Friday, 5 September 2014

Maito and The Rate of Turnover - Part 5

Another, problem for Maito's methodology is that he “ does not consider the distinction between productive and unproductive workers. Some authors consider that the wages of unproductive workers for capital, which are necessary for production of capitalist but do not generate value”. (p 4)

But, the problem here is many fold. Firstly, unproductive labour, such as that employed by merchant capital, including money-dealing capital, does not produce surplus value, but, as Marx makes clear, in Capital III, Chapter 17 et al, it has a similar effect, because it increases the mass of realised profit. In the end, capital is concerned with, and the rate of profit is a function of, the realised profit not the produced surplus value. Marx makes clear that this capital must be included in the calculation of the annual general rate of profit. An increase in turnover, of merchant capital, does not increase the mass of produced surplus value, but, by reducing the mass of capital advanced, to realise a given value of commodities, it both acts to reduce market prices, (because the profit margins of merchants falls) and to increase the rate of profit, because less total social capital is advanced.

But, by increasing productivity, the costs of realising this profit are also reduced, and so the mass of realised profit itself is increased, thereby increasing the rate of realised profit for this additional reason. The revolution in finance and communications, in the last 30 years, has slashed the costs of circulation, thereby raising the mass of realised profit to produced surplus value. The same process has increased the rate of turnover of merchant capital, and therefore, of the total social capital, causing the rate of profit to rise accordingly, in the same way that Engels previously described, in relation to the introduction of steam engines etc. Yet, according to Maito the rate of turnover has only increased nine fold since 1855!

Engels quote above also brings us to the other theoretical error in Maito's underlying assumptions. In his WW article he writes,

“The picture that Bough sought to generate without any basis is that the increase in the turnover speed of circulating capital can keep the annual rate of profit high and even growing. But this can only be said if he ignores the amount of fixed capital advanced relative to living labour - information actually present in many official national accounts (fixed capital series compared to gross domestic product or wage bill series).”

Maito is correct that, although the value of fixed capital to circulating constant capital tends to fall, in relation to the laid-out capital, the mass of fixed capital tends to rise in relation to the advanced capital. But, that can only be so, if the increase in the quantity and effectiveness of fixed capital brings about a corresponding rise in productivity and the rate of turnover. That the fixed capital introduced must have this corresponding effect of increasing its effectiveness, and thereby raising the level of productivity, and rate of turnover, is determined by the requirement, specified by Marx, that new machines are only introduced where they have this effect, i.e. where the cost of the machine is less than the paid labour it replaces, and falls as a proportion of the total output.  Unless, the new fixed capital raises productivity sufficiently, so that the quantity and, other things remaining equal, the value of circulating constant capital processed rises, by such a proportion then the value of fixed capital, relative to the output value, would also rise, and Marx makes clear that this does not happen.

“The value of raw material, therefore, forms an ever-growing component of the value of the commodity-product in proportion to the development of the productivity of labour, not only because it passes wholly into this latter value, but also because in every aliquot part of the aggregate product the portion representing depreciation of machinery and the portion formed by the newly added labour — both continually decrease.”

(Capital III, Chapter 6)

Suppose we have fixed capital 10, circulating constant capital 50, variable capital 45 and surplus value 45.  The rate of profit would then be 45/105 = 42.86%.  Assuming the fixed capital lasts a year for ease of calculation, total output value is 150, and fixed capital constitutes 6.66% of this output.  If fixed capital rises to 20, this increase of 10, must cause a fall of greater magnitude in variable capital, to comply with Marx's law that new fixed capital is only introduced where its cost is less than the paid labour it replaces.  Assume then that the variable capital falls from 45 to 30, which causes the surplus value also to fall to 30, if we assume the rate of surplus value remains constant.

Maito's requirement then that the value of fixed capital relative to variable capital is met, along with Marx's requirement that the fixed capital is only introduced where its cost is less than the paid labour it replaces.  However, the value of output is now, 20 + 50 +30 + 30 = 130, whilst the value of fixed capital has doubled to 20, which represents 15.38% of the value of output, or more than double its original level.  This breaks Marx's law that "the portion representing depreciation of machinery and the portion formed by the newly added labour — both continually decrease.”  The only way that the fixed capital could fall as a proportion of the total output value is if the output value rises to over 300. Deducting the value of fixed capital from this we obtain a figure of 280, which must be made up in the proportion of 5:3:3.  This gives circulating constant capital of 127, variable capital 76, and surplus value 76.  To comply with the requirement that the fixed capital fall as a proportion of the total output value rather than just remain constant, therefore, assume that the circulating constant capital rises to 150, in which case the variable capital rises to 90, as does the surplus value.

In other words, Marx's law that the value of fixed capital falls as a proportion of the total output value can only be met if the total amount of material processed here trebles from 50 to 150.  But, if the value of laid-out circulating constant capital rises to 150, whilst the advanced circulating constant capital remains 50, this can only arise, because the rate of turnover has trebled.  The circulating capital now turns over three times during the year.  On this basis, we have advanced capital made up 20 + 50 + 30 = 100.  The surplus value is now 90.   The rate of profit is 90:(20 + 150 + 90) = 34.6%. But, this gives an annual rate of profit of 90%, as opposed to the original 42.86%, a rise of more than 100%.  Even if we are generous to Maito, and allow the total output to only rise to where it maintains the fixed capital at its original proportion, we get advanced capital still of 100, and surplus value of 76, giving an annual rate of profit of 76%.

Although the mass and effectiveness of the fixed capital rises relative to the advanced capital, there is no reason, partly because of the limitation imposed on its introduction specified above by Marx, why its value should rise relative to the advanced capital. In fact, that was shown by the examples given in Chapter 4 by Engels. Let us give a more recent example. In 1972, my wife began work as a mainframe computer operator, working with an ICL 1900 series. I have been trying to obtain a price for such a machine, at that time, without success, because as my wife has pointed out, mainframes were usually leased rather than sold, but on the basis of knowledge of later mainframe prices, I would estimate the price, in 1972, to be not less than £1 million. She was one of two operators required, plus 5 data processing clerks, and 2 programmers.

For the purposes of illustration, let us say that such a computer is used, by a computer bureau, to process payroll data for companies. Assuming a 10% rate of profit, this £1 million of fixed capital would produce £100,000 p.a. in profit, which if accumulated would take 10 years to cover the purchase of another computer, and the doubling of the firm's business.

In the mid to late 1980's, I worked as a business and IT consultant, transferring companies' accounts and payroll on to computer. However, by this time, an average PC was able to do the work of the 1970 mainframe computer. The difference being that the PC cost just £500. The £1 million of fixed capital, required for the one mainframe, would buy 2,000 PC's, and be able to set in motion an appropriate amount of variable capital, in the shape of operators, though with standard software there was no longer a requirement for dedicated programmers, or data processing clerks. Even the £100,000 of profit, would be sufficient, if used to buy such PC's to acquire 200 machines, and thereby, in a single year, increase the business's activity 200 fold, as opposed to the original capital only being able to double its operations every 10 years.

Consequently, not only had the value of the fixed capital fallen significantly, but rather than its quantity rising relative to the variable capital it had fallen, because previously a £1 million machine employed just 9 people, whereas £1 million in the shape of 2000 PC's, employs 2000 people! Taken individually, one machine previously employed 9 people, whereas now one machine employed just one person, the difference being that this one machine constituted just 0.05% of the cost of the previous machine, and the total number of machines was consequently 2000 times greater!

Marx gives a similar example in Capital I. In Chapter 22, Marx sets out the comparative position of spinning machines in Britain compared to other countries. Britain employed one person for every 74 spindles, whereas France employed one person for just 14 spindles. Britain had an average of 12,600 spindles per factory, whereas France had only an average of 1500 spindles per factory.

It is not here that workers are running around minding ever greater numbers of machines that accounts for the higher number of spindles per person in Britain, but the fact that the machines employed in Britain had many more spindles than the machines elsewhere.

“In Germany, they tried at first to make one spinner work two spinning-wheels, that is, to work simultaneously with both hands and both feet. This was too difficult. Later, a treddle spinning-wheel with two spindles was invented, but adepts in spinning, who could spin two threads at once, were almost as scarce as two-headed men. The Jenny, on the other hand, even at its very birth, spun with 12-18 spindles, and the stocking-loom knits with many thousand needles at once. The number of tools that a machine can bring into play simultaneously, is from the very first emancipated from the organic limits that hedge in the tools of a handicraftsman.” (Capital I, Chapter 15) 

But, as Marx points out, the British machine that has on average 5 times as many spindles as the French machine, which is then five times more productive, and consequently produces the required volume of output for the working period in a fifth of the time, does not cost five times more than the French machine! On the contrary, as with the example of the computer above, the British machine may even be cheaper than the French machine, precisely because of the same improvements in technology and productivity that make its development possible in the first place! In fact, Marx sets out that progress in the development of machines was sometimes so fast that machines in the process of construction had to be abandoned, because they had already been made out of date, by new developments, of machines that were cheaper and more productive. This is the basis of the moral depreciation of fixed capital.

However, the consequence was not that fewer workers were employed in Britain than France in this production. On the contrary, more were employed, precisely for the reasons I have set out in the examples that Maito objects to. That is the higher productivity caused the rate of turnover to be higher, and the annual rate of surplus value and profit to be consequently higher too. More machines could then be employed with the released capital, which then meant that more not fewer workers were employed! Even where the constraints of the market mean they are not employed, necessarily, in the same industry, the release of capital means that they are employed, and produce surplus value in some new line of business. That is why, despite massive rises in productivity, the global working population has continued to grow, rather than there ensuing an unstoppable rise in unemployment.

And, as I have set out elsewhere, Marx demonstrates that, because this machine must be cheaper than the paid labour of the workers it replaces, this results in the release of capital that can be used for accumulation. As Marx demonstrates, the consequence of the introduction of the machine is not usually that the quantity of labour employed actually falls. As with the example of the reduction in the price of computers above, the release of capital involved means that more physical fixed capital can be employed, and the reduction in the turnover period means that the advanced variable capital falls, so that more workers can be employed, producing more surplus value. Even where machines mean that additional workers are not required in an existing line of business, because it has reached the limits of production that the market can absorb, the released capital, and increased mass of surplus value are then used for the creation of new lines of business, where the organic composition of capital is lower, and rate of profit higher. It is only where the long wave conjuncture means that there are insufficient new lines of production, available for capital to develop, that this process is constrained.

In short, there is no requirement that either the mass or value of fixed capital should rise relative to the advanced circulating capital, but there is a necessity that the increased mass and effectiveness of that fixed capital, bring about a corresponding rise in productivity, which causes a corresponding rise in the rate of turnover, and consequently in the rate of profit. 

In conclusion, I welcome Maito's attempt to deal with the question of the rate of turnover, and its effect on the annual rate of profit. However, I believe his methodology for calculating the rate of turnover is flawed for the reasons stated above. The rate of turnover of capital can only be calculated on the basis of a bottom up approach looking at each industry, and area of commerce, and determining, on that basis, the working period, production time, and circulation time for the major commodities, including services. On that basis, and by weighting each industry according to its proportion of the total social capital, a more accurate figure for the average rate of turnover could be developed.

Maito based his methodology for calculating the rate of turnover on the work of Rudy Fichtenbaum, and his 1988 paper, 'Business Cycles,' Turnover and the Rate of Profit: An Empirical Test of Marxian Crisis Theory. Another examination of the rate of turnover that precedes the work of Maito is that of Hyun Woong Park UMASS and Zhun Xu UMASS, "Turnover Time and Its Relation to the Rate of Profit" (October 2010) which again uses the work of Fichtenbaum, as well as that of Webber and Rigby. Unfortunately, because all these works attempt to calculate the rate of turnover by working backwards from national income and output data, rather than working up from the actual working periods, and circulation times of industries, they share the same weakness as Maito's methodology.

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