Ramsay, The Illusion of Profit, Historic Prices and The Turnover of Productive-Capital
(Part 1)
Ramsay continued to use the terms fixed and circulating capital, but his actual definition of them is that of constant and variable-capital. That has to be borne in mind, in his use of terminology in his analysis. Marx's analysis of Ramsay in Theories of Surplus Value, illustrates the problem with using historic prices, and the illusion of profits (and losses) that can arise from doing so. Ramsay also correctly recognised that the variable-capital does not enter the labour process. It reproduces labour-power, but what enters the labour process, and creates new value is labour not labour-power. The new value created by labour has no relation to the value of labour-power, or to the variable-capital. Constant capital transfers its current value to production, and is reproduced out of it, variable-capital does not. However, for production to be continuous, and on the same scale, the variable-capital, as much as the constant capital must be physically reproduced, on a like for like basis.
Marx sets out the real basis for calculating the rate of profit for the total social capital. The nation,
“...can calculate the total labour-time which it has to expend to replace the used-up part of its constant capital and the part of the product consumed individually, and the time of labour spent in producing a surplus designed to enlarge the scale of reproduction.”
(Theories of Surplus Value, Chapter 22)
Ramsay did not fall into the “absurd dogma” of Adam Smith, discussed in Part 2, that the value of commodities, and thereby of national output, resolves entirely into revenues. He recognised that it also comprises the value of constant capital, which constitutes a revenue for no one. He also did not reduce the rate of profit down to the rate of surplus value as Ricardo had done, but Marx notes,
“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.”
(ibid)
That is because of Ramsay's use of historic prices for the constant capital, and his failure to recognise the continuous and simultaneous nature of capitalist production, whereby the constant capital is reproduced out of current production, at its current value, and the circuit of capital is P...C` - M`.M – C...P, not M – C...P...C` - M`. The whole capital is not liquidated at the end of a cycle, as is implied by Ramsay, and the proponents of historic pricing, and the production does not cease, at the end of the cycle, being converted into money-capital, only for that money-capital to be converted again into productive-capital. That is true for some individual capitalists who sell their businesses, but not for capital itself.
Marx notes,
“If we know where this surplus comes from, then the whole matter is very simple. But if we only know that the profit depends on the ratio of the surplus to these outlays, then we can acquire the most inaccurate notions about the origin of this surplus, for example we can, like Ramsay, imagine that it originates in part in fixed (constant) capital.”
(ibid)
And, as I demonstrated in Part 3, that is exactly what happens when the rate of profit is calculated on the basis of the use of historic prices, rather than current reproduction cost. It can also result in the opposite condition, of believing that losses, or reduction in surplus value can arise from changes in the value of the constant capital. This illusion of additional profit has to be distinguished from the effect of changes in the value of the capital on the rate of profit itself.
Marx sets out an example to demonstrate this point. He assumes a farmer uses 20 kilos of grain as seed, which results in 100 kilos of grain as output, so that the seed (constant capital) is 20% of the output. He assumes that wages equal 20 kilos of grain. For the purpose of this example, Marx assumes that wages are paid in grain, and that the workers then exchange this grain for the wage goods they require. Similarly, the farmer pays for the other elements of constant capital they require in grain. This other constant capital also amount to 20 kilos of grain. In total, then, 60 kilos of grain are laid-out as capital, and must be reproduced out of the 100 kilos of output, leaving 40 kilos as surplus product. The rate of surplus value is then 200%, and rate of profit is 66.6%.
Marx then assumes that labour productivity doubles, so that with the same 20 kilos of seed, and same quantity of labour and other constant capital, the output rises to 200 kilos. As Marx says, here, the same labour went into the production of the 20 kilos of seed, as went into it the previous year, the same amount of labour went into the production of the other constant capital, whose value has not changed, and the same amount of immediate labour has been undertaken. If we assume that this amounts in total to 200 hours of labour, and that 1 hour of labour produces £1 of value, we can then say that, in the previous year, 200 hours of labour produced 100 kilos of grain, with a value of 2 hours/£2 per kilo, but that as a result of the rise in productivity, this same 200 hours of labour is embodied in 200 kilos of grain, so that a kilo of grain now has a value of 1 hour/£1.
Because wages are paid in grain, the workers wages (£40) requires that they be paid 40 kilos of grain, whereas previously they only required 20 kilos. Similarly, 20 kilos of grain was sufficient to buy the £40 of constant capital the farmer required from other suppliers. But, with the value of grain having fallen to £1 per kilo, they must now exchange 40 kilos of grain to obtain this constant capital. However, how do things stand in relation to the seed they require?
If we proceed on the basis of a calculation of the rate of profit on the basis of historic prices, the relevant calculation is how much money does the farmer have at the end of the circuit compared to what they had at the start of the circuit. That implies that all of the capital must be sold, or translated into current money prices, and compared with the money that the capitalist spent at the start of the cycle. That implies a circuit of capital that is M – C... P …C` - M`.
This is the same error as made by Brian Green, in his calculation of the rate of turnover, which I have taken up to his obvious displeasure elsewhere. I will deal, in detail, with the theoretical errors and false conclusions he arrives at in future posts. Green's problem arises from the same condition I described at the start of this series of posts, which is that he has concentrated on accumulating a mass of data, but without a theoretical framework within which to analyse it, or at least, to the extent that he has a theoretical framework, it is not that of Marx, and is based upon a number of false assumptions, which lead him to ridiculous conclusions, such as that the rate of turnover today is only 4.4, whereas Engels himself had calculated the rate of turnover 160 years ago to already to be around 8.5!
Green attempts to justify his argument that the circuit of capital is M - C...P...C` - M`, which he also wrongly extends to cover the circuit of loanable money-capital, which Marx makes clear exists outside the circuit of industrial capital, by referring to a quote from Marx in Capital II, Chapter 9, where he says,
“This qualitative identity does not come about if we take as our starting point P….P+ the form of the continuous process of production. For definite elements of P must be completely replaced in kind while others need not. However the form M…M undoubtedly yields this identity of turnover.” “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.” (Volume 2, Chapter IX, page 187).
Despite the fact that, when Green first cited this quote in his defence, I pointed out that it refers not to the turnover of the circulating capital, but to the aggregate capital, i.e. the fixed and circulating capital, and that a further reading of the paragraph shows that Marx specifically talks about the turnover of a machine, Green simply restates it above, cutting out from it, the relevant section, dealing with the fact that Marx makes plain within it, that in calculating the turnover, and annual rate of profit, it is the circulating capital, i.e. the productive-capital, not the money-capital, with which he is dealing. Green seems both not to understand the concepts that Marx presents, here, and to think that others who might understand those concepts, will not just read the paragraph for themselves, and compare what Marx actually says to what Green interprets him as saying!
The full text of what Marx says in the paragraph is,
“The qualitative identity does not come about if we take as our starting-point P ... P, the form of the continuous process of production. For definite elements of P must be constantly replaced in kind while others need not. However the form M ... M' undoubtedly yields this identity of turnover. Take for instance a machine worth £10,000, which lasts ten years of which one-tenth, or £1,000, is annually reconverted into money. These £1,000 have been converted in the course of one year from money-capital into productive capital and commodity-capital, and then reconverted from this into money-capital. They have returned to their original form, the money-form, just like the circulating capital, if we study the latter in this form, and it is immaterial whether this money-capital of £1,000 is once more converted at the end of the year into the bodily form of a machine or not. 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.”
First Green cuts out that bit of the paragraph, where Marx makes clear that he is dealing here with the question of how to deal with the turnover of the fixed capital, then even in the last bit of the quote he does include, he ignores Marx's statement that this is a measurement of the turnover of the productive-capital, not of the money-capital, and that the productive-capital is denoted in money terms, only as unit of account, so as to make a rational calculation! Green needs to have the circuit of capital defined as M – C … P... C` - M`, because, in order to arrive at his ridiculous conclusion that the rate of turnover today is only half what it was in Marx's day, he includes within it the circuit also of loanable money-capital, which Marx makes clear exists outside the circuit of industrial capital. Green makes the same mistake, in that respect as that made by Scrope, also criticised in this same Chapter of Capital II.
Green uses a calculation based upon the difference between credit given and credit taken to arrive at his conclusions. In a paragraph aimed at Scrope, but which could equally be aimed at Green, Marx writes,
“Scrope confuses here the difference in the flow of certain parts of the circulating capital, brought about for the individual capitalist by terms of payment and conditions of credit, with the difference in the turnovers due to the nature of capital. He says that wages must be paid weekly out of the weekly receipts from paid sales or bills. It must be noted here in the first place that certain differences occur relative to wages themselves, depending on the length of the term of payment, that is, the length of time for which the labourer must give credit to the capitalist, whether wages are payable every week, month, three months, six months, etc. In this case, the law expounded before, holds good, to the effect that “the quantity of the means of payment required for all periodical payments” (hence of the money-capital to be advanced at one time) “is in inverse [This is evidently a slip of the pen, the proportion being direct and not inverse. — Ed.] proportion to the length of their periods.” (Buch I, Kap. III, 3b, Seite 124.) [English edition: Ch. III, 3b, p. 141. — Ed.]”
And Marx continues,
“The credit system, to which Scrope here refers, as well as commercial capital, modifies the turnover for the individual capitalist. On a social scale it modifies the turnover only in so far as it does not accelerate merely production but also consumption.”
So, where for Marx credit is a means of raising the turnover of productive-capital, for Green it is the basis of his doubling of turnover time, and thereby halving the rate of turnover, even compared with Marx's day!
Marx and Engels make clear in numerous places that the turnover time is calculated on the basis of the turnover of the circulating capital, not the fixed capital, a fact revealed by a careful reading of Marx's comments in this chapter. That is so, because the fixed capital does not have to be reproduced in full, as is the case with the circulating capital. It is the wear and tear of the fixed capital that is reproduced during each turnover of the circulating capital. And, in this chapter, and others in Capital II, Marx also describes this in relation to the productive supply, i.e. the stock of materials etc. In other words, take a firm that processes cotton into yarn. In order to buy cotton in sufficient quantity to make delivery costs efficient, the firm might buy in a month's supply. But, this month's productive supply of cotton does not constitute its advanced circulating capital. Only that actually advanced to production during the turnover period constitutes the advanced circulating capital.
In other words, if the firm turns cotton into yarn, which it can send to market every week, and thereby realise its value, the turnover period is only a week. It is only a quarter of the productive-supply of cotton that constitutes the advanced productive-capital that is being turned over, just as it is only the wear and tear of the fixed capital during that period that is being turned over. In the same way that the residual value of the machine does not need to be reproduced during this period, because it is only when the machine is worn out that that is required, so too with the productive-supply. The remaining three-quarters of the productive supply does not need to be reproduced at the end of the week, because it is sitting waiting to be utilised in the next turnover period, already.
As with the fixed capital, the value of the productive-supply must be taken into consideration, in calculating the annual rate of profit, but as with the fixed capital, we do not have to wait until it is itself fully consumed, until we declare the end of the turnover period.
“Hence, although these materials must be continually replaced in kind, they need not always be bought anew. The frequency of purchases depends on the size of the available stock, on the time it takes to exhaust it. In the case of labour-power there is no such storing of a supply. The reconversion into money of the part of capital laid out in labour-power goes hand in hand with that of the capital invested in raw and auxiliary materials. But the reconversion of the money, on the one hand into labour-power, on the other into raw materials, proceeds separately on account of the special terms of purchase and payment of these two constituents, one of them being bought as a productive supply for long periods, the other, labour-power, for shorter periods, for instance a week.”
(Capital II, Chapter 9)
Marx and Engels repeat on numerous occasions that it is the this rate of turnover of the advanced circulating capital that is the basis for determining the rate of turnover. Moreover, emphasising the above point in relation to the advanced material to production as opposed to the productive-supply, Marx and Engels also make clear that in determining the turnover period, they essentially use the turnover period of the variable-capital, because the advanced materials are processed alongside that variable-capital, so that the turnover of the two is inseparable.
In Capital III, Chapter 4, Engels writes,
“For the sake of simplicity we assume in all the following examples that the circulating constant capital is turned over in the same time as the variable, which is generally the case in practice.”
And further,
“The quantity of surplus-value appropriated in one year is therefore equal to the quantity of surplus-value appropriated in one turnover of the variable capital multiplied by the number of such turnovers per year. Suppose we call the surplus-value, or profit, appropriated in one year S, the surplus-value appropriated in one period of turnover s, the number of turnovers of the variable capital in one year n, then S = sn, and the annual rate of surplus-value S' = s'n, as already demonstrated in Book II, Chapter XVI, I. [English edition: Vol. II, p. 305. — Ed.]”
And,
“To make the formula precise for the annual rate of profit, we must substitute the annual rate of surplus-value for the simple rate of surplus-value, that is, substitute S' or s'n for s'. In other words, we must multiply the rate of surplus-value s', or, what amounts to the same thing, the variable capital v contained in C, by n, the number of turnovers of this variable capital in one year. Thus we obtain p' = s'n (v/C), which is the formula for the annual rate of profit.”
In this chapter, on this basis, Engels also determines the annual rate of surplus value to be 1300%.
In 2011 UK wages were £799 billion. According to Green, the rate of turnover is 4.4 times per year. So, the advanced variable capital would be, £181 billion. Using Engels 1300% annual rate of surplus value, as a base, even with a modest annual rise in the annual rate of surplus value over the last 160 years, we might estimate it today to be at least, 2000%. My own experience even in the 1980's, from self-employment, puts the figure closer to around 5000%. But, using the very conservative 2000% figure we arrive at a figure for total surplus value of £3,631 billion. In fact, the total figure for profits, rents and taxes for that year was £654 billion, or just a fifth of the figure that would result from Green's formula. In order to arrive at a figure consistent with the actual National Income breakdown, even using the conservative figure of only a 2000% annual rate of surplus value, we would have to calculate the rate of turnover to be around 22 times p.a.
The annual rate of surplus value rises because rises in productivity reduce the value of labour-power, thereby raising the rate of surplus value, and similarly, rises in productivity in production and distribution, increases the rate of turnover, so that the variable-capital is turned over more quickly causing the annual rate of surplus value to rise. Given an average annual rise in productivity of around 2%, it can be seen how modest the 2000% figure is compared to Engels calculation of 1300%. Put another way, if the annual rate of surplus value today is 5000%, we arrive at the following. Total surplus value is £654 billion, so variable-capital is £13.08 billion. The actual amount for laid out wages was £799 billion, so that the rate of turnover must be 54.20 times per annum.
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