Capital III, Chapter 13 - Part 3

It is, in fact, the sharp rise in material prices, consequent upon a sharp rise in their demand, caused by this new technology, which is one of the causes of crises, as opposed to the falling rate of profit. As Marx describes, in Chapter 6, and in Theories of Surplus Value, the sharp rise in demand for materials causes their market price to rise way above their price of production. As a consequence, this rise in price cannot be passed on in the price of those commodities into which those materials enter, as inputs, because the higher price of these commodities meets consumer resistance, which causes demand to fall. In order to maintain the level of demand, producers are forced to absorb some of the rise in material prices out of their profits. If falling demand causes the market price to fall far enough, the market price falls below the cost of production so that the capital consumed cannot be reproduced.

But, these periodic crises of overproduction are also the means by which this situation is resolved. In the longer term, in periods of sustained growth, the high prices of raw materials will encourage investment, which will bring down these prices too. In fact, they may as a result, experience sharp falls in value alongside a significant increase in their own supply, creating then a glut of these materials. As well as a crisis of overproduction causing some firms to go bust, whose devalued capital is then picked up by others, the very process described in Chapter 11, shows why these capitals with a high organic composition, will have every incentive to try to bring about a reduction in the value of their constant capital, even more than their variable capital.

This is particularly the case given that this rise in wages can result in a rise in the demand for and supply of their own commodities, so that even if prices fall, the mass of profit on them may rise.

Under a regime of prices of production, it appears to capitalists that their profits arise simply from the difference between their selling price and their cost of production. This is emphasised by the fact that a general rise in wages leads to a falling price for capitals of the higher composition. For these capitals, the main component of their cost of production is the constant capital, and so it appears that the most effective means of raising profits is to reduce this cost.

Consequently, as Marx points out, although the technical composition of capital rises, the organic composition does not rise in the same proportion, because the value of the circulating constant capital falls, and because the quantity of fixed capital falls relatively, whilst its value falls also. As the quantity of fixed capital continues to increase in absolute terms, the sharp reduction in its value, as a result of moral depreciation, has an increasing effect on countering any fall in the rate of profit.

For example, suppose capitalist production is at an early stage. There is:

Fixed Capital £1,000

Material £1,000

Variable Capital £1,000

Surplus Value £1,000.

The rate of profit is 1000/3000 = 33.3%. If the fixed capital suffers a 20% depreciation then the rate of profit becomes 1000/2800 = 35.7%.

However, because fixed capital accumulates and functions for long periods, whereas the circulating capital is constantly reproduced, and advanced, its absolute value rises relative to the advanced circulating capital, even as its quantity and value falls relative to the laid out circulating capital. This is manifest by it transferring a smaller and smaller value to the end product. In other words, the ratio of fixed capital to laid out circulating capital falls because more material is processed in a year. But, given amounts of material are processed in shorter and shorter periods, so less circulating capital is thereby advanced.

Suppose we then have:

Fixed capital £100,000

Material £30,000

Variable Capital £20,000

Surplus Value £20,000.

The rate of profit is 20000/150000 = 13.33%. If the fixed capital is then depreciated by 20%, the rate of profit is 20000/120000 = 16.66%. In the first case, the rate of profit rose by 7.2%, as a result of a 20% depreciation of the fixed capital. In the second case it rises by 24.98%. In fact, the rise in the rate of profit in this latter case would be significantly more than this, because the reason that the value of the fixed capital rises here, relative to the circulating capital, is that it is a rise in relation to the advanced capital, not the laid-out capital. In other words, it is a reflection of the fact that the rate of turnover of capital has risen, and the increase in the rate of turnover is itself a function of the rise in productivity brought about by the increase in the fixed capital relative to circulating capital. If the circulating capital turns over 4 times here compared to once, the actual laid out capital would be £120,000 material, and £80,000, variable capital.

If we calculate the rate of profit to take this into account, as Marx does, then it is s x n/C. That is £20,000 x 4 = £80,000 divided by £100,000 fixed capital + £30,000 material + £20,000 variable capital = £150,000. In that case, 80/150 = 53.33%. In other words, the total effect arising from the increased organic composition of capital, and from the increase in the advanced fixed capital is that the rate of profit rises by 300%!

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