3) Cheapening of Elements of Constant Capital
Many of the various alternatives that were discussed in Chapters 1-7, covering the reasons for an increase in the rate of profit, arising from a reduction in the price of constant capital, apply under this heading. As described in Chapter 6, its important also here to distinguish between an increase in the rate of profit due to a change in the value of the constant capital, and the effects of price changes resulting from the effects of demand and supply.
As Marx points out, in a period of boom, the demand for materials will push the market price up beyond the price of production. This may persist for some time for various reasons. Firstly, raw material producers have to invest huge sums to create new mines etc. They will be loathe to do so unless they are confident that these higher prices and higher levels of demand are not just a flash in the pan. But, secondly, even when they decide to make such an investment, it will take several years before the necessary exploration, construction and so on results in any material actually being produced.
The converse of this can be seen currently, in the case of oil, gas and materials like copper, iron, foodstuffs, where once such investment in new production does occur, it can lead to a period of oversupply, so that market prices drop not just down to the new lower price of production, but below it.
In the meantime, prior to such new production coming on stream, increasing output from existing mines etc. may be more costly, because the material in them is increasingly difficult to extract. The same thing applies to trying to extract additional output from existing agriculture, as opposed to opening up new tracts of land. To the extent that the cost of increasing output rises, this represents a rise in the value of the material. But, to the extent that the market-price rises sharply, to ration available supply, this does not represent any change in value. The effect on the buyer, however, is the same. It is the market price which they must pay, whether that reflects the actual value of the material or not.
But, the more the price rises, then, as Marx sets out, in Chapter 6, the more it presents a problem for the producer of the end product. As the material price rises, so it increases the price of the end product, which thereby causes demand for it to fall. In fact, as Marx sets out in Chapter 6, Chapter 15, and Theories of Surplus Value, this is a common cause of crises of overproduction.
If demand falls too much, production cannot be carried on at efficient levels. So, to maintain demand at those levels, firms have to absorb some of the higher material costs out of their surplus value. Firms, therefore, have a powerful incentive to always be looking for ways of reducing the value of their constant capital, be it production by more efficient means, importing from cheaper sources of supply, the use of cheaper alternative materials, or the more efficient use of materials so as to reduce the quantity used in production.
This is a force pressing down constantly on the value of circulating constant capital, alongside the constant reduction in the value of fixed capital resulting from technological change, and rises in productivity.
“Hence also, with respect to the total capital, that the value of the constant capital does not increase in the same proportion as its material volume. For instance, the quantity of cotton worked up by a single European spinner in a modern factory has grown tremendously compared to the quantity formerly worked up by a European spinner with a spinning-wheel. Yet the value of the worked-up cotton has not grown in the same proportion as its mass. The same applies to machinery and other fixed capital. In short, the same development which increases the mass of the constant capital in relation to the variable reduces the value of its elements as a result of the increased productivity of labour, and therefore prevents the value of constant capital, although it continually increases, from increasing at the same rate as its material volume, i.e., the material volume of the means of production set in motion by the same amount of labour-power. In isolated cases the mass of the elements of constant capital may even increase, while its value remains the same, or falls.” (p 236)
Of course, even where the value of the constant capital does rise here, this does not signify a rise in the organic composition of the capital. This rise in the value of the constant capital is an absolute rise consequent upon the increase in the mass of materials processed. But, by the same token the variable capital will have risen absolutely too, as part of the expansion of the total capital.
For example, suppose a firm employs 100 workers with a variable capital of £1,000. They work up 10,000 kilos of cotton, which costs £1,000, and there is a 100% rate of surplus value. So,
c 1000 + v 1000 + s 1000. s' = 100%, r' = 50%.
Now assume that the price of cotton halves. Twice as much is bought, and twice the number of workers are employed to process it.
c 1000 + v 2000 + s 2000. s' = 100%, r' = 66.6%.
Now assume that productivity rises so that the 20,000 kilos of cotton can be processed by just 110 workers. Then,
c 1000 + v 1100 + s 1100. s' = 100%, r' = 52.38%.
Finally, assume the 20,000 kilos cost £1100. Then,
c 1100 + v 1100 + s 1100. s' = 100%, r' = 50%.
Here the productivity of the labour employed has almost doubled. It processes nearly twice as much cotton as before. The technical composition of the capital has risen sharply. But, because the value of the cotton has fallen, the organic composition of the capital remains unchanged. The total value of the constant capital has risen by 10%, but the total value of the variable capital has also risen by 10%, so the organic composition and rate of profit remain unchanged.
Marx then makes a further comment, which I think is wrong. He writes,
“The foregoing is bound up with the depreciation of existing capital (that is, of its material elements), which occurs with the development of industry. This is another continually operating factor which checks the fall of the rate of profit, although it may under certain circumstances encroach on the mass of profit by reducing the mass of the capital yielding a profit. This again shows that the same influences which tend to make the rate of profit fall, also moderate the effects of this tendency.” (p 236)
The main point that Marx makes that the fixed capital is being continually devalued, which causes the rate of profit to rise is correct, however, the further point that a reduction in the mass of capital, due to such depreciation leads to a reduction in the mass of profit, is not. It would only be correct if the mass of profit was a function of the mass of capital, but, in this sense, it is not. The mass of profit is not determined by taking the mass of capital, and then deriving the mass of profit as being a percentage of it. That is precisely the delusion of the capitalists and their representatives. (It is, of course, true, on the basis of prices of production, for any individual industry.)
The mass of profit is not a function of this mass of total capital, but of the mass of variable capital and the rate of surplus value. The mass of variable capital is not a function of the value of the fixed or circulating constant capital, but of its physical quantity. The mass of capital is a determined sum equal to the labour-time currently required for its reproduction. The mass of profit is also a determined sum equal to the mass of variable capital multiplied by the rate of surplus value. The rate of profit is merely the proportion of this mass of profit in relation to the mass of total capital. If the mass of total capital is even hugely reduced, as a result of the devaluation of the fixed capital, it cannot in any way, therefore, impact upon the total mass of profit, in the way Marx suggests, because there is no direct relation between these two masses.
If a machine has a value of £1,000, and a worker processes 1,000 kilos of cotton valued at £100 with it, and produces £100 of surplus value, in the process, they will still process 1,000 kilos of cotton with a value of £100, and produce a surplus value of £100, whether the machine rises in value to £10,000 or falls in value to just £100! What it will impact is the rate of profit, falling in the former case, and rising in the latter.
The only basis upon which the mass of profit could be impacted is if the change in the value of the fixed capital arose not from its devaluation but as a result of a physical change in the quantity employed. For example, if a new machine was introduced that was as productive as four older machines, then if this resulted in three workers being replaced so that the variable capital shrank, then this would reduce the mass of profit created.
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