Friday, 5 June 2015

Capital III, Chapter 6 - Part 9

The price of a unit of anything is the value of the total output divided by the quantity. If the quantity of output rises, i.e. more use values produced, the price per unit falls, and vice versa. A bad harvest means that the same amount of socially necessary labour-time was expended, but fewer crops were produced. The price of cotton rises, hitting yarn producers, and those further down the line such as weavers, tailors etc. The price of food rises, increasing the value of labour-power.

Furthermore, it is more difficult to quickly increase the production of agriculture than it is to increase the production of manufactured goods. Marx includes in the latter also things like coal and ore. This may have been true of Britain, at that time, but was not of elsewhere. Ireland had no coal for instance. But, it is not true today when such raw materials are required on a vast scale and require huge amounts of capital investment for their production.

This is what one source says in respect of copper, for instance.

"As a result of booming demand, operating profits in the copper industry have grown dramatically – operating margins up from 8% in 2001 to 38% in 2005. So why does copper supply not increase faster, as the industry clearly has plenty of cash to invest? To answer this question, we need to look at the basic economics behind investment decisions in the copper industry. Much of the added value in production of copper arises in the mining stage: only 25% of added value is in smelting / refining but the rest is in extraction and processing of copper ore. Thus the key supply constraint is the limited number of mines. When copper demand was lower, there was a surplus of production capacity and additional supply could be added simply by increasing throughput from existing mines. But supply cannot be increased indefinitely without additional copper production capacity, i.e. new mines. Despite the prevailing very high level of copper prices, copper supply from mines has not risen as fast as might be expected.

The economic theory is that when prices rise due to higher demand, supply will increase as it becomes possible to operate marginally economic mines at a profit due to the higher prices. The problem in practice is that copper is supplied from facilities that require huge investment in the mine and supporting infrastructure, and a major investment decision is required. A short-term rise in copper prices – even when sustained over several months - does not necessarily change industry investors’ perceptions of the long-term copper price. Mining companies will not invest in a project unless their expectations of long-term prices are at a level where the project becomes attractive.”

In fact, its these very long lead in times that lie behind the periods of the Long Wave

“It is therefore quite possible, and under a developed system of capitalist production even inevitable, that the production and increase of the portion of constant capital consisting of fixed capital, machinery, etc., should considerably outstrip the portion consisting of organic raw materials, so that demand for the latter grows more rapidly than their supply, causing their price to rise. Rising prices actually cause 1) these raw materials to be shipped from greater distances, since the mounting prices suffice to cover greater freight rates; 2) an increase in their production, which circumstance, however, will probably not, for natural reasons, multiply the quantity of products until the following year; 3) the use of various previously unused substitutes and greater utilisation of waste. When this rise of prices begins to exert a marked influence on production and supply it indicates in most cases that the turning point has been reached at which demand drops on account of the protracted rise in the price of the raw material and of all commodities of which it is an element, causing a reaction in the price of raw material. Aside from the convulsions which this causes in various forms through depreciation of capital, there are also other circumstances, which we shall mention shortly.” (p 118)

This description is also similar to the progress of the long wave, I have given elsewhere.

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