Monday, 1 September 2014

Maito and The Rate of Turnover of Capital - Part 3

In his paper, on the rate of turnover in Chile etc., Maito says,

“... capital turnover was estimated by dividing the total costs of the economy (intermediate consumption, wages and consumption of fixed capital) by total stock of inventories, according to Fichtenbaum (1988). The fundamental idea of this procedure is that the number of annual turnovers emerges from the number of times the total stock of inventories is expressed in the flow of total costs of the economy.” (p 9)

There is a problem with this methodology to begin with, which has been described previously, and stems from Marx's analysis of the circulation of the total social capital, and his criticism of Smith's Trinity Formula, in Capital II. That is that the national output data does not capture the value of output, in the Marxist definition of C + V + S. It only captures the newly produced value V + S. This is particularly significant, when you are trying to estimate the rate of turnover of capital, and the effect of changes in the circulating constant capital.

But, its also clear why this methodology underestimates the increase in the rate of turnover of industrial capital, because it does not take account of the changing composition of the total social capital, away from manufacturing, towards service industry production. Given the fact, that in Britain, more than 20% of household expenditure is accounted for by these kinds of commodities, (Recreation and Culture 13%, Restaurants and Hotels 8.3%: Source 2012 ONS Household Expenditure Survey) it can be seen why this rate of turnover is significant in relation to the average rate of turnover of the total social capital. The consumers who go to a football match, a pop concert, or some other form of entertainment consume the commodity simultaneously with its production, in the same way as above, in relation to the restaurant, or the prostitute. Given that, in Britain, the proportion of Manufacturing has fallen from 40% in 1976 to 18% in 2013, whilst Service Industry has risen from 57% in 1976 to 81% in 2013, and this is common across developed economies, the effect of this changed composition, of the total social capital, on the rate of turnover, can be seen.

But, its also clear why, for this rapidly growing sector of the economy, Maito's method of guesstimating the rate of turnover, based on inventories, is inadequate, even aside from the question of changing sizes of productive-supply, referred to above. The value and quantity of inventories for manufacturing industries is far greater than for service industries, and for some of the service industries listed above, the category of inventories is essentially meaningless. What is the quantity or value of inventories for a football team, or a pop singer, or for one of the largest and fastest growing types of capital, a computer games producer, for example, compared to those of a steel manufacturer, or a car producer? Yet, Maito claims,

“Capital turnover speed in core countries will not be reduced by the greater relative growth of services activities in relation to manufacturing industries that has occurred in recent decades. Instead, there is a match in services between commodity production and consumption. Thus the turnover speed of circulating capital in these activities is probably higher. However, the latter may not apply equally to services in peripheral countries, where this sector has a significant heterogeneity and is, ultimately, less governed by fully developed capitalist relations.” (p 4)

Not only is the rate of turnover “probably higher”, in these kinds of activities, it quite clearly is higher, and this higher rate is not at all captured by Maito's chosen metric of inventory levels. Moreover, as well as the shift to service industry from manufacturing industry causing a significant increase in the rate of turnover, and one that is not captured by Maito's inventory calculation, its also clear, that this shift to service industry, is not just one restricted to core economies. According to the ILO, the increase in employment, in Services, has, for example, shown the same kind of percentage rise as manufacturing employment, and most of the employment growth has been in developing economies. According to the CIA World Factbook, despite China's massive growth in manufacturing, its service sector already accounts for a larger proportion of the economy, at 46.1%, than its manufacturing sector.

But, let us take another modern industry in the realm of manufacture rather than services – pharmaceuticals. Around 2 million people (more than 6% of the total workforce) are employed in the UK pharmaceutical industry. (NB. Correction.  I'm grateful to Estoban Maito, in his comment to Part 1 of this series, for pointing out that this figure is wrong.  The 6% employment figure is the percentage of manufacturing employment, whereas I had wrongly extrapolated the 2 million number from being 6% of the total UK workforce.  Similarly the 13% GVA, is in relation to manufacturing output not total output.  However, the main point of the argument remains that production and consumption has shifted rom manufacturing and services, and even within this manufacturing sector, the nature of that industry had moved away towards high value added, industries such as the above, and away from the traditional form of manufacturing industry.)  A large number of these people are highly skilled scientists. The industry accounts for about 13% of gross value added to the UK economy. The value of their output is not determined by the fixed capital they employ, nor by the circulating constant capital involved in their production. Maito's arguments in relation to fixed capital, and his methodology in relation to inventories, therefore, has little relevance to this sector. The value of their output stems from the complex nature of the labour employed.

In fact, however, this example does throw up other complications. The value of the output stems from the complex labour largely involved in product research and development rather than the actual production process itself. This is not even the same as, say, the production time in agriculture, or forestry, where a large amount of labour is employed in planting etc., followed by a long growing period. In that case, the initial labour is related to the quantity of output – aside from natural disasters. But, a large amount of labour can be expended, in pharmaceuticals, in development, without it bearing any fruit. Moreover, even if a successful product is developed, it may only be sold in small quantities, so that the labour expended, in development, is spread across only this small quantity of output. The higher the level of output, the smaller the proportion of this initial labour to each unit, therefore.

In this sense, the labour here is more like fixed capital itself, because it is a fixed cost, irrespective of the level of output. Its value is reproduced, in each commodity unit produced, in a similar manner to the transfer of wear and tear of fixed capital. It is similar to this wear and tear, in another sense, too, in that the value created depreciates over time, as new more effective drugs appear on the market, to replace the particular commodity, or when patents run out, so that other producers can make the drug without having expended labour on its development. 

Yet, its clear how changes in technology affect this area too. If we look at the sequencing of the human genome, it was thought, twenty years ago, to have been an almost impossible task, or at least one that would require decades to achieve. But, the development of computing power made it possible to achieve within 5 years, from the date that the Celera Corporation began work on it in 1998. In fact, because computing power has developed so much, since that time, human DNA can now be sequenced in hours, representing a huge reduction in the rate of turnover of capital, in this area, and the cost of doing so has fallen to around $1,000, compared to an initial cost of $100 million per genome.  Sequencing of DNA has now become a commodity itself, and the rate of turnover of capital in producing this commodity is indicated by the above.

But, even if we take a more traditional industry like car production, Maito's guesstimate of a rate of turnover of 12 looks way too low.  Car producers take orders for production from car dealers, who in turn base their orders on instructions from customers (this is particularly the case in relation to fleet buyers).  An idea of how much the working period for a car producer has shortened is indicated by the fact that, although Henry Ford revolutionised production, with the Model T, it required 93 minutes to produce.  A car rolls off the Toyota production line in Burnaston, Derby today every minute!  That is a reduction in the production time, an increase in the rate of turnover, for this part of the circuit, of 93 times compared to the 1920's.  Yet, according to Maito, the rate of turnover has only risen by 9 times since 1855!

Of course, the production time, per car, is not the whole story, as far as the turnover period is concerned.  The working period includes the time for enough cars to be produced, to be shipped to market.  But, an indication of the pace, of the next part of that circuit, is given by the rate at which cars are shipped from the Volkswagen factory.  Trains take 2,400 cars each and every day from Wolfsburg.  Even allowing for the time of delivery to dealers, the time for the car to be detailed, and administration prior to handing over to the customer, this means that the capital, involved in car production, can complete its turnover period in no more than a week, on average, giving a rate of turnover not of 12, but closer to 52 times per year!  Moreover, the Internet is revolutionising even this rate too, because it is becoming possible for consumers to place their order direct with the producer via the Internet, and have it delivered directly to their home, ready to drive.

The time required for production and distribution of the car to customers is not, of course, equal to the time between a car being ordered and received.  In the 1970's, I worked for a major pottery manufacturer.  The process was as follows.  Orders came in by phone and post, as well as from sales representatives.  The orders were collated and passed to the Production Control department, who scheduled the orders into the plants production schedules.  Orders received this week, may not be scheduled for production for another month, therefore.  This same procedure, basically applies to car production.  But, the time between an order being placed, and that order being scheduled within the production process has nothing to do with the circulation of capital; it sits completely outside that process, which is concerned only from the point that productive-capital is thrown into production to fulfil that order, and the time when the order has been completed, and paid for.

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