Tuesday, 27 January 2015

Capital II, Chapter 20 - Part 47

The argument that Marx sets out here is basically the phenomenon that orthodox economics refers to as the Accelerator Effect . It goes like this. Suppose each year, firms replace 10% of their machines. If say there are 100 machines, that means orders for machine makers each year for 10 machines. Suppose then that trade improves by 10%, causing firms to need 10% more machines. That means in this year they demand 20 machines rather than 10. But that represents not a 10% rise in orders to machine makers, but a 100% increase!

It means they will have to double their own purchases of materials, labour-power etc. This argument is usually coupled with the multiplier effect to indicate the extent to which this increase in demand for fixed capital will have a disproportionate effect on the level of aggregate demand.

However, the contrary, also applies. If there is a slow down in trade, firms may postpone their usual replacement of equipment. In that case, machine makers suffer not a 10% reduction, but a 100% reduction in orders, with a consequent effect on aggregate demand. In short, the crisis of overproduction, Marx described.

The problem is made worse, as I suggested earlier, because of the synchronisation of equipment replacement cycles. That means large amounts of equipment may become in need of replacement one year, with very little for the next few years. The basis of Marx's assumption, that replacement was evenly spread, was that different firms begin trading at different times, they expand at different rates, and so on. Equipment is bought at varying times and thereby becomes due for replacement at a range of times.

But, Marx was aware that, in practice, this assumption does not hold. The processes of concentration and centralisation of capital mean that the spread of industrial firms is continually reduced; large firms may make existing equipment last, and replace it top to bottom, with the latest equipment, once it has been proved by other, often newer, smaller firms; moral depreciation, in the form of qualitatively newer, more efficient equipment, forces firms to abandon their existing equipment, whether it is worn out or not, and buy the new equipment.

The consequence is that an increasing proportion of equipment is bought at the same time, and subsequently wears out at the same time. Even where it is not physically worn out, it is replaced with the next generation of equipment, as part of a regular upgrade cycle.

This has been particularly marked in relation to new technology. Computer chips essentially double in power every eighteen months. Software developers base their own development cycle on this increase in speed and power, to determine the kinds of products, or development of existing products they can offer. Buyers of computers, then, have tended to gear their own upgrade cycle to when new versions of operating systems etc. are released, buying replacement machines and software together.

Given the increasing role of services within the economy, and given the centrality of personal computers and software, to much service provision, this is one reason that a discernible three year economic cycle has developed over the last 20-30 years. But, microchip technology has become ubiquitous, whether it is in a mobile phone, a car, a washing machine, or the latest jet liner. Consequently, the upgrade cycle for microchips has a far more regularising and synchronising effect on a range of equipment and commodities than simply that on the PC.

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