Thursday, 12 January 2017

Current Reproduction Cost v Historic Cost

Marx sets out in many places that the basis for determining the value of commodities is their current reproduction cost, and not their historic cost. This applies to those commodities that comprise the constant and variable-capital, and which thereby also provide the basis for the calculation of the rate of profit, annual rate ofprofit, and so consequently also the general annual rate of profit. But, some proponents of the Temporal Single System Interpretation have argued that the rate of profit should be calculated not on the current reproduction cost of the commodities that comprise the elements of the productive-capital, but on the historic cost of those commodities, i.e. the money prices paid for them by the individual capitalist.

One argument put forward for this is that, unless this is done, a logical contradiction arises. Marx argues that the reason for using the current reproduction cost is that the commodities that comprise the elements of productive-capital (raw materials consumed as part of the constant capital, food and other wage goods consumed by workers that comprises the variable capital) although the result of past production, have to be physically replaced, on a like for like basis, out of the current production. It is then, Marx says, the labour-time currently required for this physical reproduction that is decisive.

But, its precisely this which causes the proponents of historic pricing to believe that otherwise a contradiction arises. An example put forward to demonstrate this is to suppose there is an economy with one single commodity, such as with the corn models that Marx sets out in Theories of Surplus Value. The argument goes that looking at this on a purely physical basis can lead to a contradiction if there is a crop failure that leads to a sharp fall in output, so that the volume of output falls below the volume of input. So, assume the following is kilos of corn.

c 1000 + v 1000 + s 1000. The total output is 3,000 kilos. The surplus is 1,000 kilos. The rate of surplus value is 100%, and the rate of profit is 50%.

This is also presented in money terms, so that the above values can be viewed as £'s. The argument then asks what happens if the crop failure results in only say 500 kilos of corn being produced. The aim of this line of argument is to suggest that the result is that the labour produces a negative value, whereas Marx makes clear that all labour that is socially necessary and produces a use value, creates a new positive value.

But, in fact, this argument is false. It is based upon a number of misconceptions, and a relapse into Adam Smith's faulty cost of production theory of value, as opposed to Marx's Labour Theory of Value. It also confuses Smith's first correct definition of productive-labour, which is that it is productive of surplusvalue, with his second and incorrect definition of productive labour, which is that it is productive of value embodied in material commodities.

When Marx talks about all labour being value creating, so long as it is socially necessary, and that it produces use values, he is talking about precisely that, i.e. that it produces value, not surplus value. As Marx sets out at length in Theories of Surplus Value, all labour in so far as it fulfils this requirement, of producing use values, is productive of new value, equal to the labour-time expended. That is true whether the labour is productive labour – producing surplus value as a result of exchanging with capital – or unproductive labour, which does not produce surplus value, and either produces use values for direct consumption, or else exchanges with revenue rather than capital.

The argument presented by the proponents of historic cost pricing is that if we take the example above, the capital advanced was c 1000 + v 1000, but the resultant value is only 500, which means that if the capital was physically replaced, the result would be a loss equal to 1500. There would then have resulted a negative value from the labour undertaken. Indeed, it would appear impossible to determine an actual value for the output.

But, this is false, for the reasons described above, and which Marx also sets out in both Capital I, and in Theories of Surplus Value. The basis of the error of the proponents of historic pricing in this regard is to make a fundamental error in failing to distinguish the difference in constant capital and variable capital, and so to end up with a version of Adam Smith's cost of production theory of value.

If we take the final product it is an entirely new product. The corn that the labourer consumes, may look exactly the same as the corn they produce at the end of the production process, but it is not the same corn. The corn the worker produces is an entirely new product, and the value they create by their labour is entirely new value.

What Marx describes, particularly in Theories of Surplus Value, is that by the application of their labour, the worker produces this entirely new product, and an amount of entirely new value equal to the labour they expend. All of this new value is positive new value. What the proponents of historic cost pricing confuse, in their example, is the creation of this entirely new positive value, and the question as to whether a surplus value is also created. The answer to that question depends upon the productivity of labour. As Marx sets out in Capital III, and in Theories of Surplus Value, the division of all societies into classes, depends upon productivity reaching a certain minimum level so that the producer is able to produce more in a day than is required to reproduce their own labour-power. In other words, they must be capable of producing a surplus product.

The proponents of historic cost pricing have not shown any contradiction in Marx's theory by such examples, but only shown they have failed to understand this basic element of Marx's theory of value. If there is a catastrophic crop failure, so that the mass of output falls below the mass of inputs, then its clear that productivity has fallen by such an extent that this basic requirement set out by Marx, that productivity is at least sufficient to generate a surplus product does not exist. In fact, rather than demonstrating any contradiction, it shows the opposite.

If we consider Marx's position set out in Capital III, and in Theories of Surplus Value, that for social reproduction to continue, on at least the same scale, the consumed constant and variable capital must be replaced in kind, what do we see. It is that output is 500 kilos, and so in order to replace the 1000 kilos of constant capital, and the 1,000 kilos of variable capital, the capitalist would have to add an additional capital of 1500 kilos. Put another way, they would have made a loss equal to this 1500 kilos.

If we examine this from the perspective of values rather than use values, what do we find. The difference between a labour theory of value, such as that which Adam Smith starts with, and which Marx uses, and a cost of production theory of value, which Smith lapses into, without realising he has done so, is that the former determines the value of a commodity on the basis of the labour-time required for its reproduction, whereas a cost of production theory of value determines the value of a commodity from the value of the commodities consumed in its own production.  

A labour theory of value in determining the labour-time considers two forms of this labour. The value of a commodity comprises not only the living labour used in its production, but also the congealed labour embodied in the means of production used in it its production.

Let us examine it in terms of labour hours. Taking the initial situation, we might assume that workers work for 2,000 hours to produce the new product – 3,000 kilos of corn. The labour content of the value of this corn is then equal to 2000 hours. But, the value of this corn is not only comprised of labour, it is also comprised of the congealed labour embodied in the means of production, which here is represented by the 1,000 kilos of corn used as seed.

If we start from a position where social productivity is constant, then if the labour content of the 3,000 kilos of corn output is equal to 2,000 hours, the labour used in producing the 1,000 kilos of corn that comprises the seed is equal to 1,000 hours. That means that the labour-time required for the production of the 3,000 kilos of corn output is 3,000 hours comprising 1,000 hours of congealed labour, and 2,000 hours of living labour. That means that the value of a kilo of corn is equal to 1 hour. On this basis we can also verify the assumption that, with constant productivity, the labour-time embodied in the 1,000 kilos of seed was equal to 1,000 hours.

If there is a crop failure so that only 500 kilos of grain are produced, this does not change the amount of new value created by labour, which is equal to 2000 hours. It simply means this value is embodied in fewer kilos. But, likewise the value of this 500 kilos is not only comprised of this living labour. 1,000 kilos of seed was used in its production, and 1,000 hours of labour was required for its production, and this congealed labour thereby also comprises a part of the labour-time required for the production of the 500 kilos of output.

The 500 kilos of output, therefore, has a value of 3000 hours, just as previously the 3000 kilos of grain had a value of 3,000 hours. The consequence of the crop failure is that social productivity has cratered, and now the 3,000 hours of labour-time that was previously embodied in 3,000 kilos of corn is now embodied in just 500 kilos – an 84% drop in productivity. The value of a kilo of corn, thereby, rises from 1 hour to 6 hours.

The difference here between a labour theory of value and a cost of production theory of value is apparent. The value of this 500 kilos, is determined by the labour-time required for its production, which is 3,000 hours, but if we look at the cost of production we get a totally different picture. The value of a kilo of corn we have now determined as being 6 hours. Looking at the cost of production of the 500 kilos of corn we then find that it comprises 1,000 kilos of corn used as seed (constant capital), plus 1,000 kilos of corn used to pay wages to workers (variable capital). So, we have 2,000 kilos of corn with a value of 6 hours per kilo, which gives a cost of production of 12,000 hours.

If we then subtract the cost of production of the 500 kilos of output from the value of that 500 kilos, we get 3,000 – 12,000 giving a loss of 9,000 hours. And, in fact, the capital started with 2,000 kilos of productive-capital, and ended with just 500 kilos, a loss of 1,500 kilos, which at 6 hours per kilo is again equal to a loss of 9,000 hours.

Like Smith, the proponents of historic pricing confuse labour and labour-power, labour as value creating, and productive-labour as productive of surplus value, and like Smith they lapse into a cost of production theory of value, and so abandon the labour theory of value, without realising they have done so.

As Marx sets out in Theories of Surplus Value, for labour to be productive it must exchange with capital, and produce surplus value. But, for labour to produce surplus value, and for capital to act as capital, i.e. to be self-expanding value, it requires that social productivity is at a minimum level, whereby the labour-time required to reproduce labour-power is less than the value that labour can create. By trying to prove their point, by establishing such an extreme example, all that the proponents of historic pricing do is to create a scenario whereby capital cannot act as capital, because it requires that the level of social productivity has been reduced to such a low level that it is impossible for labour-power to be reproduced at a cost lower than the value that labour can create, so that the production of surplus value becomes impossible.

However, the fact that the production of surplus value is impossible is not the same as saying that the labour does not create new positive value. The 2000 hours of new labour expended, creates 2000 hours of new value, the problem being that this new value is less than the value required to reproduce the consumed capital!

What the example also illustrates is the difference between surplus value and capital gain. Take the starting position whereby the capital of the capitalist farmer consists of 2,000 kilos of corn. Of this 1,000 kilos is used immediately as seed. The farmer is left with 1,000 kilos of corn, which they pay to their workers at regular periods as wages. Assume that the farmer makes 10 payments of wages to workers during the year of 100 kilos per payment.

At the end of the 8th period, the corn output has been produced, and is being sent to market. It will require the other two periods to be able to sell the output, and during this period, the farmer also requires the workers to be preparing the ground ready for the next year's crop. Out of the original 1,000 kilos of corn set aside by the farmer as variable-capital, therefore, to pay out during the year, at the start of the 9th period, 200 kilos of corn are still left waiting to be paid as wages.

The historic cost of these 200 kilos, the labour that was actually used in their production, is equal to 200 hours, or 1 hour per kilo. But, the actual value of these 200 kilos is now 1200 hours, because the value of a kilo of corn has risen to 6 hours due to the sharp drop in productivity. The fact of this value of the corn can be seen by the fact that these 200 kilos are indistinguishable from any other 200 kilos of the current output sold on the market at its value of 6 hours per kilo.

In other words, the farmer has obtained a capital gain equal to 1,000 hours, in respect of the 200 kilos of corn left over from their initial variable-capital. Were they to sell these 200 kilos rather than pay them as wages to their workers for the remaining period of the year, they would be able to realise this capital gain of 1,000 hours. This capital gain is not surplus value. It has nothing to do with a self-expansion of value arising from production, but arises simply from the fact that the sharp drop in productivity has caused a sharp rise in the value of the capital stock over its historic price.

But, the reality is that the farmer as a capitalist does not engage in business for the purpose of obtaining capital gain, which could only be realised by ceasing business, and selling off their capital. If the capitalist were to sell these 200 kilos of grain on the market for their 1200 hours of value, so as to realise this capital gain, they would immediately have to go back into the market to buy 200 kilos of grain so as to be able to pay it out as wages to their workers, and this 200 kilos of grain would now cost them the same 1200 hours of value that they had previously realised from their own sale.


That is why, as Marx sets out in Capital II, the actual circuit of existing capital is not M – C ...P...C' – M', but P...C' -M'. M – C...P. In other words, the starting position is the existence of productive capital, which engages in production and thereby creates surplus value, which is realised in sale, and the capital is then metamorphosed back into productive-capital, which once more engages in production. Its possible that individual capitals may cease production, and thereby liquidate all of their productive and commodity-capital (though usually this capital is simply taken over by some other capital), but that simply cannot be the case for the whole social capital, i.e. capitalism presumes that production is undertaken on an ongoing basis.

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