Thursday, 16 July 2015

Capital III, Chapter 10 - Part 11

Suppose we take two commodities, say potatoes and mobile phones. At the market value of potatoes of £1, the supply is 100 units, but the demand is 120 units. For mobile phones, at the market value of £10, the demand is also 120, and the supply 100 units. In both cases, the demand exceeds supply by 20%. In the short run, because demand exceeds, supply, the market price must rise to ration out the available supply, by reducing demand. Because people need to eat, but do not need to chatter on the mobile phone, the price of potatoes will tend to have to rise by a bigger percentage to choke off the excess demand than would be the case for phones. But, by the same token, the demand for phones might have exceeded the supply by a larger percentage than the demand for potatoes exceeded the supply, yet the demand for phones would still be choked off more easily than the demand for potatoes.

But, in the medium term, the larger increase in the price of potatoes, would tend to increase potato profits, and thereby increase the capital employed in potato production relative to phone production. How this affects the market value of potatoes would depend upon how much labour-time is involved in this additional production. Suppose, the current market-price of potatoes is £1.50. The market value is currently £1, and for the average producer, the cost of production is £0.75. At the market-price, the average producer currently makes £0.25 of normal profit, and £0.50 of surplus profit. If the additional production has a value equal to the current average, then more of this production would be forthcoming than where the additional capacity had a higher value than the average. Suppose this new capacity has a cost of production of £1 rather than £0.75, then the profit to be made from it will be less than the average. However, if the cost of production is only £0.50 then this new production will make a bigger profit than the current average, so it will encourage more production.

So, if the additional production causes the market value to fall it will require less of a price rise to bring forth the required additional supply than if the additional production causes the market value to rise. Put another way, as the increased supply to the market causes the market price to fall, this will have less an effect on the quantity supplied to market, where the market value is falling due to the more efficient additional production, than where it is rising due to the introduction of less efficient production.

On the one hand additional production might involve using less fertile land so that the amount of labour-time required on average increases (rising marginal costs), on the other, this increased level of demand might mean that production on a larger scale justifies more capital intensive (lower cost) production, or the bringing into cultivation of more distant, but more fertile lands. The latter occurred, for example, with the introduction of new agricultural production from the US Mid-West, whilst the former occurred in Britain, with the use of fertilisers, increased capital spending on drainage etc.

Marx indicates that the market value is indeed the mean average not the median average when he says,

“Finally, if the lot of commodities produced at the favourable extreme occupies greater place than the other extreme, and also than the average lot, as it does in case III, then the market-value falls below the average value.” (p 184)

And he also indicates that what he means by “determines” is really influences rather than equals, when he says of the situation where production is skewed towards the least favourable conditions,

“How close the market-value approaches, or finally coincides with, the latter would depend entirely on the volume occupied by commodities produced at the unfavourable extreme of the commodity sphere in question.” (p 184)

Similarly, Marx says its only when supply exceeds demand by a wide margin that a large proportion of this supply can be derived from the most favourable conditions. If demand were higher, he says, then more of the supply required to meet it would come from the less favourable conditions.

“Should demand be weaker than supply, the favourably situated part, whatever its size, makes room for itself forcibly by paring its price down to its individual value. The market-value cannot ever coincide with this individual value of the commodities produced under the most favourable conditions, except when supply far exceeds demand.” (p 184-5)

But, for the reasons described earlier, this does not follow. The consequence of concentration and centralisation of capitalist production is that the larger, more efficient firms concentrate a larger proportion of production in their hands. They thereby determine the market value, even though their output is increasingly planned to prevent it exceeding demand. By contrast, the smaller, less efficient firms in the industry, have to accept that lower market-value, and the lower market price that flows from it, and so make smaller profits as a consequence.

In the same way, a large rise in demand may cause investment in some new source of supply, whose conditions of production are far more favourable than the current production. For example, growing European populations requiring food, made the opening up of the US plains for food production worthwhile, and this large proportion of food production thereby took place on the basis of much more favourable conditions. The recent industrialisation of China and other parts of Asia, has had a similar effect in encouraging the rapid development of modern efficient farming of large parts of Africa.

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