Capital II, Chapter 19 - Part 5

Smith then is forced to recognise that these revenues are not the end of the matter, because in addition to the wages, profits and rent there is also the value of the constant capital. He then sets up a counter argument to try to escape this problem.

“A fourth part, it may perhaps be thought, is necessary for replacing the stock of the farmer, or for compensating the wear and tear of his labouring cattle, and other instruments of husbandry. But it must be considered that the price of any instrument of husbandry, such as a labouring horse, is itself made up of the same three parts: the rent of the land upon which he is reared, the labour of tending and rearing him, and the profits of the farmer who advances both the rent of this land, and the wages of this labour. Though the price of the corn, therefore, may pay the price as well as the maintenance of the horse, the whole price still resolves itself either immediately or ultimately into the same three parts of rent, labour” (he means wages), “and profit.” (Book I, Ch. 6, p. 42.)” (p 377-8)

In other words, he simply relies on repeating the assertion that everything resolves itself into v + s.

But, Marx points out,

“He forgets, however, to add: and, moreover, into the prices of the means of production consumed in their own creation. He refers us from one branch of production to another, and from that to a third. The contention that the entire price of commodities resolves itself “immediately” or “ultimately” into v + s would not be a hollow subterfuge only if he were able to demonstrate that the commodities whose price resolves itself immediately into c (price of consumed means of production) + v + s, are ultimately compensated by commodities which completely replace those “consumed means of production,” and which are themselves produced by the mere outlay of variable capital, i.e., by a mere investment of capital in labour-power.” (p 378)

But, of course, he can't. All production resolves itself into c + v + s. Unfortunately, some socialist economists, anxious to make the point that all production ultimately comes down to the value created by workers, have also fallen into this error.

The variable capital set in motion by the capitalist results in the production of new value by the workers, i.e. positive value equal to the average social labour expended by the workers. At the same time, those workers preserve the value of any constant capital that is transferred to the end product.

NB. It is only the value of constant capital actually transferred that is preserved. If material or machines are destroyed, depreciated or otherwise wasted, and thereby prevented from entering the final product, then obviously its value is not transferred either.

But, this is all those workers can do. This new value they create is divided into v + s. Assuming the value of the labour-power is less than the new value created by those workers, the surplus will then be appropriated by capital, and some of it may be shared as rent with the landlord, some as interest with the money capitalist and so on.

“And what is true of the industrial labour of one day is true of the labour set in motion by the entire capitalist class during one year. Hence the aggregate mass of the annual value produced by society can resolve itself only into v + s, into an equivalent by which the labourers replace the capital-value expended for the purchase of their own labour-power, and into an additional value which they must deliver over and above this to their employers. But these two elements of commodity-value form at the same time sources of revenue for the various classes engaged in reproduction: the first is the source of wages, the revenue of the labourers; the second that of surplus-value, a portion of which is retained by the industrial capitalist in the form of profit, while another is given up by him as rent, the revenue of the landlord. Where, then, should another portion of value come from, when the annual value-product contains no other elements than v + s?” (p 378-9)

Marx explains.

Adam Smith determines the value of a commodity by the amount of labour a worker adds to the materials he works with. But, this value added is entirely independent of whether those materials had any value to begin with. This new value, embodied in a new commodity, is in part an equivalent to the wages paid to the worker, but also in part, a surplus value, paid as profits etc. Whether or not this surplus is shared with others does not change the fact of it being a surplus, or the amount of that surplus.

What is true for any individual commodity, or business, is true for the whole economy.

“It “fixes” (Adam Smith’s expression) in the annual product of a total value determined by the quantity of the annual labour expended, and this total value resolves itself into one portion determined by that part of the annual labour wherewith the working-class creates an equivalent of its annual wages, in fact, these wages themselves; and into another portion determined by the additional annual labour by which the labourer creates surplus-value for the capitalist class. The annual value-product contained in the annual product consists therefore of but two elements: namely, the equivalent of the annual wages received by the working-class, and the surplus-value annually provided for the capitalist class. Now, the annual wages are the revenue of the working-class, and the annual quantity of surplus-value the revenue of the capitalist class; hence both of them represent the relative shares in the annual fund for consumption (this view is correct when describing simple reproduction) and are realised in it.” (p 380) 

But, of course, as all the previous analysis has shown, the value of a commodity, and therefore of national output, cannot be reduced to just v + s, to the new value created, precisely because those materials used, the constant capital, do already possess value that is transferred into the final product.

“Now Adam Smith’s first mistake consists in equating the value of the annual product to the newly produced annual value. The latter is only the product of labour of the past year, the former includes besides all elements of value consumed in the making of the annual product, but which were produced in the preceding and partly even earlier years: means of production whose value merely re-appears — which, as far as their value is concerned, have been neither produced nor reproduced by the labour expended in the past year.” (p 381)

In part, Smith's error rests upon his confusion between abstract and concrete labour, and between labour and labour-power, which itself rests on the two-fold nature of labour itself. Abstract labour is the essence and measure of value, it creates value through the expenditure of labour-power. But, labour-power can only ever be concrete. Workers do not exist as abstract workers, but as specific kinds of workers, tailors, spinners, teachers etc. It is this concrete labour-power that is sold as a commodity. It is concrete labour that is the source of value, because it is only concrete labour that exists as a material thing, and which produces use values. Abstract labour cannot be sold as a commodity, as labour-power, precisely because it does not exist as a material thing. It is only an abstraction.

“The total quantity of the commodities fabricated annually, in other words, the total annual product is the product of the useful labour active during the past year; it is only due to the fact that socially employed labour was spent in a ramified system of useful kinds of labour that all these commodities exist; it is due to this fact alone that the value of the means of production consumed in the production of commodities and reappearing in a new bodily form is preserved in their total value. The total annual product, then, is the result of the useful labour expended during the year; but only a part of the value of the annual product has been created during the year; this portion is the annual value-product, in which the quantity of labour set in motion during the year is represented.” (p 381)

So, Smith puts forward a one-sided argument when he claims that it is only the useful labour expended during the year which creates the value of the total output, because he forgets the value contributed by all of the materials used in it, the tools and machines used to assist labour and so on, and 

“...therefore, the “annual labour,” while it created value, did not create all the value of the products fabricated by it; that the value newly produced is smaller than the value of the product.” (p 381-2)

The simple answer, in a way, was given by the quote Marx gave from William Thompson earlier in Chapter 17, that a society could continue to consume for a time even if it did not produce. It could consume its existing capital. A portion of that capital always is consumed each year. But, in order to prevent its diminution each year, a portion of production must always be devoted not to consumption, but to the replacement of that capital.

Back To Part 4

Northern Soul Classics - Ain't It Baby - Kenny Gamble and the Romeos

Another classic oldie from Kenny Gamble and the Romeos.

The Law of The Tendency For The Rate of Profit To Fall - Part 35

Fall In the Value Of The Variable Capital (19)

In Part 34, it was shown how the rise in productivity increases the annual rate of profit, but also results in the release of capital, as the period during which variable capital is advanced is continually reduced. But, this release of capital, also has other results. If we take the release of capital in Year 2 above, the advanced variable capital was £670, representing a release of capital of £330.

On the assumptions made so far, the cost of fixed capital is £200. This fixed capital is assumed to last for one year, and each year, it has been replaced by new fixed capital of the same value, but which is progressively more productive. Given the assumptions made, if double the quantity of fixed capital were employed, then assuming twice as many workers were employed to operate it, twice the quantity of material could be processed. But, the consequence of this is interesting.

Currently in Year 2, using £200 of fixed capital, 800 units with a value of £800, is processed by 1400 labour units employed with a variable-capital of £670. If £400 of fixed capital were employed, then to operate it, 2800 labour units would be required. It would then appear that an additional £670 of variable capital would be required, along with an additional £800 of circulating constant capital (material) to be processed. But, in fact, that is not the case.

If the amount of output for a turnover period remains 3000 units, then the material required to produce this 3000 units does not change. It is still the case that only 800 units of material (£800) is required to be advanced for the turnover period. But, also if double the quantity of fixed capital, and double the quantity of labour-power produces double the output in a given period of time, by the same token, the same quantity of output (3,000 units) can be produced in half the time.

In other words, although twice the physical quantity of workers is employed, the variable capital advanced, is advanced for only half the time. Previously it took 29.71 weeks to produce 3000 units, but now with twice the amount of fixed capital, and twice the quantity of labour-power, this 3000 units can be produced in just 14.85 weeks. The amount of variable capital advanced for this turnover period is then still only £670. The annual rate of profit can then be calculated.

The surplus value produced by the 1400 labour units in 29.71 weeks was £930. The surplus value produced by 2800 labour units in 14.85 weeks is, therefore, the same. The total surplus value produced in the year is then s x n = 930 x 3.5 = £3,255. The fixed capital advanced for a turnover period is £400, the circulating constant capital is £800, and the advanced variable capital is £670. The total advanced capital is then £1,870. The annual rate of profit is then 3255/1870 = 174%.

That is a rise from 97%, of 79%. In other words, this rise in the organic composition of capital brought about by a doubling of the fixed capital, results not in a fall in the rate of profit, but a significant rise. This is the reason that so far as it remains possible to find available markets for the output, capital always has an incentive to utilise the released capital to invest in additional fixed capital, so as to increase productive potential, because although this means that the quantity of laid out capital increases, the quantity of advanced capital does not, and consequently the annual rate of profit must rise.

This is a further validation of Marx’s analysis that the very process that results in a tendency for the “Rate of Profit” to fall, simultaneously results in a tendency for the mass of capital to grow, including the mass of variable capital, and for the mass of profits to grow alongside it. It results in an increasing volume of released capital available for yet further accumulation.

Back To Part 34

Forward To Part 36

Why The West Wants Russia To Invade Ukraine

NATO, the EU and western governments repeatedly proclaim their concern that Russia may invade Ukraine.  Indeed, they talk as though Russia had virtually already invaded Ukraine, and use that to promote sanctions.  But, in fact, the West wants Russia to invade Ukraine.  Its actions of taking sanctions against Russia and so on have been designed to try to provoke Russia into such an escalation on the basis that if such action was being taken without the invading, they may as well do so.

The West wants Russia to invade Ukraine, because having done so it will have bought the problem, and thereby have let the West off the hook.  Having tried to pry Ukraine away from Russia, the West, as it frequently does, has promoted destruction without creating anything positive in its place.  That was what happened in Russia itself after the fall of Stalinism, when western advisers came in, promoting Austerian, free market policies that wreaked havoc on the economy.  The same policies are being imposed on the EU periphery with the same kind of effect.

In order to put the Ukrainian Humpty Dumpty back together again, far more than the several billions the CIA pumped into Ukraine to promote dissent will be required.  The Ukrainian economy is a total basket case.  In fact, its only hope of regeneration lies in its Eastern industrial heartlands.  Rebuilding Ukraine, is likely to require as much investment as is required in the whole of the EU periphery, perhaps as much as $2 trillion in both cases.  The inevitable collapse of the banks in Ukraine, and the effect on other European banks could drain somewhere between $200 billion to $400 billion.

Neither the US nor the EU shows any appetite for picking up this tab, and yet the failure to ride to the rescue means that the Ukrainian economy in the not too distant future is going to go into meltdown. That is why the government collapsed because it couldn't agree on the spending cuts required. Government employees are not being paid, the country's debts are mounting, and it can no longer get gas from Russia, which will be a major problem in a couple of months time when the weather starts to get colder.

When that happens it will not just be people in the East that oppose the Kiev regime.  On top of economic collapse will come social and political chaos, in conditions where in the West, the most organised, disciplined and ideological coherent forces are those of the fascists.  In other words, the same kinds of conditions that have led to control of the streets falling to militant fascist militias in Libya, Iraq, and Syria as a result of the West seeking to destabilise the previous regimes will unfold right on Europe's doorstep.

If the West can cajole Russia into invading Ukraine, Russia will have to pick up the financial tab, and/or it will have to be the one seen to be quashing the inevitable unrest that breaks out across the country.  If Putin has any sense, he will not fall into that trap.  And, indeed, he has no need to to do so.  He has a much better option.  Over the last few years, Cuba has built a close relation with China.  But, it has also been making closer relations with the US.  Now Russia is drawing closer to Cuba again.  Cuba has just re-opened an old Soviet era spying station, so that Russia can again listen in to US communications.

Moreover, as Russia has responded to western economic sanctions by banning food imports from the US and EU, Russia has the potential to expand its trade with Cuba, as an agricultural producer, in exchange for the oil and gas it requires.  From Russia's perspective putting its efforts into building a relation with Cuba on the US front door is a far better strategic play in response to the West trying to push the borders of NATO up to Russia, than an expensive invasion of Ukraine.

Maito and The Rate of Turnover of Capital - Part 2

If we examine the circuit, for a restaurant, what we see then is that such a restaurant has customers come in, who place orders. Variable capital is advanced, in the production process, (P) as labour-power, which takes the order, as well as the labour-power that cooks the food. Circulating constant capital is advanced in the form of electricity to power the till, to light and heat the restaurant etc., and in the form of the materials used in the food. In fact, in a fast food restaurant, payment for the food (M') will usually be made, even before the commodity has been supplied, but the circuit of this capital is really only complete at the point that the commodity has been supplied to the customer, and payment made, so that the above payment can be used to reproduce the consumed productive-capital, ready to fulfil the next order. It is complete, because not only is this money-capital then available to reproduce the productive-capital, but that productive-capital is itself already immediately on hand, in the form of a productive-supply, i.e. the workers are already there in place, and the materials are already on site, waiting to be advanced to the production process, to replace those consumed in the previous circuit. In reality, the circulating capital advanced is turned over in this way, not just on a daily basis, as I suggested previously, but many times, even just during a single day.

If you want a practical example of how that might occur, it would be of a pimp, who immediately takes the money paid to a prostitute, by a client, and, after taking out their profit and any expenses, pays the remainder to the prostitute, so that they can reproduce their labour-power, and continue to the next client.

If, on average, there are 500 customer orders completed during the day, the variable capital turns over 500 times, (in reality modified by how many orders are on average filled simultaneously) and this is not changed by the fact that, in practice, the value of the commodity is not used, after each completed circuit, to pay the workers, or to buy replacement material, used in that particular production process. The fact remains that, after the completion of each order, the circuit of capital has been completed, the capital required to reproduce the productive-capital, used in the commodity's production and circulation, has been realised, along with additional capital to cover the wear and tear of fixed capital, plus the relevant amount of surplus value, and sits in the till, available for use, or else has been transferred, by electronic means, into the company's bank account, equally available for use. In a 7 day week, the advanced circulating capital will have been turned over 3500 times, even before any money has been paid to workers as wages, or to cover payments to material suppliers.

In fact, if the workers are paid one month in arrears, and the material is supplied on the basis of payment within a month of receipt, no money-capital will need to be advanced for its purchase, because the required capital will be generated from the sale of commodities during that month, made possible by the advance of labour-power and circulating constant capital! That is one reason why Marx calculates the rate of profit on the current reproduction cost of this advanced capital value, and not on the historic money prices paid for it.

But, just as the fact that workers are paid a week or a month in arrears, and materials are paid for on one month's commercial credit from suppliers, does not affect the rate of turnover, of the advanced productive-capital, so it would not matter, either, if they were paid for in advance, rather than in arrears. All that would change here, is that the capital value would assume a different form. As Marx points out, in Capital II, the individual firm, for various reasons, may buy up inputs in advance of the production process, which then constitute, not productive-capital, advanced to the production process, but constitute merely a productive supply, that is in the hands of that particular producer, rather than the hands of the merchant or other producer that supplies them.

If a particular capital has 10,000 units of materials in a productive-supply, but only requires 1,000 of those units to be advanced to meet the needs of production for one turnover period, the advanced capital is not calculated on the value of the 10,000 units, but on the value of the 1,000 units actually advanced to production. The fact, that the capitalist has this additional 9,000 units, simply means they have a capital value equal to that amount in the form of commodities, rather than money-capital (or more accurately in the form of commodities rather than money, because money that is not being used productively so as to expand is not acting as capital, and the same applies to the commodities).

The fact, remains that in order to have continuous production during the whole of the turnover period, the capitalist only requires to advance 1,000 units. When these 1,000 units are processed into commodities, and sold, their value assumes the form of money, which now the capitalist does not need to immediately transform into materials, to reproduce those consumed in production, because they already have a productive supply, of an additional 9,000 units, ready to be advanced to production, without any additional purchases, or advance of money-capital.

The commodity-capital when sold assumes the form of money, not money-capital, precisely because it can be used for unproductive consumption rather than to buy additional productive-capital.  It does not need to immediately buy additional productive-capital, because of the existence of the productive-supply.  At the point that the next 1,000 units of these commodities leave the productive supply and are advanced to production, they cease being merely commodities, and become productive-capital, just as money when it is advanced to buy productive-capital ceases being simply money, and becomes money-capital.

The same is true above. If the pimp immediately took the money, paid by each client, to the prostitute, but only paid the wages, to the prostitute, at the end of the day, and only paid out expenses at the end of the day, this would not change the fact that the variable capital, represented by the labour of the prostitute, had turned over several times during the day, and that the pimp had obtained their surplus value, on it, several times during the day, which would have been available for them, after each circuit, to invest in other ways.

The same is true in relation to the payment for orders provided by a fast food restaurant. But, this also demonstrates the problem with Maito's methodology, of calculating the rate of turnover based on “the number of times the total stock of inventories is expressed in the flow of total costs of the economy.” That is that, besides the problem of accurately determining, in a Marxist sense, what those total costs are, there are numerous reasons why the total stock of inventories may vary, in proportion to those costs, that has nothing to do with changes in the rate of turnover of productive-capital.

Back To Part 1

Forward To Part 3

Capital II, Chapter 19 - Part 4

2) Adam Smith Resolves Exchange Value into v + s 

Smith resolves exchange value and the value of national output into three parts – The Trinity Formula. That is wages, profits and rent. This is also the assumption of orthodox economics, be it the Neoclassical or Keynesian. In fact, Keynes' General Theory is based on the assumption of such an equality i.e. that the value of national output is equal to National Income. Marx sets out to demonstrate that this assumption is most obviously false.

Smith's assumption comes down to saying that exchange value/national output comprises v + s, wages plus surplus value. The fact that Smith refers also to rent does not change this. If a rent is obtained, this only means that workers have created enough surplus value that one could be paid.

Marx quotes Smith himself to demonstrate this. For example, talking about manufacture, Smith says,

“The whole annual produce of the land and labour of every country ...naturally divides itself into two parts. One of them, and frequently the largest, is in the first place, destined for replacing a capital, or for renewing the provisions, materials, and finished work, which had been withdrawn from a capital; the other for constituting a revenue either to the owner of this capital, as the profit of his stock; or to some other person, as the rent of his land. (p. 222.)” (p 375)

In other words, v + s, wages and profits. Then in relation to agriculture, besides,

“the reproduction of a value equal to their own consumption, or to the [variable] capital which employs them, together with its owners’ profits ...” — furthermore, “over and above the capital of the farmer and all its profits regularly occasion the reproduction of the rent of the landlord.” (Book II, Ch. 5, p. 243.)” (p 375)

But, Marx points out, 

“The fact that the rent passes into the hands of the landlord is wholly immaterial for the question under consideration. Before it can pass into his hands, it must be in those of the farmer, i.e., of the industrial capitalist. It must form a component part of the value of the product before it becomes a revenue for anyone. Rent as well as profit are therefore, according to Adam Smith himself, but component parts of surplus-value and these the productive labourer reproduces continually together with his own wages, i.e., with the value of the variable capital. Hence rent and profit are parts of the surplus-value s, and thus, with Adam Smith, the price of all commodities resolves itself into v + s.” (p 375-6) 

Smith conflates the idea of wages, profits and rent being component parts of revenue, which, as seen, could be reduced to just v + s, with them being the original source of revenue. But, Marx points out that although its true that the revenues of all sorts of people, not engaged in production, from a prostitute to a King, comes from a payment by a productive worker or a capitalist, those who receive them do so by virtue of the function they perform,

“and they may, therefore, regard these functions as the original sources of their revenue.” (p 376)

3) The Constant Part of Capital 

There is clearly an important distinction between the source of revenue and its destination. For example, profit may be paid to a capitalist, and all sorts of justifications as to why they should receive it can be formulated. That may be that they have taken a risk, that they have abstained from consumption etc. But, none of these have anything to do with the source of the profit they receive.

A capitalist may take a risk, for example, producing some commodity that nobody wants. Rather than this risk creating a profit, they will make a loss, and the resources used for its production will be wasted. A capitalist may abstain from consumption, and hide their pot of gold in the ground until later. But, when they dig it up, it will have increased in value by not one jot!

So, when Smith says,

“In the price of corn, for example, one part pays the rent of the landlord.” (p 377)

this is not an explanation of the value of the corn, based upon the revenues that are paid to the revenue recipients (the basis of the cost of production argument) but quite the reverse shows that the value of the corn can be divided up so as to provide a revenue to various recipients.

In other words, it is the value of the commodity, which determines how much can be distributed as revenue not how much is distributed as revenue that determines value. Suppose a firm produces without any constant capital. The value of its output is equivalent to 10,000 hours of social labour. If to produce it, it employs 10 workers, who are paid in arrears, the fact that the value of their labour-power amounts to 15,000 hours of social labour does not mean they can be paid it!

The most the firm can pay, from its revenue, is the equivalent of 10,000 hours. If the workers had been paid in advance, the full 15,000 hours, then the capitalist would have made a loss equal to 5,000 hours, which they would have to make up from their capital. The 10,000 hours of value created by the workers is all new, positive value. It is value that did not previously exist. The problem is that this new value, created by the workers, is less than the value of their labour-power consumed in producing it!

In other words,

“This entire price, i.e., the determination of its magnitude, is absolutely independent of its distribution among three kinds of people.” (p 377)

Back To Part 3

Forward To Part 5

Maito and The Rate of Turnover of Capital - Part 1

This is a response to the article by Estoban Maito in the Weekly Worker , discussing the role of the rate of turnover of capital, and its effect on the annual rate of profit. A fuller analysis and critique of his other works in this respect, will require more time than I currently have available.

I welcome the attempt by Maito to calculate an average rate of turnover of capital. For several years now, I have been arguing that estimates of the rate of profit are inadequate, because, for one thing, they do not take into consideration changes in the rate of turnover of capital. For that reason alone, Maito's attention to it is helpful, compared to those who believe the rate of turnover is only a “phoney novelty”. However, there are other reasons why the calculations of the rate of profit are inadequate, and some of those reasons also mean that Maito's attempt to calculate the rate of turnover, based on national income and output data, is fraught with problems. I do not believe it is possible to calculate the rate of turnover by working backwards from this data, and making extrapolations, in the way that Maito does. The only way to estimate the rate of turnover, is to do what Marx and Engels did, which is to work upwards from the firms actually involved in production and circulation, and thereby to determine the actual working period, production time and circulation time of commodities.

Maito makes a fundamental error to begin with, in relation to the circuit of productive-capital. He says,

“Capitalist production consists of a valorisation process (M-M’) through the exploitation of the labour force (M-C...P...-C’-M’).”

But, this is wrong. Marx makes clear in Capital II, that this is only the circuit for newly invested money-capital.

“M ... M' becomes a special form of the industrial capital circuit when newly active capital is first advanced in the form of money and then withdrawn in the same form, either in passing from one branch of industry to another or in retiring industrial capital from a business. This includes the functioning as capital of the surplus-value first advanced in the form of money, and becomes most evident when surplus-value functions in some other business than the one in which it originated. M ... M' may be the first circuit of a certain capital; it may be the last; it may be regarded as the form of the total social capital; it is the form of capital that is newly invested, either as capital recently accumulated in the form of money, or as some old capital which is entirely transformed into money for the purpose of transfer from one branch of industry to another.” (Chapter 2, p 61)

The circuit for already functioning productive-capital is by contrast P...C' – M'.M – C...P. 

“The circuit of productive capital has the general formula P ... C' — M' — C ... P. It signifies the periodical renewal of the functioning of productive capital, hence its reproduction, or its process of production as a process of reproduction aiming at the self-expansion of value; not only production but a periodical reproduction of surplus-value; the function of industrial capital in its productive form, and this function performed not once but periodically repeated, so that the renewal is determined by the starting-point.” (Capital II, Chapter 2, p 65) 

As Marx says in Capital III,

“In the reproduction process of capital, the money-form is but transient – a mere point of transit.” 

This is important for understanding the rate of turnover for capital, because its clear that for Marx, this circuit is not a circuit of money or money-capital, but of capital value, starting from the capital value of the productive-capital itself. The problem of Maito's approach can be seen by taking his circuit above and comparing it with the reality of an already functioning productive-capital. Take the example, I have referred to previously, of a fast food restaurant.

The reality is that such a productive-capital does NOT begin with an amount of money-capital, which it pays out for labour-power and materials. As with all currently functioning productive-capitals, it begins its circuit, as Marx points out above, with a quantity of productive-capital. It already has, at the start of its circuit, fixed capital acquired previously; it has a stock of materials; and it has an existing workforce. The whole point of capital expansion, for this already functioning productive-capital, is not to expand a quantity of money-capital, but to expand the quantity of this existing productive-capital, because that is the means by which it again increases the mass of surplus value, so as to expand once more. The realisation of the increased capital-value, in money form, is, as Marx says above, merely a moment within this circuit, not its terminal objective. The aim of expanding the quantity of money-capital is only the function of money-capital, not productive-capital. As Marx says, it only describes the circuit of capital where money-capital is first invested, or when money-capital is being withdrawn from a particular sector.

As Marx points out, in Capital II, the reason the Physiocrats were in advance of Adam Smith and his followers, in this respect, was precisely because they began their analysis, of the circuit of capital, not with the current year, but with the previous year's harvest, because it was this harvest which made available the productive-capital, already in the possession of productive-capitalists, in the form of seeds, food to cover the variable capital and so on, with which they commence the current year's production. 

But, also, in reality, in a modern capitalist economy, the workers are paid, maybe, a week, or even a month in arrears, whilst the materials themselves will usually be bought with commercial credit, from suppliers. So, no money-capital is actually advanced, for this circulating capital, ahead of the production and circulation process. However, as Marx points out in Capital II, this is irrelevant, because the rate of turnover is calculated not on the basis of money paid out for wages or materials, but on the actual capital-value of the productive-capital, determined by its current reproduction cost, advanced to the reproduction process. A concern for the payment of wages, or for other inputs risks making the same mistake that was made by Adam Smith and others, criticised by Marx. That is to confuse the periodicity of these money payments for the turnover period of the advanced productive-capital itself. As Marx points out, wages are not capital. They are merely a money price for the value of labour-power, in its phenomenal form. Workers may be paid weekly in arrears for the labour-power they sell, but their labour is advanced to the production process on a completely independent basis from that. As capital value, it may turn over only in a year, or by contrast may turn over several times a day, depending upon the nature of the commodities being produced and sold.

Forward To Part 2

Flation

Everywhere you look there is some kind of flation. In Japan, for the last 20 years, there has been deflation. In China, by contrast, there is inflation. In Europe, including the UK, there is disinflation, and it may be heading for stagflation, in the near future. In the US, inflation is on the rise. Everywhere, except Japan, there is massive asset price inflation.

Twenty years ago, Japan had gone through a massive asset price bubble, similar to, but actually smaller than, that which western economies have experienced, over the last few decades. When the Japanese bubble burst, in the early 1990's, the stock market fell 82%, from over 39,000 to less than 7,000. With Japanese banks highly geared to property and shares, the fall in the stock market also went along with a fall in Japanese property prices, of around 90%. The sharp fall in prices, also set in place the process of deflation that has affected Japan, for the last twenty years.

Consumers, who saw that there was an advantage in saving money, rather than spending it, because next week, the prices of things you want to buy will be cheaper than they are this week, caused Japanese consumption to fall, and its savings rise. Falling consumption itself plays into deflation, because it tends to mean that aggregate supply is always greater than aggregate demand. Pressure is constantly maintained, on prices, in a downward direction. But, also, as savers save rather than spend, producers seek markets elsewhere. At the same time, the savers provide the state with the money it requires to fund its expanding budget, as they buy its bonds.

The savers also buy the bonds of foreign state's and companies, and thereby provide them with the funds they require, to buy the commodities exported to them from Japan, China and other surplus economies. The income they receive, on these bonds, even as its squeezed by “financial repression”, still appears positive, for the Japanese saver, because even these low rates of return buy more, in an economy where prices are falling, than where they are rising. Prime Minister Abe, seeing the state deficit rising, whilst the Yen rises, thereby increasingly threatening the ability of the economy to finance itself, by high levels of exports, has attempted to reverse the deflation, by promising to double the money supply, thereby massively depreciating the value of the currency. Despite massive money printing, Japanese consumer prices have only moved up slowly, and whenever there is any global uncertainty, the Yen rises, as money rushes towards safe havens.

In China, without a welfare state or other means of social insurance, workers similarly save large amounts of their income to cover unforeseen eventualities. Yet, despite this high savings rate, China has seen inflation rather than the deflation that has affected Japan. Building its economy, on the basis of exporting large volumes of cheap commodities, China pegged its currency to the Dollar, as its main market for those commodities. In that way, whenever the US printed money, to pay for its debts, and thereby reduced the value of the dollar, the Remnimbi also fell, and the Chinese money supply increased, pushing up inflation.

As China, consumed ever more quantities of raw materials, to feed its rapidly growing industrial machine, the prices of those commodities rose, and was monetised by the increasing quantity of money circulating in the Chinese economy. From 1999 onwards, as the new global long wave boom swung into action, the prices of food and raw materials soared. That pushed up the end prices of commodities, produced in China, that was only offset by the massive rise in productivity that Chinese productivity brought about. As China sucked in increasing quantities of labour-power, from its countryside, Chinese wages themselves began to rise, by around 10% p.a., some of it simply covering the rise in prices, some reflecting an actual rise in Chinese real wages, as workers living standards rose sharply.

For twenty years, global commodity prices were kept low, because the new global long wave boom brought with it massive rises in productivity, and rises in the rate of turnover of capital, and in addition, because China pegged the value of its currency to the Dollar, although Chinese domestic inflation was pushed up, by the greater volume of money in circulation, Chinese export prices were kept low.

But, China has itself had to start sourcing production in lower wage economies, as wages have risen continually at home. In fact, its reported, in some industries, that Chinese wages have risen so much that production has been relocated to the US, because production costs are now cheaper there than in China! Whilst the rise in global food and raw material prices has more or less ceased, as new sources of cheaper supply have been brought on stream, the huge rise in productivity that occurred in the 1990's, and early 2000's, has also slowed, so that unit costs are rising. At the same time, China has allowed the RMB to rise, within limits. That helps to reduce its own import costs, but simultaneously causes its export prices to rise.

At the same time, the huge expansion of Chinese money supply, as elsewhere, has caused an increasing bubble in Chinese property prices. Chinese share markets have not bubbled up as they have elsewhere, because large amounts of money-capital has gone into actual productive investment, rather than simply bidding up existing share prices, but another feature has been that, particularly smaller companies, whose output is not encouraged within the objectives of the Five Year Plan, have had to seek out funding from a shadow banking system, that has also grown on the back of low interest rates, and a surplus of money in circulation. Instead, the surplus Chinese money-capital, has been converted into revenue, and invested in western bonds and shares, creating massive bubbles in such fictitious capital.

This massive rise in productivity, that went along with the new long wave boom, after 1999, as well as the fact that vast quantities of cheap commodities were thrown on to the global market, by China, during this period, has caused commodity price inflation, in Europe and the US, during that period, to be low. Had there not been massive money printing, during that period, there would have been actual deflation. That is market prices would have been falling significantly rather than rising. This is one reason that the real rate of profit is much higher than it appears, on the basis of nominal prices. At the same time, the massive rise in money supply, that started back in the late 1980's, caused a huge rise in asset prices. The real rise in those prices, whether for property or shares, occurred in the 1980's and 90's; the bubbles blown up at that time have only been kept inflated in the last 15 years. The Dow Jones, for example, rose by 1,000% between 1982 and 2000, but has risen by only 70% since 2000.

But, as productivity slows, and Chinese production costs rise, the potential for the value of commodities to fall further becomes limited. Meanwhile, the huge volume of currency thrown into circulation, and the inflation of banks balance sheets, on the back of this fictitious capital, provides the potential for money prices, of these commodities, to rise sharply, with only a small rise in the velocity of circulation. That is being witnessed now in the US, as both Producer Price and Consumer Price indices have begun to rise sharply. This poses a severe problem for the Federal Reserve. It has been “tapering” its money printing for several months, and yet is still engaging in quantitative easing to the extent of $15 billion a month.

Many are already saying that the Federal Reserve, and other central banks, are way behind the curve, in relation to inflation. It takes around two years before changes in money supply feed through into the economy, to be shown up in prices. Having previously targeted the unemployment rate, as a point when they would cease money printing, and begin to raise official interest rates, the Federal Reserve and the Bank of England, have both abandoned that criteria, after it was met, to justify continued money printing and low official rates. Now, they are targeting wage inflation. But wage inflation always arises – if it arises at all – after price inflation, not before.

The process is, as occurred in China, that commodity prices rise, and cause profits to rise. If the rise is sustained for long enough, so that firms believe that it is a permanent state of affairs, they begin to take on additional workers. Eventually, the number of workers available begins to fall, relative to this demand, so firms have to begin to bid up wages, to attract them. There are indications this is already happening in the US, and, in the UK, there are shortages of workers, with the necessary skills, for a number of industries, which has been exacerbated by the Liberal-Tory immigration controls.

If the Fed and the Bank of England wait until they see actual wage inflation, they will be two years too late. An inflationary spiral will already be under way, and any action they take will require two years to have any effect. It will have to be that much more drastic as a consequence. That is why there are increasing voices being raised, at the Fed, for the pace of action to be speeded up, why its more recent announcements have sounded more hawkish, and also why the minutes of the last Bank of England MPC meeting showed that two members –  Martin Weale and Ian McCafferty – voted to increase rates immediately to 0.75%.

But, both the Fed and Bank of England are reluctant to stop the money printing or raise official interest rates, because as soon as they do so, the massive asset price bubbles will collapse, and that means that the banks, whose insolvency is only hidden, by their fictitious balance sheets, will start to go bust on a large scale. The ECB has already enlisted the help of a US firm that dealt with bank failures in the US, in preparation for the expected failure of many European banks.

In the US, Robert Shiller has pointed out that, on his Cyclically Adjusted P/E ratio, shares are at levels only previously seen ahead of major market crashes, in 1929, 1987, 2000 and 2008. He also believes that property prices are once again in a similar bubble. Following a 30 year secular bull market, in bonds, that has raised their prices to levels not seen in centuries, this is another asset class that is in bubble territory. Almost everywhere you look, asset prices have been bubbled up, as investors seek places to put their money that might provide some modicum of return. Worryingly, one of those has been in the so called “Junk Bond” market.

Junk Bonds, are bonds issued by countries or companies with poor credit ratings. They tend to pay a bit higher yield because lenders are reluctant to lend to them for fear that they will not get their money back. But, there is another problem with Junk Bonds, especially as they have begun to be bought via exchange traded funds. That is that they are illiquid. Fewer people invest in them than other, safer assets. That means that if investors run for the doors, there is no potential buyer of these bonds, at almost any price, so they fall through the floor, taking investors with them, and that causes the kind of financial panic and credit crunch that was seen in 1929, and 2008.

For years, UK inflation was way above the Bank of England target of 2%. The reason was that the value of the pound was falling, and that pushed up UK import costs, for things like food and energy. When the US began QE III, whilst the Bank of England stopped its policy of money printing, the pound rose against the dollar by about 15%, going from $1.50, to over $1.70. That reduced UK import costs, and inflation fell. A similar cause lies behind the fall in Eurozone prices, as the Euro rose from around $1.20 up to $1.40. The other factor was that recession and austerity in the Eurozone depressed prices. As Marx demonstrated, lower wages do not cause lower prices. They bring about higher profits. However, in a global economy, prices and wages are determined at this global not national level. Within this context, lower wages can only result in higher profits, if the firm's involved are globally competitive, so that their prices remain the same. In much of peripheral Europe, the industry is not even competitive within the EU, let alone the global economy. Under these conditions, lower wages do not translate into higher profits, but into lower market prices, in order to enable the company not to go bust.

But, with global productivity gains slowing, global commodity prices rising, as the cheap prices offered by Chinese producers disappear, and are replaced by rising prices of Chinese commodities, the consequence is an overall squeeze on profits, whilst the demand for labour-power rises, and causes wages to rise. Moreover, the consequence of austerity measures is to constrain demand, and reduce the level of output to meet it. As was seen in the 1970's, the consequence of this is not to put downward pressure on prices, but to put upward pressure on unit production costs. The result is stagflation, low levels of economic activity, combined with steadily rising prices.

It creates the worst of all possible conditions, for asset prices. Share prices fall sharply, as the rate of profit declines, and available money-capital is required for productive-investment, rather than speculation. Workers have less money available, despite rising nominal wages, as inflation rises. Low levels of economic activity, mean they are less likely to spend on things like property. But, also as inflation rises, interest rates rise sharply, as bond investors seek compensation for the constantly falling value of the money they are paid in. The rise in interest rates causes share prices to fall further, and collapses the property market, especially where it has been in the kind of massive bubble that has built up over the last 40 years.

That is why the central banks have continually changed their message as to when they will stop money printing and begin to raise rates, because the end of this story is coming closer by the minute.

The Law of The Tendency For The Rate of Profit To Fall - Part 34

Fall In the Value Of The Variable Capital (18)

In Part 33, it was set out how a dramatic rise in the organic composition of capital, leading to a fall in the “Rate of Profit”, also results in an equally dramatic rise in the annual rate of profit, as the rise in productivity, that underlies the former, brings about equivalent increases in the rate of turnover of capital. But, even this is only part of the story. Alongside the rise in the rate of turnover, and lying behind the rise in the annual rate of profit, is a continual release of capital. This release of capital is also the other side of the process by which a relative overpopulation is created. The two things together form the basis of additional accumulation either in the existing industries or in new lines of production, as Marx sets out in Chapter 14.

If we look at what is happening as the rate of turnover rises, it can be analysed in the terms that Marx sets out for determining the annual rate of profit. The calculation of the annual rate of profit is the surplus value, produced in one turnover period, multiplied by the number of turnovers in the year, divided by the advanced capital, for one turnover period, of the circulating capital. Because the fixed capital always has to be present for production to take place, the full value of the fixed capital is always included in the advanced capital, whose other components are the circulating constant capital, and the variable capital.

If we ignore the circulation period, or simply assume that the 3000 units produced in Year 1 constitutes an entire turnover period, including the circulation period, then we can use this formula to examine the basis of the annual rate of profit in each year. In Year 1, because there is only one turnover of the capital, the year is the turnover period, so the calculation, using the formula s x n/c+v, is 1000 x 1/(200 + 800) + 1000 = 50%.

In Year 2, because of the rise in productivity, which stands behind the rise in the organic composition of capital, and tendency for the rate of profit to fall, the capital is turned over 1.75 times. Put another way, a single turnover period is now 29.71 weeks. On this basis the surplus value, constant capital and variable capital advanced for this period can be calculated. In Year 2, the amount laid out each week for wages is £23 (rounded up). The amount of variable capital advanced for a turnover period is then £670. Similarly, the circulating constant capital is £27 per week = £802, whilst the fixed capital is £200. The surplus value is £930.

Obviously, the consequence here is that the advanced capital for the turnover period is less than the capital laid out for the year. The capital advanced for materials for the turnover period remains the same (allowing for rounding) because, the material used to produce the 3000 units that comprise the turnover period does not change. However, the rise in productivity means that even if the same quantity of labour were used as previously, the shorter turnover period means that less is advanced as variable capital. In addition to the variable capital released, as was previously seen, because of the fall in the value of labour-power, due to the cheapening of wage goods, an additional amount of capital is released here, because variable capital is now advanced for only 29.71 weeks, rather than 52 weeks.

So, even if the technical relation, between material and labour, remained 8:10, so that 1000 units of labour were advanced, instead of this 1000 units being advanced for a year, it is only advanced for 29.71 weeks. Even discounting the reduction in the value of this labour-power due to the rise in productivity, the fact that it is advanced for this shorter period of time means that the difference in the advanced variable capital is released. The value of the variable capital advanced for 52 weeks, was £1,000. But, even on the above basis, the value of the variable capital advanced for Year 2 falls to £571. That is a release of capital of £439, solely due to the reduction in the turnover period.

The rise in productivity means that the technical composition of capital has risen so that, instead of 1000 units of labour being advanced, only 800 units of labour are advanced for the turnover period. Again even discounting the reduction in the value of labour-power, that means that £200 of capital is released.

This creates a contradictory effect that, after taking these other factors into account, the end result is a smaller release of capital, than if it were just a result of the rise in the rate of turnover, because the release of capital, due to the other factors, reduces the saving that can be achieved solely on the basis of the increased rate of turnover. In short, the higher the variable capital advanced for a turnover period, the greater the release of capital to be achieved by shortening the period of turnover.

By the time we get to Year 10, the turnover period is only 1.2 weeks. In order to produce the 3000 units of output, the variable capital advanced is then just £31, or a release of Capital of £1,969.

Back To Part 33

Forward To Part 35

Northern Soul Classics - I'll be Loving You - Soul Brothers Six

Wonderful northern ballad from the Soul Brothers Six.

Should The State Stop Jihadists Going To Iraq?

The growth of the Islamic State (formerly ISIS or ISIL) in Iraq and Syria has led to the British government saying that it would try to prevent British jihadists going to Iraq or Syria. Now that it appears that a British jihadist was responsible for the murder of US journalist, James Foley, those sentiments have been strengthened. But, socialists should oppose any such action by the British state.

The reasons for opposing any such ban by the British state is the same as that we have for opposing bans on other fascists by that state. In other words, it is being proposed against fascists today, but tomorrow it will be used against workers and socialists. We cannot place any faith in the capitalist, nor sow any illusions in the minds of workers that this state is in any sense neutral between the interests of capital and labour. Our interests are not the same as those of capital and its state, and we have to rely on our own strength to pursue workers interests as against those of capital.

In fact, rather than supporting the British state in imposing such bans, the international labour movement should itself learn some lessons from the jihadists where they appear to be in advance of the workers movement.

For example, the jihadists take their ideology seriously enough that they not only present themselves as being united into a single whole by that ideology, wherever they live, but they act on that basis too. Where, for much of the labour movement, the slogan “Workers of the World Unite”, is nothing more than that, a slogan to be tagged on the the bottom of books and pamphlets, for the jihadists, the equivalent is repeatedly put into practice, as fighters go to wherever they see their brothers engaged in such a struggle.

Similarly, although socialists talk about the workers having no country, and profess their internationalism, their politics is continually delineated along national boundaries, as the current Scottish referendum indicates, and phrased in nationalistic terms such as the demand for “Nationalisation”. By contrast the jihadists by their actions make clear that for them these lines on a map really do have no significance, in a way that has not been true for the workers' movement since the time of the International Brigade.

Rather than allowing the state to place limits on such acts of solidarity, the workers movement should learn from them, and begin to build its own international solidarity, its own means of providing real physical support for workers in struggle, wherever in the world they are, irrespective of lines drawn on a map.

That does not in any means involve us supporting the politics or actions of the jihadists, any more than it means supporting the politics or actions of other fascists, when we oppose state bans against them. It means we do not allow the capitalist state to present itself as neutral, we do not allow it to introduce measures or gain powers that it will use effectively against us.

And both in the case of fascists and the jihadists it is clear why that is the case. In the past, when the workers movement has been very strong, and posed a threat to capital, the state has had no compunction against allowing these kinds of forces to be used against the workers, to break up its meetings, to attack strikes and so on. On the contrary, the state has frequently in the past provided assistance to the fascists in doing precisely that. It uses versions of that tactic all the time. In the North of Ireland during the 1970's and 80's, the state as well as carrying out its own murder of Republicans, also provided information and support for Protestant paramilitaries to carry out attacks against not only Republican fighters, but also against civilians such as solicitors acting to defend Republicans.

Most recently, the capitalist state as well as acting itself to bomb Libya, provided weapons and resources to the jihadists to fight Gaddafi, as it had done before in providing support for Bin laden in Afghanistan, or indeed, as it has been doing over the last three years in arming the jihadists in Syria.

It did the same thing in providing weapons and support for the fascists of the Kosovan Liberation Army, so that they could incite ethnic conflict with Kosovan Serbs. It has done the same thing in supporting fascists in Ukraine. The capitalist state does this all the time, using such forces as useful idiots to fight its immediate enemies, and then turning on those useful idiots themselves, using their existence as a means of justifying a further strengthening of the state itself.

A similar thing occurs in Israel and Gaza. On the one hand, the Israeli state uses the threat of Hamas, and other terrorists to strengthen its own position. On the other, organisations like Hamas use the massively excessive response of Israel to justify their own existence and methods. Israel's attacks on Gaza are wholly indefensible. At the same time the rocket attacks by Hamas as a response are wholly ineffective. Yet, for Hamas, they are effective, precisely because they provoke that over-reaction by Israel, and thereby feed the sentiment that Hamas needs to justify its existence and message. It acts to prevent any possibility of Palestinian workers uniting with Israeli workers, and thereby working towards a solution to meet their joint interests as workers as against the interests of capital, or the interests of their immediate oppressors. It does so by presenting the workers living on the other side of a line drawn on a map as being their real enemy, rather than that enemy being their own state.

Capital II, Chapter 19 - Part 3

Marx says that Smith's definitions in respect of workers producing means of consumption are “not quite exact”. But, that seems to understate the case.

“For he says that in these kinds of labour, both the price of labour and the product “go to” the stock reserved for immediate consumption, 

'the price' (i.e., the money received in wages) 'to that of the workmen, the produce to that of other people, whose subsistence, conveniences and amusements, are augmented by the labour of these workmen.'” (p 370)

Marx points out that workers cannot live on wages, but only on the commodities bought with those wages. Those commodities may or may not be those produced by the workers spending the wages. But, Marx seems to miss that Smith's formulation amounts to double counting. If both the wages and the value of the commodities produced by the workers receiving those wages are included, the same thing in different forms has been counted twice. The value of the output of the workers producing means of consumption will be higher than the value of their own wages, because that output has to be sufficient not only to meet their own consumption needs, but also the consumption needs of capitalists, and workers producing means of production. But, a portion of that value is equal to their own wages, and adding it to the value of their output amounts to counting it twice.

So, Smith understates the value of national output by omitting the value of constant capital, but overstates it by counting these wages twice.

Smith says,

“Whatever portion of those consumable goods is not employed in maintaining the former” [the fixed capital] “goes all to the latter” [the fund for immediate consumption], “and makes a part of the neat revenue of the society. The maintenance of those three parts of the circulating capital, therefore, withdraws no portion of the annual produce from the neat revenue of the society, besides what is necessary for maintaining the fixed capital.” Book II, Ch. 2, p. 192.)” (p 370) 

Marx comments that this is sheer tautology. What does not go to replace means of production, automatically is available for consumption by workers or exploiters, again assuming simple reproduction. 

Smith argues that the circulating capital of a firm differs from that of society as a whole. Remember that for Smith, circulating capital is actually capital in circulation. So, Smith argues that for the individual firm, the circulating capital comprises no part of his net revenue, which is only his profit. However, that is not the case for society, he says.

So, the stock of a merchant's shop is not there for his consumption, i.e. it is not equal to his income, used to buy consumption goods. His income/profit is only what he makes in selling those goods, i.e. the excess of their selling price over their cost.

But, for society, as a whole, he says, those goods do comprise their consumption, and are bought using their income, or net revenue – excess of income over cost. Smith, in a confused way, has hit upon a truth here. He has excluded the fixed capital from his calculation of the firm's profit. He has also excluded the circulating capital required for the maintenance and reproduction of that fixed capital. In so doing, he has essentially arrived at the truth that the constant capital is not the source of the firm's surplus value. But, also that the capital laid out as variable capital, in so far as it is simply reproduced, in the value of the end commodity, also cannot represent a surplus value. All of these components of the value of the commodity only reproduce the capital advanced.

“Hence that portion of his commodity-product which replaces his capital cannot resolve itself into constituents of value which form any revenue for him.” (p 371)

But, Smith fails then to resolve the question of where that surplus value does come from.

Both the circulating capital, for which read commodity-capital, and the fixed capital, of each firm, constitutes a fraction of society's total capital. However, the nature of the circulating/commodity-capital is different considered from the social as opposed to the individual viewpoint. The total commodity-capital of society is consumed by society, either productively or as consumption. It is thereby bought, and consequently has to be bought with some form of income/revenue.

So, from the social standpoint, that commodity-capital appears as the equivalent form of all incomes. However, from the individual standpoint, it is clear that this is not so. The income/profit of the shopkeeper is not enough to buy all of the stock upon which that profit is made. It could only be so if it had no cost, and the selling price comprised only the equivalent of his own labour.

But, as Marx points out, in making this analysis, Smith should not only have recognised this from the standpoint of the shopkeeper, but should,

“have selected the masses of goods stored away in the warehouses of the industrial capitalists.” (p 372)

Had Smith put all this together, Marx says, he would have arrived at the following conclusions.

“The annual product of society consists of two departments: one of them comprises the means of production, the other the articles of consumption. Each must be treated separately.” (p 372) 

The value of the output of means of production comprises three parts. One part represents the value of means of production used to produce the means of production themselves. In other words, it is not new value produced, but only existing capital-value reappearing in a different form. As such, although it comprises a portion of the value of national output, it produces no revenue, and is not bought with revenue.

To the extent that means of production are produced by one capital, and bought by another, this is not an exchange of capital with revenue, but of capital with capital.

A second part is the value created by labour that transforms those means of production, which is divided into the portion equal to what is paid out as wages, by all capitalists involved in production of means of production, and another portion, which comprises the third part of the value of means of production, which is equal to all of the surplus value extracted by capital in that department.

The constant capital, or what Smith calls “fixed capital”, constitutes then neither a revenue for the individual capital, nor for the social capital. It exists only as capital. But, the other portion of the value of means of production do. In so far as the means of production are sold, this added value from labour, results in wages, profits, rent, interest etc. i.e. revenues for those involved in production. But, for those that buy these means of production, i.e. from the standpoint of social capital, they represent not revenue but capital.

The means of production produces revenue for the sellers equivalent to the added value by labour, but for the buyers i.e. the capitalists in Department II, the producers of means of consumption, they constitute only capital. In other words, as in Volume I, they merely transfer their value to the final product rather than being the source of any new value/revenue.

In its turn, the constant capital, which then forms a constituent part of the means of consumption, in whose production it has taken part, represents also the physical manifestation of the consumption fund of the workers and capitalists in Department I. It is the physical equivalent of the revenues they have received as wages, profits etc.

If we think of Robinson Crusoe, he spends a part of his week making fishing nets (means of production). He does not consume the fishing net. But, when he uses it to catch fish (means of consumption) a portion of the value of the net is transferred to the value of the fish. In other words, the time he spends making nets is a necessary part of the time it takes him to catch the fish. The time he spends producing nets, produces no fish (revenue) but he covers his 'wages'/consumption fund for this period of time, by selling to himself the nets in return for a portion of the fish he catches with those nets.  But, in fact, in addition to this, Robinson also spends part of his time producing neither nets, nor catching fish.  Part of his time must be spent producing and repairing the tools he requires to make the nets, to obtaining the material required for making the nets.  In other words, this is time required for producing means of production used in the production of means of production, not consumption.  In order to carry out this production, he must forgo some of the time he would have spent producing means of production, and the exchange he undertakes with himself here, is not an exchange of capital with revenue, but of capital with capital.

“If Adam Smith had continued his analysis to this point, but little would have been lacking for the solution of the whole problem. He almost hit the nail on the head, for he had already observed that certain value-parts of one kind (means of production) of the commodity-capitals constituting the total annual product of society indeed form revenue for the individual labourers and capitalists engaged in their production, but do not form a constituent part of the revenue of society; while a value-part of the other kind (articles of consumption), although representing capital-value for its individual owners, the capitalists engaged in this sphere of investment, is only a part of the social revenue.” (p 373)

Marx draws the following conclusions.

1. The value of total national output is equal to the value of the aggregate output (commodity-capital) of all the individual firms. Therefore, c + v + s x n = C + V + S. However,
   
   “...the form of appearance which these component parts assume in the aggregate social process of reproduction is different.” (p 373)
   
2. The working day is divided in two, one part being necessary labour-time, in which the worker replaces the value of their labour-power, i.e. the value of their consumption fund, and a second part, in which the worker performs surplus labour, thereby producing the value that forms the consumption fund for the capitalist. But, in addition to the production, which creates this new value, part of production also creates new constant capital.

The former creates revenue that is the equivalent of this new capital-value. The latter does not because it is merely the reappearance of existing capital-value in a new form. The former is an exchange of capital with revenue, the latter of capital with capital. 

Back To Part 2

Forward To Part 4

The Law of The Tendency For The Rate of Profit To Fall - Part 33

Fall In the Value Of The Variable Capital (17)

Looking back to the table presented in Part 28, the effect of rising productivity on “The Rate of Profit” can be easily seen. As described there, the real impact of this falling rate of profit, and that which Marx draws out in his analysis in Chapters 13 and 15, is on the continually falling proportion of the unit price of each commodity comprised of the wear and tear of fixed capital, of variable capital, and of surplus value, and the consequent rise in the proportion of the price accounted for by the circulating constant capital, i.e. the raw and auxiliary materials. It is these changing proportions that are the basis of the “Falling Rate of Profit”.

Taking that table, the percentage of each of these components in the price of the commodity change as follows.

Year	Fixed Capital	Material	Variable Capital	Surplus Value	Total Output	Price Per Unit
1	6.67	26.67	33.33	33.33	3000	1.00
2	4.55	31.82	26.67	36.97	5250	0.84
3	3.07	38.97	19.83	38.13	9520	0.68
4	2.11	47.66	14.05	36.18	16972	0.56
5	1.49	55.38	10.39	32.75	27922	0.48
6	1.09	62.38	7.81	28.72	42785	0.43
7	0.84	68.89	5.86	24.41	61498	0.39
8	0.67	73.63	4.65	21.05	82419	0.36
9	0.55	77.29	3.82	18.34	105270	0.35
10	0.46	80.53	3.15	15.86	129994	0.33

The importance of these changed proportions, as Marx sets out, is that, as the total quantity of use values, dumped on the market, explodes in this way, although the market value of each commodity unit falls significantly (here by two-thirds), this supply faces increasing difficulty in obtaining sufficient demand, because of price elasticity. The more likely it becomes, therefore, that any change in consumer preferences will result in market prices falling below this market value, and so the now much smaller (smaller in absolute terms even more than in proportional terms) profit margin will be wiped out.

From the other side, the massively increased proportion of material now in each commodity unit, finds its expression in a much higher demand for that material, which may lead to rising material prices. Any rise in material prices may then be unable to be passed on into end product prices for the reasons Marx points out in Capital III, Chapter 6, which means again that the profit margin may be wiped out.

Yet, as suggested in Part 28, this substantial drop in the “Rate of Profit” goes along with a substantial rise in the annual rate of profit, because the rise in productivity that is behind it, brings about a corresponding rise in the rate of turnover of capital. The turnover of Capital in Year 1, was completed with the production of 3000 units of output. If we take this as the baseline of production required for one turnover period, therefore, we can examine how the rate of turnover rises, by comparing this 3000 units, with the output in each subsequent year. Dividing that output by 3000 gives the number of turnovers of capital for that year. Examining that, and using the formula provided by Marx, we obtain the following for the rate of turnover, and the annual rate of profit for each year.

Year	Number of Turnovers	Annual Rate of Profit %
1	1.00	50
2	1.75	97
3	3.17	177
4	5.66	278
5	9.31	383
6	14.26	477
7	20.50	544
8	27.47	598
9	35.09	641
10	43.33	662

In reality, as Marx makes clear, in discussing the working period, as capital develops, and begins to supply large merchant capitals, the quantity of production constituting such a working period tends to increase. The consequence is that the rate of turnover does not necessarily rise in the proportions suggested. On the other hand, the introduction of these large merchant capitals itself speeds up the process of circulation, which increases the rate of turnover, and the same is true for the development of modern financial systems. In addition, improved transport systems, as well as the introduction of things like “Just In Time”, can act to reduce working periods, because shipments can be sent of smaller quantities more frequently.

The tendency for the rate of profit to fall, as a result of rising productivity, is important in respect of understanding the fall in profit margins, which can make the potential for crises greater for the reasons cited above, but, given that those smaller profit margins necessarily go along with a rising mass of profit, and rising annual rate of surplus value, it cannot be an explanation for periods of stagnation, or falling investment.

Back To Part 32

Forward To Part 34