Friday, 27 November 2015

Capital III, Chapter 18 - Part 11

Illustrating the point made earlier, about Marx using the terms general rate of profit and annual rate of profit interchangeably, even though he has previously shown the considerable difference between the two, he uses the term “general annual rate of profit” here, which although he has sometimes used previously, he has not specifically defined, but is clearly to be understood as the general rate of profit described in Chapter 9, and modified in Chapter 17, to take account of merchant capital, but now specifically defining it to take account of the effect of the rate of turnover of capital, to establish the annual rate of profit.

“The same mass of profits, determined for any given magnitude of merchant's capital by the general annual rate of profit, hence determined independently of the specific character of the commercial operations of this capital, is differently distributed — proportionately to the rate of turnover — over masses of commodities of equal value, so that, for instance, if a merchant's capital is turned over five times a year, 15/5 = 3% if once a year, 15%, is added to the price of the commodities.” (p 312)

This differs from the situation in respect of industrial capital. Whereas the rate of turnover of commercial capital affects the selling prices of commodities, as outlined, the rate of turnover of productive-capital has no effect on the value of produced commodities.

The value of a commodity is determined by the labour-time required for its production. Whether the capital which purchases that labour-time - dead labour, in the case of constant capital, and living labour in the case of variable capital - turns over one or a hundred times, does not change that quantity of labour-time. But, what the rate of turnover does determine is how much capital is required, in any given period of time, to mobilise that labour-time, and thereby create that value. Consequently,

“... it does affect the mass of values and surplus-values produced in a given time by a given capital, because it affects the mass of exploited labour.” (p 312)

This Marx says, is hidden, because of the fact that prices of production differ from exchange values. If the total capital is considered so that the value of the totality of commodities is equal to the labour-time required for their production, and the capital required for their production is then the capital advanced for that production and not the capital laid out for that production, then this becomes clear.

“If we look upon the process of production as a whole, and upon the mass of commodities produced by the total industrial capital, we shall at once find the general law vindicated.” (p 312)

This, in fact, is the resolution of the discrepancy between Marx's use of the term general rate of profit (or average rate of profit) and his use of the term annual rate of profit, which he then merged into general annual rate of profit.

The actual position is this. In order to understand the potential for crises, the role of profit margin is important, because the smaller the profit margin on each commodity unit, the smaller the drop in market prices need be to wipe it out. A change in consumer sentiment, a sharp rise in input prices, that cannot be passed on, in the end product price, can be enough to wipe out the profit margin on each commodity unit, so that without reducing supply, the capital consumed in those commodities cannot be reproduced.

Marx and Engels describe this in Chapter 13, discussing the Law of The Tendency For The Rate of Profit To Fall. Having set out the calculation of this general rate of profit, as the profit margin, i.e. cost-price plus profit, Marx comments,

“However, the rate of profit, if calculated merely on the elements of the price of an individual commodity, would be different from what it actually is. And for the following reason:” (p 227)

and Engels continues to explain that this rate of profit, based on the laid out capital, and the annual rate of profit could only be the same if the laid-out capital and the advanced capital were the same. In other words if the capital turned over just once during the year.

But, having pointed that out, the rest of the chapter continues to explain the tendency for the rate of profit to fall without reference to the annual rate of profit, i.e. without reference to the fact that the same process which causes a rise in the organic composition of capital, also leads to a rise in the rate of turnover, and, therefore, in the annual rate of profit.

In Chapter 9, in setting out the basis of the formation of the average rate of profit, Marx makes clear that the rate of profit must be calculated on the value of the total productive-capital advanced, i.e. including the total value of the fixed capital, not just the portion transferred as wear and tear. But, in all the examples given, its taken that the advanced capital turns over just once. This, in effect, gives us yet another average rate of profit, which is based on the laid-out circulating capital plus the value of fixed capital, for one turnover period.

Yet, as Marx now describes in Chapter 18, to properly determine prices of production, what is required is a “general annual rate of profit”, and that can only be one based on the capital advanced for one turnover period, but the surplus value produced in a year.  If this is done, then most of the argument surrounding the Tendency For The Rate of Profit To Fall disappears, unless it is considered solely on the basis of it being just a law of the tendency for profit margins to fall.  That is because, as productivity rises, causing the organic composition of capital to rise, and profit margins to fall, the rate of turnover of capital also rises, so that a given amount of advanced capital, produces a greater mass of surplus value, and a higher general annual rate of profit.

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