## Monday, 23 February 2015

### Oil Price. Good For The Economy, Terrible For Financial Markets - Part 11

A number of points need to be drawn from the analysis set out in Part 10. The fall in prices of fixed capital, resulting from a fall in oil prices, and consequently of other commodity prices, may enable surplus value to be realised that previously was not, because tight market conditions meant that not all input costs could be passed on. In other words, existing levels of supply may be maintained at existing market prices, but with lower costs of production, so that realised profits rise. On the other hand, a lower price for fixed capital, given appropriate market conditions, may spark an increased demand for fixed capital, as part of an accelerated accumulation of capital.

The fall in the value of fixed capital, directly leads to a rise in the rate of profit, as even with s remaining constant, a lower value of C, causes s/C to rise. But, a fall in the value of fixed capital, may have a disproportionate effect on the annual rate of profit, precisely because rising social productivity, which leads to a rise in the rate of turnover of capital, increases the proportion of fixed capital to advanced circulating capital.

Suppose, we have fixed capital of £5,000, circulating constant capital of £5,000, variable capital of £2,500 and surplus value of £2,500. The annual rate of profit is then 20%. Suppose then that as a result of introducing new machines, which cost £10,000, productivity rises five fold, so that what took a year to produce is now produced in a fifth that time. In that case, the advanced capital is £10,000 for fixed capital, £5,000 for circulating constant capital, and £2,500 for variable capital. The total surplus value produced during the year is 5 x £2,500 = £12,500, and the annual rate of profit is then 12500/17500 = 71.43%.

In terms of the laid out capital, the fixed capital has gone from being 5000/7500 = 66.66%, to 10000/37500 = 26.66%, as a consequence of the rise in productivity it brought about.

Consider, therefore, the effect of a fall in the value of the fixed capital compared to a fall in the value of the circulating constant capital, on the annual rate of profit. Suppose, the price of the fixed capital drops by 50%. The annual rate of profit is then 12500/12500 = 100%. If the same cause results in the value of the circulating constant capital falling by 50%, whilst the value of fixed capital remains unchanged, the annual rate of profit, is then 12500/15000 = 83.33%.

As Marx points out, as production expands, and productivity rises, as a function of the enhancement of fixed capital, and extensive accumulation, the rate of turnover of capital rises, and consequently the value of wear and tear of fixed capital, as a proportion of the commodity value, continually falls. Reductions in the price of fixed capital, therefore, have a proportionately smaller effect on the price of commodities than does falls in the price of raw materials.

“Further, the quantity and value of the employed machinery grows with the development of labour productivity but not in the same proportion as this productivity, i. e., not in the proportion in which this machinery increases its output. In those branches of industry, therefore, which do consume raw materials, i. e., in which the subject of labour is itself a product of previous labour, the growing productivity of labour is expressed precisely in the proportion in which a larger quantity of raw material absorbs a definite quantity of labour, hence in the increasing amount of raw material converted in, say, one hour into products, or processed into commodities.  The value of raw material, therefore, forms an ever-growing component of the value of the commodity-product in proportion to the development of the productivity of labour, not only because it passes wholly into this latter value, but also because in every aliquot part of the aggregate product the portion representing depreciation of machinery and the portion formed by the newly added labour — both continually decrease. Owing to this falling tendency, the other portion of the value representing raw material increases proportionally, unless this increase is counterbalanced by a proportionate decrease in the value of the raw material arising from the growing productivity of the labour employed in its own production.”

(Capital III, Chapter 6)

However, as indicated above, the effect of a fall in the value of fixed capital on the annual rate of profit, is proportionately greater than a fall in the value of circulating capital, precisely because although the fixed capital forms an ever smaller proportion of the laid-out capital, for the same reason it forms a greater proportion of the advanced capital, as the rate of turnover of capital rises.

The fall in the price of oil, therefore, may not noticeably affect the prices of other commodities, as a consequence of a fall in the value of fixed capital, but in reducing the value of fixed capital itself, it will have a proportionately greater effect on increasing the annual rate of profit. By reducing the value of fixed capital, it will also result in a release of capital that can be used to either expand production in the given sphere, or else for use in some other sphere. For example, a fall in the price of fertiliser, may mean that farmers are able to buy more of it, for the same outlay of capital, and thereby to bring additional land into cultivation. This may not result in any rise in the rate of profit on the capital advanced, but it means that more capital is advanced in total, more profits are made in total, and economic activity increases as a consequence.