Monday, 12 October 2015

Capital III, Chapter 15 - Part 33

As part of this competitive struggle, over who will shoulder the losses, the capitalist class as a whole must lose.

“How much the individual capitalist must bear of the loss, i.e., to what extent he must share in it at all, is decided by strength and cunning, and competition then becomes a fight among hostile brothers. The antagonism between each individual capitalist's interests and those of the capitalist class as a whole, then comes to the surface, just as previously the identity of these interests operated in practice through competition.” (p 253)

The resolution of this contradiction arises via the destruction of capital value, to the extent of its overproduction. Again, its important to understand that it is the destruction of capital value, not physical capital that is important here, because some economists following Keynes, including some Marxists, have suggested that what is required for the restoration of profits and economic growth is the physical destruction of capital, such as happens during wars. This is contrary to Marx's argument. Marx makes clear, in Theories of Surplus Value, that it is the destruction of capital value that is the basis of the restoration of profits.

“When speaking of the destruction of capital through crises, one must distinguish between two factors.” (TOSV2 p 495)

One is the form of physical destruction described above, but it is the second form that is beneficial for capital.

“A large part of the nominal capital of the society, i.e., of the exchange-value of the existing capital, is once for all destroyed, although this very destruction, since it does not affect the use-value, may very much expedite the new reproduction.” (TOSV2 p 496)

Physical capital may be destroyed during such a crisis, because any physical capital, left unused, will deteriorate. Machinery rusts, material deteriorates, workers lose skills and so on. But, all of these things are negatives, not positives for restoring profits and growth. What capital needs, to restore its rate of profit, is to be able to mobilise all of this existing physical capital, but for it to cost it less to do so. If the physical capital is destroyed, capital has to endure the cost of replacing it, which is hardly conducive to higher profits! It is precisely this reduction in the value of the existing physical capital, that the crisis brings about.

“The main damage, and that of the most acute nature, would occur in respect to capital, and in so far as the latter possesses the characteristic of value it would occur in respect to the values of capitals. That portion of the value of a capital which exists only in the form of claims on prospective shares of surplus-value, i.e., profit, in fact in the form of promissory notes on production in various forms, is immediately depreciated by the reduction of the receipts on which it is calculated.” (p 254)

In other words, the capital value of existing productive-capital falls, rather like the process of “moral depreciation”, because the surplus value this capital can claim, as its share has fallen, That is particularly the case with those capitals, big or small, that go out of business, as part of this process. Their capital, in the shape of buildings, machines and materials, can then be bought up, at a much reduced cost, by their competitors, and put to work profitably. If firm A's cost of production is £10,000, but the market price for this production is £8,000, it makes a loss of £2,000. But, if firm B buys up A's capital, for £5,000, and sets it to work, it produces for it a £3,000 profit.

Given that these new owners are usually more dynamic and enterprising, than the former owners, and use the physical capital more effectively, they will usually increase its profitability even more than this.

Where the company has bought its productive-capital with borrowed money-capital, then as Marx describes here, the value of this fictitious capital also falls.  A bank, which loaned money to the firm, would have a claim for interest on the loan, out of the firm's profits.  It would hold the firm's collateral against it.  But, as the firm's potential for making profits falls, the potential for paying that interest falls.  The asset value of the collateral on the bank's balance sheet should be depreciated.

Where the firm has borrowed money-capital by issuing commercial bonds, the owners of these bonds likewise have a right to receive the average rate of interest on the money-capital loaned.  But again, as the potential for paying this interest falls, and the likelihood of default rises, the value of the bond should also be depreciated.

Finally, where the firm has borrowed money-capital by issuing shares, the owners of these shares also have a right to receive the average rate of interest, as dividends, on the money-capital they have loaned.  But, again, as the potential for paying these dividends out of profits falls, so the value of the shares falls.  All of these forms of fictitious capital - bank loans, bonds, shares - are thereby depreciated by the same factors that depreciate the value of the productive-capital, i.e. a reduction in the ability to produce profits, out of which the interest is paid.

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