Tuesday, 27 November 2018

Interpreting US Profits (10) - The Illusion of Profit, Historic Prices, Depreciation and Wear and Tear

The Illusion of Profit, Historic Prices, Depreciation and Wear and Tear 

It is clear in these examples, and from what Marx says elsewhere, that he believes that the calculation based upon the current reproduction cost, is the correct basis for calculating the rate of profit, and not the historic cost, because he assumes that capitalist production is continuous and ongoing, rather than that every capitalist ceases production, and liquidates their capital at the end of each year! The basis for the circuit of the advanced capital, which determines the period of turnover, and for the calculation of the rate of profit is P...C`-M`. M – C...P. As Marx puts it, 

“In calculating the aggregate turnover of the advanced productive capital we therefore fix all its elements in the money-form, so that the return to that form concludes the turnover. We assume that value is always advanced in money, even in the continuous process of production, where this money-form of value is only that of money of account. Thus we can compute the average.” 

(Capital II, p 187) 

It is expressed in Marx's expanded formula for the circuit of industrial capital.
Note Marx's terminology here. Firstly he begins by making clear that what he is talking about is “the advanced productive capital”. To make clear it is not the advance of the money-capital which metamorphoses into productive capital, that Marx is talking of. He then says that what he is doing is only to “fix all its elements in the money-form”. Finally, to make clear that his analysis here is one based on the actual capital-value advanced, i.e. the value/current reproduction cost of the commodities that comprise the elements of the productive capital, and not on the money-capital advanced, he makes clear that the use of money here, is merely a convenience of calculation, and that he is using it essentially only in its role as “money of account”.

The reason for this, as Marx sets out is that the commodities that constitute the productive-capital engaged in the productive process "P" are use values, for example 100 kilos of yarn, and 10 hours of labour-power, whereas the commodities that result from this productive process C`, are totally different use values, for example, 10 metres of linen.  There is no rational means of expressing the expansion in value of the latter in terms of the former, because it is like comparing apples and oranges.  Similarly, the final C (L + MP) is merely the physical replacement of C, the yarn, and labour-power consumed in the prior productive process, but this cannot be rationally compared with the 10 metres of linen, which is metamorphosed into it.  It's only by reducing these use values down to their common feature as values, and thereby down to their monetary equivalents, measured at current values, i.e. their current reproduction cost - so as to remove any distortion in the expansion of the capital due to changes in prices/values from outside the labour process - that the real expansion of capital, arising from the production of surplus value, can be measured.

Marx makes clear that the situation described in Parts 8 and 9, whereby a fall in the value of the constant capital results in a release of capital, and rise in the rate of profit, does not just apply to those situations where, as with the farmer, the constant capital, or a part of it, is reproduced, in kind, out of the capitalist's own production. It applies to every such fall in the value of constant capital, and, in a similar way, to falls in the value of variable-capital, as described in Capital III, Chapter 6. He describes the situation of a producer of cotton goods, the same as that described in Capital III, Chapter 6, where Marx gives further such examples, of where an appreciation of capital causes a tie-up of capital, and depreciation of capital causes a release of capital

The cotton goods producer lays out £80 for cotton twist and £20 for other capital, and makes £20 profit. The product sells for £120. Having sold the cotton goods, the price of cotton falls, so that he now only needs to spend £40 on cotton, and £20 on other capital. His profit remains £20. It now represents 33.3% rather than 20%. £40 of capital has been released, as revenue, which can be consumed or accumulated. But, if we assume that the value of cotton falls, prior to him selling his output, the value of his output also, thereby falls by £40, so he does not obtain this release of £40 of capital, but he does still obtain the second effect of the rise in his rate of profit. In other words, the value of his output would fall by £40, to £80. But, the value of the capital laid-out is calculated on its current reproduction cost of £60, and not its historic cost of £100. So, his rate of profit is still 33.3% up from the initial 20%. 

Marx says, of the £40 of capital released as revenue, due to the fall in the value of cotton, 

“If he invests it, he will lay out [an additional] £26⅔ on cotton and £13⅓ on labour, etc., on the new scale. The profit [will amount to] £13⅓ The total product will now be 60+40+33⅓, or £133⅓.” 

(Theories of Surplus Value, Chapter 22) 

The situation also becomes clear, Marx says, if we consider the situation of a new producer, who faces the current reproduction costs of the capital. In the case of the farmer, they use 20 kilos of seed, plus 40 kilos to cover other constant capital, plus 40 kilos to cover wages, or, in money terms, £100 in total. 

“Formerly he needed £120 to enter the business: £40 to buy 20 quarters of seeds, £40 to buy the other ingredients of constant capital, and £40 to pay wages. And his profit was £80. 80 on 120 is equal to 8 on 12, or 2 on 3, or 66⅔per cent. 

He now has to advance £20 to buy 20 quarters of seed, £40 as previously [to buy the other elements of constant capital], £40 to pay wages, so that his outlay of capital amounts to £100. His profit is [£]80, that is, 80 per cent. The amount of profit has remained the same, but the rate of profit has increased by 20 per cent. Thus one can see that the fall in the value of seed (or of the price which has to be paid to replace the seed) has in itself nothing to do with the increase in [the amount of] profit, but implies merely an increase in the rate of profit.” 


And, this also demonstrates that even where an individual capitalist does liquidate all of their capital, and cease trading, thereby selling also their seed corn, this does not change the situation for the actual capital itself. If our first farmer sold up, then individually they would not obtain the release of capital from the fall in the value of seed, and their rate of profit would also fall accordingly, in relation to the money prices paid out for their capital. That is the other exceptional case discussed by Marx, where the circuit of capital is M – C … P … C` - M`, rather than its normal circuit P … C` - M`. M – C … P, i.e., 

“... it is the form of capital that is newly invested, either as capital recently accumulated in the form of money, or as some old capital which is entirely transformed into money for the purpose of transfer from one branch of industry to another.” 

(Capital II, Chapter I) 

But, their loss in this respect is the new farmer's gain. The new farmer who buys the farm, and all of its productive-capital, from them, does so at these current values, and their rate of profit is accordingly 80%. If we view things in terms of the actual capital, rather than from the subjective perspective of the two capitalists, one selling up, and the other employing newly invested money-capital, nothing has changed, so that its circuit continues to be P … C` – M`.M – C ... P. In other words, the value of the productive-capital, as it continues in operation, is equal to £20, not £40, but this £20 represents 20 kilos of seed, whereas previously it would have represented only 10 kilos. The old farmer suffers a capital loss equal to £20, but the new farmer obtains a capital gain of £20, i.e. £20 of their money-capital now buys twice as much grain as previously, releasing for them this £20 of capital, and, at the same time, providing them with a correspondingly higher rate of profit than when the price of seed was £40. This is the situation, in general, with capital gains and losses. A capital gain for one is cancelled by an equal capital loss for someone else. That is Marx's basis for his statement that falls in the prices of shares, bonds, property etc. have no necessary consequence for the real economy, because they represent merely a transfer of wealth out of the hands of one group of speculators into the hands of another. 

Marx then goes on to show that the same thing applies to the depreciation in the value of machinery and other fixed capital, whether that depreciation arises from a rise in productivity, in its production, that reduces the value also of the existing machines, in the same way that a fall in the value of cotton causes the value of cotton goods, cotton held in stock, to also be retroactively reduced in value, or whether it arises from moral depreciation, as technological development means that the new machinery is more productive than that it replaces. 

Again, Marx's use of this depreciated value of fixed capital evidences his use of current reproduction costs, rather than historic prices, as the basis for calculating the rate of profit. Marx illustrates that in Theories of Surplus Value, Chapter 23, where he shows that the rate of profit rises, each year, where the current value of fixed capital falls, each year, due to wear and tear. This is one means by which producers offset loss of competitiveness against new producers who enter production with new fixed capital with a lower value, or greater degree of productivity.  This also illustrates the difference between wear and tear and depreciation.  The value of the former is recovered in the value of output, the value of the latter is not.

He takes the example of a coal producer with a capital of £100, divided £50 of fixed capital, and £50 of variable-capital, producing £50 of profit. The rate of profit is then 50%. But, the fixed capital loses 10%, or £5, each year in wear and tear, so that in Year 2, the capital is £95, and the £50 profit now represents a rate of profit of 52.63%. 

“The rate of profit would have risen, because the value of the fixed capital would have declined by one tenth as a result of wear and tear during the first year. Thus there can be no doubt that in the case of all capitals employing a great deal of fixed capital—provided the scale of production remains unchanged—the rate of profit must rise in proportion as the value of the machinery, the fixed capital, declines annually, because wear and tear has already been taken into account. If the coal producer sells his coal at the same price throughout the ten years, then his rate of profit must be higher in the second year than it was in the first and so forth.” 

(Theories of Surplus Value, Chapter 23) 

But, as well as capital losing value due to wear and tear, which is transferred to, and thereby reproduced in, the value of output, it also loses value due to depreciation, which is not transferred to or recovered in the value of output. The depreciation can come from a simple physical depreciation of the capital (extreme examples being damage from fire, flood or other aspects of Nature, or vandalism etc., or simple passage of time) or from a reduction in the current labour-time required for its reproduction, or from the introduction of some new technology that makes existing machines outdated, and thereby devalues them via moral depreciation.

Suppose a new coal producer enters production with a new more efficient machine. If it is twice as efficient as the original machine, it will cause the value of the original machine to halve. The consequence then depends, obviously, on the age of the original machine, and how much of its original value has already been written down, and recovered as wear and tear, in the value of its output. If its Year 1, its value has fallen from £50 to £45, due to wear and tear, but moral depreciation would reduce its value to £25. The actual loss from depreciation is thereby reduced from £25 to £20. If the machine is 5 years old, its value has already been written down by £25 of wear and tear, during that period, so when the new machine is introduced, this has little effect on its current value. If its Year 10, all of its original value has been recovered in wear and tear, the coal producer, has an amortisation fund of £50, with which he can now replace the old machine with its new, more efficient alternative. He will have suffered no capital loss due to depreciation. The annual reduction in the value of fixed capital from wear and tear, means that producers using this older fixed capital can enjoy a rising rate of profit, based on its current value, or, in order to remain competitive with other producers, using newer lower value fixed capital, they can reduce their selling price, and thereby forego the higher rate of profit. 

“This extra profit may be equalised also as a result of the fact that—apart from wear and tear—the value of fixed capital falls in the course of time, because it has to compete with new, more recently invented, better machinery. On the other hand this rising rate of profit, which results naturally from wear and tear, makes it possible for the declining value of the fixed capital to compete with newer, better machinery, the full value of which has still to be taken into account. Finally, the coal producer sold his coal more cheaply [at the end of the second year], on the basis of the following calculation: 50 on 100 means 50 per cent profit, 50 per cent on 95 comes to 47½; if therefore he sold the same quantity of coal [not for 105 but] for 102½ —then he would have sold it more cheaply than the man whose machinery, for example, began to operate only in the current year. Large installations of fixed capital presuppose possession of large amounts of capital. And since these big owners of capital dominate the market, it appears that only for this reason their enterprises yield surplus profit (rent).” 


In Capital III, Chapter 6, Marx also demonstrates the effect of cheapening of variable-capital, both in releasing capital, and in raising the rate of profit. But, he also shows that it raises the rate of surplus value, and thereby raises the rate of profit for this second reason too. 


Matthew said...

We should be careful to distinguish between where Marx is talking about profit in terms of value and where he is talking about profit in terms of exchange-value. The two are not necessarily the same.

For example, imagine a corn farmer buys 100 bushels of corn seed at $100 and produces 120 bushels of corn. In real physical terms, this would seem to be a rate of profit of 20%. But let us imagine that the exchange-value of corn meanwhile dropped by half before the farmer could sell the corn. Now, if the farmer tries to sell the corn, he/she will only recoup $60. In terms of exchange-value, the farmer has made a loss.

This fact is not changed if we consider that the farmer can now carry on expanded reproduction in physical terms. It is true that the farmer could now, instead of selling the corn, replant all 120 bushels. It also does not matter that, using current reproduction costs rather than historic costs, the farmer would conclude that he has made a profit.

The problem with viewing the farmer as having made a profit is that the farmer's friend who held onto his $100 can now buy and plant 200 bushels. In terms of maximizing exchange-value, this other friend has come out even. Using current reproduction costs, the farmer might conclude that this friend has made a 100% rate of profit. But how can this be if the friend didn't actually produce anything? This implies very strongly that the scenario where someone hoards their exchange-value (choosing not to undertake the circuit of M-C-P-C'-M) must be taken as the baseline for comparison...meaning, the friend who hoarded money made a 0% profit, and the original farmer made a loss. Profit must be calculated in comparison to that baseline of hoarded money, not in comparison to physical use-values accumulated or to value.

The problem with value is that it is intangible. Value must concretely always take a value-form, which is exchange-value. Capitalists only care about maximizing their exchange-value. They are oblivious to value and could care less about it (although exchange-values cannot deviate too far from values in the long-run without powerful incentives that will emerge to bring the two back into line).

That is why the capitalist economy can come into crisis even if surplus-value is produced...if additional exchange-value (gold) is not also produced. In aggregate, the capitalist class cannot accumulate exchange-value (i.e. realize the surplus-value of their production in the form of exchange-value), even if they collectively produce surplus-value but produce no additional exchange-value. They must collectively produce additional supplies of a money-commodity that society has defined as "directly social," whose entire concrete labor is defined unconsciously by society as automatically counting as abstract socially-necessary labor. Historically, society has chosen gold as the most convenient commodity to fulfill this role.

Accordingly, for example, the world gold stockpile must increase by 5% if the global collective capitalist class is to make a 5% rate of profit...regardless of whether they have produced surplus-value or not. If the world gold stockpile is stagnant, there can be no aggregate rate of profit, even if surplus-value is produced. Concretely, this will manifest in the prices of commodities dropping to such an extent that the typical capitalist will find him/herself in a situation very similar to that of the corn farmer above, where production results in a physical surplus and perhaps even in surplus-value, but also in a loss (or at best, break-even) in terms of commodity-money.

In this scenario, capitalists will have every incentive to hoard gold rather than produce surplus-value.

Boffy said...

The example you give is exactly the example that Marx gives to prove the opposite of what you are saying, the only difference being that Marx assumes the farmer, saves the seed from their own output, rather than selling seed to a seed merchant, and then buying seed back from a seed merchant. The more close example is that he gives later in Chapter 22, which I have also cited is in relation to a cotton goods producer, where they buy cotton.

I think that you meant to distinguish use value from exchange-value rather than value from exchange value, and I'm assuming that's what you meant, or your example makes no sense. As Marx points out, the value of the seed or cotton, in calculating the rate of profit is determined by the current reproduction cost, not the historic money price paid for it. If the farmer buys 100 bushels of seed for $100, whose value subsequently falls by 50%, then what Marx says quite clearly in TOSV Ch. 22, as well as in Cap.III, Ch. 6 is that its value for calculating the rate of profit is $50, not $100. They make a capital loss on this depreciation, but it clearly cannot result in a "loss", any more than it could have resulted in a profit/surplus value, had the price moved in the other direction, because there has been no change in the value created by the farmer's immediate labour, or in the value of that labour-power, so no change in the surplus value produced.

On the basis of the argument you are making, the labour theory of value is destroyed, because you are now saying that surplus value, negative value is created by something other than living labour! You are saying, as Ramsay did, and as the marginalists do, that value/profit can be created by the constant capital, and changes in its value. In other words, here your argument is that a loss of $20 is made although there has been absolutely no change in the amount of surplus value produced by the immediate labour!

Marx's argument, as clearly presented in relation to the cotton goods producer, is that the fall in the value of corn, which brings about a 50% fall in the value of seed (because corn is its own seed) means that when the farmer sells their 120 bushels of corn for $60, this $60, fully replaces the consumed 100 bushels (which costs them now only $50) and leaves them with a $10 surplus value. This $10 now buys an extra 20 bushels of seed, equal to the amount that would previously been bought by $20. The weakness in your example is that you do not include labour, or relate the produced surplus value to the new value created by labour, so that the change in the amount of surplus value is related directly to the change in price of corn, and not to the surplus value produced by labour, which again undermines the basis of the labour theory of value. That is the consequence of using historic prices, rather than Marx's use of current reproduction costs.

Boffy said...

I have to go out now, but I will respond to other points you have raised later. In actual fact, all the points you have raised, are covered in what I've already said, and in what Marx says in opposing that outlook you have presented, which follows the mistakes of Ramsay in relation to the use of historic prices.

Where your analysis fails is that like bourgeois economics it starts from subjectivists standpoint of taking the individual as the starting point. So you start your analysis from the subjective standpoint of the individual capitalist, and how things appear to them in the superficial terms of money flows, and not from the objective standpoint of capital itself, and its nature as continuous self-expanding value.

Boffy said...

Okay, let's unpack the problems with your argument.

Firstly, you say the farmer buys 100 bushels of seed for $100, producing 120 bushels of corn, and subsequently the value of corn falls by 50%. But, you fail to take into account that if the value of corn falls by 50%, that can only be because the same amount of labour now produces twice as much corn. So, as Marx sets out in his examples, instead of his output being 120 bushels of corn, a fall of 50% in its value implies that his output would have doubled to 240 bushels.

Completely missing from your examples is any reference to labour, or the new value, and thereby surplus value it creates. In your example, profit/surplus value, becomes entirely dependent upon movements in the prices of the constant capital, thereby destroying the labour theory of value, and its explanation of the source of surplus value.

You make the same mistake as Ramsay, thereby, as a result of using historic prices rather than current reproduction costs, so that as Marx says, of Ramsay,

"We shall see later that the way he describes the influence of the value of constant capital on the rate of profit is very inadequate, and even incorrect.”

So, if we assume that the value of corn drops by 50%, and that can only be because the same amount of labour produces twice as much corn, rather than producing 120 bushels, which sells for $60, the farmer produces 240 bushels, which sells for $120. They now only require $50 to replace the 100 bushels of seed consumed. It leaves them with $70, which represents $50 release of capital resulting from the fall in the value of seed, plus their previous $20 of profit. But, now this $20 of profit buys twice as much seed as before, enabling them to double their rate of accumulation.

You say,

"Using current reproduction costs, the farmer might conclude that this friend has made a 100% rate of profit."

But, that is only if, as with Ramsay, or financial market traders, you confuse capital gains and losses for real profits resulting from the production of surplus value, or conversely a negative surplus value, resulting from the value of labour-power exceeding the new value created by labour. Your conclusion of profit as equivalent to capital gains is precisely the illusion that results form using historic prices rather than current reproduction costs. The farmer who retained his $100 in his pocket does indeed, make a capital gain of $100, as Marx points out, because it now buys him 200 bushels of corn, which would previously have cost him $200. But a capital gain is not a profit.

However, as Marx points out, because this second farmer only has to lay out $50 to buy 100 bushels of seed, rather than $100, the surplus value produced by labour, now represents a much larger rate of profit. Again that is why an accurate picture is only obtained by using current values, not historic prices.

Your examples lead to false conclusions because, you do not include in them the value of labour-power, and new vale created by labour, as the basis of surplus value.


Boffy said...

"Profit must be calculated in comparison to that baseline of hoarded money, not in comparison to physical use-values accumulated or to value."

No, the farmer who held on to their money-capital made a capital gain, i.e. their money became worth more relative to corn. The first farmer made a capital loss for the same reason, but they made a profit on their actual productive activity, and that is because profit is the product of surplus value, and the amount of surplus value produced is not changed by changes in the value of constant capital. That is the whole point about Marx's labour theory of value, and his explanation of the source of surplus value, produced by labour in the labour process. Your analysis which has profits and losses deriving form changes in asset prices, destroys the LTC, and moves on to the ground of bourgeois marginal productivity theory, with all factors of production - here the money or the seed - being equally capable of creating new value and surplus value.

You say,

"The problem with value is that it is intangible. Value must concretely always take a value-form, which is exchange-value."

This is very confused. I assumed that when you earlier spoke of value, you were meaning use value, because that was the implication of your argument. But, here "value" cannot mean use value, because use values generally clearly are tangible. An apple for example is a tangible use value. But, if you actually mean value rather than use value, this again makes no sense. Value - labour-time - certainly is not tangible, but nor must it always take a form as exchange-value. If I grow vegetables in my garden, those vegetables as products have value, equal to the labour-time required for their production. But it does not take the form of exchange-value, precisely because I grow them as products for my own consumption, rather than as commodities to be sold. The fact that they have value is easily seen by the fact that the £10 I might otherwise have paid to buy the same vegetables from the supermarket remains firmly in my pocket.

"Capitalists only care about maximizing their exchange-value."

No, they only care about maximising surplus value. You have fallen into the same trap here as Adam Smith, as highlighted by Ricardo, and subsequently by Marx. The fall in the value of the seed, means that the surplus value now represents a higher rate of profit, which enables increased accumulation, which enables greater production of surplus value.


Boffy said...

You say,

"(although exchange-values cannot deviate too far from values in the long-run without powerful incentives that will emerge to bring the two back into line)."

Completely wrong, because commodities under capitalism sell at prices of production not exchange values, and those prices of production vary widely from exchange values. The whole formulation you present here is wrong, because you are comparing to different things. Value is measured in labour-time and exchange-value is measured in terms of a quantity of some other use value. The value of corn depends only upon the labour currently required for its production, but its exchange value depends on a whole series of other considerations. For example, the exchange value of corn against linen, depends not just on the value of corn, but on the value of linen. The value of corn may remain constant, but if the value of linen falls in half, the exchange value of corn will double as against linen. Yet, the exchange value of corn might fall as against say gold, if the amount of labour required to produce gold rises, so that the value of gold rises.

You then say,

"That is why the capitalist economy can come into crisis even if surplus-value is produced...if additional exchange-value (gold) is not also produced."

Absolutely not. Additional exchange value is produced as additional commodities are produced. Gold or whatever other commodity acts as the universal equivalent form of value, only acts as a unit of account, so as to express the exchange value of other commodities in this universal form. Even in an economy that relies entirely on the use of precious metals for currency, it does not require more precious metal to be produced. It can simply be that more of the existing precious metal is monetised and thrown into circulation, or it can be that the velocity of circulation is increased. But, commodity producing economies long before capitalism learned to use tokens as representatives of the money-commodity so that circulation of commodities could continue without producing more gold. That is certainly the case today, and the circulation of commodities has no relation whatsoever to the production of gold.

So, this statement,

"Accordingly, for example, the world gold stockpile must increase by 5% if the global collective capitalist class is to make a 5% rate of profit...regardless of whether they have produced surplus-value or not."

I'm afraid bears absolutely no relation to reality. It simply represents commodity fetishism, in the shape of a gold fetish similar to that of the gold bugs, or mercantilists. Money is only a manifestation of value as labour-time. A piece of paper representing 10 hours of labour-time is equally good as money as is a gram of gold representing 10 hours of labour-time, and the profit of the capitalist can just as easily be represented by the piece of paper as by the gram of gold. The real nature of the capitalists profit is not the gold or the piece of paper, but the existence of surplus products, of available supplies of additional materials, labour-power, and means of subsistence to be able to pay to the additional workers as wages. The piece of paper acts just as well to convert their profit into accumulation of these additional elements of capital as does the gram of gold, with the advantage that the piece of paper costs much less itself to produce, thereby realising capital for other productive purposes than simply providing a means of circulation.