Tuesday, 2 September 2014

The Law of The Tendency For The Rate of Profit To Fall - Part 36

The Rise In The Rate of Turnover (1)

In previous parts, I have set out Marx's analysis that the driving force of the tendency for the rate of profit to fall, is the rise in the social productivity of labour. The contradiction created by this, as Marx sets out, is that this same driving force also has other effects, which cause the rate of profit, and more significantly the annual rate of profit to rise. Rising productivity, reduces the value of fixed, constant and variable capital. The fall in the value of variable capital raises the rate of surplus value. All of these cause the rate of profit to rise. They also result in a release of capital, as well as the development of new types of use value, which form the basis of new industries, which themselves have high rates of profit and thereby pull up the average rate of profit. But, I have also demonstrated the way this rise in social productivity causes the rate of turnover of capital to rise, which itself causes the annual rate of profit to rise, and also produces a release of capital available for additional accumulation.

I have, so far, only examined the role of this increase in productivity, in raising the rate of turnover, via a reduction in the production time, as opposed to the circulation-time, but Marx also analyses the way this same rise in productivity revolutionises the circulation of capital, reducing the time of circulation, and thereby again releasing capital, and increasing the annual rate of profit. The increase in the rate of turnover for industrial capital, whilst increasing the annual rate of profit does not affect the price of commodities. However, as Marx demonstrates, this is not true of Merchant Capital. The higher the rate of turnover of Merchant Capital, the lower the profit margin on each commodity sold, and so the lower the price of each individual commodity.

Engels writes,

“The chief means of reducing the time of circulation is improved communications. The last fifty years have brought about a revolution in this field, comparable only with the industrial revolution of the latter half of the 18th century. On land the macadamised road has been displaced by the railway, on sea the slow and irregular sailing vessel has been pushed into the background by the rapid and dependable steamboat line, and the entire globe is being girdled by telegraph wires. The Suez Canal has fully opened East Asia and Australia to steamer traffic. The time of circulation of a shipment of commodities to East Asia, at least twelve months in 1847 (cf. Buch II, S. 235 [English edition: Karl Marx, Capital, Vol. II, pp. 251-52. — Ed.]), has now been reduced to almost as many weeks. The two large centres of the crises of 1825-57, America and India, have been brought from 70 to 90 per cent nearer to the European industrial countries by this revolution in transport, and have thereby lost a good deal of their explosive nature. The period of turnover of the total world commerce has been reduced to the same extent, and the efficacy of the capital involved in it has been more than doubled or trebled. It goes without saying that this has not been without effect on the rate of profit.”

Capital III, Chapter 4

The comments here about the shortening of the circulation time to America and India in relation to crises, illustrates another connected aspect. The reason they could previously have this much larger impact is precisely because the longer turnover period meant that more capital had to be advanced, to cover this extended circulation period. The fact that this capital becomes advanced by merchant capitalists rather than productive-capitalists, does not change this fundamental relation. As Marx points out, the circuit of the capital is only complete when the commodities have been bought by the final consumer.

In fact, the role of the merchant could exacerbate matters here, particularly in so far as the merchant buys the commodities, to be sold, using borrowed money-capital. The merchant continues to buy from the manufacturer, in the belief that a market for the commodities exists. They borrow money-capital for this purpose, and to the extent that interest rates are low, and potential profits appear high, they will borrow more and buy more from the producer. The producer, in turn, will then increase their own production. But, on this basis, the producer could have been producing commodities for a year, before the merchant discovers they cannot sell them. The merchant may then not only be unable to repay the money-capitalist, but may also be unable to pay the manufacturer.

The shorter the circulation time, the sooner the manufacturer can know that there is no final demand for their production, and so can avoid additional over production, by reducing or even stopping their operations. The development of electronic point of sale systems (EPOS), together with many more such almost instantaneous analysis of consumer behaviour, today provides both merchant and productive-capital with immediate information about whether to slow down some or all production, or to increase the production of some commodities compared to others etc. The development of Just In Time systems, and flexible specialisation production systems, further facilitate quick shifts in the types of production to be undertaken.

But, its clear that the kind of revolution in productivity, described by Marx and Engels above, is tiny compared to the revolution in transport and communications that has occurred in the last few decades, as I will examine next.

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