Wednesday, 31 December 2014

The Long Wave - Part 7

Marx, in his analysis of the phases of the business cycle, looks at the way the cycle affects the rate of profit and the rate of interest, and the way these, in turn, react back on production, via the spur to innovation and so on. Those who believe that crises are caused by the law of the tendency for the rate of profit to fall, have it back to front. Crises of overproduction arise because, during a period of boom, input prices and wages can be pushed up sharply, at a time when expanded production of commodities has lowered profit margins, and when production is expanding faster than the market. As Marx sets out in Capital III, Chapter 6 and Chapter 15, this is a period not of rising social productivity, due to technical innovation – the driving force behind the law of falling profits – but a time of extensive rather than intensive capital accumulation. Existing technology is simply rolled out on a much expanded scale.

“Growth of capital, hence accumulation of capital, does not imply a fall in the rate of profit, unless it is accompanied by the aforementioned changes in the proportion of the organic constituents of capital. Now it so happens that in spite of the constant daily revolutions in the mode of production, now this and now that larger or smaller portion of the total capital continues to accumulate for certain periods on the basis of a given average proportion of those constituents, so that there is no organic change with its growth, and consequently no cause for a fall in the rate of profit. This constant expansion of capital, hence also an expansion of production, on the basis of the old method of production which goes quietly on while new methods are already being introduced at its side, is another reason, why the rate of profit does not decline as much as the total capital of society grows.”

(Capital III, Chapter 15)

It causes, the reserve of labour-power, in particular, to be used up, so that wages rise to a point whereby the rate of surplus value falls, and no additional labour-power can be employed profitably.

“In both cases there would be a steep and sudden fall in the general rate of profit, but this time due to a change in the composition of capital not caused by the development of the productive forces, but rather by a rise in the money-value of the variable capital (because of increased wages) and the corresponding reduction in the proportion of surplus-labour to necessary labour.”

(Capital III, Chapter 15)

The law of falling profits is not the cause of such crises, but the solution to them, as Marx points out!

“The specific feature about it is that it uses the existing value of capital as a means of increasing this value to the utmost. The methods by which it accomplishes this include the fall of the rate of profit, depreciation of existing capital, and development of the productive forces of labour at the expense of already created productive forces.”

(Capital III, Chapter 15) 

In other words, in order to overcome the problem it faces, which result in crises of overproduction, as labour-power becomes scarce, and wages rise, reducing the rate of surplus value, and as the price of constant capital rises, for similar reasons, capital is forced, once more, to seek solutions to these problems, not simply by expanding production further on the same technological basis, but to engage in the process of innovation, to develop new labour saving technologies that can reduce the problem of a shortage of labour-power, and can develop new technologies that replace existing machines and materials. But, the consequence of this is then to devalue the existing capital, because this rise in productivity causes the value of materials to fall, and brings about the moral depreciation of existing fixed capital. Moreover, the rise in productivity that arises from this innovation, in resolving the problem it faced, of replacing labour, so as to overcome shortages, which caused high wages, and reduced surplus value, creates the conditions for the rate of profit to fall, because it means that, in doing so, the organic composition of capital rises.

Its no wonder that Marx entitles Chapter 15, “Exposition of the Internal Contradictions of the Law”, because what he sets out, within the chapter, is the process, over the cycle, by which new technologies, having been previously developed, to resolve the problems of production, which cause rising input prices, and which cause wages to rise, so squeezing profits, then become rolled out, more extensively, in the new boom period. The new technology resolves these problems, because it creates a relative over-population, by replacing labour – as Marx points out in Vol I, this does not necessarily mean an absolute reduction in existing employment, but the ability to expand production without employing additional labour. 

But, the consequence of this is that the organic composition of capital rises, creating the conditions for a falling rate of profit. In other words, the solution to crises of overproduction, resulting from a high rate of profit that causes over expansion, and a sharp squeeze on profits, is to introduce new technology that brings about a fall in the rate of profit! 

In this process, these new technologies, thereby become the standard technology. As Marx put it,

"During this cycle business undergoes successive periods of depression, medium activity, precipitancy, crisis. True, periods in which capital is invested differ greatly and far from coincide in time. But a crisis always forms the starting-point of large new investments. Therefore, from the point of view of society as a whole, more or less, a new material basis for the next turnover cycle.”

A new period of extensive accumulation, thereby occurs, in which the condition for the operation of the law of falling profits (rising social productivity causing a rising organic composition of capital) is missing, but during which this extensive accumulation, once more begins to create conditions under which the price of materials begins to rise, and during which labour supplies are used up, causing wages to rise, and the rate of surplus value to fall once more, thereby creating the conditions for crises of overproduction. Once more the condition for developing innovations is created, which thereby reduces input prices, and wages, and which simultaneously creates the conditions for the rate of profit to fall.

Those who believe that crises of overproduction are a consequence of the law of falling profits, rather than that the mechanism is the other way around, fail to distinguish between different types of investment, at different periods of the cycle; the difference between extensive accumulation and intensive accumulation.  Crises of overproduction arise due to sharp squeezes on profits during periods of extensive accumulation, which utilises existing technology.  The law of falling profits is a means of resolving such crises, because it is based on intensive accumulation, using new technologies, that increase social productivity, and the organic composition of capital, thereby creating a relative surplus population, reducing wages, and increasing the rate of surplus value, and simultaneously bringing about a devaluation of existing capital.  At the same time, this new technology creates whole new industries, with low organic compositions of capital, and high rates of profit, which creates the basis for a new extensive accumulation of capital.

The crises of overproduction that arose, for example, in the period after 1914 were not due to a falling rate of profit due to the introduction of new technology during that period, that caused social productivity to rise, and the organic composition of capital to rise. On the contrary, the technology used during that period, was already by that time old, having been developed at the end of the previous century. The same was true of the crises of overproduction that affected the global economy in the latter half of the 1970's, and into the 1980's. The resolution of the causes of those crises came precisely from the spur to innovation that led to the subsequent introduction of new technologies.

In the 1930's, for example, those new technologies led to a reduction in the value of constant capital, and labour-saving technology, as well as the development of whole new consumer and producer goods industries based upon them. It is often forgotten, for example, that one reason for the Jarrow Hunger March to London, was to remind workers, in what was, by then, a relatively affluent Midlands, and South-East, based on these new industries, that conditions, elsewhere in the country, were pretty dire.

In the 1980's, the introduction of new technology, for example, in the printing industry, directly undermined the high wages, and organisation of print workers, firstly by creating a whole series of “instant print” workshops across the country, using computer technology for typesetting, and what were now relatively cheap pieces of fixed capital, in the shape of photocopiers and so on. In so doing, this new technology created a relative surplus population, reduced wages, and the value of capital. But, the means for achieving this was to bring about a rise in the organic composition of capital, via a rise in social productivity, and a consequent fall in the rate of profit.

The law of the falling rate of profit does not lie behind crises of overproduction, but lies behind the resolution of such crises, because, by creating the conditions for a new period of intensive accumulation, it creates the conditions for removing the constraints on the expansion of capital that develop on the back of extensive accumulation to its limits. 

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