Tuesday, 20 November 2018

Interpreting US Profits (7) - Depreciation and The Rate of Profit

Depreciation and The Rate of Profit 

In a response to Sam Gindin, Michael says, that the rate of profit is periodically restored by “the destruction of capital values”. 

But, how, if the rate of profit is calculated on the basis of historic prices, is that even possible? The destruction of capital values, is precisely the process of devaluation that Marx describes in Capital IIIChapter 6! That process of devaluation arises, periodically because, rises in social productivity reduce the current reproduction costs of the commodities that comprise the productive-capital. As Marx sets out in Chapter 6, that applies both to the constant capital, and the variable-capital, though it has different effects in relation to constant capital compared to variable-capital. A fall in the value of constant capital, reduces the value of output, but a fall in the value of variable-capital, has no effect on the output value. However, a fall in the value of constant capital has no effect on the mass of surplus value, but a fall in the value of variable-capital, causes the rate of surplus value, and thereby mass of surplus value to rise. 

But, if, as Michael previously insisted, the rate of profit is to be calculated on the basis of the historic cost of that capital, and not on the basis of its new depreciated value, how could the rate of profit in any way be affected? It couldn't. It can only be affected, if the rate of profit is calculated on the basis of the new depreciated value, i.e. on the basis of its current lower reproduction cost, and not the historic cost. Periodically, another form of this moral depreciation occurs, where technological change means that a new piece of equipment is introduced, which is more productive than the equipment it replaces. If a new machine is able to produce twice as many units of output per hour, than its predecessor, then even if its cost is the same, its relative value falls in half. It spreads its cost over twice as much output, as its predecessor, in the form of wear and tear. In order to remain competitive, owners of the older machines, can only recover the same amount of value of wear and tear, per unit of output, as for the new machine. That means that the value of their machine, irrespective of its historic cost, is cut in half, and it's on that basis that they calculate their rate of profit, because, although they suffer a capital loss on their existing machine, the cost of the new machine they buy, is itself effectively half what it was previously. 

In other words, if A has a machine with a value of £1,000, which produces 10,000 units over its five year lifespan, that is £0.10 per unit in wear and tear. If a new machine with a value of £1,000 is introduced by B, which produces 20,000 units over five years, it transfers £0.05 per unit in wear and tear. A can now only recover the same £0.05 per unit, which means that the value of their machine falls to £500. They suffer a £500 capital loss. They must add £500 of capital, to be able to replace the machine, but when they do, they will replace it with the new machine, and because this machine is relatively half the price of the original machine (because its cost is spread over twice as much output), their rate of profit rises.  But, it does not rise only from the point they introduce the new machine.  It rises from the point that their old machine is devalued by 50%, because it now represents a smaller amount of capital value, actually advanced to production.  I will explain this later, in looking at how Marx explains how Ramsay was led into confusion by this, and the use of historic pricing.  It requires, Marx shows, that the two separate things involved are separated out.  Firstly, in this case, a tie-up of capital (the £500 of capital that must be added from revenue, to compensate for the £500 capital loss), and secondly, the effect on raising the rate of profit, because the capital value advanced is reduced by 50%. 

The important other factor here is the concept of capital loss, or capital gain as a result of such a depreciation, or appreciation respectively, in the value of the capital. Where the commodities that comprise the elements of productive-capital rise in value, this causes a capital gain – in the same way that if you own a piece of land, or a bond, or a share that rises in price, you obtain a capital gain. But, a capital gain is not a profit, despite what bourgeois economists would have you believe. Profit is the result of the production of surplus value, and surplus value is only created by labour. Such capital gains are not the consequence of additional surplus value being created by labour, but merely a consequence of changes in the value of commodities, or even just the rise in the price of those commodities, or assets

Surplus value arises from the fact that the new value created by labour, is greater than the value of the labour-power that undertakes that labour. It relies on this fact that social productivity has risen to such a level that the value of labour-power is low enough that the labourer can work for longer than is required to reproduce their labour-power. As Marx says, ultimately, all surplus value is relative surplus value, for that reason. If for some reason, social productivity fell sharply, for example, if there was a crop failure in an economy where wages were composed overwhelmingly of agricultural produce, then its possible that the value of labour-power could rise to a level that was greater than the new value produced by labour. In that case, instead of the workers producing a surplus value, they would produce a loss. As Marx also describes in Capital III, Chapter 15, if capital expands so much, in relation to the available labour supply, that it pushes up wages to a level whereby wages exceed the new value created, the same thing would apply, instead of producing additional surplus value, this additional labour would cause the mass of surplus value to fall. 

But, again, this is totally different to a capital loss caused by a fall in the value or price of the commodities that comprise the constant capital, or indeed a capital loss suffered as a result of a fall in the value of a piece of land, share, bond or other asset. None of those have anything to do with surplus value, just as a capital gain is not the consequence of surplus value. But, as Marx describes in Capital III, Chapter 6, a fall in the value of commodities that comprise the constant capital, although it results in a capital loss, it also results in a rise in the rate of profit, because the value of the constant capital to be replaced has fallen. Moreover, as indicated in Marx's earlier quote, it has another effect in relation to the release of capital. 

Suppose a capital is comprised 

c £1000 + v £1,000 + s £1,000 = £3000. 

Its rate of profit is 50%. It sells its output, but before it replaces its constant capital, the price of its raw materials falls in half. So, now, £500 of the capital it reproduced in the sale of its output is released. It is no longer required for the purchase of raw materials. This release of capital, therefore, creates the illusion of additional profit, not because any additional surplus value has been created, but solely because a portion of capital that has been reproduced is no longer required for that purpose, and so is converted into revenue. If previously, £1,000 of profit would have been used to expand the capital by 50%, now £1500 of revenue is available for accumulation of capital. But, as Marx explains two separate things have occurred here. Assume that the profit was all previously consumed unproductively, so that there was no accumulation. Firstly, £500 of capital has been released, and this capital, now transformed into revenue, can be accumulated, so that more capital and labour are employed, even though £1,000 of profit continues to be consumed unproductively. That would result in a rise also then in the amount of surplus value, because more labour is thereby employed. Secondly, and separately, even if this capital released as additional revenue is also consumed unproductively, the rate of profit will rise. In the next year, there will be: 

c 500 + v 1000 + s 1000 = 2500, s` 100%, r` 66.6%. 

No additional profit is made in this year, because the additional £500 of revenue, resulting from the depreciation of the constant capital, only created the illusion of profit, as capital was released, and converted into revenue. But, the rise in the rate of profit is continued, because it was very real, the surplus value continues to represent a larger proportion of the capital to be reproduced, because the value of constant capital has fallen. And, this would also have been the case had the value of the materials fallen prior to the sale of the end product, so that the value of the end product also fell. In other words, as Marx described in Chapter 6, in relation to a fall in the value of cotton, it would reduce the value of all the cotton held in stock, in work in progress, and in cotton goods entering the market. But, the value of those goods still then reproduces the £500 required to replace the constant and variable capital, and to produce £1,000 of profit. Previously, that £1,000 profit would enable a 50% accumulation of capital, but now it enables a 66.6% accumulation of capital, and a consequent additional increase in the labour employed, and mass of surplus value produced by it. 

So, if we assume that instead of the 1000 profit being consumed unproductively, we assume that it is accumulated. In the first year, having sold the output for 3000, only 500 is required to reproduce the constant capital, 1000, is required to reproduce the variable-capital, and 1000 constitutes the profit that would be normally accumulated. But, that leaves 500 left over that is capital released, as a result of the fall in the value of c. Even, then, if we assume that this 500 released capital that has been turned into revenue, is consumed unproductively, we find that the rate of profit, on a current reproduction cost basis, is 66.6%, not 50%. The 500 of profit is consumed unproductively, but the 1000 of profit, now buys 66.6% more material, and 66.6% more labour-power. 

A similar situation can be seen in relation to assets. If the price of bonds falls from £1000 to £500, I could with £100,000 now buy 200 bonds, rather than 100. If each bond has a coupon of £10, I will obtain a revenue of £2,000 p.a. rather than £1,000. That is why, as asset prices were astronomically inflated over the last 30 years, workers fairly fixed monthly pension contributions, bought fewer and fewer bonds and shares, so that, even had yields on those assets not also been falling during that time, the capital base of their pension funds, and its ability to generate revenues to finance future liabilities/pension payments would have been significantly undermined, which has, indeed, resulted in huge black holes in those pension funds, especially as falling yields, meant that fund managers sought to cover current liabilities by cashing in on the capital gains on the fund, by selling assets, which further undermined the ability to generate future revenues. 

In Theories of Surplus Value, Chapter 22, Marx showed in response to Ramsay's confusion over the illusion of profit created by the use of historic prices, why it is current reproduction costs that form the basis for the calculation of the rate of profit. As Marx sets out, in opposition to Ramsay, the use of historic prices would only be relevant if you saw capitalism as a static system, whereby all capital is effectively liquidated at the end of the year, and then started again. But, as Marx indicates capitalism does not work like that, it works on the basis of an assumption of ongoing production, so that the capital consumed in production is reproduced on a like for like basis out of current production

If the value of the capital that has to be physically replaced falls in value, because of rising productivity, or just falling market prices for the commodities that comprise the elements of capital, a smaller portion of this year's output is required to reproduce them. That means that a) a portion of capital is released as revenue/profit, which is what caused Ramsey's confusion, and can be utilised to increase accumulation, and b) the proportion of profit to the value of the capital that must be so replaced rises, so that the rate of profit rises. The first effect, Marx says creates the illusion that additional profit has been created, but the second effect is real

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