Capital III, Chapter 25 - Part 4

Marx quotes Tooke, to the effect then that banks perform two basic functions, circulating both money and money-capital. To the extent that they take in deposits, which are then loaned out, to those who require capital, they circulate money-capital. To the extent they take in receipts, from those who simply wish to pay this money out again, at some future date, they circulate money, or as Tooke puts it, currency.

Marx also quotes from the Reports of Committees Volume VIII, Commercial Distress, Volume III, Part 1, 1847-8. As a result of the 1844 Bank Act, when gold went out of the country, to cover the payment of Britain's food imports, following the crop failures, the Bank of England was required to reduce the money supply. Its interesting to compare this with the current experience of Q.E.

As Marx has described, the average rate of interest is determined by the demand and supply of money capital, not money, or money tokens. Both the demand for and supply of money-capital is ultimately determined by the rate of profit. If the rate of profit is high, there will be a higher demand for money-capital, because its use will bring a higher return. For the same reason, the owners of money-capital will require a higher rate of interest on it, for having given up this use value, of its potential to create profit. On the other hand, the higher rate of profit means that an increased mass of profit is produced, which takes the form of potential money-capital, when those profits are realised. So, the supply of money-capital is increased at the same time. It is the balance of these two effects that determines the rate of interest.

On this basis, its clear that printing money tokens (QE) cannot reduce the rate of interest, because all it does is to devalue the money token, and thereby affects both sides of this demand-supply equation equally, multiplying both sides by X. In fact, because it leads to inflation, the holders, particularly of longer dated securities, will, at some point, demand higher rates of interest, i.e. will sell their bonds, in order to recuperate the real terms reduction in their value.

A central bank can use QE to reduce some interest rates, but only at the cost of increasing others. If the bank buys 10 year gilts, for example, it will raise their price above where it would otherwise have been, and thereby reduce the yield on those bonds. The market, knowing the bank is acting to buy these bonds, will also buy them, knowing that their price is being manipulated higher. But, the money that thereby goes into those bonds has been diverted from elsewhere, so the prices of other securities are lower than they would have been, and interest rates higher. Moreover, in a global market, the effect of money printing cannot be confined to one country, and so money printing in once country may result in higher inflation in some other, and higher interest rates along with it.

The effect of money printing, and of money constriction are not equal and opposite. If money is printed, and put into circulation, first of all it may result in the velocity of circulation slowing down. It only causes inflation if it is actually borrowed and circulates, thereby pushing up prices. If it simply sits in bank accounts, it does not have this effect. Its only if bond holders begin to see inflation that they sell their bonds, and demand higher interest.

But, even if it does circulate, there is an approximately two years lag before it causes inflation to rise, so again the immediate fall in some interest rates may not be followed by a compensating rise, until two years later. However, by its nature, money-capital has the form of money, and can only act as capital if its money form is available in sufficient quantity. A lack of money, by definition, means a lack of money-capital, and the effect unlike too much money, is pretty immediate. As soon as it becomes difficult to get your hands on actual money, the more you will try to hold on to whatever actual money you have. Moreover, you will try to obtain payment in money, rather than credit, for the same reason.

But, for the same reason that capitalist development required the increasing use of credit, of money as means of payment rather than circulation, any return to those conditions, i.e. a requirement to pay for commodities immediately, brings with it an immediate slow down in transactions, in economic activity.

By the same token, those who have money-capital seek to hold on to it, and will only loan it out at high rates of interest. In other words, what develops, despite an ample supply of potential money-capital, is a credit crunch, because the money itself, which is required for that capital to assume the money form, has been constricted.

This is what happened in 1847, as a result of the Bank Act, at a time when the demand for money-capital was itself raised because of other factors to be discussed later. In 1847, faced with a constriction of actual money, the banks attempted to compensate by using bills of exchange, rather than their own bank notes.

“According to the same report, bankers were in the habit of giving such bills of exchange regularly in payment to their customers whenever money was tight. If the receiver wanted bank-notes, he had to rediscount this bill. For the banks this amounted to a privilege of coining money. Messrs. Jones, Lloyd and Co. made payments in this way "from time immemorial," as soon as money was scarce and the rate of interest rose above 5%. The customer was glad to get such banker's bills because bills from Jones, Loyd and Co. were easier discounted than his own;” (p 404)

Back To Part 3

Forward To Part 5

Capital III, Chapter 25 - Part 3

In Capital I, in examining the development of money, it was seen that, in order to function, it required the development of various hoards and reserves. In Capital II, in examining the circulation of capital, the other side of this, from the standpoint of individual capitals, was examined. Each firm needs reserves of money and money-capital to cover the variations in its cash flow, in the different periods, during which it is making payments and obtaining receipts.

It requires hoards of money-capital that are the equivalent of the surplus value it realises, which is not immediately accumulated, as productive-capital, and it also requires money reserves, which are the equivalent of the value of wear and tear of fixed capital, which must be accumulated until such time as the fixed capital is replaced.

Nearly all of these hoards and reserves, apart from the small amounts retained as petty cash, the firm deposits with the bank. These bank deposits form part of the banks' reserves of money and money-capital, which it can make available, as interest-bearing capital. In fact, this very possibility, of creating interest bearing capital, enables the banks to pay interest on deposit accounts, and thereby attract additional sums.

In addition to the money of businesses, the provision of these interest-bearing, deposit accounts draws in the small savings of workers and the growing middle class. These small savings, which on their own could not function as capital, when amassed in the hands of the banks, can be thrown on to the money market en masse.

“This aggregation of small amounts must be distinguished as a specific function of the banking system from its go-between activities between the money-capitalists proper and the borrowers. In the final analysis, the revenues, which are usually but gradually consumed, are also deposited with the banks.” (p 403)

The credit or loans provided by the banks, for commercial purposes, take a number of forms. The first has been referred to. The bank takes a bill of exchange, and gives money in return. If say the bill has a value of £1,000, and is due for payment in 30 days time, the bank may pay £990 for it. The £10 difference constitutes the interest of 1% for the month, which it has charged. But, the bank may lend to the business by a range of means we are familiar with today. It may lend against the personal credit of the borrower, i.e. if it is some well established business or person; more often, it will lend against some form of collateral, such as government bonds, stocks, but also against other potential future income such as “overdrafts against bills of lading, dock warrants, and other certified titles of ownership of commodities and overdrawing deposits, etc.” (p 403)

The bank may itself issue bills of exchange drawn on other banks, or cheques, as well as establishing credit accounts as a means of providing credit. At a time when the individual banks, and not just the Bank of England, were allowed to issue bank notes, the bank note itself was a form of credit.

“A bank-note is nothing but a draft upon a banker, payable at any time to the bearer, and given by the banker in place of private drafts. This last form of credit appears particularly important and striking to the layman, first, because this form of credit-money breaks out of the confines of mere commercial circulation into general circulation, and serves there as money; and because in most countries the principal banks issuing notes, being a peculiar mixture of national and private banks, actually have the national credit to back them, and their notes are more or less legal tender; because it is apparent here that the banker deals in credit itself, a bank-note being merely a circulating token of credit. But the banker also has to do with credit in all its other forms, even when he advances the cash money deposited with him. In fact, a bank-note simply represents the coin of wholesale trade, and it is always the deposit which carries the most weight with banks.” (p 403-4)

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Forward To Part 4

Northern Soul Classics - What You Gave Up - Continental Four

Friday Night Disco - Sugar Pie Guy - The Joneses

Read These Two Articles By Weeks and Husson

I came across two articles in the last week that I think are well worth reading. The first article is by John Weeks. The second article is by Michel Husson.

In the first article, John Weeks examines the assumption that finance capital rules Britain. That is an assumption that was made by Mike McNair in his recent articles in the Weekly Worker, and which I responded to recently. Weeks sets out the basis of the assumption.

“1) the large amount of revenue generated by the City makes the UK government beholden to finance capital; 2) finance funds the Conservative Party and strongly influenced Labour under Blair and Brown; and 3) the economic power of finance is so great that no government could take the political initiative to reform the City.”

He summarises his response, as follows.

“By the most liberal interpretation the first of these is an exaggeration. However, the second gained empirical support from a recent study estimating that half the contributions to the Conservative Party come from the City. The third allegation posits an all-pervasive power of the City working through MPs, the media and business economists to influence and constrain policy discussion such that debate rarely emerges.” 

I think that this is correct. It brings out the distinction I have set out previously between the actions and policies of the state, which ultimately must defend and further the interests of the dominant form of capital, and the actions and policies of governments and political parties, who represent the interests of the particular class fractions, upon which they are based.

Weeks also focusses on another issue which I have described over the last few years. It is the difference between the actions of interest-bearing capital, in seeking yield, and its actions in seeking capital gain. Ultimately, interest-bearing capital can only survive by extracting yield – that is why it is called interest-bearing capital. As Marx describes, in Capital III, all interest-bearing capital is not capital in the true sense, but is only fictitious capital. It does not, and cannot simply self-expand its own value. Only productive-capital can do that, and interest-bearing capital is only able to obtain interest, in the end, because productive-capital produces surplus value, a part of which is appropriated by the money-lending capitalists.

Interest-bearing capital can only, ultimately, increase the mass of interest payable to it, if the mass of productive-capital expands, and the rate and mass of profit expands, so as to produce the potential for a greater mass of interest to be paid. The money lenders can at times obtain a higher yield, when the demand for money-capital outstrips the supply at current interest rates, but if the proportion of surplus value going to interest rises at the expense of the proportion going to profit of enterprise, and available for accumulation – what Haldane describes as “capital eating itself” - then productive-capital will not accumulate at the rate it should, and so the mass of surplus value will grow more slowly than it should, which thereby undermines the basis for the interest-bearing capital obtaining future rises in revenue.

Yet, as I have written previously, at times, this interest-bearing capital has no concern about low yields. Instead, it is only concerned with obtaining large, quick capital gains from speculation. The two things go together. Speculation causes asset prices to rise, creating the potential for speculative capital gains, whilst the much higher asset prices, cause yields to shrink, because yields move inversely to asset prices, as a consequence of the process of capitalisation. So, landlords buy London property, not because they have any desire to obtain the rent on it, but because they believe that next year the price of the property will have risen by 20%. The rent itself may be high in absolute terms and yet produce a low yield, as the property price rises. For example, a property with a price of £100,000 may produce a rent of £10,000 a year, giving a yield of 10%. The absolute level of rent will be determined by a range of factors such as demand for rental properties, the level of income of potential renters and so on. If rents rise to £12,000, but speculation causes property prices to rise to £200,000, then the yield will have fallen to 6%.

In fact, its this same process, in relation to shares that results in shareholders using their power through the boardroom to push up dividends, and other capital transfers beyond what is justifiable in economic terms, and which results in the phenomenon of “capital eating itself”. As Weeks puts it,

“That type of an economy, produce then distribute with finance facilitating production, ended with the Reagan-Thatcher financial deregulation, deregulation extended under Clinton and Blair. Policy change, not “globalization”, liberated financial capital to break free of the production-distribution cycle which severely limited its potential for profit-taking. Suddenly, financial capital had a new and powerful mechanism to garner profit, speculation.”

Weeks describes the motivation for this in the same terms, I have described previously. Why would you use your available capital to engage in productive activity, which is uncertain, and requires a long-time before it provides any return on the capital invested, when instead you could speculate by buying a house, a share or bond, which you expect to see rise in price by 10%, 20% or more, in a year. That is especially the case when those asset prices are being underpinned by central bank policies of money printing, and government policies to goose property prices. And by this means the economy becomes made synonymous with the stock, bond and property markets. That identity is enforced by the media.

“The pervasive control of the UK economy reveals itself in what passes as economic news, more correctly named “speculation news”. Since the beginning of 2016 the media’s reporting of the movement in stock markets has reached the point of obsession. Each day’s business news headlines focus on whether these market indices fall or rise. Commentators present a fall as a harbinger of disaster, with a rise provoking optimistic cheers that we escaped disaster.”

Yet, the reality is that the economy and the financial markets are generally inversely related. If potential money-capital is diverted into speculation in financial assets, pumping up those prices, that is money-capital that is not going into the accumulation of productive-capital, so as to expand the production of new value and surplus value. If financial capitalists use their power, for example as shareholders, to boost the proportion of surplus value going to dividend payments, to compensate for falling yields, this again undermines capital accumulation.

As Marx puts it,

“... profit of enterprise is not related as an opposite to wage-labour, but only to interest.” (Capital III, p 379)

Michel Husson, in his article, makes a similar point.

“In the “financial sphere”, quantitative easing is feeding stock-market bubbles rather than productive investment, which is stagnating. And the mere prospect - held back so far - of a renewed rise in Fed interest rates hangs like the sword of Damocles and is destabilising the currencies and markets of many countries. In short, “Uncertainty, Complex Forces Weigh on Global Growth”, to quote the IMF's formula in its latest survey.” 

Husson again makes the same point I have made in the past, and which I make in my book “Marx and Engels' Theories of Crisis”. That is that as a response to a credit crunch, and lack of liquidity, injecting liquidity is absolutely the correct thing to do, to cut short its effects on commodity circulation, and economic activity. But, once that has been achieved, continuing to throw additional liquidity into circulation, as an alternative to resolving an underlying problem of insolvency of banks and financial institutions only exacerbates the problem. The insolvency of those institutions was created on the back of an astronomical growth of fictitious capital, and the prices of financial assets and property. The insolvency was hidden by the continued inflation of those asset prices, and the process of “extend and pretend”. The 2008 financial crisis, exposed the underlying problem – one that resides in the financial and property markets and not in the real economy – but central banks and governments, that have become closely tied to those interests have responded by simply greater doses of money printing, and even greater delusion through a further policy of “extend and pretend”.

In reality, the crisis of 2008, was like those financial crises of the 18th century, that Marx discusses, and which were the basis of the theories of crisis of people like Ricardo. That is they were crises centred in the financial markets, where banks printed more banknotes than they could back up with their own capital. That led to speculation, and financial bubbles – like Tulipmania, and the South Sea Bubble, and John Law's Mississippi Scheme. That is different to the kind of economic crisis resulting from overproduction, which Marx theorises, and which first broke out in 1825. As Marx puts it, a financial or money crisis, always appears as part of an economic crisis, because the latter causes a failure of payments – a crisis of the second form, as Marx calls it – but this is different from the above kind of purely financial crisis.

“The monetary crisis referred to in the text, being a phase of every crisis, must be clearly distinguished from that particular form of crisis, which also is called a monetary crisis, but which may be produced by itself as an independent phenomenon in such a way as to react only indirectly on industry and commerce. The pivot of these crises is to be found in moneyed capital, and their sphere of direct action is therefore the sphere of that capital, viz., banking, the stock exchange, and finance.” (Capital I, Chapter 3, note 1 p 137)

In fact, the process of money printing or quantitative easing, another round of which has been undertaken today by Japan, where the central bank has introduced negative interest rates, has actually been a major cause of economic slowdown, for the reasons set out above. It has backstopped financial speculation, which diverts potential money-capital away from productive investment, and into speculation, to buy up existing shares, bonds and property, so as to inflate their prices further. The only purpose for that is to protect the interests of the current owners of those assets, from a decimation of their fictional wealth. But, it does so by restricting the wealth of the rest of society, by reducing the potential accumulation of productive-capital and profits. It has, in fact, as a result been a significant contributor to the deflation of commodity prices in general, a deflation which it contends it is designed to counter!

As Husson puts it,

“The inefficacy so far of monetary policy can be explained by various mechanisms or secondary effects which weigh upon the current conjuncture. To start with, this injection of money is blind and nothing guarantees that the liquidity will be used in a manner that is favourable to investment. On the contrary, it will feed speculation and provoke an increase in asset prices which will benefit only the richest and which will lead to the creation of a bubble.” 

But, the reality is that this is not a failure of policy. The policy never was intended to spur economic activity. Its purpose was always to protect the interests of the existing owners of fictitious capital, at the expense of productive-capital, and the rest of society. As Marx puts it,

“The credit system, which has its focus in the so-called national banks and the big money-lenders and usurers surrounding them, constitutes enormous centralisation, and gives to this class of parasites the fabulous power, not only to periodically despoil industrial capitalists, but also to interfere in actual production in a most dangerous manner — and this gang knows nothing about production and has nothing to do with it. The Acts of 1844 and 1845 are proof of the growing power of these bandits, who are augmented by financiers and stock-jobbers.” (Capital III, Chapter 33) 

Husson is wrong to say, “Quantitative easing simultaneously leads to a reduction in interest rates”. This is a fallacy that goes back to John Locke and William Petty, and confuses money and capital. QE, enables the central bank to purchase some bonds, and thereby to raise their price, and so reduce the yield on those bonds, but they can only thereby affect those prices and yields, not the prices of all other financial assets, and yields. The average rate of interest cannot be altered by simply printing more money, and thereby reducing the value of money, because all this does is to change the units of measurement by which the demand for, and supply of money-capital is undertaken. The rate of interest is the market price of money-capital, determined by this interaction.

If the current rate of interest is 6%, and at this rate there is a demand for money-capital of £100 million, and likewise a supply of money-capital also of £100 million, then the 6% will be a stable equilibrium rate. If the supply of money-capital rises, because for example realised profits rise, which are thrown into the money market, then the rate of interest will fall, and that will cause the demand to rise, until a new equilibrium rate is established. But, if more money is simply printed, this just depreciates the currency. If the amount of currency is doubled, and the velocity of circulation remains constant, then all money prices are simply doubled – overall. In that case, the £100 million of demand for money-capital (required to buy buildings, machines, materials, labour-power) will now be represented by a money price of £200 million. Similarly, the money supply measured by this new devalued money value will also be equal to £200 million, so the equilibrium rate of interest remains 6%.

As Marx puts it,

“Hume attacks Locke, Massie attacks both Petty and Locke, both of whom still held the view that the level of interest depends on the quantity of money, and that in fact the real object of the loan is money (not capital). 

Massie laid down more categorically than did Hume, that interest is merely a part of profit. Hume is mainly concerned to show that the value of money makes no difference to the rate of interest, since, given the proportion between interest and money-capital—6 per cent for example, that is, £6, rises or falls in value at the same time as the value of the £100 (and. therefore, of one pound sterling) rises or falls, but the proportion 6 is not affected by this.” 

The real basis of the very low interest rates seen over the last thirty years, is not money-printing, but has been the massive increase in the supply of money-capital, resulting from the sharp rise in the rate and mass of profit, which occurred from the late 1980's onwards. That has helped feed into the speculative frenzy, as it has in previous times. For example, in 1847, as Engels sets out, there was an economic boom, high rates and masses of profits to be made, and yet quick, large capital gains could be made from speculation in railway shares. So, capitalists starved their businesses of investment to speculate in those railway shares, until a rise in interest rates caused the bubble to burst.

Not only have companies engaged in such financial speculation by using resources to buy back shares, buy the shares of other companies and so on, but private households have engaged in the same kind of speculation, particularly in relation to property. The consequence is that although all the focus is on government debt, the real problem resides in the massive explosion of private debt. Household debt has risen from around 80% of income in 1987, to around 160% today. This massive overhand of debt, is also a major reason for the sluggishness of growth.

Husson also points to another factor that I drew attention to about three years ago, which is the change in productivity levels. I argued back in January 2013, that a conjunctural shift in the long wave had taken place to the Summer phase. That means that the period of intensive accumulation, as new technologies developed in the 1980's were rolled out as replacement for labour and former technologies, comes to an end, as that new technology has become pervasive. Along with it, productivity does not rise so fast, further capital accumulation brings with it, a greater demand for labour-power, which pushes up wages and squeezes profits. A shift towards the production of wage goods arises to meet the demands for this greater quantity of workers, and their higher wages. The demand for capital rises, at a time when profits are being squeezed, which leads to a rise in interest rates which crashes financial asset prices, via the process of capitalisation.

In the end, it is production and productive-capital, which is the mainspring of capitalism, and not financial capital, which remains subordinated to it.

Capital III, Chapter 25 - Part 2

The bank or discount house that takes a bill of exchange, in return for cash, does so in return for charging interest on it, to cover the period until the bill falls due for payment. By allowing the buyer of commodities to pay via a bill of exchange, that is only due for payment at some future date, the supplier has provided credit to the buyer, in the shape of a loan of commodity-capital. The bank, in discounting the bill, provides credit by advancing money-capital against it.

As Marx and Engels describe later, this also opens up the potential for various frauds and the expansion of fictitious capital, because money can then be borrowed, using the bills as collateral. This encourages the supply of commodities whether there is a market for them or not, simply in order to obtain bills of exchange that can be used as collateral against the borrowing of cash.

It was seen earlier, in Chapter 19, that as capitalist production, and the circulation of commodities, expands the need arises for all of the book-keeping of payments to become a separate, specialised activity. This money-dealing capital, as merely a means of effecting the movement of money around the system, develops in the same way that merchant capital develops as an independent form of capital to facilitate the movement of commodities around the system.

“The other side of the credit system is connected with the development of money-dealing, which, of course, keeps step under capitalist production with the development of dealing in commodities. We have seen in the preceding part (Chap. XIX) how the care of the reserve funds of businessmen, the technical operations of receiving and disbursing money, of international payments, and thus of the bullion trade, are concentrated in the hands of the money-dealers. The other side of the credit system — the management of interest-bearing capital, or money-capital, develops alongside this money-dealing as a special function of the money-dealers. Borrowing and lending money becomes their particular business. They act as middlemen between the actual lender and the borrower of money-capital. Generally speaking, this aspect of the banking business consists of concentrating large amounts of the loanable money-capital in the bankers' hands, so that, in place of the individual money-lender, the bankers confront the industrial capitalists and commercial capitalists as representatives of all moneylenders. They become the general managers of money-capital. On the other hand by borrowing for the entire world of commerce, they concentrate all the borrowers vis-à-vis all the lenders. A bank represents a centralisation of money-capital, of the lenders, on the one hand, and on the other a centralisation of the borrowers. Its profit is generally made by borrowing at a lower rate of interest than it receives in loaning.” (p 402-3)

Back To Part 1

Forward To Part 3

We Need A New Definition of Affordable Housing

The definition of affordable housing, in terms of the requirement for builders to provide it, as part of any new development, is that its price should be 20% below the average price of houses in the area. That is clearly a ridiculous definition. On TV, last week, even Tory candidate for London Mayor, Zach Goldsmith, admitted that, in London, it means that someone on even double the average London wage, would not be able to buy such “affordable housing”, in the capital. The average house price in London, is now over half a million pounds, so that 20%, below that still means defining affordable as houses costing around £450,000. A new definition of affordable needs to be established, as a legal requirement for all new developments.

In the past, house prices remained fairly stable at around 3 times average wages. For most of the last century, house prices went nowhere. Between 1900 and 1960, the inflation adjusted price of houses rose by zero! During some years they rose, but in other years they fell, sometimes by as much as 20%. After 1950, UK house prices rose by less than 1% a year in real terms, and that was entirely consistent with the rise in average household incomes that occurred between 1950 and 1970. Yet, house prices in the last 30 or 40 years have rocketed, despite wages being relatively stagnant.

That mirrors the situation with stock markets, where during the period of post war boom, GDP grew far more rapidly than the rise in stock markets, whilst in the following period, when GDP grew more slowly, stock markets soared. Both have the same root cause, a huge expansion of credit, and the encouragement of workers to make up for their sluggish wage increases, by going into increasing levels of unsustainable household debt. That is most notable after 1987. After that period, UK household debt to income rose from around 80-100%, to 160%. We are back now at levels of household debt equal to those in 2007-8, just prior to the financial meltdown. The difference today is that global interest rates are rising, and there is nothing central banks can do about that.

The average rate of interest is determined by the interaction of the demand for and supply of capital, and for various reasons I have described before, that balance is shifting in the direction of the demand outstripping the supply. That view has also been expressed recently by David Solomon of Goldman Sachs, who talks about capital markets becoming tighter, with firms having to go back into capital markets to issue additional bonds, or shares to raise capital.

As interest rates rise that is going to create a much greater financial crisis than happened in 2008. Not only will UK households, with this huge amount of debt, suddenly find that their debt repayments have risen by massive amounts each month, but the process of capitalisation also means that many of the paper assets they have seen as constituting their wealth, will evaporate into thin air. That process of capitalisation, for example, will cause land and property prices to collapse. That will also affect the banks that rely on these paper assets as the basis of their own balance sheets, so that they will be faced with needing to call in and curtail huge amounts of their current lending, as their own balance sheets shrink.

Much of this, and the consequent effects on the real economy could have been avoided had the irrational rise in property prices being prevented, but all governments over the last thirty years have seen an advantage in facilitating the delusion of rising real wealth – which was really rising impoverishment through increased debt – and have then found that having created that delusion, they could not risk unpopularity by causing the bubble to burst. Now that has changed. More people now see rising house prices as a bad thing rather than a good thing, as the reality begins to sink in.

As part of restoring some measure of sanity, therefore, a start would be to introduce a more rational definition of “affordable housing”. I would suggest that it be that it is defined as being a house price that is no more than three times average income for the particular area. In a place like Stoke, for example, where average wages are closer to £15,000 a year, than the national average figure of £25,000, that would mean a price of around £45,000. In London, it would mean a price of more like £90,000. If builders cannot provide affordable housing, as part of any new development, at these prices, they should be required to provide, instead, rented properties.

But, its also necessary to ensure that this does not result in just a further reduction in the quality of property provided as “affordable”. Britain already has some of the worst housing in Europe, in terms of the average property size. That is compounded by current planning rules on the Green Belt etc., which squeeze additional properties into unsuitable locations, on brownfield sites, where no one wants to live. We should introduce something akin to the old Parker-Morris standards for housing.

But, in addition to this, local councils, should have a mandatory duty imposed upon them to provide, by one means or another, the amount of new dwellings required for their area, as set out in the local plan. If private developers cannot provide the required additional dwellings to buy or rent, then the local authority should have a required duty to build those houses themselves, and to acquire the land needed by compulsory purchase, in the same way that, in the 1960's, slum clearance was achieved by such compulsory purchase of existing dwellings.

Capital III, Chapter 25 - Part 1

Credit and Fictitious Capital

The analysis of the credit system lies outside the scope of Marx’s current work, but, like other features of capitalism, such as competition, which lie outside the scope of “Capital”, it is necessary to investigate their role, within the process of reproduction and circulation of capital. That has already been touched on in respect of the development of credit in the two previous volumes of “Capital”, in discussing how the exchange of commodities necessarily leads to an increasing role of money as means of payment rather than circulation.

“With the development of commerce and of the capitalist mode of production, which produces solely with an eye to circulation, this natural basis of the credit system is extended, generalised, and worked out. Money serves here, by and large, merely as a means of payment, i.e., commodities are not sold for money, but for a written promise to pay for them at a certain date. For brevity's sake, we may put all these promissory notes under the general head of bills of exchange.” (p 400)

These bills of exchange circulate, within the commercial world, as money, because the possessor of the bill can endorse it, and then pass it on as payment for their own purchases. They act increasingly as money, and in doing so reduce the need for actual money. If A owes B £10, and B owes C £10, and C owes D £10, then £10 of actual money is required. A pays it to B, who pays it to C etc. If A owes B £10, C £10 and D £10, then £30 of money is required, because here one payment does not cancel out another. But, if A pays B with a bill of exchange, B can then pass that bill to X in payment of £10 of goods bought from them. X may then endorse the bill, and use it as payment to C, for £10 of goods bought from them. A may simply pay C and D with bills of exchange, who in turn endorse them, and use them to pay for their own purchases. To the extent that all these transactions can simply be netted off against each other, the only actual money that then needs to change hands is that which remains to balance the difference.

“Just as these mutual advances of producers and merchants make up the real foundation of credit, so does the instrument of their circulation, the bill of exchange, form the basis of credit-money proper, of bank-notes, etc. These do not rest upon the circulation of money, be it metallic or government-issued paper money, but rather upon the circulation of bills of exchange.” (p 400-401)

Those who believe that the cause of capitalist crises is the introduction and expansion of credit, induced by the state, and its replacement of money based on gold, or some other precious metal, are, therefore, well off the mark. Credit money is developed by capital, naturally, alongside the existence of money based on gold and silver. It arises simply because the exchange of commodities, especially as it expands, necessitates exchange on the basis of payment, as opposed to its simple circulation.

Marx quotes a Yorkshire banker, W. Leatham , and J. W. Bosanquet  on the extent to which bills of exchange acted as money. Leatham, in his “Letters on the Currency” (1840) wrote that,

“The bills of exchange make up "one component part greater in amount than all the rest put together" (p. 3).” (p 401)

According to Leatham, the total value of bank notes, and bank liabilities, amounted to £153 million. By contrast, the quantity of gold available to back these notes amounted to only £14 million.

In tones familiar to anyone, following the financial crisis of 2008, he continues,

"The bills of exchange are not ... placed under any control, except by preventing the abundance of money, excessive and low rates of interest or discount, which create a part of them, and encourage their great and dangerous expansion. It is impossible to decide what part arises out of real bonâ fide transactions, such as actual bargain and sale, or what part is fictitious and mere accommodation paper, that is, where one bill of exchange is drawn to take up another running, in order to raise a fictitious capital, by creating so much currency. In times of abundance and cheap money this I know reaches an enormous amount" (p 401)

Illustrating the point made earlier that the circulation of bills of exchange reduced the need for actual money, Bosanquet, in his “Metallic, Paper and Credit Currency” (1842), writes that the London Clearing House settled payments of around £3 million per day, but only required around £200,000 to do so.

Back To Chapter 24

Forward To Part 2

Why Labour Really Lost The Election

There was a lot of speculation over the weekend about why Labour lost the last election. It was sparked by the release of Margaret Beckett's Report, and the criticism of it, by Deborah Mattinson, the party's former pollster. But, none of this speculation really addressed the question of why Labour lost. The real reason is that Labour has failed to convince a majority of voters of the correctness of the ideas and principles for which it stands. Indeed, one reason it failed to do that is because, for the last thirty years, it has followed the advice of pollsters, and others to tailor its message to what they claim the voters want. In the process it has made it very difficult for anyone nowadays to know exactly what it is that Labour's principles are, because they have been made increasingly vacuous, and and ever changing, in order to meet that objective. Its one reason that Jeremy Corbyn's clear principles have cut through, and been taken up enthusiastically.

The various pollsters and pundits who treat politics as a commodity, encouraged by the fact that they are really only interested in selling a set of politicians to the public, so that those politicians have a job for the next five years, have no interest in trying to win voters to a set of ideas. And, of course that means that when someone like Corbyn comes along, this challenges their world view. But, it also causes a problem for the supporters of Corbyn, because their alternative concept of politics, whereby it is about standing for a set of principles and trying to convince others of their correctness, is not something that can be achieved overnight, and it is a view that cannot be abandoned, therefore, simply on the basis that you have not yet achieved that aim.

If we think about other areas of life, it would be seen as obviously ridiculous. When Galileo, discovered that the Earth was not flat, and that it was not at the centre of the Universe, that view was not at all popular, especially with the Catholic Church. Had he been advised by today's pollsters, spin doctors and political gurus, he would have immediately dropped the notion, and done the obvious thing of falling in behind the popular view. The same thing could be said about Darwin's views on evolution, and so on.

Yet, in a world where short-termism, and instant gratification dominates, the idea of sticking to a set of principles and beliefs, and engaging in the long haul slog of convincing others of those views is always going to be difficult. The advocates of that commoditised, fast-food view of politics will be quick to criticise Corbyn if Labour does badly at the polls in May. Yet, that is even more ridiculous, given that he has only been leader for a few months, that right-wing Labour MP's have been trying to undermine his message during all that time, and despite the fact that in so short a time, it is quite clear that the old adage applies that you cannot fatten a pig on market day.

The problem for Labour, however, is also different than for the Tories. The reality for Labour is that in order to win it has to be able to offer the vast majority of society solutions to their problems, and other than at specific times of prosperity, those solutions are not simply in the gift of any government. The solutions required for the problems of the vast majority of society cannot be provided by any government, no matter how well meaning it might be. Those solutions rest in the hands of the vast majority of society itself.

In times of prosperity, when the demand for labour-power is high, wages will rise, unemployment and so welfare spending will fall, and the government will be able to assist in a redistribution of wealth and income within the confines of its powers. But, apart from such times, governments cannot themselves effect such changes. Ed Miband, started to grasp that concept with his talk about “pre-distribution”, and John McDonnell, is now talk about this, by reintroducing the idea of encouraging worker-owned co-operatives, and so on.

The real solution to workers problems of low incomes, temporary employment and so on, cannot be resolved by government tax and benefits policies, but only by workers themselves having control over those aspects of their lives, through the establishment of worker-owned co-operatives, linked together through a co-operative federation. They cannot resolve the problems that exist at an international level, other than by themselves forming international organisations, and working within existing international organisations such as the EU, to further their collective interests. Any suggestion by Labour politicians that the current EU referendum can be viewed through the lens of “Britain's interest”, will necessarily undermine that collective interest, just as the SNP focus on “Scottish national interest”, did so in the Scottish referendum.

The answer to the social problems within workers' communities, across Britain, will not be resolved by governments, but by the workers within those communities themselves taking back ownership and control over them, and establishing their own democratic structures for doing so. The problems of criminal gangs, and people traffickers, utilising the refugee crisis in Europe, will not be solved by national government, each trying to pursue its own “national interest”, but only by workers, across Europe, uniting to provide a common European solution, to bring in refugees, to establish the required facilities and infrastructure, in each country and locality, so that they can be absorbed.

But, there has been a very long period, during which voters across Europe, and elsewhere have been encouraged to the view that politics is something they consume, like any other commodity, rather than that it is something that is integral to their own lives and existence. Restoring that knowledge is a long term task, and in the meantime, any government that fails to provide the necessary solutions, will not get the votes required to form a government.

Capital III, Chapter 24 - Part 4

The only sense in which the idea of compound interest could be seen to apply, is in the sense that Marx described in Capital I. That is that surplus value, when accumulated as additional productive-capital, then produces additional surplus value and so on.

But,

“1) Aside from all incidental interference, a large part of available capital is constantly more or less depreciated in the course of the reproduction process, because the value of commodities is not determined by the labour-time originally expended in their production, but by the labour-time expended in their reproduction, and this decreases continually owing to the development of the social productivity of labour. On a higher level of social productivity, all available capital appears, for this reason, to be the result of a relatively short period of reproduction, instead of a long process of accumulation of capital.” (p 398)

In addition, Marx refers to the tendency for the rate of profit to fall, but this does not seem to be a real objection, because as he sets out, in discussing it, that same process leads to a continuing rise in the mass of profit. Moreover, for the reason set out in his Point 1 above, this continually rising mass of profit, will accumulate a continually rising mass of this cheaper capital. Moreover, the accumulation of capital is a function of the advanced capital, and therefore, the general annual rate of profit, not the rate of profit. As the growth of social productivity rises, the rate of turnover of capital rises, and with it the general annual rate of profit. That provides the basis of increased accumulation. But, the same process also releases capital for additional accumulation.

There are objective limits on the expansion of surplus value and consequently accumulation.

“This consists of the total working-day, and the prevailing development of the productive forces and of the population, which limits the number of simultaneously exploitable working-days.” (p 398)

But, if interest is seen as simply an automatic product of capital, resulting simply from its nature, then there is no bounds to it. An amount of accumulated money-capital then simply expands each year, by the amount of the average rate of interest, regardless.

“We know, however, that in reality the preservation, and to that extent also the reproduction of the value of products of past labour is only the result of their contact with living labour; and secondly, that the domination of the products of past labour over living surplus-labour lasts only as long as the relations of capital, which rest on those particular social relations in which past labour independently and overwhelmingly dominates over living labour.” (p 399)

Back To Part 3

Forward To Chapter 25

Back To Volume III Index

The Rate of Profit

The rate of profit is a derivative of the rate of surplus value. Just as the rate of surplus value is calculated as the proportion of the surplus value to the laid out variable capital, so the rate of profit is calculated as the proportion of the surplus value to the laid out constant capital, and variable capital.

That laid out capital also includes the value of the wear and tear of the fixed capital, even though, in any one year, any individual capital may not actually lay out capital to replace its fixed capital. It must set aside this value of wear and tear, so that fixed capital can eventually be replaced, and so it represents a part of the cost of producing the profit. As Marx sets out, in Capital II, for the economy as a whole, this will tend to average out. If fixed capital has an average lifespan of ten years, in any one year, it will transfer, through wear and tear, 10% of its value to the commodities it helps produce. So, if the total fixed capital stock has a value of £1,000, it will transfer £100. But, in any one year, on average, 10% of the fixed capital stock will need to be physically replaced, which also equals £100. In other words, for the economy as a whole, though not for any individual capital, the amount of value of wear and tear recovered in the value of its output, and set aside to cover the replacement of fixed capital, will be equal to the amount of capital actually laid out to replace fixed capital.

In fact, however, as Marx sets out in Capital II, this is never likely to be exactly true. If fixed capital lasts longer than is expected, more value will be extracted from circulation in the value of wear and tear, than is thrown back into circulation for the purchase of replacement fixed capital. In that case, a disproportion between Department I and Department II arises, so that the under-consumption of fixed capital by Department II, causes an overproduction by Department I. If, fixed capital lasts for less time than expected, the opposite situation arises.

As with the rate of surplus value, this rate of profit, because it is based upon the laid out capital, as opposed to the advanced capital, is the same whether it is measured for a day, week or year. If £1000 of capital is laid out in a week, made up of £500 materials (c), plus £400 wages (v), plus £100 wear and tear (d), and the surplus value (s) is £400, then the rate of profit s/c + d + v, which is equal to 40%. If we measure the rate of profit for the year, we will find it is the same. It would then be, for a fifty week year £50,000 of capital laid out made up £25,000 materials, £20,000 wages and £5,000 wear and tear, whilst the total surplus value would be £20,000, again giving a rate of profit of 40%.

Marx makes clear that the rate of profit, is the rate of profit on the productive-capital, although later in Capital III, Chapter 18, he modifies this so as to include the capital laid out as merchant capital, in the calculation, which merely reflects the fact that the portion of industrial capital forming the commodity-capital, and money-capital, during its circulation phase, has been transformed into independent capitals. The starting point for Marx then in calculating the rate of profit is the circuit of this productive-capital. That is all the more clear in Marx's analysis of the process of social reproduction, in which Marx follows on the model set out by the Physiocrats in the Tableau Economique.

For Marx, as with the Physiocrats, that circuit of productive-capital begins with the stock of physical capital in the possession of the capitalist/s. No production can occur unless there already exists a quantity of physical commodities, which comprise the constant and variable capital, which is to be advanced in the process of production. Before workers can be set to work, the capitalist must have factories, machines, and materials, for example. These do not simply appear out of thin air, but are themselves the product of previous years' production. Capitalism itself could never have commenced unless, in the thousands of years preceding it, societies had produced a stock of various products, and commodities, which could then form this physical capital stock.

In the same way, there must exist a physical stock of means of subsistence required both by workers and capitalists, as well as landlords, and money-lenders, who must live by consuming such commodities, whilst production is taking place to replace them. Marx sets out the circuit of productive capital then in the following expanded form.

This indicates that a physical mass of commodities exist, in the shape of fixed and circulating constant capital, as well as of variable capital. Its important to understand the variable capital in the terms Marx describes in his analysis of social reproduction, following on from the Physiocrats. In other words, not as a sum of money wages, but as a mass of commodities required for the workers' reproduction. The value of both the constant and variable capital, here, are expressed in money terms, only, as Marx sets out, because it is impossible to undertake any rational calculation without doing so. But, money here only acts as unit of account for the purpose of undertaking such calculation, and should not be confused with the money prices paid for the commodities bought that comprise the constant and variable capital.

The capital laid out here, is the capital consumed in the production process, and reproduced by that same process. As Marx sets out later, it is the physical use values that are consumed by this process, which must be physically reproduced by the reproduction process, on a like for like basis, so that social reproduction can occur, on at least the same scale, and for that reason, what is determinant for their value, the surplus value produced, and thereby the rate of profit, is the current labour-time required for their reproduction, not the labour-time required for their production at some point in the past.

“This entire portion of constant capital consumed in production must be replaced in kind. Assuming all other circumstances, particularly the productive power of labour, to remain unchanged, this portion requires the same amount of labour for its replacement as before, i.e., it must be replaced by an equivalent value. If not, then reproduction itself cannot take place on the former scale.” 

(Capital III, Chapter 49, p 835)

and later.

“In so far as reproduction obtains on the same scale, every consumed element of constant capital must be replaced in kind by a new specimen of the same kind, if not in quantity and form, then at least in effectiveness.”

(Capital III, Chapter 49, p 849)

In other words, if we take the total social capital, the use values that comprise the consumed constant and variable capital, and which were produced in previous periods, must be physically replaced out of current production. If current production does not physically reproduce the machines and other fixed capital that has been worn out, in its own production, then those machines will not be available to assist in the processing of material, so less material will be processed, and less labour will be employed, so social reproduction will contract. If the materials consumed in production are not physically replaced, they will not be available to take part in the reproduction process, so again fewer workers will be employed, and social reproduction will contract. If the food and other necessities required for their subsistence are not reproduced out of current production, there will be insufficient to sustain the current workforce, which will then contract. 

If we assume constant levels of productivity, then Marx's expanded formula for the circuit of productive-capital, above, shows this process. C' is the social product, created by the current production process. It divides into C, the physical use values, consumed in its own production. The money equivalent, or value of this product is given by M, which then also represents the value of the use values, which are thrown into the next cycle of production, so that the circuit here is C – M – C, or P... C – M – C... P.

This can also apply to an individual productive-capital. It starts with a quantity of physical capital, which is thrown into the production process. Of its output, a certain proportion, equal to C, is required to reproduce, the use values consumed in its production. This proportion of its total output is sold, and provided it is sold at its value, results in its money equivalent, M. This money equivalent, then buys the commodities, means of production and labour-power, required to replace those consumed in the current production.

In both cases, a proportion of the total product, over and above C, represents a surplus product, c, and this is available to either be consumed by non-producers (capitalists, landlords, the state) or else to be accumulated. It is the surplus physical product that enables firms to employ the additional machines, to process additional material, and to provide the means of subsistence for additional workers, which comprise this surplus physical product. This can be seen if we consider the situation in relation to a farmer who produces corn, which here represents all of the constant and variable capital.

The farmer begins the period with 500 kg of corn. Of this 100 kg is required as seed (c), whilst 400 kg is required to be paid to his workers as wages (v). As a consequence of production, 600 kg of corn are produced. This means that the 100 kg of seed is replaced, and the 400 kg, paid as wages to workers, and required to feed the workers in the next period is also replaced. This means that a surplus product of 100 kg of corn is produced. This can be consumed by the farmer, so there is simple reproduction. The rate of surplus value here is equal to 25%, the ratio of the surplus product to the variable capital, or necessary product. The rate of profit is 20%, the ratio of the surplus product to the constant and variable capital.

Suppose the workers work for 1,000 hours to produce this output. In Marx's terms as set out in Capital I, this 1,000 hours can be broken up and viewed in different ways. If it is considered as a single social working day, then, firstly, a part of this day comprises necessary labour, undertaken solely to reproduce the consumed labour-power. It takes the form of a necessary product, produced during that time, which comprises the commodities required to reproduce that labour-power. Secondly, the remainder of this social working day represents surplus labour, and the product of this portion of the day represents a surplus product. 

That means 1,000 of new value is produced. In that case, the value of c = 1/5 of 1,000 = 200. The total value of current production is then equal to 1200, which is the value of the constant capital consumed, plus the new value created by labour, which itself divides into 800 v + 200 s. The value of a kg of corn is equal to 2 hours. So we have,

c 200 + v 800 + s 200 = 1200. s' = 25%, p' = 20%.

If workers continue to work for 1,000 hours, this continues to be the new value they create, but this new value will divide differently between v and s, dependent upon the level of productivity. In all events, in order for social reproduction to continue, on at least the same scale, the workers will need to be paid 400 kg of corn, to ensure their reproduction. What proportion this 400 kg represents of the total product, and the surplus product, and so also of the total labour-time, and surplus labour-time, depends upon the level of productivity. If productivity rises, more corn is produced in a given time, so less time is required to produce the corn required to replace both the constant and variable capital, and vice versa. This means both that a greater mass of surplus product and surplus value is created, and that it represents a greater proportion to the value of the capital laid out for its production.

If productivity rises, so that output is equal to 800 kg, 100 kg is still required to replace seed, and 400 kg replaces (v). In that case, (s) rises to 300 kg. Now the rate of surplus value, s', has risen to 75%, and the rate of profit has risen to 60%. If we measure this in terms of values, then 100 kg of seed was used, and was converted into 800 kg of output. The 1000 hours of labour, created 700 kg of output, so that the current value of a kg of corn falls from 2 hours to 1.43 hours. The current value of the seed consumed in production, therefore, falls from 200 hours to 143 hours. 

So, we have,

c 143 + v 571.43 + s 428.57 = 1143. s' = 75%, p' = 60%.

This demonstrates Marx’s other point about the contradictory nature of the commodity as both use value and value. If this were a society, its total wealth, represented by the quantity of use values produced, has risen by 33.3%, because previously 600 kg. was produced, and now that has risen to 800 kg. However, the total value of this new, higher level of output is lower, at 1143, as opposed to 1200, because the labour-time required to produce it has fallen.

Suppose workers continue to work 1,000 hours, creating 1,000 of new value. If productivity now falls so that only 500 kg of corn is produced, then 100 kg is still required to reproduce the seed, and 400 kg to replace the variable capital. That means that there is no surplus product, and no surplus value. All of current production must go simply to reproduce the capital consumed in current production. The 1,000 of new value is equal to 400 kg of output, giving a value per kg of 2.5 hours. Now, the 100 kg of (c) is equal to a value of 250, the 400 kg of (v) to a value of 1000. The total output of 500 kg has a value of 1250 hours. So, we have,

c = 250 + v 1000 + s 0 = 1250.

This reflects the situation described by Marx and Engels that class society is only possible when social productivity has reached a level whereby the producers are able to produce sufficient not only to replace the means of production, but also their own means of consumption, with an additional surplus product over and above that level. Because, under capitalism, this social surplus takes the form of surplus value, this means that they must be able to firstly reproduce the value of the consumed means of production, in the value of the final output, and must create sufficient new value, so as to not only reproduce the value of their labour-power, but to produce a surplus value in excess of it.

Of course, every capitalist engages in production on the assumption that this will be the case, but it cannot be guaranteed. The workers they employ will always create new value equal to the labour-time they expend, (provided it is socially necessary labour) but there is no reason that this new value will always exceed the value of the labour-power used in production, as the above demonstrates. If total output had fallen to 400 kg for instance, 100 kg would still be required to reproduce seed, but now there is insufficient production to reproduce the consumption requirements of the workers – 400 kg are required, but only 300 kg are available.

In that case, to continue production on the same scale, the capitalist would have to add to their capital to make up the difference. Instead of a surplus value, the capital would have produced a loss. Now, 1000 hours expended produced an additional 300 kg, giving a value per kg of 3.33 hours. So, now we would have,

c 333 + v 1333 + s – 333 = 1333.

In other words, rather than extracting a surplus value, and being able to accumulate capital, the capitalist must add an additional 100 kg of corn, or 333 hours of additional value, just to continue production on the same scale. This situation could occur in agriculture due to a crop failure, for example. Suppose, such a crop failure resulted not just in output failing to cover the requirement to reproduce the variable capital, but also failed even to reproduce all of the constant capital, so that output falls to just 50 kg. In order to ensure that reproduction could continue on at least the same scale, the capitalist would then have to add an additional 450 kg of corn as additional capital.

The value of a kg of corn would now rise to 20 hours. We would have,

c 2000 + v 8000 – s 9000 = 1,000.

The workers would have continued to produce 1,000 of new value, as before, because they performed 1,000 hours of socially necessary labour-time, but the crop failure causes such a collapse of productivity that the value of a kg of corn soars to 20 hours. The workers were paid 400 kg of corn, as wages, and this now has a value of 8,000 hours, the amount of labour-time now required to replace it.  They must continue to be paid the 400 kg of corn required for their subsistence, if production is to continue on the same scale. So, the capitalist suffers a loss of 7000 hours, in terms of the new value created by labour, as opposed to the value of labour-power consumed in its production. In addition, they must now also add a further 2000 hours of capital to replace the consumed constant capital, leaving them with a loss of 9000 hours.

This is the difference between Marx’s method of calculating the rate of profit on the basis of the current value of the laid out capital, as opposed to calculating it on the basis of the historic prices paid for the consumed capital. Marx's method shows the real relation on the basis of the potential to accumulate capital, or indeed, as described above, for capital to contract, as a sharp fall in productivity causes a much larger proportion of the total social product to be required simply to replace the consumed capital.

This can be seen clearly by examining again Marx's expanded formula for the circuit of productive-capital.

Suppose 100 kilos of cotton are consumed in the production of yarn, the realised value of the yarn must contain, an equivalent amount of value to the current reproduction cost of 100 kilos of cotton. Suppose the 100 kilos of cotton required 10 hours of labour to produce, equal to £10. This £10 is transferred to the value of the yarn, provided productivity remains constant. If the yarn also comprises £5 of variable-capital, and £5 of surplus value, it will sell for £20.

If productivity rises, so that the cotton can now be produced in just 5 hours, its value falls to just £5. It is then this value, not the £10 originally paid, which is transferred to the yarn, which now sells for £15. This £15, however, is still capable of reproducing the capital in kind, because only £5, or 5 hours of labour-time are now required to physically reproduce the 100 kilos of cotton.

“If the price of raw material, for instance of cotton, rises, then the price of cotton goods — both semi-finished goods like yarn and finished goods like cotton fabrics — manufactured while cotton was cheaper, rises also. So does the value of the unprocessed cotton held in stock, and of the cotton in the process of manufacture. The latter because it comes to represent more labour-time in retrospect and thus adds more than its original value to the product which it enters, and more than the capitalist paid for it...

The reverse takes place when the price of raw material falls. Other circumstances remaining the same, this increases the rate of profit.”

(Capital III, Chapter 6) 

The same applies to Marx’s comment about “effectiveness” quoted above from Chapter 49 (p 849). If a producer replaces a machine costing £100, that is capable of producing 1000 units per day, with another machine costing £100 but which produces 2000 units per day, this is the same thing as if productivity had risen, so that the old machine now only required half the labour-time to produce, or had fallen in value to £50. It is the basis of what Marx calls “moral depreciation”.

But, in all these cases, the purpose is to reproduce the physical capital on at least the same scale – simple reproduction – and, in reality, on an expanded scale.

“In the reproduction process of capital, the money-form is but transient – a mere point of transit.”

(Capital III, Chapter 24) 

The term M, in fact, only refers to the money equivalent of the current value of the capital, which must be reproduced. As Marx makes clear, it is only money as unit of account, required in order to make rational calculations. The historic cost of the consumed cotton may have been £10 (because that reflected the previous amount of labour-time required for its production), but that is irrelevant to its current value, and the value it transfers to the yarn, as well as to the portion of the yarn (and similarly of social-labour-time) required to reproduce the cotton. That is apparent in Marx's analysis in Capital II, where he separates out the portion of the end product, of the commodity-capital, C', into C and c. C is the physical portion of the commodity-capital required to physically reproduce the commodities (that comprise the constant capital and labour-power) consumed in its production, whilst c, is the portion of the commodity-capital in excess of that. It is represented as its money equivalents, by M and m.

The fact that £10 was the actual historic price paid for the 100 kilos of cotton, therefore, becomes irrelevant, because the circuit here is based on the actual value of the commodities that take part in the production and subsequent circulation process.

P is equal to £10, which comprises £5 value of cotton and £5 for labour-power (£5 constant capital, £5 variable capital) . As a result of the production process, £5 of surplus-value is created by labour, which now forms part of the value of the commodity-capital, C' £15. It has a money equivalent of £15, which is realised on sale, M' £15.

Assuming simple reproduction, £10 of this £15 then goes to reproduce the £5 value of cotton, and £5 value of labour-power, M £10. These commodities, then form the firm's productive-capital once more, C £10, and this value once again enters the production process… P £10. If the output consisted of 90 kilos of yarn, then it would break down into 60 kilos (C), required to reproduce the cotton and labour-power consumed in its production, and 30 kilos (c) which constitutes a surplus product. The money equivalent of these would be £10 M plus £5 m.

The importance of this can be seen when considering not the M, but the m, the money equivalent of the surplus value. At its original price of £10 for 100 kilos of cotton, £5 would have bought 50 kilos of cotton, but it now buys 100 kilos. In other words, the rate of profit, the ratio of the surplus to the actual capital value required for its production, has risen, and it is for this reason that Marx bases his calculation for the rate of profit on the current reproduction cost of the capital, and not upon the historic prices paid for it.  It is this rate of profit Marx says he is referring to when discussing the Law of The Tendency for the Rate of Profit to Fall.

"{Incidentally, when speaking of the law of the falling rate of profit in the course of the development of capitalist production, we mean by profit, the total sum of surplus-value which is seized in the first place by the industrial capitalist, [irrespective of] how he may have to share this later with the money-lending capitalist (in the form of interest) and the landlord (in the form of rent). Thus here the rate of profit is equal to surplus-value divided by the capital outlay." 

(Theories of Surplus Value, Chapter 16)

In terms of the total social capital, this rate of profit is equal to the profit margin, p/k, where p is the amount of profit, and k is the cost of production (c + v). In the same way that the rate of surplus value differs from the annual rate of surplus-value, as a consequence of the rate of turnover of the circulating capital, so too the rate of profit differs from the annual rate of profit. The more the rate of turnover of the total social capital increases, the more the annual rate of profit will tend to rise, whilst the rate of profit will tend to fall.

The average or general rate of profit is the annual rate of profit, not the rate of profit, and in Capital III, Marx even refers to it as the annual general rate of profit. For individual capitals whose rate of turnover is higher than the average, their annual rate of profit will tend to be higher than the average and vice versa, whilst their rate of profit, or profit margin will be lower than the average, for the same reason. I've described that elsewhere.

The average rate of profit is based upon the annual rate of profit of the total social capital, i.e. on the surplus value produced in a year, measured against the capital advanced during one turnover period. This determines the amount of profit to be added to the cost of production for each sphere, and thereby determines its price of production. This then determines the profit margin in that sphere, which necessarily differs from the average annual rate of profit.

“Take, for example, a capital of 500, of which 100 is fixed capital, and let 10% of this wear out during one turnover of the circulating capital of 400. Let the average profit for the period of turnover be 10%. In that case the cost-price of the product created during this turnover will be 10c for wear plus 400 (c + v) circulating capital = 410, and its price of production will be 410 cost-price plus (10% profit on 500) 50 = 460.” 

(Capital III, Chapter 9)

This is clearly different than a price of production calculated as k + kp', which would be, 410 + (410 x 10%) = 41, giving a price of production of 451.

This is also important for the study of development economics, as Ken Tarbuck set out in his analysis of Bukharin's “Economics of the Transition Period”. An economy whose production is geared towards production where the rate of turnover of capital is higher than the global average will tend to have a higher annual general rate of profit, whilst its rate of profit will tend to be lower. Its lower profit margins will mean that its output is more globally competitive than other economies with a lower rate of turnover of capital.