Wednesday, 26 October 2016

Wear and Tear

Wear and tear of fixed capital is often confused with depreciation. The essential differences are that wear and tear is a function of use, whereas depreciation is a function of time; wear and tear of fixed capital represents a transfer of value, to the final product, and is thereby reproduced and recovered within it, whereas depreciation forms no part of the production process, so that no value is transferred to the end product, and is not, therefore, reproduced or recovered within it, meaning it represents an absolute capital loss; wear and tear applies only to fixed capital, representing a portion of the fixed capital's use value consumed in production, whereas depreciation can apply both to fixed capital and to circulating capital, for example, materials can deteriorate in storage.

This last point illustrates Marx's distinction between fixed capital and circulating constant capital. Circulating constant capital is used up entirely in the production process. It transfers all of its use value to the end product, or to put it another way, its wear and tear is always equal to 100%. By contrast, fixed capital continues to physically exist beyond the end of the production process. A portion of its value, therefore, remains fixed within this physical use value.

A screwdriver, used by a joiner, suffers wear and tear as it is used to insert screws into the joiner's products, but when the joiner has finished the labour process, and produced a cabinet, the screwdriver still exists, and can be used, by the joiner, in another labour process to produce another cabinet, or other product. In the cabinet, the wood used by the joiner, along with the screws and other materials are all used up in its production. They constitute circulating constant capital. If the wood has a value of £5, the screws £1, and various auxiliary materials a further £1, all of this constant capital value is transferred to the value of the cabinet. If the joiner's labour adds a further £5 of value that too is recovered along with the value of the constant capital, when the cabinet is sold, and the capital is thereby turned over.

The screwdriver, however, may have a value of £20, but this value is not wholly transferred to the end product. If the screwdriver, on average, can be used to produce 1,000 such cabinets, before it is worn out from use, it will only transfer, on average, £0.02 to the value of each cabinet. After, it has been used for the first time, £1.98 of value will remain fixed within it. How quickly, the screwdriver loses all of its use value, i.e. becomes worn out, and so its value, will then depend upon how much it is used. If the joiner produces one cabinet per week, the screwdriver will last for twenty years, but if the joiner produces ten cabinets per week, it will only last for two years.

By comparison, the wood, screws etc, transfer all of their use value, and so value to the end product in one go. But, suppose the joiner has to keep the wood, and screws in poor conditions. Then the wood and screws may lose some of their use value even before they take part in the production process. As the use value of the materials is reduced, so the value of those materials, transferred to the end product is also thereby reduced, and cannot be recovered in the value of that end product. It represents an absolute capital loss. They have not suffered wear and tear, but depreciation. As a result, the use value of the end product will itself be reduced. They will still transfer all of their use value and value to the end product, but this use value and value will already have been diminished prior to them even taking part in that process.

In each production process, therefore, such as the production of a cabinet, fixed capital will lose a portion of its use value, and thereby transfer a proportion of its value to the end product. A screwdriver each time it is used to drive in screws, loses some of the metal of its blade, and the action of screwing, causes wear of the handle of the screwdriver. None of that, however, prevents the screwdriver from being used again and again, until such time as this cumulative wear and tear from use, does make the screwdriver unfit for purpose, at which point it needs to be replaced.

As Marx sets out in Capital Volume II, this forms the basis of one type of capitalist crisis arising from disproportion. Suppose there are just two producers in an economy. One is a machine maker, and the other is a farmer. The former produces machines required by the latter, who, in turn produces food that they sell to the machine maker. Suppose the machine maker produces a machine with a value of £1,000, which they sell to the farmer. The machine will last for ten years, given its current level of usage. The machine maker requires £100 of food each year from the farmer, to cover their subsistence.

Over ten years, therefore, the farmer would supply the machine maker with £1,000 of food, and the machine-maker would supply the farmer with a machine of equal value. However, one problem here is obvious. The machine maker wants £1,000 straight away from the farmer, and not £1,000 of food spread out over ten years. The farmer would then have to sell £100 of food to the machine maker, and make up the other £900 from their own cash hoard. But, this is also not a very good situation for the machine maker, as they would not have any work, or income for another ten years.

They would, of course, be able to use the £900 of cash, they now have, to cover their purchases of food for the next nine years. However, one potential cause of a crisis is illustrated here, because if the farmer were to find that the machine they bought lasted not for ten years as expected, but for eleven or twelve years, the anticipated income for the machine maker would not materialise, and they would have no money to be able to buy food from the farmer, which would be bad both for the machine maker who would not be able to subsist, and for the farmer, who would not be able to sell all of their output.

Of course, in reality, as Marx describes, in Capital II, one aspect of this requirement for proportionality is that the right quantity of fixed capital is produced each year relative to the amount of circulating capital to be processed. So, instead of the machine maker producing a machine once every ten years for the farmer, what would actually develop would be that one machine maker would produce machines for ten farmers, and on average each of these farmers would require a replacement machine each year, keeping the machine maker fully employed.

Suppose the value of output of each farmer is £1,000 each year. This might comprise £300 of circulating constant capital in the shape of seeds, £600 of new value created by labour, making £900. But, it will also comprise £100 of wear and tear of the machinery bought from the machine maker. Farmer 1 sells £100 of food to the machine maker, required for their own subsistence. They hand over a further £900 to the machine maker in money. The machine maker requires this money to buy their own materials required to replace those consumed in the machine sold to the farmer.

The machine maker has thereby been able to reproduce their own labour-power for the next year (£100 of food) and also to reproduce their own constant capital. They can then proceed to produce another machine. They sell this machine to Farmer 2, who also produces £1,000 of food, £100 of whose value comprises wear and tear of their existing machine. Whether the machine maker now buys £50 of food from Farmer 1 and £50 from Farmer 2, or whether he continues to buy all of his food from Farmer 1 does not matter. Both farmers must sell all of their output in the market, and in that way they also recover the £100 of value of wear and tear contained in it.

Taking the situation of all the farmers together, they produce each year food to the value of £10,000, and of this a total of £1,000 includes the value of wear and tear of machinery. For each farmer, however, the amount of wear and tear, contained in the value of their output is only £100. Each farmer, recovers this in the value of their output, but does not immediately use it to buy replacement fixed capital. They are able to set this money to one side, so that, at the end of ten years, when their machine is worn out, they have the necessary cash to buy the replacement machine.

If all of the machines were new, the fixed capital stock would be £10,000, but in any year, only 10% of this value enters into the cost of production of food, and is reproduced in the value of that food. This is the position also that Marx describes in relation to national output and social reproduction. In the value of national output, it is only this value of wear and tear of fixed capital that is reproduced, just as equally, it is the equivalent use value that is produced, and for which a proportion of social labour-time is set aside. In other words, as in this example, the value of output represented by wear and tear is £1,000. Although, nine out of the ten farmers do not replace their machines, because only 10% of the use value of each machine is used up during the year, one farmer replaces the use value of an entire machine. Social labour-time equal to £1,000 is set aside for the production of this machine.

Its on this basis that Marx says that, on average, the amount of value set aside to cover wear and tear of fixed capital within the economy is equal to the amount of value represented by the production of fixed capital to replace that which is actually worn out in any one year. However, as set out above, this is only an average or approximation. If existing fixed capital is made to last longer than this average, value will continue to be taken out of circulation, to cover the value of wear and tear, but this value will not be thrown back into circulation for the purchase of fixed capital. The consequence as Marx says in Capital II, is that even with a constant level of output, an overproduction of fixed capital would arise.

Moreover, this average is based upon each individual capital replacing its fixed capital at more or less uniformly spread intervals. As new capitals are constantly arising, there is some basis for such an assumption, and as each capital accumulates additional machines, over a period of years, this would again tend to mean that they would wear out and require replacement at such intervals. However, as capital becomes increasingly concentrated in huge firms, the proportion of fixed capital accounted for by new capitals becomes smaller and smaller. Furthermore, as the process of moral depreciation arises, when the development of technology means that machines are replaced, not because they are worn out, but because a revolutionary type of new machine makes them obsolete, means that whole swathes of fixed capital, of the same type, can come up for replacement, at the same time, across the economy, followed by periods when no such replacement is required. As Marx says, this is one important factor that plays into the determination of the duration of the business cycle.

Another factor here is the difference between periods of intensive as opposed to extensive accumulation. In a period of intensive accumulation, firms may replace their existing machines, but they replace them with new types of machines. By definition, these newer machines are more productive. Each one replaces two or more of the older machines. Take the situation that Marx describes in Capital I.  In England, each person employed in a cotton spinning factory was complemented by 74 spindles, whereas in France it was just one person to 14 spindles. That reflected a constant revolutionising of machinery in England. One new machine was able to replace five of the older machines.

Consequently, even if the price of such a new machine was greater than that of an older machine, it would represent proportionately less value per unit of output. A machine with 74 spindles, even if it was twice as expensive as a machine with 14 spindles, would still transfer only a third as much value in wear and tear to the end product. Moreover, where the machine maker would previously have expected to have sold five machines, they would now sell only one, and the loss of output would not be compensated by the fact that this one new machine represented twice as much value as one old machine.

But, in reality, the same causes of the development of the new machine, i.e. the development of technology, always tends to also reduce the value of the new machines too, because as productivity rises, so the cost of producing these new machines also falls. That is why, as Marx says in Capital III, Chapter 6, the value of wear and tear of fixed capital, as a proportion of the value of the end product always tends to fall, whilst the value of the materials processed by that fixed capital tends to rise as a proportion of the value of the end product. It is that which also lies behind the long-term tendency for the rate of profit/profit margin to fall.

The reason that this process, whereby one new machine replaces several older machines, does not lead to a permanent state of overproduction is several fold. Firstly, as Marx says in Capital III, Chapter 15, the periods of rapid technological change are matched by periods when no such rapid change occurs. Its when a period of extensive accumulation has lasted for some time, and existing supplies of labour-power have started to get used up, pushing up wages, and squeezing profits, that firms start to seek out new labour-saving technologies, to overcome that problem. It takes time for such new technologies to be developed, and then turned into practical machines.

But, secondly, as Marx also describes, during the periods of intensive accumulation, the falling value of fixed capital, and of circulating capital causes the annual rate and mass of profit to rise. At a certain point, therefore, although each new machine may replace two older machines, the increased mass of profit produced, means that capital is accumulated at a faster rate, so that although maybe only one replacement machine was required, an additional one, two or more machines is also employed.

As Marx sets out, in Capital II, this process is facilitated by the fact that for each firm the money hoard set aside for the replacement of worn out fixed capital, becomes merged with the money hoard of realised profits set aside for accumulation, so that at one time, funds intended for replacement are used for accumulation, and vice versa. At the level of the total social capital, this is intensified by the pooling of these money hoards and reserves by the banks, so that money-capital can be provided to finance such expansion.

In Capital II, Marx sets out that the potential disproportion discussed above, arising from fixed capital wearing out at different rates, and thereby causing an overproduction, is not one limited to capitalist production. It will apply under socialist production too. As a result, Marx says, it will always be necessary under socialist production to have a degree of overproduction. However, where under capitalism such overproduction is a potential cause of crisis, under socialism it would be a boon, an amount of additional production that could be utilised for the benefit of society.

“This sort of over-production is tantamount to control by society over the material means of its own reproduction. But within capitalist society it is an element of anarchy.”

(Capital II, Chapter 20)

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