Monday, 31 October 2016

Moral Depreciation

Moral Depreciation is a special form of depreciation. All depreciation is a reduction in use value, and consequently value that arises outside the labour process. It, therefore, represents a capital loss. Where moral depreciation differs from depreciation is that the former arises not as a result of any physical deterioration of the constant capital. Its use value declines, relatively, because some new replacement for it provides greater use value. Its value declines either because of this relative decline in use value, or else because rising social productivity means that less labour-time is required for its production. This means that moral depreciation has different consequences than normal depreciation.

Moral depreciation can occur where a new, more productive type of machine is introduced. Suppose machine type A is currently in use. Its value is £1,000, and it is expected to be able to produce, over its lifetime, 10,000 units of output. In that case, it transfers £0.10 of its value to each unit of output, as wear and tear. Now, if a new machine, type B, with the same value of £1,000, but which is expected to produce 20,000 units of output, during its lifetime, is introduced, it will only transfer £0.05 of its value to each unit of output.

In effect, the use value, and value of machine type A has been halved, irrespective of any deterioration in its actual condition it might have experienced. Its use value has halved, because it is only capable of producing half as many units of output as machine type B. Irrespective of its historic cost, i.e. its value or market price, at the time it was purchased, the value of machine type A, has also, therefore, been halved overnight. Its value is now only £500, and this capital has, thereby suffered a capital loss of £500.

Moral depreciation can also occur, where a rise in productivity causes a reduction in the labour-time required for production of the constant capital, and consequently a fall in its value. For example, if machine type A, above, required 100 hours of labour-time to produce the wood, metal, and other materials required for its construction, representing a value of £500, and also required a further 100 hours of labour-time undertaken by the machine maker, for its construction, again representing a value of £500, the value of the machine could fall if either less labour-time is required for the materials, used in its construction, or in the labour-time itself required for its own construction.

If rising productivity means that the cost of wood, metal and other materials used in the machine falls to £250, and if productivity in the machine building industry (perhaps itself due to the introduction of some new machine) rises so that only £250 of new additional value is added, the value of the machine will fall to £500. Again, irrespective of the historic cost of such machines, their value too will be reduced to £500, again representing a £500 capital loss.

But, again demonstrating the difference between depreciation and wear and tear, this moral depreciation does not only apply to fixed capital. In Capital III, Chapter 6, Marx sets out a series of examples of appreciation and depreciation of circulating capital. Also, in Capital III, Chapters 48 and 49, and elsewhere, Marx says that the constant capital must be replaced "in kind", in other words must be physically replaced. However, he goes on to qualify this by adding “at least in effectiveness”. In other words, machine A can be replaced by the more productive machine B, but could not be replaced by a less productive machine type C, if social reproduction were to continue on at least the same scale. Moreover, as Marx says, this could not happen in practice, because firms never choose to replace one method of production with a less efficient method of production.

The value of raw materials held in stock can be morally depreciated, because rising productivity means that they can be now produced more efficiently, and their current reproduction cost is, therefore, less than their historic cost, again representing a capital loss. As Marx sets out in Capital III, Chapter 6, this can occur the other way too, creating a capital gain, if for some particular commodity productivity falls, and the current reproduction cost rises.

“Appreciation and depreciation may affect either constant or variable capital, or both, and in the case of constant capital it may, in turn, affect either the fixed, or the circulating portion, or both...

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.”

(Capital III, Chapter 6) 

But, the value of raw materials held in stock may be morally depreciated for the same reason as that applying to fixed capital where a new machine is introduced. In other words, a new alternative material may be introduced, which is either more effective, or else is cheaper. Iron rails were replaced on railways by the more effective and durable steel rails, for example, and any iron rails, held in stock by railroad construction companies, would thereby be morally depreciated.

As Marx also suggests in the quote above, labour-power can also be depreciated in this manner. Workers may have negotiated a wage for the current year, which would be based upon the value of labour-power. That would then be the historic cost of labour-power, paid by the firm. But, if rising productivity means the value of labour-power falls, because the value of means of consumption falls, the actual value of the labour-power employed by the capital will be less than what is paid in wages, equal to the variable-capital. It would again represent a capital loss for the firm. This is one reason that modern large-scale capital does not like deflation, and prefers an element of inflation, so that as social productivity rises, and the value of labour-power falls, the rate of surplus value can increase without the need to introduce reductions in nominal wages.

This moral depreciation has different consequences to those of ordinary depreciation. A firm that has constant capital with a value of £1,000, might see it depreciate by 10%. That depreciation might be because some of it is eaten by mice, is spoiled by damp etc., or may be because the entire productive supply loses some of its use value. For example, a market trader might find that all of their stock of produce deteriorates during the day, so that they have to sell it for less money; a producer of clothing may have a stock of material of one design or colour, which becomes unfashionable, so that the clothes they produce with the material have less use value, and have to be sold at a lower price

In each of these cases, the firm will have suffered a capital loss equal to the difference between the historic cost of the capital, and its current value. When they come to replace the consumed capital, however, they will again have to cover its full value, which they can only do via an injection of additional capital, equal to this capital loss. But, this is not the case with moral depreciation.

If a firm employs a machine with a value of £1,000, then, if the machine is depreciated by 10%, because it lies idle, and is not maintained, when it is replaced, the firm will again have to pay £1,000 for the replacement machine. The firm will have suffered a £100 capital loss. However, suppose the machine suffers a moral depreciation of 10%, because a rise in social productivity means that it can now be produced for only £900. The firm again suffers a £100 capital loss. If it came to sell its machine, it would only be able to get £900 for it.

In addition, if the machine gives up 10% of its initial value, each year, as wear and tear, then instead of it transferring £100 of value to the end product, it will now only give up £90 per year – 10% of its now depreciated value. Over ten years, a sum of £900, rather than £1,000, will have been built up in the fund for its replacement. However, a new machine, now only costs £900, rather than £1,000, so that the fund for replacement, built up from the value transferred to the end product, and thereby reproduced within it, is now adequate to acquire the replacement machine without any injection of additional capital. This applies also to the circulating constant capital in terms of the difference between a normal depreciation of value, as opposed to a moral depreciation of value.

In other words, if the value of cotton falls, due to a rise in productivity in cotton production, the value of the cotton held in stock, work in progress, or in the final product yet unsold, is likewise depreciated. It transfers less value to the final product, but less value is, in turn, required, to replace this constant capital, as a result of the same reduction in its value, so that the value of the now depreciated constant capital is still reproduced in the end product. This is the true meaning of the circuit C – M – C. In terms of a simple reproduction of the capital.  If a producer holds a stock of materials C, with a value of £1,000, if this material falls in value to £800, it now only transfers this £800 of value to the end product, which is then realised in money, as £800 of money-capital. But, this £800 of money-capital, is now adequate to replace the original mass of consumed commodities.

But, as Marx sets out in Capital III, Chapter 6, this moral depreciation has a significant consequence for the rate of profit. This can again be compared with the situation in relation to a normal depreciation. Suppose a capital is comprised of a building with a value of £100,000, a machine with a value of £10,000, materials comprising £5,000, labour-power of £3,000, with a 100% rate of surplus value. The capital turns over once per year. The building is expected to last for 100 years, and the machine for 10 years, so that each transfers £1,000 per annum to the value of the end product in wear and tear.

We would then have for the annual rate of profit:

Advanced capital of £100,000 (building) + £10,000 machine + £10,000 materials + £3,000 wages = £123,000. The surplus value is £3,000 giving an annual rate of profit of 2.44%.

The rate of profit/profit margin is:

Laid out capital of £10,000 materials + £3,000 wages + £2,000 wear and tear of fixed capital = £15,000. The surplus is value is £3,000 giving a rate of profit/profit margin of 20%. The value of output is £18,000.

Suppose that the materials are depreciated by £2,000. The firm suffers a £2,000 capital loss. These materials can only transfer £8,000 of value to the end product. The same would be true if the machine suffered a depreciation, and required £2,000 of additional capital for its repair etc. In this case, the £2,000 capital injection is required immediately. In the case of a depreciation of the materials, it is only when they come to be physically replaced that the £2,000 of additional capital is required. The firm now sells its output for £16,000. £3,000 is taken as profit, £2,000 is placed in the fund for replacement of fixed capital, leaving £11,000 to reproduce the £13,000 of circulating capital required. So, at this point, an additional £2,000 of capital would have to be injected.

Now consider the situation where instead of such a normal depreciation, there is a moral deprecation of the capital. We will assume that it is the material that suffers a 20% depreciation in its value, due to a rise in productivity, in its production. The situation in respect of the annual rate of profit would then be:

Advanced capital of £100,000 (building) + £8,000 material + £3,000 wages = £111,000. The surplus value remains £3,000 so the annual rate of profit rises to 2.70%.

The rate of profit/profit margin would be:

Laid out capital of £8,000 materials + £3,000 wages + £2,000 wear and tear = £13,000. Surplus value remains £3,000 giving a rate of profit of 23.08%. The value of output falls to £16,000.

However, suppose that all of the surplus value is accumulated as additional capital. If the capital suffers a moral depreciation, any quantity of surplus value will now buy more of it. This indeed is what is reflected in the rise in the rate of profit from 20% to 23.08%. If previously, £10,000 bought 10,000 units of material, these 10,000 units now have a value of only £8,000, and this is passed on into the value of the end product, C – M – C. The £8,000 value realised in the end product value, now reproduces these 10,000 units of material.

If 200 workers are employed to process these materials, then the profit of £3,000 would have enabled an additional 2,000 units of material to be processed, and an additional 40 workers to be employed to process them. But, with the lower value of materials, the £3,000 of profit will now enable an additional 2,300 units of material to be processed, and an additional 46 workers to be employed to process them. 

So, in both cases, the capitals involved suffer a capital loss of £2,000 due to the depreciation of their capital. However, in the case of the capital where its capital suffers a normal depreciation, there is no variation in its rate of profit, which remains 20%, whereas in the case of the capital which suffers a moral depreciation of its capital, due a fall in the value of its materials, this capital loss is offset by a rise in its rate of profit from 20% to 23.07%, because its profit is now able to buy a greater quantity of material and labour-power.

Capital III, Chapter 49 - Part 14

But, it is when the total social production is considered that the real confusion begins.

“The value of the entire portion of the product which is consumed as revenue in the form of wages, profit and rent (it is entirely immaterial whether the consumption is individual or productive), indeed, completely resolves itself under analysis into the sum of values consisting of wages plus profit plus rent, that is, into the total value of the three revenues, although the value of this portion of the product, just like that which does not enter into revenue, contains a value portion = C, equal to the value of the constant capital contained in these portions, and thus prima facie cannot be limited by the value of the revenue.” (p 841)

In other words, the existence of intermediate production causes further confusion. As far as the national output and national income data is concerned, the issue seems to be resolved, because the value of the final output is seen to be made up both of the value added, plus the value of intermediate production. This is the point made earlier, that final production is made up of a number of stages of intermediate production, where, at each stage, additional labour adds value to the intermediate production of that stage. For example, the grain produced by the farmer is intermediate production from the perspective of the miller, who adds value by processing the grain into flour. However, from the perspective of the baker, the flour produced by the miller is only intermediate production, to which the baker adds value in producing bread.

The delusion is thereby created that by taking into consideration all of this intermediate production, which provides constant capital, consumed in the production of the annual product, that the matter of the reproduction of constant capital has thereby been accounted for. But, of course, it hasn't. All that has been accounted for is the value of the constant capital in the annual product, not in the Gross Output. In other words, all that has been accounted for is the new value produced in the form of constant capital, i.e. I (v + s).

“The phrase: that which appears as revenue for one constitutes capital for another, relieves one of the necessity for any further reflection. But how, then, the old capital can be replaced when the value of the entire product is consumable in the form of revenue; and how the value of the product of each individual capital can be equal to the value sum of the three revenues plus C, constant capital, whereas the sum of the values of the products of all capitals is equal to the value sum of the three revenues plus 0 — this appears, of course, as an insoluble riddle and must be solved by declaring that the analysis is completely incapable of unravelling the simple elements of price, and must be content to go around in a vicious circle making a spurious advance ad infinitum. Thus, that which appears as constant capital may be resolved into wages, profit and rent, but the commodity-values in which wages, profit and rent appear, are determined in their turn by wages, profit and rent, and so forth ad infinitum.” (p 842)

So, Smith and others after him, attempted to resolve this contradiction by the subterfuge that the constant capital itself was divisible into these factor incomes. This is essentially the position outlined above, in respect of the intermediate production. But, as Marx says above, this is clearly not possible because this merely leads to a vicious circle that goes on to infinity.

I can argue that the constant capital of the baker comprises the flour of the miller, and thereby refer to the miller's income, and when its pointed out that the miller also had constant capital, in the form of the grain, I can point out that this was the product of the farmer, and constituted his income. But, the grain was not solely the product of the farmer's labour. It also comprised constant capital in the shape of seed, fertiliser, machinery and so on.

I might then argue that all of this constant capital employed by the farmer formed income for other capitals, producing seed, fertiliser, and equipment, but this process can be continued forever, without any possibility of finding some production, which was undertaken solely by labour, and without any constant capital!

Sunday, 30 October 2016

Profit, Rent, Interest and Asset Prices - Part 12 of 19

When it comes to the price of capital, the rate of interest, then, as Marx says, there is no objectively determinable natural price, although the limits within which it fluctuates are themselves set by objectively determined factors. But, Marx wants to establish rent as an objectively determinable quantum, even though land, like capital, has no value, i.e. neither capital nor land are the product of labour.

The economic basis of rent is surplus profit. Total Rent divides into Absolute Rent and Differential Rent. Absolute Rent arises, because of a surplus profit in agriculture, compared to industry, and this surplus profit exists, because the organic composition of capital, in agriculture, is lower than in industry. As Marx describes, in Volume III, in discussing the formulation of prices of production, and the general annual rate of profit, surplus profits exist across all industries, but, the existence of this multiplicity of annual rates of profit causes capital to move from low profit areas to high profit areas. The consequence is that the supply of commodities in the latter areas increases reducing market prices until they reach the price of production, whereas the supply of commodities in the former areas declines, causing market prices to rise until they reach the price of production.

Marx describes it as follows.

Industry

c 80 + v 20 + s 10 = 110, r' = 10%.

Agriculture

c 60 + v 40 + s 20 = 120, r' = 20%.

If agriculture were like other industries, capital would flow into it, in search of this higher rate of profit. Agricultural prices would fall and industrial prices rise until both settled at the price of production of 115, where both sectors would make an annual rate of profit of 15%. But, landed property prevents such a free flow of capital. The landlord says, to the capitalist farmer, you have invested 100 of capital, and like other capitalists you are entitled to a 10% annual rate of profit. But, the market value of your output is 120, so I will take 10 as an absolute rent, which means you will still make that average annual rate of profit.

On this basis, the general annual rate of profit is that set in industry of 10%. Both industrial and agricultural capitalist obtain this same average rate, whilst the landlord appropriates the surplus profit of 10, as Absolute Rent. The basis of the Absolute Rent then is the difference between the market value of output (120) and the price of production of that output (110).

If the organic composition of capital in agriculture were then to rise, on average, above that in industry, this economic basis of absolute rent would disappear, Marx says. However, that does not mean that Absolute Rent itself would disappear. Surplus profits can exist for reasons other than the organic composition of capital being lower in one sphere than the average. For one thing, as Marx sets out in Capital III, and in Theories of Surplus Value, where the rate of turnover of capital is higher than the average rate of turnover, the annual rate of profit will be higher than the general annual rate of profit. That, however, is also unlikely to apply in agriculture, where the production time exceeds the working period, because, for example, crops must grow, before they can be harvested, animals must be fattened before they can be slaughtered. It may be the case in mining, where large scale, fixed capital investment may result in large quantities of output being produced in shorter and shorter time periods, and sent to market.

But, surplus profits can also arise as a consequence of monopoly prices. For example, a work of art may obtain a market price way above its value, simply on the basis that it cannot be reproduced; wine produced in a specific region may obtain a higher market price, for the same reason that the specific land on which it is produced is also limited in supply. Because of the existence of landed property, and because landowners will demand some minimum level of Absolute Rent, therefore, even if the organic composition of capital were to become higher in agriculture than in industry, agricultural surplus profits would continue to exist, and Absolute Rent, would absorb it.

After all, it will remain the case, as Marx argues against Ricardo, that the landlord will have no reason to lease their land to the farmer for nothing. It will still remain the case that the landlord will be able to withhold their land, until the farmer agrees to pay the rent, and the condition for the farmer being able to pay the rent will be that the market prices of agricultural commodities rise to a level whereby the farmer can pay the rent and still make the average profit.

Assume that we have a situation where:

Industry

c 60 + v 40 + s 20 = 120

Agriculture

c 70 + v 30 + s 15 = 115

Under these conditions, capital would leave agriculture and enter industrial production. The supply of industrial commodities would rise, and their prices would fall until they reached 117.5, where the same rate of profit would be made as in agriculture, with an average rate of profit of 17.5%. Similarly, the supply of agricultural commodities would decline, as capital left this sphere, and agricultural prices would rise, until the price reached 117.5.

However, the landlord would still demand rent for their land, just as a money-lending capitalist always demands interest on their money-capital from the industrial capitalist. If the landlord demands an absolute rent of 10, then capital will continue to migrate from agriculture to industry, reducing the supply of agricultural commodities until their price reaches a level whereby this absolute rent can be paid, and the farmer can still achieve the average profit.

The average rate of profit would have to fall to 12.5%. That would imply a significant movement of capital out of agricultural production, and into industrial production, thereby raising the supply of industrial commodities and reducing their prices from 120 to 112.5, and simultaneously reducing the supply of agricultural products whilst raising their price from 115 to 122.5. So, we would have

Industry

c 60 + v 40 = k 100 + p 12.5 = 112.5

Agriculture

c 70 + v 30 = k 100 + p 12.5 + r 10 = 122.5

Its clear then that a situation where the organic composition of capital is higher in agriculture than in industry requires a higher price of agricultural products, in order that an absolute rent can be paid, but it is by no means impossible for such an absolute rent to arise. It simply requires that a larger mass of land is withheld from production, so that agricultural production is reduced, and so that the supply of agricultural commodities is restricted, so that their prices rise to such a level that both absolute rent and average profit are obtained.

By the same token, it implies a higher investment of capital in industrial production than would otherwise have been the case, and a consequent increased supply of industrial commodities, along with a lower price for industrial products.

But, now we have the problem that Marx wanted to avoid. If Absolute Rent is objectively determinable as the difference between market value and price of production, the question of why the Absolute Rent is £10 rather than £20, is itself resolved, as previously the question of why the average annual rate of profit was 10%, rather than 20%, was resolved. The annual rate of profit was seen to be 10% rather than 20%, because the objectively determined mass of surplus value, as a proportion of the objectively determined value of advanced constant and variable capital was 10%. Similarly, the Absolute Rent is £10 rather than £20, because the objectively determined market value of agricultural products, is £10 more than the objectively determined price of production of those products.

But, what happens when the organic composition of capital is higher in agriculture than in industry? In that case, the market value of agricultural output will be lower than the price of production of that output. Yet, the landowners will still demand an absolute rent, and will, as shown above be able to extract it, simply on the basis of being able to withhold land from the market, and thereby driving up agricultural prices until they reach a level whereby they produce a surplus profit out of which the absolute rent is paid.

The basis of such an Absolute Rent, arising from surplus profits resulting from a monopoly price is then clear, but there is no longer any objective basis for determining what the level of this Absolute Rent should be. It then comes down, to a subjective decision by the owners of landed property, as with the owners of loanable money-capital, of what minimum level of revenue they are prepared to accept in order to supply their particular asset. Below a particular rate of interest, the owners of money-capital may decide to use their money hoards for consumption or speculation, and similarly, below a particular level of rent, the owners of land may decide to leave it uncultivated, to use it for recreational purposes and so on rather than to make it available for rent or purchase.

Moreover, if the owners of landed property are able to levy an Absolute Rent on the basis of such monopoly prices, where the organic composition of capital in agriculture is higher than in industry, they can also do so where the organic composition of capital in agriculture is lower than in industry. In other words, the actual Absolute Rent levied by the landowner might then comprise an amount of surplus profit arising from the lower organic composition of capital in agriculture, and an amount of surplus profit arising from monopoly prices. In that case, the actual amount of Absolute Rent becomes no more objectively determined than is the case for the rate of interest.

Capital III, Chapter 49 - Part 13

By contrast, the Gross Income is equal to the 1400 kg. of grain produced, which represented the new value. It forms the total revenue paid as wages to workers and profits to capitalists. The Net Income is equal to the 400 kg. of grain that constituted the surplus value. In other words, 1100 kg. of grain had been used for production, and so constituted the cost of production. The Net Income, therefore, was the surplus of production over this cost of production.

“The gross income is that portion of value and that portion of the gross product measured by it which remains after deducting that portion of value and that portion of the product of total production measured by it which replaces the constant capital advanced and consumed in production. The gross income, then, is equal to wages (or the portion of the product destined to again become the income of the labourer) + profit + rent. The net income, on the other hand, is the surplus-value, and thus the surplus-product, which remains after deducting wages, and which, in fact, thus represents the surplus-value realised by capital and to be divided with the landlord, and the surplus-product measured by it.” (p 840)

The value of each commodity, and, therefore, of the total commodity-product, divides into two parts. One part constitutes capital, whereas the other constitutes revenue. A part of the value, which represents the constant capital, must always be reproduced as capital. The other part, which is equal to the new value created, however, constitutes revenue, and is paid as wages, profits, interest and rent. This is true, despite the fact that from the perspective of the capitalist, a portion of this new value, equal to wages, always flows back to them, in the form of variable capital, equally destined to be laid out once more as productive-capital, as is the constant capital.

“Viewing the income of the whole society, national income consists of wages plus profit plus rent, thus, of the gross income. But even this is an abstraction to the extent that the entire society, on the basis of capitalist production, bases itself on the capitalist standpoint and thereby considers only the income resolved into profit and rent as net income. 

On the other hand, the fantasy of men like Say, to the effect that the entire yield, the entire gross output, resolves itself into the net income of the nation or cannot be distinguished from it, that this distinction therefore disappears from the national viewpoint, is but the inevitable and ultimate expression of the absurd dogma pervading political economy since Adam Smith, that in the final analysis the value of commodities resolves itself completely into income, into wages, profit and rent.” (p 840-1)

As described previously, this fallacy that national output can be equated with National Income, just as the value of each commodity can be divided into factor incomes – wages, profits, interest and rent – continues today.

An examination of an individual capital shows that this is impossible, because it is obvious that in addition to the incomes received as wages by the firm's workers, the profits by the entrepreneur, the interest by the shareholders, and the rent by the landlord, the firm must also lay out additional capital for the purchase of machines, materials etc. In other words, for constant capital, and this must also be recovered in the price of the commodity.

Yet, in fact, orthodox economics has difficulty even accepting this obvious fact. It attempts to avoid the problem by what is effectively a deception, which again stems back to Adam Smith as well as to Say.

In respect of the latter, Marx quotes Ricardo, to show how obviously ridiculous is the idea that the value of output can be reduced to factor incomes.

“Ricardo makes the following very apt comment on thoughtless Say: "Of net produce and gross produce, M. Say speaks as follows: ‘The whole value produced is the gross produce; this value, after deducting from it the cost of production, is the net produce.’ (Vol. II, p. 491.) There can, then, be no net produce, because the cost of production, according to M. Say, consists of rent, wages and profits. On page 508 he says: ‘The value of a product, the value of a productive service, the value of the cost of production, are all, then, similar values, whenever things are left to their natural course.’ Take a whole from a whole, and nothing remains." (Ricardo, Principles, Chapter XXII, p.512, Note.) — By the way we shall see later that Ricardo now refuted Smith’s false analysis of commodity-price, its reduction to the sum of the values of the revenues. He does not bother with it, and accepts its correctness so far in his analysis that he "abstracts" from the constant portion of the value of commodities. He also falls back into the same way of looking at things from time to time.” (Note 51, p 841)

Saturday, 29 October 2016

Capital III, Chapter 49 - Part 12

If we take a situation like that analysed by the Physiocrats, the capitalist farmer may have capital solely in the form of agricultural commodities. Let's assume this can be represented solely by a quantity of grain. If we assume that 100 kg. of grain is required as seed (c), and 1,000 kg. is required as food to reproduce the labour-power of their workers (v), they can begin production with a capital made up of 1100 kg. of grain.

The 100 kg. of grain is planted by the workers, and each week for 50 weeks, as they tend and ultimately harvest the grain, they are paid 200 kg. of grain as wages, from the farmer's store constituting his variable capital. If we assume no changes in productivity, so that the value of the grain, which here also constitutes the form of the constant and variable capital, remains constant, then, at the end of the 50 weeks, 1,500 kg. of grain may be produced.

Out of this 1,500 kg., 100 kg. must be used to reproduce the constant capital consumed in its production, whilst 1,000 kg. must be put in store as variable capital, ready to pay the wages of the workers in the coming year. This leaves 400 kg. of grain as a surplus product, and surplus value in the hands of the farmer.

The new value, i.e. the annual product, or national income, produced by the workers was contained in the 1,400 kg. of grain additional to the 100 kg. required to reproduce the constant capital. Of this 1,400 kg., 1,000 kg. is required to reproduce the workers' labour-power, or else social reproduction cannot continue. This 1,000 kg. is equal to the 1,000 kg. previously laid out as variable capital. The other 400 kg. constitutes surplus value.

Assuming social reproduction occurs on the same scale, 100 kg. must reproduce the constant capital, and so cannot be consumed. It cannot form an income or revenue for anyone. Only the 1400 kg. of new value can be consumed, and thereby forms revenue – wages (1,000 kg.) and profit (400 kg.).

“In order to avoid unnecessary difficulty, one should distinguish gross output and net output from gross income and net income. 

The gross output, or gross product, is the total reproduced product. With the exception of the employed but not consumed portion of fixed capital, the value of the gross output, or gross product, equals the value of capital advanced and consumed in production, that is, constant and variable capital plus surplus-value, which resolves itself into profit and rent. Or, if we consider the product of the total social capital instead of that of an individual capital, the gross output equals the material elements forming the constant and variable capital, plus the material elements of the surplus-product in which profit and rent are represented.” (p 840)

In other words, in the example above, the gross output is equal to the 1500 kg. of grain – 100 kg. c + 1000 kg. v + 400 kg. s. If we measured this output in terms of the abstract labour-time required for its production, we might have in labour hours:

100 c + 1000 v + 400 s = 1500.

If a £1 gold coin has a value of 10 labour hours, the above might be expressed as an exchange value or price, as:

10 c + 100 v + 40 s = £150.

In this example, no fixed capital is used, but if it was, the value of the fixed capital itself would not change these figures. The only element of the fixed capital that would be included is the value of the wear and tear on it.

So, if a plough with an exchange value of £100 was used, in the production, this would not change the figure above. However, if this plough loses 10% of its value each year, as a consequence of its use in production, i.e. wear and tear, this would affect the numbers, because the wear and tear here forms part of the value of the output.

We would then have:

10 (d) + 10 c + 100 v + 40 s = £160.

The 10 (d) or value of wear and tear need not be immediately used, but this amount of value must be reproduced and hoarded so that the fixed capital itself can ultimately be replaced when it is completely exhausted.

Northern Soul Classics - Candle - Doni Burdick

Friday, 28 October 2016

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Depreciation

Depreciation is often confused with the wear and tear of fixed capital. 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.

In fact, as Marx set out in Capital I, it is the fact that an element of productive-capital is not used that causes it to depreciate. A machine, for example, when it is being used, is also, as part of that usage, cleaned and maintained. It is regularly oiled and greased etc. That keeps its working parts lubricated and functioning, and prevents the material of the machine from rusting etc. Where usage causes a machine or some other piece of fixed capital to lose some of its use value, and so value, as a result of wear and tear, that same usage acts to prevent the fixed capital from becoming depreciated. Likewise, a lack of usage will see a machine depreciate. Its fabric will rust, its moving parts will begin to seize up, and so on.

But, it is not just fixed capital that suffers depreciation. In Capital II, Marx makes the point that materials kept as a productive supply still constitute circulating rather than fixed capital, or to be more precise, they exist as commodity-capital rather than productive-capital, and so represent capital in circulation, rather than circulating capital. For example, a textile company might buy a quantity of cloth, and of yarn. It will not process all of this material in one labour process. The same applies to a business that buys coal to power its steam engines to provide power to its machines. It might buy in a tonne of coal, whilst only using a tenth of this amount each day.

But, Marx says, in both cases, these materials constitute circulating rather than fixed capital. For the material that is actually consumed in the labour process, it is all consumed. It transfers all of its use value, and its value to the end product during that process, leaving none fixed within itself, as is the case with fixed capital. A textile business might process 100 metres of cloth, and 1 kilo of yarn in producing garments, in a day. It might use 0.10 tonnes of coal to power its steam engines, to run the machines during that day. The firm is then able to send all of its output to market, thereby turning over this capital, ready to buy materials, energy and labour-power once more.

But, because it is more economical, due, for example, to transport costs, it may buy 1,000 metres of cloth, 10 kilos of yarn, and 1 tonne of coal at any one time. It then keeps some of this stock as a productive-supply. But, it all comprises circulating rather than fixed capital. It is only when the capital is actually advanced to production that it actually comprises advanced productive-capital. Here again is a difference with fixed capital. A machine with a value of £1,000 is advanced in its entirety to production, as soon as it takes part in the production process, even though it may lose only 1% of its use value, and value through wear and tear during any particular labour process. But, a productive-supply of 1 tonne of coal is not advanced in its entirety to the production process, during one working period, or labour process. That part of the productive-supply that is not advanced, still comprises commodity-capital rather than productive-capital. It is just commodity-capital now in the hands of this producer, rather than its supplier. It is then still capital in circulation, and so neither fixed nor circulating capital, at this point, because those categories only apply to the productive-capital.

But, all such capital can suffer a depreciation. I worked for a company such as that above (though it used electric to power its machines not coal), and, on a number of occasions, the factory was plagued by mice, that began to chew the productive-supply of cloth, making some of it unusable. That represented a depreciation of its use value and value. This depreciation had nothing to do with the labour process, of which it had not yet entered. It was effectively the same as if a portion of the stock of materials had been stolen. This is a difference between depreciation and wear and tear. The wear and tear of fixed capital is a necessary element of the production process, and a portion of the value of the fixed capital is transferred to the end product, and reproduced within it. But, depreciation occurs outside the production process, it involves no such passage of use value or value to the end product, and represents, therefore, simply a capital loss for the particular capital.

In other words, the reduction in the value of fixed capital, due to wear and tear, is equally matched by a transfer of value, via the production process, to the end product, and this value is thereby recovered in the value of that product, and realised via its sale. It thus enables the fixed capital to be reproduced, when it is worn out, because its value has been reproduced in the end product. However, the reduction in value due to depreciation is not transferred to the end product, and not reproduced within it. A machine or tool that is stolen is a capital loss to the firm, and can only be replaced by an equivalent injection of capital, or, alternatively, profit that would otherwise have been used to accumulate additional capital, now has to be used simply to replace the stolen machine or tool. In the same way, materials, machines, and so on that lose value as a result of depreciation represent a capital loss to the firm, and that loss can again only be made up by an injection of additional capital.

That depreciation can also apply to labour-power. In Capital I, Marx makes the point that capital benefits from a number of things for which it does not pay. Capital buys labour-power, for which it pays the equivalent amount of exchange value as wages. But, the worker in selling their labour-power to capital thereby also enables capital to obtain an amount of labour/value, for which it does not pay. The greater the value produced by labour, the greater the labour/value obtained by capital for which it has not paid. So, when the division of labour leads to labour being undertaken co-operatively, this results in a higher productivity of labour, and this higher productivity means that the proportion of surplus labour to necessary labour increases. Yet, capital does not pay anything for this additional labour/value it obtains as a result of co-operative labour.

Similarly, the longer and more regularly labour is employed the more proficient and productive it becomes. The more a worker carries out certain functions, the better they become at them; increased skills and so on, get passed on from one generation of workers to another, so that each generation tends to become more productive. Again capital pays nothing for this improvement in the use value of the labour-power employed, or the additional value it produces. But, the opposite also applies.

During periods of chronic and persistent unemployment, workers skills tend to deteriorate as they are not practised; one of the things that capitalism introduces, as opposed to peasant production, is labour discipline, and again this is lost. After long periods of unemployment, therefore, this depreciation of labour-power represents an absolute capital loss for capital. In order to restore those lost skills, labour discipline and so on, additional capital has to be introduced for training etc.

There are some exceptions to this, as Marx sets out in Capital II. For example, he discusses the situation in agriculture. The seasonal nature of agriculture means that some machines can only ever be used for part of the year, and then lie unused for many months, during which time they depreciate. But, in this case, this depreciation is a normal part of the production process during the year. Every capital involved in agriculture faces this same condition. This depreciation is then an integral aspect of the value of agricultural products.

It is rather like the situation with “cotton dust”. In Capital I, Marx describes the situation that in textile production a quantity of raw material is processed, and so the value of this raw material is all transferred to the end product. However, as a natural part of this production process, not all of the raw material is consumed and transferred into the end product. An element of natural wastage arises. But, although this part of the raw material ends up on the factory floor, rather than in the end product, all of its value is transferred to the end product.

But, it is this exception that proves the rule in relation to the difference between wear and tear, and depreciation.

Capital III, Chapter 49 - Part 11

None of the output equal to the capital component of the total output comprises an income for anyone. Just as that portion of output that comprises means of production cannot simultaneously be means of consumption, so that portion that comprises capital, cannot simultaneously be revenue. If all of Department I is considered as one giant enterprise, then its clear that what is true of the farmer and the use of a portion of his output simply to reproduce the seed used in this year's production, is also true for the whole of Department I, however, differently this may appear on the surface, as a consequence of competition, and a multitude of individual purchases and sales amongst Department I firms.

What then appears, on the surface, as a sale of coal to the steel producer, which generates an income for the coal producer – divided into wages, profits, interest and rent – can be seen, when taken in the context of the totality of such transactions, as no such thing. If the coal producer and steel producer are seen as only different departments, within one large single capital, it becomes clear that the coal supplied to the steel producer, to replace that consumed, is no different to the grain produced by the farmer, part of which is used as seed. It is not the revenue of the steel producer (workers, capitalists and landlords) that consumes the coal, but the capital of the steel producer, and the steel producer does not produce consumption goods to be consumed by the coal producer (workers, capitalists and landlords), but likewise produces means of production consumed by the coal producer's capital.

The only portion of the value of Department I, which creates revenues – wages, profits, interest and rent – is that represented by the new labour expended, which creates new additional value, to that represented by the constant capital, itself consumed within the Department, i.e. consumed by capital rather than revenue.

“Thus, the value of the annual commodity-product, just like the value of the commodity-product produced by some particular investment of capital, and like the value of any individual commodity, resolves itself into two component parts: A, which replaces the value of the advanced constant capital, and B, which is represented in the form of revenue — wages, profit and rent. The latter component part of value, B, is counterposed to the former A, in so far as A, under otherwise equal circumstances: 1) never assumes the form of revenue and 2) always flows back in the form of capital, and indeed constant capital. The other component, B, however, carries within itself, in turn, an antithesis. Profit and rent have this in common with wages: all three are forms of revenue. Nevertheless they differ essentially in that profit and rent represent surplus-value, i.e., unpaid labour, whereas wages represent paid labour.” (p 838-9)

One portion of the value of this product is then equal to wages, which, under the assumptions made, is equal to the variable capital. This portion then has a two-fold function. On the one hand, as variable capital, it is a sum of money-capital that is metamorphosed into productive-capital, labour-power. This is its function from the perspective of capital. But, from the perspective of the worker, this portion of value appears not as capital but as revenue, money wages, obtained in exchange for the sale of their commodity, labour-power, and required for its reproduction via the purchase of wage goods.

“If we imagine the circulation of money to be eliminated, then a part of the labourer’s product is in the hands of the capitalist in the form of available capital. He advances this part as capital, gives it to the labourer for new labour-power, while the labourer consumes it as revenue directly or indirectly through exchange for other commodities. That portion of the value of the product, then, which is destined in the course of reproduction to be converted into wages, into revenue for the labourers, first flows back into the hands of the capitalist in the form of capital, or more accurately variable capital. It is an essential requirement that it should flow back in this form in order for labour as wage-labour, the means of production as capital, and the process of production itself as a capitalist process, to be continually reproduced anew.” (p 839)

Thursday, 27 October 2016

Profit, Rent, Interest and Asset Prices - Part 11 of 19

Objectively, rent is surplus profit. The landlord is able to pocket this surplus profit rather than the capitalist farmer, because unless the farmer hands it over to the landlord, the landlord will not allow the farmer to use the land. Competition between capitalist farmers will cause them to demand land wherever it is possible to still make above average profits, and this increased demand for land acts to push up rents. But, the objective limit to rent is this mass of surplus agricultural profits, because if landlords push rents to a level beyond it, farmers will make below average profits, and leave agriculture to invest in industry. A similar thing arises with builders. If landowners seek high rents, for land, from building developers, builders will not be able to build houses at prices that tenants will be able to afford. If landowners seek high land prices (capitalised rents) builders will not be able to build houses at prices the buyers will be able to afford.

However, as with money-capital and interest, things are not entirely that simple, in reality. In the case of money-capital, if it is in such excess supply as to cause interest rates to fall to very low levels, the owners of that money-capital may decide to use it instead as revenue. They may decide to simply spend a larger proportion of their money hoards, and revenues in luxury consumption, or speculation. Alternatively, they may decide to turn themselves into industrial capitalists, metamorphosing their money-capital into productive-capital or commercial capital, in order to directly obtain profit of enterprise. In that way, the supply of money-capital is reduced, which acts to push the average rate of interest higher.

We see that today. Low rates of interest have caused the owners of money-capital to engage in higher levels of luxury spending, but they have also engaged in vast amounts of speculation, gambling on the prices of financial assets, such as shares, bonds and property, as well as in other assets from which they expect to obtain speculative capital gains, such as gold, diamonds, art, and so on. In so far as such speculation has also driven the prices of fictitious capital higher, it has been self-fulfilling, and the more those engaged in such speculation believe that it is likely to continue – especially when for the last thirty years such speculation has been underpinned by central banks – the more they become fixated on a desire for such speculative capital gains, rather than yield. But, that has thereby diminished the supply of money-capital available for the accumulation of real capital.

Similarly, Marx outlines the way landlords are able to divert their land to alternative uses, whenever they feel that the rent produced from it falls to a low level. They can make the land available for other uses, for example, urban development, as well as turning it into recreational areas for hunting and so on, as well as just leaving it uncultivated. And, in the last thirty years, as speculation has driven land prices, particularly development land prices, ever higher, there is an inevitable incentive for landowners – including builders with land banks – to hold on to their land hoards, in the expectation that by doing so they will make large capital gains, on those assets. As Marx notes, this is why huge swathes of land are always uncultivated, because to make them available as additional supply, would hugely depreciate rents, undermining the revenue of the landowners, and also causing the capitalised value of the land to fall significantly, which would thereby undermine the fictitious wealth of the landlords, and of those money-lending capitalists holding mortgages on the land and property.

There is then a difference between the owners of loanable money-capital, and of land, as compared with the owners of industrial capital (productive-capital and commercial capital, including money-dealing capital). As far as industrial capital is concerned, the individual private industrial capitalist is torn, as Marx described earlier. On the one hand, as their profits expand, they are pulled towards wanting to use it as revenue, to enjoy a more luxurious lifestyle. On the other hand, the objective requirement of industrial capital is to expand.

As the market expands, because population expands and living standards rise, new use values are developed, causing a rise in demand for commodities, each individual capital is necessarily driven to try to capture a share of this expanding market. Unless it does so, its mass of profits will fall relative to its competitors, its own competitive position will be undermined, and ultimately it will, thereby cease to act as capital. Consequently, as Marx says, there is no minimum level of the rate of profit, below which capital will stop accumulating. It may be that in the era of private capitalist property, the private capitalist who took their revenue as profit, might choose to accumulate less of it, if the rate fell below a certain level, but as these capitals grew larger it became the mass of profit rather than the rate of profit that became more important to the bigger, private capitalist owner.

If meeting an expansion of the market could only be achieved by an accumulation of capital that resulted in a lower rate of profit, the larger private capitalists would still be led to undertake such investment, both because they could not risk losing market share, and because the increase in the mass of profit obtained was more important for them than the lower rate of profit. Moreover, when the era of private capitalist property ends, and is replaced by socialised industrial capital, in the form of joint stock companies, co-operatives, trusts and corporations the individual private industrial capitalist is replaced by the “functioning capitalists”, the army of professional managers, technicians, and administrators who carry out the previous social function of the capitalist, in organising production efficiently, so as to maximise the production of surplus value, and accumulation of capital. Unlike, the private industrial capitalist, who took their revenue as profit, these functioning capitalists, are salaried employees, who take their revenue as wages, as part of the variable capital of the business. In a more pure form than the private capitalist, they are the personification of the industrial capital itself, and its drive to maximise surplus value, and its accumulation.

No such objective constraints apply to the owners of loanable money-capital, or landed property, i.e. the owners of fictitious capital. The only constraint, which applies to them, is that they are able to obtain sufficient revenue from the ownership of this fictitious capital to afford them the means of subsistence. If someone owns £1 million in the shape of a bond, which produces for them 5%, or £50,000 of interest, each year, and which affords them a standard of living that is sufficient, there is no objective necessity for them to accumulate additional loanable money-capital.

Unlike a productive or commercial capital, that would lose competitiveness if it did not accumulate, this £1 million of fictitious capital does not suffer any competitive deterioration, by not being increased to £2 million. If the average rate of interest is 5%, it will produce this same 5% whether the money-lending capitalist has £1 million in a bond, or £2 million. Here the only difference is the absolute amount of interest obtained - £100,000 rather than £50,000. The only necessity for it to be increased, is if the owner of that capital decides that they desire a higher standard of living than £50,000 provides them, or if the rate of interest were to fall, thereby reducing the revenue produced by it. 

The same applies to the rent obtained by a landlord. A capitalist farmer, like any other industrial capitalist is objectively driven to try to expand their capital, and to farm larger expanses of land, in order to maximise their profits, to increase or maintain their market share, and thereby to maintain or improve their competitiveness, so as to survive. But, no such objective compulsion applies to the landowner. Provided the rent they obtain from say 1,000 hectares of land, provides them with sufficient rent to sustain the standard of living they require, there is no objective requirement for them to have to expand their land ownership to 2,000 hectares. The only requirement on them in that respect is a subjective requirement to do so in order to obtain additional rent as revenue, in order to enjoy a higher standard of living.

Of course, that doesn't mean that the owners of loanable money-capital, or landed property are not driven by subjective factors, i.e. greed, social status etc., to accumulate more loanable money-capital, or more landed property, but such subjective drivers are not the same as the objective compulsion for industrial capital to accumulate or die.

Capital III, Chapter 49 - Part 10

The more society develops, and the more social productivity rises, so that the quantity and value of the circulating constant capital increases, as a consequence of accumulation, the greater this component of the national output becomes, and so the greater becomes the difference between the annual product/National Income, and the national output.  It is also another expression of the law of the tendency for the rate of profit to fall.  It illustrates the fact that, as social productivity rises, although the annual rate of profit, and so the general annual rate of profit rises (because the annual rate of surplus value and rate of turnover of capital rises) as the advanced capital rises at a slower rate than the rise in surplus value, this very same rise in social productivity causes a proportionally greater rise in the mass of raw materials consumed in production.  The mass of laid-out capital, as opposed to advanced capital rises at a faster rate than the rise in variable-capital and surplus value, so that the rate of profit, i.e. the profit margin falls.

This is only mitigated to the extent that rises in productivity and improvements in technology enable the amount of labour-time required for the production of this constant capital to be reduced.

“In Class I the product consists of the same constituents, as regards form. But that part which here forms revenue, wages + profit + rent, in short, the variable portion of capital + surplus-value, is not consumed here in the natural form of products of this Class I, but in products of Class II. The value of the revenues of Class I must, therefore, be consumed in that portion of products of Class II which forms the constant capital of II to be replaced. The portion of the product of Class II which must replace its constant capital is consumed in its natural form by the labourers, capitalists and landlords of Class I. They spend their revenue for this product of II. On the other hand, the product of I, to the extent that it represents a revenue of Class I, is productively consumed in its natural form by Class II, whose constant capital it replaces in kind. Finally, the used-up constant portion of capital of Class I is replaced out of the very products of this class, which consist precisely of means of labour, raw and auxiliary materials, etc., partly through exchange by capitalists of I among themselves, partly so that some of these capitalists can directly use their own product once more as means of production.” (p 837-8)

In other words, as already described, the output of Department I is not consumed by its workers, capitalists and landowners, but part of it (equal to the new value added by labour [v + s] equal to £2,000) is exchanged with Department II. It constitutes Department II's constant capital, i.e. intermediate production. Department II exchanges consumer goods for it, and these are consumed by Department I workers, capitalists and landlords.

Of the £4,000 of additional Department I output, some will be exchanged within the Department, so coal producers exchange with steel producers and so on, whilst, for example, part of the grain of the farmer will be used as seed, to replace that used in production, part of the coal produced by the coal mine will be used to fuel steam engines used to pump water from mines, in the process of producing coal.

None of this output comprises an income for anyone, even though it constitutes a growing component of the value of national output. Its quite clear, for example, that the grain produced by the farmer, which is not sold but is used as seed for the following year, produces no income for him, just as it forms no part of the consumption fund of society, i.e. it is not consumed by anyone. Just as society's production must divide into the production of means of production and consumption goods, so the value equivalent of that production divides into capital and revenue.

The proportion of the value of current output (on current reproduction costs rather than historic prices) equal to the constant capital used in current production comprises this capital component, and is set aside, for the physical replacement of the constant capital on a like for like basis. By the same token, the proportion of the value of current production, due to the newly added value contributed by labour, comprises the revenue part. This revenue divided into wages, profits, interest and rent, is then able to purchase the remaining physical output, and thereby to reproduce the variable capital, to meet the consumption needs of exploiters, and also the needs of capital accumulation.

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)