"Although in absolute terms a machine becomes dearer with the growth of its bodily mass, it becomes relatively cheaper. If five labourers produce ten times as much of a commodity as before, this does not increase the outlay for fixed capital ten-fold; although the value of this part of constant capital increases with the development of the productiveness, it does not by any means increase in the same proportion.” (p 260)
Sure enough, Engels concludes from this example that there is no cost saving for this individual capitalist, over what he saves in wages, but that is not really the point. The point is that Marx shows why this portion of the price of each unit must be falling, not rising, as a result of rising productivity.
The point of Engels' example is to show that capitalism does not introduce new machines etc. simply to raise productivity, and thereby reduce values. It only does so to increase profits. The example he uses is this,
A firm has the following costs, measured as portions of the price of each commodity unit:-
Wear and Tear of Machinery £0.025
Materials £0.875
Wages £0.100
Surplus Value £0.100
Total £1.100
Assuming this producer represents the average, the price of production equals the exchange value of the commodity. The cost of production is £1, the profit £0.10, giving a rate of profit of 10%. Engels assumes the firm takes the price from the market, so if it introduces a machine this does not affect the market value.
A new machine enables it to replace labour-power and so reduce wages so that:-
Wear and tear of machinery £0.075
Materials £0.875
Wages £0.050
Surplus Value £0.050
Total £1.050
So, the individual value of this commodity falls to £1.05 from £1.10. But, the market value is still £1.10. The cost of production for this firm is still £1, and so the profit they make is still £0.10, or 10%, so there is no reason for the firm to introduce this machine, even though, from a social point of view, it would raise productivity, and reduce the value of the commodity by nearly 5%, thereby releasing additional social labour-time.
Engels concludes the example with a rhetorical flourish.
“Here the capitalist mode of production is beset with another contradiction. Its historical mission is unconstrained development in geometrical progression of the productivity of human labour. It goes back on its mission whenever, as here, it checks the development of productivity. It thus demonstrates again that it is becoming senile and that it is more and more outlived.” (p 262)
But, this is stretching it a bit. The fact is that even in the flush of its youth, capital would not have introduced a machine that did not increase profits. This is nothing to do with the maturity or otherwise of capitalism as a system, its just an aspect of the way it operates, and indeed even more so the way it operated in the past, on the basis of profit.
In fact, as Marx described earlier, the biggest accumulations of capital were the huge joint stock companies, such as the railway companies. They were the biggest accumulators of capital despite having the lowest rates of profit. They could continue to accumulate on such a large scale, precisely because, despite low rates of profit, they had huge masses of profit, and because instead of individual private owners, reliant upon high rates of profit, the productive-capital is owned collectively by the firm itself (the associated producers - workers and managers - as Marx later describes it) whilst the shareholders who loan money-capital to the firm, for the purchase of this productive-capital, are paid a low rate of interest (dividends) on their shares.
In fact, as Marx now continues, this growth in social productivity, which leads to a rising organic composition of capital, resulting from the introduction of machines that process vastly increased quantities of materials, results itself in a process of concentration and centralisation that leads ultimately to the dominance of these large socialised capitals.
“Under competition, the increasing minimum of capital required with the increase in productivity for the successful operation of an independent industrial establishment, assumes the following aspect: As soon as the new, more expensive equipment has become universally established, smaller capitals are henceforth excluded from this industry. Smaller capitals can carry on independently in the various spheres of industry only in the infancy of mechanical inventions. Very large undertakings, such as railways, on the other hand, which have an unusually high proportion of constant capital, do not yield the average rate of profit, but only a portion of it, only an interest. Otherwise the general rate of profit would have fallen still lower. But this offers direct employment to large concentrations of capital in the form of stocks.” (p 262-3)
The other aspect of this uneven nature of the rise in social productivity is that rapid technological changes may be occurring in some industries whilst others continue to operate on their existing basis. This is most clearly the case where new industries are established. As described elsewhere, there are always numerous aspects of social productivity that apply for all industries. The introduction of PC's and the Internet has, for example, an impact on all industries. In the same way, the introduction of railways and steamships had a revolutionary impact on all industries.
But, a change say in steel production technology only affects the steel industry, whilst no such changes may be introduced at the same time in say weaving. As described elsewhere, in relation to the Long Wave, however, there do tend to be periods of widespread rapid technological change, followed by other periods where capital simply expands on its current technological basis.
This difference has been described by theorists of the Regulation School as periods of intensive versus extensive growth. Where capital expands on the existing technical basis, then there is no basis for the organic composition of capital to rise, or, therefore, for the rate of profit to fall. Its only where rapid technological change occurs that there is a basis for a change in the organic composition of capital, leading to a tendency for the rate of profit to fall.
“Growth of capital, hence accumulation of capital, does not imply a fall in the rate of profit, unless it is accompanied by the aforementioned changes in the proportion of the organic constituents of capital. Now it so happens that in spite of the constant daily revolutions in the mode of production, now this and now that larger or smaller portion of the total capital continues to accumulate for certain periods on the basis of a given average proportion of those constituents, so that there is no organic change with its growth, and consequently no cause for a fall in the rate of profit. This constant expansion of capital, hence also an expansion of production, on the basis of the old method of production which goes quietly on while new methods are already being introduced at its side, is another reason, why the rate of profit does not decline as much as the total capital of society grows.” (p 263)
But, it is during such periods of rapid technological change that the value of capital is reduced, that the rate of surplus value rises, and that the rate of turnover rises, causing the rate of profit and annual rate of profit to rise. In other words, this process is again contradictory. Rapidly rising productivity, causes the organic composition of capital to rise, which creates a tendency for the rate of profit to fall, but that same rapid technological change causes the value of the new machines and technology to fall, and the proportion of wear and tear in the price of each commodity unit to fall. That leads to a moral depreciation of all existing, installed fixed capital, which creates a tendency for the rate of profit to rise! Rapidly rising productivity, reduces the value of all produced commodities, including those that comprise the circulating constant capital, which tends to a rising rate of profit, but the same process requires an increased mass of materials to be processed, which tends to a falling rate of profit.
That same process reduces the value of wage goods, and so the value of labour-power, which raises the rate of surplus value, and so tends to raise the rate of profit, but involves a reduction in the relative mass of labour employed, and so tends towards a fall in the rate of profit. How this balances out, as Marx says depends upon quantities. For example, a small firm that introduces a new more efficient machine as a replacement for a worn out old machine, in order to reduce its high labour costs, will not thereby change the market value of the produced commodity, but will release labour, and increase its own profits. In a period where increasing numbers of firms follow suit, however, there comes a point whereby a) the market value of the produced commodity is reduced, and the rate of profit falls, b) increasing quantities of labour is made redundant, so that wages fall, and the rate of surplus value rises, but not by enough to offset the rise in the organic composition of capital, to prevent a fall in the rate of profit.
That does not mean that the mass of profit, and annual rate of profit is not rising during such a period. It is, for the reasons set out above, and this mass of capital then starts to be employed in new lines of production, often associated with the new technologies. It is again then a matter of quantities. These new lines of production are initially too small a proportion of the total social capital, for their high rates of profit to cause the general rate to rise. However, because this sector has a higher growth rate, at a certain point in the cycle, that changes. Then rather than simply introducing new machines and technologies to replace worn out fixed capital, additional machines are introduced.
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