Suppose previously we had:-
Wear and tear of machines £0.10
Material £0.50
Wages £0.40
Profit £0.40
The price per unit is £1.40, and the rate of profit is 40%. The firm takes the price from the market. The new machine replaces 10 machines with a combined value of £1,000 and has a value itself of £1,500. We then have:-
Wear and tear of machine £0.15
Material £0.50
Wages £0.04
Profit £0.71
The market price is £1.40, the firm's cost price is £0.69, giving a profit of £0.71, and a rate of profit of 102.90%. The firm would have a considerable incentive then to introduce this machine. In fact, the incentive would be far greater than shown here. The example, as with the example given by Engels earlier is designed to show that a firm will introduce a machine that is more expensive than its current machines provided its cost is less than the wages of the labour it replaces. Here, that meant assuming that this one machine was more expensive than the ten machines it replaced. For the reasons Marx gives earlier, that is very unlikely.
First, the same technological processes which made the new, better machine possible, also bring about rises in productivity that reduce the value of the machine itself. Consider something like a personal computer. A modern PC has far more power, is far more productive, than the kind of mainframe computer my wife operated in the 1970's, or even up to 20 years ago. Yet, the mainframe computers cost millions of pounds, whereas a PC costs just a few hundred pounds.
Secondly, even if a machine is absolutely more expensive than the machine it replaces, it will be relatively cheaper, precisely because of its much higher productivity. In fact, the process of moral depreciation, described by Marx, is impossible unless that is the case.
But, this competitive process that leads to the need to introduce these new methods, at the level of the firm, can be counter-productive at the level of the industry. Take the previous example. We have:-
Wear and tear of machine £0.15
Material £0.50
Wages £0.04
If this is then the average position for the industry, and assuming the rate of surplus value remains at 100%, the surplus value would also then be £0.04 per unit. The price per unit would fall to £0.73, and the rate of profit would fall to 5.80%. What was highly profitable for the individual firm is not when it is adopted as the standard across the industry. The fall in the rate of profit will then cause capital to leave this industry, reducing supply and thereby raising prices until the average profit is achieved, and as the capital moves to other areas of production, it will raise their supply, reducing prices and profits accordingly.
But, finally, its necessary to consider the situation here not from the standpoint of the rate of profit, but also from the standpoint of the annual rate of profit. Let us assume that the capital produces 10,000 pieces in a working period of 6 weeks. There is a 48 week year, and no circulation time, so the capital turns over 8 times. In this 6 week period, £5,000 is advanced for material and £4,000 for wages. The fixed capital has a value of £1,000.
The annual rate of profit is then £4,000 x 8 = £32,000/ £10,000 (£1,000 fixed capital + £5,000 material + £4,000 wages). That is 320%.
The new machine produces these units in the same period, but now 1 worker not 10 is employed. Variable capital falls to £400 for the working period, and surplus value falls accordingly. So the annual rate of profit is £400 x 8 = £3,200/ £6,900 (£1500 fixed capital + £5,000 material + £400 wages) = 46.38.
So, the annual rate of profit still falls, but not as drastically as the rate of profit. Moreover, this is unrealistic for the reasons Marx sets out earlier. Capital, certainly not the earlier capital Marx was analysing, does not accumulate capital in new machines, simply to keep producing at the same scale. It does so to produce on an enlarged scale and to produce larger quantities in shorter periods.
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