The Value Composition of Capital and The Squeeze on Profits
In Part 3, I looked at the role of the technical composition of capital, as fundamental to Marx's Law of The Tendency For The Rate of Profit To Fall. The other ratio that has to be considered in examining changes to the rate of profit is the value composition of capital. If we take an example, such as that discussed by Marx in Capital III, Chapter 6, suppose that, due to sharp increases in demand, due to a boom in textile production, the existing suppliers of cotton cannot keep up with demand. So, the price of cotton rises. In this case, there may be no change in the technical composition, because there has been no dramatic change in technology or productivity. Suppose we have originally,
c 1000 + v 1000 + s 1000 = 3000, s` 100%, r` 50%.
The £1000 c represents 1,000 kilos of cotton. Now, textile output doubles on the basis of the same technical composition of capital, so that twice as many workers are employed, and the demand for cotton doubles. However, cotton suppliers cannot meet this demand at current prices. They have to bring more land into cultivation, and so on, with higher costs. The price of cotton rises from £1 per kilo to £1.20 per kilo. So, now,
c 2400 + v 2000 + s 2000 = 6400, s` 100%, r`45.45%.
Here, there is no change in the technical composition of capital, the rate and mass of surplus value remains constant, but the rate of profit falls, due only to the rise in the price of cotton. In fact, as Marx points out, in Chapter 6, and in Theories of Surplus Value, depending on market conditions, it may not be possible to pass on this rise in the price of textiles. If previously, output of textiles was 1,000 with a unit price of £3.00, it is now 2,000 with a unit price of £3.20. A rise in price will cause, demand to fall. So, a portion, at least, of the rise in price could not be passed on, if output was to stay at 2000 units. It would have to be absorbed out of the potential profit. That is all the more so the case, where production is undertaken on a huge scale, with vast amounts of fixed capital that must be kept fully operational.
“This shows again how a rise in the price of raw material can curtail or arrest the entire process of reproduction if the price realised by the sale of the commodities should not suffice to replace all the elements of these commodities. Or, it may make it impossible to continue the process on the scale required by its technical basis, so that only a part of the machinery will remain in operation, or all the machinery will work for only a fraction of the usual time.”
(Capital III, Chapter 6)
So, a rise in the value composition of capital, as opposed to the technical composition of capital, can cause a squeeze on profits, and the rate of profit, but this is completely different to the condition that Marx describes as the basis of the Law of the Tendency for the Rate of Profit to Fall. The latter depends upon a rising technical composition of capital, which would also tend to a fall in the unit values of raw materials, as a result of the rise in social productivity, which reduces the value of commodities. Here there is no rise in the technical composition, and instead of productivity rising, causing a fall in the value of those commodities that comprise constant capital, productivity falls, as less fertile land, mines, oil wells have to be used to meet demand, causing the prices of these commodities to rise. Or, as Marx says, it may simply be that the supply of these materials cannot be increased sufficiently, so that, although the cost of producing them does not rise, their market price does, as firms demanding these inputs push up the price, as they compete to obtain them. As Marx describes, its in response to those conditions that capital seeks to introduce new technologies to raise productivity in the production of these inputs, and to improve the efficiency in the use of them, as well as opening up new lands, mines etc., that, in the longer term, will have higher levels of fertility, and productivity, once the necessary capital investment in infrastructure has become absorbed into their natural fertility (Theories of Surplus Value, Chapter 9).
Similarly, the value composition of capital can fall, and yet the rate of profit also falls as a consequence. If, for example, food prices, or the prices of other wage goods rise, then the value of labour-power will rise. So, the ratio of c:v will fall, as v increases. But, this rise in v, is then not a consequence of more labour being employed, which produces more surplus value. It is simply a function of wages rising, and the rate of surplus value, thereby falling. Instead, of the mass of surplus value rising, therefore, it falls. And, as Marx says, it need not even be that the value of labour-power rises, to cause this rise in v, and fall in the ratio of c:v. It can simply be a result of the accumulation of capital reaching a point, whereby capital has to pay higher wages, in order to employ additional labour. Firstly, in order to increase the length of the social working-day it may have to pay overtime pay, or higher premium rates, for additional work. As one firm competes with another for workers, it will have to offer higher wages, and those higher wages will then have to be offered to all workers. In that case, the value composition of capital falls, but rather than leading to a rise in the rate of profit it leads to a fall. Marx discusses, these various scenarios at length, in Theories of Surplus Value, Chapters 12-18. And, he also sets out the consequences for this in Capital III, Chapter 6.
“Suppose, with 500 employed labourers, the original proportion in which the product is divided = 400 v + 600 s = 1,000, making the rate of surplus-value = 150%. In that case, the labourer receives £4/5 , or 16 shillings per week. Should 500 labourers cost £500 per week, due to an appreciation of variable capital, each one of them will receive a weekly wage = £1, and £400 can employ only 400 labourers. If the same number of labourers as before is put to work, therefore, we have 500 v + 500 s = 1,000. The rate of surplus-value would fall from 150 to 100%, which is ⅓. In the case of new capital the only effect would be this lower rate of surplus-value. Other conditions being equal, the rate of profit would also have fallen accordingly, although not in the same proportion. For instance, if c = 2,000, we have in the one case 2,000 c + 400 v + 600 s = 3,000. The rate of surplus-value = 150%, the rate of profit = 600/2,400 = 25%. In the second case, 2,000 c + 500 v + 500 s = 3,000. The rate of surplus-value = 100%, the rate of profit = 500/2,500 = 20%. In the case of already invested capital, however, there would be a dual effect. Only 400 labourers could be employed with a £400 variable capital, and that at a rate of surplus-value of 100%. They would therefore produce an aggregate surplus-value of only £400. Furthermore, since a constant capital of £2,000 requires 500 labourers for its operation, 400 labourers can put into motion only a constant capital of £1,600. For production to continue on the same scale, so that 1/5 of the machinery does not stand idle, £100 must be added to the variable capital in order to employ 500 labourers as before. And this can be accomplished only by tying up hitherto disposable capital, so that part of the accumulation intended to extend production serves merely to stop a gap, or a portion reserved for revenue is added to the old capital. Then a variable capital increased by £100 produces £100 less surplus-value. More capital is required to employ the same number of labourers, and at the same time the surplus-value produced by each labourer is reduced.
The advantages resulting from a release and the disadvantages resulting from a tie-up of variable capital both exist only for capital already engaged and reproducing itself under certain given conditions. For newly invested capital the advantages on the one hand, and the disadvantages on the other, are confined to an increase or drop in the rate of surplus-value, and to a corresponding, if in no way proportionate, change in the rate of profit.”
But, Michael makes no such distinction in respect of a fall in the rate of profit from these opposing conditions, one resulting from higher productivity, and a rising technical composition of capital, the other arising from falling productivity, a rise in the value composition of capital, as the prices of materials rise, or from a rise in wages, which causes the rate of surplus value to fall. In other words, he makes no distinction between a fall in the rate of profit caused by Marx's Law of The Tendency For The Rate of Profit To Fall, or from a squeeze on profits caused by a Smithian or Ricardian fall in the rate of surplus value, due to a rise in the value composition of capital, or a rise in wages. Yet, Marx was at great pains himself to distinguish between these different conditions and thereby to reject the Smithian/Ricardian explanation of the falling rate of profit, as the basis of the long-term tendency! Instead, Michael just points to a supposed fall in the rate of profit, and uses that to claim validation of the Marxian Law, without any evidence that it is at all due to rising productivity, and a rising technical composition of capital. Its like confusing a parasol for an umbrella. In fact, on the basis of what we know about productivity levels, and Michael's own analysis of fixed capital investment, we know the opposite is true. Productivity growth is sluggish, and investment in new fixed capital is at low levels.
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