Thursday, 1 October 2015

Capital III, Chapter 15 - Part 22

The fundamental contradiction is this. Competition forces each capital to continuously expand production in order to reduce its costs. This process reduces not only the value of each commodity unit, but the surplus value contained within each unit. This is the real difference between the fall in the rate of profit (measured against the laid-out capital, i.e. the profit margin) and the rise in the annual rate of profit (measured against the advanced capital). The total mass of value and surplus value rises, but because it is spread over this much greater quantity of units, the value and surplus value per unit falls.

This is important, for the reason set out earlier, that whether or not only the socially necessary labour-time has been expended is dependent not only on the amount of time spent producing each unit, but the total time spent on producing the total units. If not all the units can be sold at their market value, some labour-time expended was not socially necessary. The less surplus value contained in each unit, the more each unit is prone to have this surplus value wiped out, when this is taken into account.

Provided the entire output can be sold, this increased mass of surplus value can be realised, but if it cannot be sold, at the market value, then the market price of the commodity must fall. The smaller the proportion of surplus value in the price of each commodity unit the less the price has to fall before the market price falls below the cost of production, so that the capital cannot be reproduced.

Again its important to understand the difference between the advanced capital and the laid out capital here, as Marx describes in Chapter 13, explaining this point. Suppose, the advanced capital is x and turns over ten times, r' is 10 x s/x. But, the rate of profit, or profit margin, assumes the capital is turned over just once. The rate of profit is calculated on the laid-out capital not the advanced capital. So, the rate of profit may be low, whilst the annual rate of profit, calculated on the advanced capital is high, because the rate of turnover of capital, flowing from high levels of productivity, resulting from a high organic composition of capital, is high.

Suppose we have:

c 1000 + v 1000 + s 1000. r' = 50%. The capital turns over just once, so the rate of profit and annual rate of profit are the same. If 1000 units are produced, the price per unit is £3. The profit per unit is £1, a margin of 50% over the cost of production.

If capital is accumulated, and the organic composition of capital rises, then as Marx says, this process requires also that productivity rises, proportionately, so then the rate of turnover of capital rises correspondingly, so the annual rate of profit and rate of profit must diverge accordingly.

If then we have a quadrupling of the organic composition of capital, and a proportionate rise in productivity, the rate of turnover of capital also quadruples. We then have for one turnover period

c 1000 + v 250 + s 250. But, the calculation of the annual rate of profit is s x n/C = 250 x 4/1250 =

1000/1250 = 80%.

The consequence of a rising organic composition of capital then is that the annual rate of profit has risen by 60% from 50% to 80%, because the consequence is a release of capital, as the amount advanced for variable capital falls relative to that advanced for constant capital, whilst the total surplus value for the year remains constant. Yet, looked at from the perspective of the rate of profit/ profit margin, it appears that the rate of profit has fallen.

The previous production of 1000 units, now rises to 4000 units.

c 4000 + v 1000 + s 1000. Price per unit £1.50. Profit per unit £0.25, a profit margin of 20% over the cost of production, with a rate of profit also of 20%, or a quarter of the annual rate of profit.

Originally, the market price of units would have needed to fall by £1, or a third, before the profit margin was wiped out. Now, it only needs to fall by £0.25, or 16.67%, before the profit margin is wiped out, yet the annual rate of profit on this production has risen significantly.

So, the more the output is continually increased, the more the profit margin per unit falls. But, also even as this reduces the value of each unit, the more this increased output faces consumer resistance, for the reasons Marx sets out, in relation to the nature of demand, earlier, i.e. the more difficult it becomes to sell the increased output, so that the danger increases that the market price will fall below the market value, thereby wiping out the diminished profit margin.

Take Apple. It has made huge profits in the past from its products. When some of its early products came on to the market, they were new types of commodity. At the time of the first Apple Macintosh computers, few people had any such device, other than some enthusiasts who had built their own. Today, despite the fact that personal computers are many orders of magnitude more powerful than those first Macs, the price of a PC is a fraction of what it was, in real terms, large numbers of people own one or several, and the profit margin, on each machine, has shrunk considerably.

But, the same is true with iPhones and iPads. For a time, profit margins could be maintained by selling new generations of phone etc. to existing customers, as well as expanding the user base. But, increasingly, as the number of people who already have a phone rises, and as the new generations of phone are seen as little different to previous phones, the profit margin on each phone gets squeezed. Apple's overall profit margin has continued to shrink considerably, and unless it can come up with qualitatively new products, to generate new customers, it will continue to shrink. But, as the above demonstrates, that does not at all mean that its annual rate of profit need shrink, or its ability to accumulate additional capital.

“The contradiction, to put it in a very general way, consists in that the capitalist mode of production involves a tendency towards absolute development of the productive forces, regardless of the value and surplus-value it contains, and regardless of the social conditions under which capitalist production takes place; while, on the other hand, its aim is to preserve the value of the existing capital and promote its self-expansion to the highest limit (i.e., to promote an ever more rapid growth of this value).” (p 249)

In other words, each capital wants to see the value of its own capital rise, but the way to achieve that is via accumulation out of profits. But, the very process required to increase profits reduces commodity values, which thereby reduces the value of all those commodities that comprise the existing capital.

“The periodical depreciation of existing capital — one of the means immanent in capitalist production to check the fall of the rate of profit and hasten accumulation of capital-value through formation of new capital — disturbs the given conditions, within which the process of circulation and reproduction of capital takes place, and is therefore accompanied by sudden stoppages and crises in the production process.” (p 249)