The Long Wave - Part 8

In Part 7, it was demonstrated that the law of falling profits is not the cause of crises of overproduction, but the means of resolving them, by creating a relative surplus population, thereby reducing wages, and raising the rate of surplus value, and also of simultaneously bringing about a devaluation of existing capital values. A rising or high rate of profit creates the conditions for crises of overproduction, because it is this high or rising rate of profit that acts as the “goad of capitalist production” (Capital III, Chapter 15). It leads to over-expansion, as existing capitals buy additional machines, and new capitals, often using borrowed money-capital, are established. By contrast, a falling rate of profit has the opposite effect, because it “checks the formation of new independent capitals” (ibid).

What is highlighted here is the difference between the annual rate of profit, and the rate of profit as essentially the profit margin. Under conditions of expanding production, it is not only possible but inevitable that the annual rate of profit will be rising, whilst the profit margin will be falling. This can happen without rising social productivity, i.e. within conditions of extensive rather than intensive accumulation. Take a situation of a capital, which represents the average social capital, and where, therefore, its price of production is equal to the exchange value of its output.

It has fixed capital of £10,000 in the shape of a machine; circulating capital (materials) £5,000; variable capital £2,000; there is a 100% rate of surplus value, so that £2,000 of surplus value is produced. The circulating capital turns over once a year, and the fixed capital has a life of 10 years, so that £1,000 of wear and tear is transferred as value to the final product each year. It produces 10,000 units per year.

On this basis,

c (1000 + 5000) 6,000 + v 2000 gives a cost of production (k) of 8,000.

The profit is 2,000, giving an annual rate of profit, s x n/C, of 2000/17,000 = 11.76%

But, the profit margin is p/k = 2000/8000 = 25%.

The price of each unit is £1, of which £0.20 equals profit.

Now, assuming that there is extensive accumulation on the basis of constant technology, this average firm introduces a second machine. It now employs twice as much materials, and labour-power, and produces twice the amount of value in a year. However, this also means that it produces the previous quantity of 10,000 units in half of the year. The rate of turnover of the advanced capital, thereby rises. If we ignore the circulation period for the purpose of simplicity, we then have:

Fixed capital £20,000

Wear and Tear per year £2,000

Advanced circulating constant capital £5,000

Advanced Variable Capital £2,000

Total Surplus Value from 2 turnover periods £4,000

The annual rate of profit is then:

£4000/(20,000 + 5,000 + 2,000) = 4000/27,000 = 14.81%, a rise of 25.94%.

However:

Cost of production = £2,000 (wear and tear) + £10,000 materials + £4,000 wages = 16,000, which means that the profit margin remains constant, at 25%.

But, for the reasons, Marx set out in Capital Vol. I, this conclusion that the rate of profit/profit margin remains constant, whilst the annual rate of profit rises, does not apply in reality, because of economies of scale. In reality, even without any change in technology, the introduction of additional machines, of the same kind, will result in proportionally more material being processed, relative to the quantity and value of fixed capital, and labour-power. The consequence, as Marx sets out, is that the rate of turnover of capital will be higher than suggested here, so the annual rate of profit will rise more than is suggested. At the same time, the cost of production will rise more than suggested here, so that the profit margin will fall, because the value of fixed capital, as well as variable capital and surplus value will thereby fall as a proportion of the total output value, whereas the value of the circulating constant capital will rise proportionately.  In other words, the organic composition of capital will rise, and p/k will fall.

Moreover, for the reasons set out earlier, and as Marx sets out in Capital III, Chapter 6, this process will cause the prices of material inputs to rise, sometimes sharply, as well as causing wages to rise, thereby causing the rate of surplus value to fall.

The more capital accumulation on an extensive basis arises, the more this divergence between the annual rate of profit and the profit margin will develop. I have set out, the consequences of this previously. This divergence, of a rising annual rate of profit, and a falling profit margin, creates enhanced conditions for a crisis of overproduction, as the former encourages additional investment, whilst the latter means that the chances of market prices falling below costs of production increase. As set out in Part 7, it is when, during the Autumn phase of the long wave cycle, this condition becomes most acute, and it becomes more difficult to employ additional labour-power profitably, that capital has the greatest incentive to move from extensive accumulation to intensive accumulation, and thereby creates the incentive for a new innovation cycle.

Back To Part 7

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