Marx notes,
“But in general, it should be noted here, as in the previous case, that if variations take place, either due to savings in constant capital, or due to fluctuations in the price of raw materials, they always affect the rate of profit, even if they leave the wage, hence the rate and amount of surplus-value, untouched. They change the magnitude of C in s' (v/C), and thus the value of the whole fraction. It is therefore immaterial, in this case as well — in contrast to what we found in our analysis of surplus-value — in which sphere of production these variations occur; whether or not the production branches affected by them produce necessities for labourers, or constant capital for the production of such necessities. The deductions made here are equally valid for variations occurring in the production of luxury articles, and by luxury articles we here mean all production that does not serve the reproduction of labour-power.
The raw materials here include auxiliary materials as well, such as indigo, coal, gas, etc. Furthermore, so far as machinery is concerned under this head, its own raw material consists of iron, wood, leather, etc. Its own price is therefore affected by fluctuations in the price of raw materials used in its construction. To the extent that its price is raised through fluctuations, either in the price of the raw materials of which it consists, or of the auxiliary materials consumed in its operation, the rate of profit falls pro tanto. And vice versa.”
We can look at the effect of a fall in the price of oil on all these factors – fixed capital, circulating constant capital and variable capital.
Fixed Capital
It may be thought that the price of oil has no direct consequence for the price of fixed capital. That would be wrong. Its not just that the price of oil has an indirect effect on the price of fixed capital, because it affects the prices of other commodities, which in turn enter the production of fixed capital, but oil itself enters directly into the production of some forms of fixed capital, and not just as an auxiliary material, to lubricate machines, or as fuel to power machines, heat buildings and so on.
In his discussion of the difference between fixed and circulating capital, in Capital II, Chapter 8, Marx writes,
“Similarly in agriculture the substances added for the improvement of the soil pass partly into the plants raised and help to form the product. On the other hand their effect is distributed over a lengthy period, say four or five years. A portion of them therefore passes bodily into the product and thus transfers its value to the product while the other portion remains fixed in its old use-form and retains its value. It persists as a means of production and consequently keeps the form of fixed capital.”
In this respect, therefore, fertiliser is to be considered fixed capital, and oil is a major constituent of the production of fertilisers via the petrochemical industry. Given the huge scale upon which modern agriculture relies on products such as fertiliser, and other products from the petrochemical industry, a reduction in their price of production, thereby brings about a significant moral depreciation of this fixed capital.
But, as indicated above, a fall in the price of oil indirectly reduces the value of fixed capital in a variety of ways. Oil enters into the production of plastics, for example, and plastics are used extensively in a variety of products, some of which form elements of fixed capital. Just a cursory thought of the extent to which plastics are used in modern life, from building construction to vehicle construction, illustrates the point.
A fall in the price of oil, also reduces transport costs, and as nearly all commodities, in a global economy, comprise some elements that have been shipped from other locations, this reduction in costs must be passed on to a reduction in the cost of producing all kinds of fixed capital, as with every other commodity.
Finally, the fall in the price of oil, by reducing the production costs of all these variety of other commodities, also reduces the cost of reproducing labour-power. But, the fall in the price of oil directly reduces the cost of reproducing labour-power, because workers themselves use oil more or less directly as a consumer good, to fuel their cars, and to heat their homes. This fall in the value of labour-power, does not affect the value of the product created by it, here some form of fixed capital, but only changes the distribution of the new value created by that labour-power, between what must go to reproduce labour-power, and what is left over as surplus value.
But, that means that the rate of profit in industries producing fixed capital thereby rises, because even setting aside all the other considerations described above, this rise in the rate of surplus value, results in the produced surplus value constituting a larger proportion in relation to the advanced capital. For example, if we have a production function such as:
c 5000 + v 1000 + s 1000, the rate of profit is 1/6 = 16.66%.
If the value of labour-power falls to 800, this does not change the amount of new value created by labour, which remains at 2000, but is now distributed 800:1200. We then have:
c 5000 + v 800 + s 1200, and the rate of profit is then 1200/5800 = 20.69%.
But, there is another way in which the fall in the value of labour-power may affect the price of fixed capital itself. In Chapter 6, Marx outlines the fact that under some market conditions, price rises may not be capable of being passed on in market prices. In that case, the individual capitalist firm or industry has to absorb some of this cost, out of the produced surplus value.
“But it is evident — although we merely mention it in passing, since we here still assume that commodities are sold at their values, so that price fluctuations caused by competition do not as yet concern us — that the expansion or contraction of the market depends on the price of the individual commodity and is inversely proportional to the rise or fall of this price. It actually develops, therefore, that the price of the product does not rise in proportion to that of the raw material, and that it does not fall in proportion to that of raw material. Consequently, the rate of profit falls lower in one instance, and rises higher in the other than would have been the case if products were sold at their value.”
In conditions, where realised profits are being squeezed, because a portion of the produced surplus value is being absorbed, therefore, it might be the case that, in the example above, competition between producers of fixed capital, forces the market price down to 5000 + 800 + 966, at which point, it only obtains the previous rate of profit of 16.66%.
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