I and II, Marx focuses on surplus value, and the rate of surplus value, leaving his analysis of profit and the rate of profit until Volume III. There are good reasons for that. Firstly, profit is the phenomenal form of surplus value. In other words, it is the superficial appearance that surplus value takes. Unless you understand surplus value and its source, you cannot understand profit. Similarly, the rate of surplus value has a determinant effect on the rate of profit, so to understand the formation of the rate of profit, its necessary to understand the rate of surplus value. But, secondly, for Marx, it is the rate of surplus value, not the rate of profit that provides an understanding of the real relation between capital and labour, and the extent to which workers are exploited.

The rate of profit, Marx sets out, must always be lower than the rate of surplus value, because the former measures the amount of surplus value against the total capital employed, whereas the latter measures it only against the labour-power that created it. However, Marx sets out that even the rate of surplus value does not give a true picture of the extent to which workers are exploited. In Capital II, in Chapters 7 to 17, he sets out the role of the rate of turnover of capital. Wallace and Dobbs claim that the main chapter dealing with the rate of turnover, Chapter 16, was not written by Marx at all.

“Bough introduces a phoney novelty in the form of turnover time, which, according to him, masks the real rate of profit. He states: “In Capital, volume 2, Marx analyses the effect of the rate of turnover on the annual rate of surplus value. His analysis is extensive, and central to his study of the circulation of capital.” If only this were true. Marx did not write any of it: Engels wrote it in its entirety.”

They are wrong. It is in manuscript 2, of Marx’s material edited by Engels. I don't know if they have ever actually read Volume II, but if they have, they should have seen in the Preface, on page 20 that it states quite clearly “pp 165-350, all from ms. II”. Chapter 16 starts on page 297 and runs through page 348. 

They should also have seen the following Note 32.

“In the manuscript, the following note is here inserted for future amplification: “Contradiction in the capitalist mode of production: the labourers as buyers of commodities are important for the market. But as sellers of their own commodity — labour-power — capitalist society tends to keep them down to the minimum price.

—Further contradiction: the periods in which capitalist production exerts all its forces regularly turn out to be periods of over-production, because production potentials can never be utilised to such an extent that more value may not only be produced but also realised; but the sale of commodities, the realisation of commodity-capital and thus of surplus-value, is limited, not by the consumer requirements of society in general, but by the consumer requirements of a society in which the vast majority are always poor and must always remain poor. However, this pertains to the next part.”

But, then given that Steve Dobbs, in the past, accused me of being a member of the SPGB, and then of holding a state capitalist analysis on the USSR, both of which he had to quickly retract, it seems that basic fact checking is not one of their strong points, along with their apparent inability to comprehend basic Marxist concepts, like the rate of turnover of capital.

Given that Marx spends ten chapters out of the twenty-one in Volume II, dealing with the basis of the rate of turnover of capital, it also seems fairly obvious that unlike Wallace and Dobbs, he did not consider it a “phoney novelty”.

The reason this is important is that what Marx shows is that workers provide the capital that is used for their own exploitation, so the capital actually provided by the capitalist is only a fraction of what it appears to be. That was the basis of the analysis provided in my post above.

In other words, the capitalist advances an amount of variable-capital, say £100, for wages. This covers let's say a five week period, during which the workers work producing commodities. This period, the turnover period, covers the time required to produce these commodities and to sell them, say four weeks to produce them, and one week to sell them. If, the rate of surplus value is 100%, when the commodities are sold, the capitalist will get back, in their price, not only the capital he advanced, but also this £100 of surplus value. But, the workers have also created, in these commodities, the value which reproduces the variable capital required for them to be employed for another five week period.

In other words, although the workers are exploited for 50 weeks of the year, the capitalist has only put up five weeks of capital for their exploitation. The other 45 weeks of variable capital, required for their exploitation, is actually produced by the workers themselves as new value embodied within the commodities they produce, and appropriated by the capitalist, to use to employ them again in the next turnover period. So, the actual rate of surplus value, the real degree of exploitation of the workers, is then not 100%, as the rate of surplus value suggests, but 1,000%, because the capitalist has only ever advanced £100 of capital, but in the year, the workers have produced £1,000 of surplus value! Marx calls this amended rate of surplus value the annual rate of surplus value.

Wallace and Dobbs seem to be like "a certain Biedermann" cited by Engels in Capital III, Chapter 4.  Based on the data from an actual firm in Manchester, where the annual rate of surplus value is calculated at 1307%, Engels comments.

"The s'n in the formula p' = s'n (v/C) stands, as has been said, for the thing called in Book II [English edition: Vol. II, p. 295. — Ed.] the annual rate of surplus-value. In the above case it is 153 11/13% multiplied by 8½ or in exact figures, 1,307 9/18%. Thus, if a certain Biedermann [Biedermann — Philistine. A pun, being also the name of the editor of the Deutsche Allgemeine Zeitung. — Ed.] was shocked by the abnormity of an annual rate of surplus-value of 1,000% used as an illustration in Book II, he will now perhaps be pacified by this annual rate of surplus-value of more than 1,300% taken from the living experience of Manchester."

In Capital III, Chapter 3, Marx turns to the analysis of the rate of profit, and how the rate of surplus value relates to it. A lot of his calculations in this chapter had to be amended by Engels, with the help of Samuel Moore, but the basic concepts are those of Marx himself. Where the rate of surplus value is determined as the amount of surplus value divided by the variable capital, i.e. s/v, the rate of profit is defined as being the whole capital, divided by the surplus value, i.e. s/c+v, the surplus value divided by the sum of the constant capital and variable capital. This is the first definition of the rate of profit used by Marx.

However, given the above analysis of the difference between the rate of surplus value, and the annual rate of surplus value, its quite obvious, that this rate of profit must give a false picture of the real situation, because the total amount of constant and variable capital here laid-out for the year, is not the same as the capital advanced by the capitalist for one turnover period. It would only be correct if the advanced capital turned over just once in the year. Its then clear that this definition must be amended to take account of the annual rate of surplus value. Once again, I don't know if they have ever actually read Volume III, but if they have, they should have seen Engels comment, again in the Preface, where he says,

“But since its subject-matter, the influence of turnover on the rate of profit, is of vital importance, I have written it myself, for which reason the whole chapter has been placed in brackets. It developed in the course of this work that the formula for the rate of profit given in Chapter III required modification to be generally valid.”

So, they should have known that, in Capital III, we already have here two different definitions of the rate of profit, one in Chapter 3 which does not take account of the annual rate of surplus value, and another in Chapter 4, which does! Engels statement above that “the influence of turnover on the rate of profit, is of vital importance”, is also in stark contrast to Wallace and Dobbs claim that it is a mere “phoney novelty”! Just how much an effect changes in the rate of turnover can have is indicated by Engels.

“The recently discovered methods of producing iron and steel, such as the processes of Bessemer, Siemens, Gilchrist-Thomas, etc., cut to a minimum at relatively small costs the formerly arduous processes. The making of alizarin, a red dye-stuff extracted from coal-tar, requires but a few weeks, and this by means of already existing coal-tar dye-producing installations, to yield the same results which formerly required years. It took a year for the madder to mature, and it was customary to let the roots grow a few years more before they were processed...

The time of circulation of a shipment of commodities to East Asia, at least twelve months in 1847 (cf. Buch II, S. 235 [English edition: Karl Marx, Capital, Vol. II, pp. 251-52. — Ed.]), has now been reduced to almost as many weeks. The two large centres of the crises of 1825-57, America and India, have been brought from 70 to 90 per cent nearer to the European industrial countries by this revolution in transport, and have thereby lost a good deal of their explosive nature. The period of turnover of the total world commerce has been reduced to the same extent, and the efficacy of the capital involved in it has been more than doubled or trebled. It goes without saying that this has not been without effect on the rate of profit.”

(Capital III, Chapter 4)

Just in the reduction of the circulation period, Engels states here that “the efficacy of the capital involved in it has been more than doubled or trebled.” In other words, the effect had been to double or treble its annual rate of profit, by means of what according to Wallace and Dobb is merely a “phoney novelty”!

If we move then to Chapter 9, where Marx deals with the historical and logical development of a general rate of profit, the question arises, which of these two rates of profit does he use? Marx gives the answer at the start of the chapter. He writes,

“It is further assumed that the capitals in the different spheres of production annually realise the same quantities of surplus-value proportionate to the magnitude of their variable parts. For the present, therefore, we disregard the difference which may be produced in this respect by variations in the duration of turnovers. This point will be discussed later.”

In other words, he is basically using the original definition of the rate of profit as s/c+v, and ignoring the effect of the rate of turnover. However, there is a difference between this rate of profit and that used in Chapter 3, for the simple reason that although Marx ignores the role of the rate of turnover, he does make clear that this rate of profit, like that in Chapter 4, must be based upon the capital advanced, i.e. for one turnover period, rather than the capital laid out for the year. The difference with Chapter 4 is that he does not specify the length of the turnover period, so it could be that the turnover period is, in fact one year, as well as it could be a month. 

But, Marx in Chapter 9, makes a further modification, which is to deal with the issue of the fixed capital, which Wallace and Dobbs find to be so,“complicated”, “problematic” and “tricky”. Marx, as with Engels in Chapter 4, resolves it quite simply.

“We must, therefore, remember in comparing the values produced by each 100 of the different capitals, that they will differ in accordance with the different composition of c as to its fixed and circulating parts, and that, in turn, the fixed portions of each of the different capitals depreciate slowly or rapidly as the case may be, thus transferring unequal quantities of their value to the product in equal periods of time. But this is immaterial to the rate of profit. No matter whether the 80c give up a value of 80, or 50, or 5, to the annual product, and the annual product consequently = 80c + 20v + 20s = 120, or 50c + 20v + 20s = 90, or 5v + 20v + 20s = 45; in all these cases the redundance of the product's value over its cost-price = 20, and in calculating the rate of profit these 20 are related to the capital of 100 in all of them.” 

In other, words, where Wallace and Dobbs wittered on ignorantly about how the fixed capital made calculation of the rate of profit “complicated”, “problematic” and “tricky”, Marx simply points out that the issue of the fixed capital and its rate of turnover is irrelevant to the calculation of this rate of profit, because although its wear and tear enters the cost price of the commodity – in other words c + v – it does not enter the calculation of the advanced capital. On the contrary, it is the entire value of the fixed capital that must be included in the calculation, because the whole of the fixed capital must be present, and is thereby advanced. So, we now have a third definition of the rate of profit, one which now also defines the role of the fixed capital.

For the entire social capital, the issue of the different rates of turnover in each sphere is resolved, because the general rate is an average of the annual rate of profit in each sphere, and this annual rate, is calculated in accordance with the formula set out by Engels in Chapter 4, which does take account of the rate of turnover in that sphere. 

“Since the general rate of profit is formed by taking the average of the various rates of profit for each 100 of capital invested in a definite period, e.g., a year, it follows that in it the difference brought about by different periods of turnover of different capitals is also effaced. But these differences have a decisive bearing on the different rates of profit in the various spheres of production whose average forms the general rate of profit.”

Once again, what for Wallace and Dobbs is merely a “phoney novelty”, is for Marx something which has “a decisive bearing on the different rates of profit”

So, we come to Chapter 13 then, and the rate of profit used there. Which rate of profit is used here? A look at almost all of the discussion in Chapter 13, is framed in terms of the cost price of commodities, k, plus the profit p. But, such a discussion means that the basis of the definition of the rate of profit here, must be one in which the advanced capital turns over once. The cost-price of commodities is given by the capital advanced as constant and variable capital, plus the amount of wear and tear of fixed capital. However, as seen above, in calculating the annual rate of profit, the wear and tear is not included, because it is the total fixed capital advanced whose value is taken as part of the denominator. The rate of profit used in Chapter 13, which is repeatedly given as p/k, the profit divided by the cost-price, can only be the same as the annual rate of profit set out in Chapter 4, if, and only if, the fixed capital turns over just once during the year, and consequently where the figure for wear and tear is equal to the value of fixed capital itself. But, moreover, it can only be the same if the circulating capital turns over once during the year.

In other words, Marx has used the same rate of profit essentially as was used in Chapter 3. The cost price, k, is taken as being c + v, all of which turns over once. But, you don't have to take my word for that, because Marx and Engels themselves make that clear. Marx states,

“However, the rate of profit, if calculated merely on the elements of the price of an individual commodity, would be different from what it actually is. And for the following reason:”

Engels continues the explanation,

“The rate of profit is calculated on the total capital invested, but for a definite time, actually a year. The rate of profit is the ratio of the surplus-value, or profit, produced and realised in a year, to the total capital calculated in per cent. It is, therefore, not necessarily equal to a rate of profit calculated for the period of turnover of the invested capital rather than for a year. It is only if the capital is turned over exactly in one year that the two coincide.

On the other hand, the profit made in the course of a year is merely the sum of profits on commodities produced and sold during that same year. Now, if we calculate the profit on the cost-price of commodities, we obtain a rate of profit = p/k in which p stands for the profit realised during one year, and k for the sum of the cost-prices of commodities produced and sold within the same period. It is evident that this rate of profit p/k will not coincide with the actual rate of profit p/C, mass of profit divided by total capital, unless k = C, that is, unless the capital is turned over in exactly one year.” 

To illustrate this effect, Engels gives three examples where the capital turns over at different rates, thereby showing the difference between the rate of profit as defined in Chapter 13, and the“ actual rate of profit p/C”.  Example III is as follows.

“Let the capital rise to £15,000 owing to a constant growth of the productiveness of labour, and let it annually produce 30,000 pieces of the commodity at a cost-price of 13s. per piece, each piece being sold at a profit of 2s., or at 15s. The annual turnover therefore = 30,000×15s. = £22,500, of which £19,500 is advanced capital and £3,000 profit. The rate of profit p/k then = 2/13 = 3,000/19,500 = 15 5/13%. But p/C = 3,000/15,000 = 20%...

...in case III, in which the total capital is smaller than the amount of the turnover, it is lower than the actual rate calculated on the total capital. This is a general rule.” 

Why is it that the advanced capital, C, is only £15,000 in this case, whereas the total laid-out-capital, k, is £19,500 (Engels makes a slip in referring to this as advanced rather than laid-out capital)? Its because, the circulating capital turns over more than once during the year.  And, why is it that the capital turns over more than once a year in example III, compared to the situation in the previous two examples, where it doesn't?  Its precisely because of what Engels says at the beginning of the example, "a constant growth of the productiveness of labour".  The same reason that leads to the rising organic composition of capital that is behind the fall in the rate of profit! 

The reason this is important, and the reason why Marx and Engels use this definition of rate of profit, as essentially the profit margin, is because it prepares for the use of that measure in Chapter 15, to demonstrate how, even as the annual rate of profit rises, causing increased levels of investment that creates a plethora of capital, that same process causes the profit margin to fall, and thereby makes crises of overproduction more likely. I described that in the above blog post, showing that with a rate of turnover of 120, a car manufacturer, might have an annual rate of profit of 120%, and yet they might have a profit margin per car of only 1%, or £120, so that even a slight change in market conditions might make it impossible to recover the value of the capital used in its production.

The problem is that because our prophets Wallace and Dobbs do not understand that Marx uses these different definitions of the rate of profit, even though Marx and Engels are at pains to describe the fact that they have done so, they are led to use the wrong profits as the basis of their analysis, such as it is. So, when they say,

“The profit margin is only 3.3%! The fact is that most car manufacturers do not have healthy margins.”

They merely emphasise the lack of their own knowledge of the basic difference between these alternative definitions of the rate of profit used by Marx and Engels.

In Chapter 17,  Marx develops yet a further definition of the rate of profit to include merchant capital as well as productive-capital in the total social capital that determines the general annual rate of profit, and from this point Marx also uses this term general annual rate of profit.  In Chapter 18, Marx also deals with the consequences of the turnover of merchant capital in influencing market prices, and its effect back on the amount of total social capital advanced, which in turn affects the general annual rate of profit.

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