3. Excess Capital And Excess Population
The drop in the rate of profit arises on the back of a rise in social productivity. The rise in productivity is a function of technological change, so that the new more efficient machines are introduced which thereby process a much greater quantity of material using the same amount of labour-power. The organic composition of capital rises, therefore, because a greater quantity and value of circulating constant capital is laid out.
But, because this implies an increase in the mass of capital employed, it also implies a process of concentration of capital, because now the minimum scale of operation for efficient production is increased. Only the larger capitals can produce efficiently on this scale. The smaller capitals profits fall, or they start to make losses.
“Concentration increases simultaneously, because beyond certain limits a large capital with a small rate of profit accumulates faster than a small capital with a large rate of profit. At a certain high point this increasing concentration in its turn causes a new fall in the rate of profit. The mass of small dispersed capitals is thereby driven along the adventurous road of speculation, credit frauds, stock swindles, and crises.” (p 250-1)
The larger firms, employing these new machines and more efficient methods, even allowing for the fact that they produce for large wholesalers, who require larger batches, turn over their capital faster than do the smaller capitals, precisely because, on the basis of their higher productivity, their working period is shorter than for the smaller capital. So, although the rate of profit (calculated on the total laid out capital) may fall, the annual rate of profit will rise, because the rate of turnover of its capital rises, and advanced capital is thereby released.
This process described by Marx in Capital II, Chapter 15, means that the larger capital, as well as producing a larger mass of surplus value, than the smaller capital, as well as making a higher annual rate of profit, also enjoys a release of capital, which can be used for additional accumulation.
On the other hand, this release of capital, as Marx describes in the above chapter, also releases money-capital into the money market, thereby depressing interest rates, to the extent it is not used by existing capitals. But, this process whereby productivity rises so that a given quantity of labour-power processes a greater quantity of material, also implies that a given quantity of material can be processed by a smaller quantity of labour. The creation of a relative over-population is then part of the same process that creates the release of capital.
To the extent that the existing capital uses the released capital for accumulation, the labour-power it employs can be increased, so that despite a relatively smaller quantity of labour being employed, a greater mass of labour is employed. But, there are limits to which this is possible for any existing capital. That includes that it can expand only within the technological constraints on efficient production, determined by the technical composition of capital, i.e. to expand to the next efficient level of production might require it to double the size of its total capital, or that it may determine that the size of the market for the commodities it produces, does not warrant such expansion.
In that case, there is a release of workers into the labour market, or what amounts to the same thing, additional workers entering the labour market, as part of the growth of population, do not get taken on.
The very fact of lower interest rates, caused by the release of capital into the money market thereby acts as a spur to some of those workers borrowing money to set up in business on their own account. Members of capitalist families may take part of their fraction of capital to start some new business, and the firm itself may decide to establish some new line of business. What characterises all of these new separate capitals is that they are small. Where they try to find a place within existing lines of production – frequently the case with workers and managers who seek to use their existing skills and knowledge for their own account – they will necessarily tend to operate at below the minimum efficient size, and will, as Marx says, simply be at the disposal of the managers of the larger firms, more or less as subcontractors.
Sometimes, these new capitals will be a form of speculation into some new line of production, which may or may not succeed. In this way, new capitals are always being formed, some of which do grow into becoming large capitals themselves. But, the vast majority do not. Around 75% of new firms in Britain fail within the first three years. Part of that is because these firms are too small to compete, part because of bad management, part because there is no demand for the new commodities the firm wishes to sell, at their market value, part because some companies with a new profitable line of business get swallowed up by an existing capital.
At the same time, even when rates of profit are high, this release of money capital into money markets, which reduces interest rates, encourages other forms of speculation and swindling. The smaller capitals, in order to try to make ends meet, are led to try to swindle their workers, suppliers, and customers by various means. They are led to speculate in relation to the purchase of their materials, hoping to buy below the market price at some opportune moment etc.
But, the low interest rates encourage merchants to borrow to buy larger quantities to sell, especially into foreign markets, and as Marx sets out, in later chapters, this leads to speculation and fraud in relation to bills of exchange masquerading as trade.
Finally, it leads to open speculation and fraud such as happened with the South Sea Bubble, and John Law's Mississippi Scheme. And, as Marx and Engels describe, in the 1840's, this process of high rates of profit, release of capital and low interest rates led to speculation in railway shares, which like all such bubbles ended in a financial crisis.
“With the same zeal as was shown in expanding production, people engaged in building railways. The thirst for speculation of manufacturers and merchants at first found gratification in this field, and as early as in the summer of 1844, stock was fully underwritten, i.e., so far as there was money to cover the initial payments. As for the rest, time would show! But when further payments were due — Question 1059, C. D. 1848/57, indicates that the capital invested in railways in 1846-47 amounted to £75 million — recourse had to be taken to credit, and in most cases the basic enterprises of the firm had also to bleed.”
(Capital III, Chapter 25)
The big capital, therefore, is able to continue to grow as the rate of profit falls, because its mass of profit grows, it benefits from a release of capital, as the rate of turnover rises, and that same process causes its annual rate of profit to rise. The vast majority of the smaller capitals do not enjoy these advantages.
“The so-called plethora of capital always applies essentially to a plethora of the capital for which the fall in the rate of profit is not compensated through the mass of profit — this is always true of newly developing fresh offshoots of capital — or to a plethora which places capitals incapable of action on their own at the disposal of the managers of large enterprises in the form of credit. This plethora of capital arises from the same causes as those which call forth relative over-population, and is, therefore, a phenomenon supplementing the latter, although they stand at opposite poles — unemployed capital at one pole, and unemployed worker population at the other.” (p 251)
The big capital, therefore, is able to continue to grow as the rate of profit falls, because its mass of profit grows, it benefits from a release of capital, as the rate of turnover rises, and that same process causes its annual rate of profit to rise. The vast majority of the smaller capitals do not enjoy these advantages.
“The so-called plethora of capital always applies essentially to a plethora of the capital for which the fall in the rate of profit is not compensated through the mass of profit — this is always true of newly developing fresh offshoots of capital — or to a plethora which places capitals incapable of action on their own at the disposal of the managers of large enterprises in the form of credit. This plethora of capital arises from the same causes as those which call forth relative over-population, and is, therefore, a phenomenon supplementing the latter, although they stand at opposite poles — unemployed capital at one pole, and unemployed worker population at the other.” (p 251)
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