Marx, Ricardo and Michael Roberts

The following is the full version of a letter sent to the Weekly Worker, in response to an article by Michael Roberts on investment.

Michael Roberts says,

“What really drives investment in modern capitalist economies, where private capital investment dominates, is the profitability of projects. Private investment has failed to deliver because profitability is too low, but even so the public sector must not interfere.”

Its certainly true that capital will not knowingly advance additional capital in some endeavour that is loss-making (though as Marx sets out in analysing rent, it may even do that under some conditions, for example, where the additional output value makes a contribution towards existing fixed capital costs), but the thrust of Michael's argument here is not Marxist, but Ricardian. Michael seems to have ruled out the actual driving force of capital – to self-expand, and the need to do so due to the impulsion of competition from other capitals – and replaced it with the Ricardian notion that additional capital will only be advanced where it is incentivised to do so, by a higher rate of profit, and higher prices to effect that higher rate of profit.

In Capital III, in discussing rent, and the advance of capital, Marx makes that clear, in his critique of Ricardo's argument. Ricardo, like Michael, argued that capital would only be incentivised to advance additional capital, if agricultural prices, and thereby the rate of agricultural profits rose. But, this is wrong, Marx says.

“Finally, the extension of cultivation to larger areas — aside from the case just mentioned, in which recourse must be had to soil inferior than that cultivated hitherto — to the various kinds of soil from A to D, thus, for instance, the cultivation of larger tracts of B and C does not by any means presuppose a previous rise in grain prices any more than the preceding annual expansion of cotton spinning, for instance, requires a constant rise in yarn prices. Although considerable rise or fall in market-prices affects the volume of production, regardless of it there is in agriculture (just as in all other capitalistically operated lines of production) nevertheless a continuous relative over-production, in itself identical with accumulation, even at those average prices whose level has neither a retarding nor exceptionally stimulating effect on production. Under other modes of production this relative overproduction is effected directly by the population increase, and in colonies by steady immigration. The demand increases constantly, and, in anticipation of this new capital is continually invested in new land, although this varies with the circumstances for different agricultural products. It is the formation of new capitals which in itself brings this about. But so far as the individual capitalist is concerned, he measures the volume of his production by that of his available capital, to the extent that he can still control it himself. His aim is to capture as big a portion as possible of the market. Should there be any over-production, he will not take the blame upon himself, but places it upon his competitors. The individual capitalist may expand his production by appropriating a larger aliquot share of the existing market or by expanding the market itself.” 

(Capital III, Chapter 39)

Marx's reference to "average prices" here, as he sets out in Theories of Surplus Value means the price of production, i.e. cost price plus average profit, around which the market price revolves.

Capital according to Marx's analysis does not require a higher rate of profit to persuade it to advance additional capital, as Ricardo and Michael believe, but merely requires that it can make additional profit, i.e. that it can increase the mass of profit realised. The condition for that is that it should believe that a market exists for the new output that will result from such an advance of additional capital. In fact, in the chapters on rent, Capital III, Chapter 37-47, (Marx expands on this in Theories of Surplus Value), Marx deals in some considerable detail with the situation in which additional capital invested on the land results in a falling marginal productivity of capital, which results in a lower rate of profit on such new advances of capital.

But, capital is driven to advance additional sums, because its primary goal is its own self-expansion, and competition from other capitals, is enough to force it to act to expand its own market share, or to not see that share fall, as the size of the market itself expands. That is particularly the case now that capital is dominated by huge socialised capitals, rather than the private capitals that predominated in the early 19th century. As Marx says,

“Concentration increases simultaneously, because beyond certain limits a large capital with a small rate of profit accumulates faster than a small capital with a large rate of profit...

The so-called plethora of capital always applies essentially to a plethora of the capital for which the fall in the rate of profit is not compensated through the mass of profit.”

(Capital III, Chapter 15)

And, as soon as the economy becomes dominated by these huge socialised capitals, Marx says, 

“The rate of profit, i.e., the relative increment of capital, is above all important to all new offshoots of capital seeking to find an independent place for themselves. And as soon as formation of capital were to fall into the hands of a few established big capitals, for which the mass of profit compensates for the falling rate of profit, the vital flame of production would be altogether extinguished. It would die out.” 

(ibid)

Andrew Kliman is right, when he says,

“Companies' decisions about how much output to produce are based on projections of demand for the output.”

 (Note 4, Page 16, The Failure Of Capitalist Production)

If a large company sees the demand for its output rising sharply, it will increase its investment so as to be able to meet that demand, even if the rate of profit it makes in supplying this new output is lower than that it currently enjoys on its current production. It will do so, for the reasons Marx sets out above, i.e. capital is concerned to expand the mass of profit it realises, and this is increasingly the case as these capitals become larger. It may well be the case, however, given the huge amounts of capital now involved, particularly in some spheres of production where the turnover of capital is much lower than the average, that firms will wait to see that any increase in demand is likely to be permanent, before making the required investment. Take this view, for example, on investment in copper production.

“As a result of booming demand, operating profits in the copper industry have grown dramatically – operating margins up from 8% in 2001 to 38% in 2005. So why does copper supply not increase faster, as the industry clearly has plenty of cash to invest? To answer this question, we need to look at the basic economics behind investment decisions in the copper industry. Much of the added value in production of copper arises in the mining stage: only 25% of added value is in smelting / refining but the rest is in extraction and processing of copper ore. Thus the key supply constraint is the limited number of mines. When copper demand was lower, there was a surplus of production capacity and additional supply could be added simply by increasing throughput from existing mines. But supply cannot be increased indefinitely without additional copper production capacity, i.e. new mines. Despite the prevailing very high level of copper prices, copper supply from mines has not risen as fast as might be expected.

Copper Industry Investors Look at Long Term Prices

The economic theory is that when prices rise due to higher demand, supply will increase as it becomes possible to operate marginally economic mines at a profit due to the higher prices. The problem in practice is that copper is supplied from facilities that require huge investment in the mine and supporting infrastructure, and a major investment decision is required. A short-term rise in copper prices – even when sustained over several months – does not necessarily change industry investors’ perceptions of the long-term copper price. Mining companies will not invest in a project unless their expectations of long-term prices are at a level where the project becomes attractive.”

(International Copper Federation)

In fact, as I have set out elsewhere, in discussing the material foundations of the long wave cycle, it is this fact, which explains why these large scale capital investments can become bunched, and why then the resultant output leads eventually to an overproduction, and collapse in market prices. It takes around seven years to get a copper mine up and producing, and around 12-13 years before its working at optimal capacity. That is why all of the new capacity that was eventually put in place as a result of the sharp rise in demand as the new long wave boom commenced in 1999, resulted in the overproduction of copper, oil, iron ore, and other primary products that resulted in the collapse in their prices in 2014. 

As Marx put it above,

“It is the formation of new capitals which in itself brings this about. But so far as the individual capitalist is concerned, he measures the volume of his production by that of his available capital, to the extent that he can still control it himself. His aim is to capture as big a portion as possible of the market. Should there be any over-production, he will not take the blame upon himself, but places it upon his competitors.”

Take two shops on a high street, providing snacks for workers in surrounding businesses. Both shops employ capital of £100,000, and employ 2 workers. Both shops make £10,000 of profit, or a rate of profit of 10%. Suppose, the owners of the shops become aware of a large new business that employs 1,000 workers, all of whom are potential customers, that would double the turnover of the shops. To take advantage both shops would have to double the capital employed, but on this new capital, they expect now to make only an 8% rate of profit. Will they choose then not to invest the additional sum, as Ricardo and Michael suggest would be the case? Of course, they will choose to invest this additional capital, for the reasons Marx sets out.

If one of the shops chooses not to invest the additional capital, because it stubbornly refuses to accept an 8% rather than a 10% rate of profit, the other will do so, in order to capture a larger share of the market. That is the fundamental nature of capital, as analysed by Marx. Shop A, might invest its additional capital, and now double its turnover. In fact, if all of the new demand cannot be satisfied, because B does not invest additional capital, market prices may rise, so that realised profits rise anyway, so that A makes £20,000 of profit, whilst B, continues to make, its original £10,000. But, A will then quickly accumulate these profits, so as to expand its capacity and satisfy all of the new demand. It will then make £24,000 profit on its capital of £300,000. However, it will now control 75% of the market, and quickly use that control to undermine shop B.

The same is true if we consider two large motor manufacturers such as Ford and Toyota. Are we really to believe that if these two corporate giants saw a huge rise in demand for cars, and the potential to realise large amounts of additional profits, that Toyota would say, we will not invest additional capital, because it will only produce 8% profit, rather than the 10%, we currently make, and thereby leave it open for Ford to make that investment and thereby corner the additional market share? Of course, they would not do that, especially given that producing on this larger scale usually, in the longer-term, reduces the cost of production, and so opens the possibility of a higher rate of profit.

Similarly, businesses may invest in fixed capital, where the market is not expanding. They would do so, for the alternative reason that new developments mean that existing levels of output can be produced more efficiently. In other words, this would be intensive rather than extensive accumulation of capital.

The investment plans of huge socialised capitals extend over very long periods, which is why they look to projections of increases in demand for that output, and why they require the state to provide relatively stable environments for investment over these prolonged timescales. Even so, they look for such stability and increased demand to persist for some time, before committing themselves to additional investment to increase output, which is why events like Brexit that cause uncertainty, act to deter investment plans.  It is why in the era of the domination of this large-scale socialised capital, the state takes the form of the social-democratic state, and social-democracy is the underlying basis for the form of bourgeois democracy.