Ramsay, The Illusion of Profit, Historic Prices and The Turnover of Productive-Capital
(Part 2)
“... 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)
It is also the case, where realised profit, is reinvested as additional productive-capital. However, as he sets out, in Capital II, it is not the circuit of existing industrial capital, based on the assumption of continuous and ongoing capitalist production. That circuit is rather P … C` - M`. M – C … P.
“The circuit of productive capital has the general formula P ... C' — M' — C ... P. It signifies the periodical renewal of the functioning of productive capital, hence its reproduction, or its process of production as a process of reproduction aiming at the self-expansion of value; not only production but a periodical reproduction of surplus-value; the function of industrial capital in its productive form, and this function performed not once but periodically repeated, so that the renewal is determined by the starting-point.”
(Capital II, Chapter 2)
Its extended form as set out by Marx is,
It shows, the point that M constitutes only a moment in the circuit of the industrial capital, not its termination point. It also demonstrates the point made earlier that the circuit M – C...P...C` - M`, only applies to that part of the realised profit m, which is reinvested. As Marx makes clear, in this chapter, and elsewhere in Capital, money “M”, here is only the use of money as a unit of account, as the money equivalent of the value (current reproduction cost) of the commodities that comprise the capital, in its various forms. It does not represent the money prices paid for those commodities, i.e. it does not represent the historic price of the capital, nor the price actually obtained from the sale of the commodities.
"The circuit of productive capital is the form in which classical Political Economy examines the circular movement of industrial capital.”
(ibid)
Or, as Marx puts it in Capital III, Chapter 24,
Or, as Marx puts it in Capital III, Chapter 24,
"“In the reproduction process of capital, the money-form is but transient – a mere point of transit.”
And Marx makes clear that in measuring the rate of profit it is by measuring the expansion in the value of that capital, not in the expansion of monetary values that he undertakes his analysis. Indeed, as Marx goes on to demonstrate here, it is precisely the analysis of profit in terms of changes in monetary values that leads Ramsay into error.
“They exhibit their capitalist birthmark not in the absolute magnitude of their value but in its relative magnitude, in the magnitude of their value as compared with that possessed by the productive capital embodied in them before it was transformed into commodities.”
Note that it is the value embodied in the "productive-capital", not the value of the money-capital, prior to its metamorphosis into productive-capital, that is Marx's starting point. Now, if we return to Marx's example of the farmer, in Theories of Surplus Value, Chapter 22, and calculate the rate of profit on the basis of historic prices, we would have £120 of capital laid-out (£40 for seed, £40 for other constant capital £40 for wages). In order to reproduce this capital, at its current value, 120 kilos would have to be sold, or put another way, out of the £200, obtained from the sale, £120 would have to be set aside to cover the capital laid out. It would leave £80 of profit left over, and this represents a rate of profit of 66.6%. But, Marx demonstrates that this calculation based on the use of historic prices is wrong. It is wrong precisely because the circuit of industrial capital is not M - C ... P ... C` - M`, but is P ... C` - M`. M - C ... P. M as, Marx says in Capital III, Chapter 24, is not a termination point, "the money-form is but transient – a mere point of transit.” Marx's analysis of capitalist production and reproduction, and the rate of its expansion, is based on the observation that it is continuous and ongoing, not broken up into a series of discrete periods. As Trotsky puts it, it is like a motion picture, not simply a series of individual photographs.
If instead of assuming that capitalist production ceases at the end of this circuit, with all of the capital being liquidated, we instead remain with the reality of capitalist production, as production that is continuous and ongoing, what we actually have is this. 20 kilos of grain has to be taken out of current production to replace the seed, and quite clearly in order to replace this 20 kilos of seed, the farmer does not have to exchange 40 kilos of grain to obtain it! That is only the case in relation to the grain they must exchange to obtain the other elements of constant capital they require, and to obtain the labour-power they require, the value of which has not changed. The value of this other constant capital, and labour-power has not changed. It is only the exchange-value of those other commodities that has changed. It has risen as against grain, because the value of grain has fallen, and thereby the exchange value of grain relative to the other constant capital, and labour-power has fallen, i.e. the grain price of that constant capital, and labour-power has risen; more grain must now be exchanged in order to obtain the previous quantities of them. But, that is not the case with the seed, precisely because the seed is the grain.
For the historic cost calculation to apply, we would have to assume that the farmer lays out £120 for capital, and that at the end of the circuit, they sell all of their output including that part that they replace in kind out of their output for seed. They could, of course, do that, if they were going to cease being a capitalist farmer. They could literally consume their seed corn. In that case, the 20 kilos of seed that they laid out at the start of the circuit, with a value of £40, only has a current value of £20, so that they would be seen to have made a loss of £20 on that capital. It would appear that this loss arises from the change in the value of the seed, but if such a loss can arise from a change in the value of the constant capital, it can just as easily be applied in the opposite direction so that it creates a surplus value. That was the error, as Marx noted earlier, that Ramsay falls into, and it is the inevitable conclusion that must be drawn from the use of historic prices, rather than current reproduction cost, as the basis for calculating the rate of profit. It destroys the basis of the labour theory of value.
But, as Marx demonstrates, what the farmer is actually interested in, here, is the use value of the 20 kilos of grain as seed, not its exchange value. Indeed, the exchange value of grain relative to seed, the grain price of seed, has not changed, because they are the same thing. Where the fall in the value of grain means that he must now use 40 kilos of output to replace wages, and 40 kilos to replace other elements of constant capital, that is not the case with the 20 kilos of grain set aside as seed. For the seed corn, he only requires the same 20 kilos, as before. So, out of the output of 200 kilos – 20 kilos as seed, 40 kilos as other constant capital, 40 kilos as wages, leaving 100 kilos as surplus product.
This 100 kilos of surplus product, has a value of £100, which is only half what it previously would have been, because the value of grain has halved. The previous surplus product was 40 kilos which had a value of £80. The current surplus product of 100 kilos is equal, at the previous value, to only 50 kilos. So, there is a discrepancy of 10 kilos, which, at the previous value, was equal to £20, and, at the current value of grain, is equal to 20 kilos. In fact, as Marx shows, what this demonstrates is not that a loss of £20 has arisen, but that 20 kilos of production, equal to £20, at current values, has been released. A portion of current output (20 kilos) is no longer required to replace the consumed capital, because the value of the seed has fallen in half (i.e. twice as much seed is produced with the same amount of labour).
The fall in the value of grain, which is the same use value as the seed, means that the value of the seed component of the productive-capital falls. So, there are two different things occurring here, Marx shows. Firstly, the fall in the value of seed means that capital is released as revenue, (a portion of physical output previously required to physically replace capital is released for consumption) and this creates the illusion that the mass of profit/surplus value has risen. Ramsay confuses this illusion of an increase in the mass of profit with the rise in the rate of profit, which is the second consequence of this fall in the value of seed.
If we remove that illusion, however, it becomes obvious that the rise in the rate of profit exists without it. If we assume that the surplus product is only 80 kilos of grain, rather than 100 kilos – so removing the 20 kilos of grain that has been released – then the consumed capital is 20 kilos for seed, 40 for other constant capital, and 40 kilos for wages = 100 kilos. But, 80 kilos is 80% of 100 kilos, or, in its money equivalent form, £80 is 80% of the current capital value laid out. That is a rise compared to the original rate of profit of 66.6%. Marx notes,
“Although wages remained the same in both 1 and 2, the ratio of profit to wages, that is, the rate of surplus-value, would have risen. But this is only an illusion. The profit would consist firstly of 80 quarters, equal to 40 quarters in case 1, and the ratio to wages would remain the same; secondly, [in case] 2, of 20 quarters, equal only to 10 quarters in the first case, which would have been converted into revenue from constant capital.”
(Theories of Surplus Value, Chapter 22)
This illusion, created by the release of capital to become revenue, is discussed in more detail in relation to both constant and variable-capital, in Capital III, Chapter 6, and Marx there also deals with the opposite condition whereby a rise in the value of the commodities that comprise the productive-capital, results in a tie-up of capital, whereby if production is to continue on the same scale, a portion of revenue, must instead be used as capital. That can happen where productivity falls, or where a portion of the productive-capital is physically destroyed. A release of capital creates the illusion of additional profit, but the reality of a rise in the rate of profit, whilst a tie-up of capital results in the illusion of a reduction in profit, but the reality of a fall in the rate of profit.
Marx sets out the illusion in respect to the profit and rate of profit, caused by this use of historic prices, and the assumption that the circuit of capital is M – C … P...C` - M`, rather than P … C` - M`.M – C … P. He assumes that the farmer is selling up, and ceasing production so that the former circuit applies. The farmer initially uses 60 kilos of grain as capital (20 seed, 20 constant capital, 20 wages) with a value of £2 per kilo, and so a capital of £120. Now, with the value of a kilo of grain having halved to £1, if the farmer had to recover the value of their capital, they must sell 120 kilos, leaving a surplus of 80 kilos, or £80, which represents a rate of profit of 66.6%, as before. But, as seen earlier, Marx shows that this is wrong, and that on the assumption of continuous and ongoing capitalist production, the farmer only sells 80 kilos of grain, so as to replace their constant capital, and wages, and simply replaces the 20 kilos of seed directly out of their own production. They only use 100 kilos of grain, with a value of £100, leaving them a surplus product of 100 kilos, with a value of £100, thereby providing them, apparently, with a rate of profit of 100%. Then, as seen, even if we remove the illusory profit, which represents merely, the release of £20 of capital, the rate of profit has still risen to 80%, and if the level of productivity then remained constant, this would also be the rate of profit for subsequent years. Marx says,
“In the course of the reproduction process, however, the matter is altered to a certain extent. For the farmer replaces the 20 quarters of seed corn in kind out of his own product. [As far as their value is concerned] they are replaced by 40 quarters in the [new] product. But in the reproduction process he only needs to replace them with 20 quarters in kind, as was the case previously. The rest of his expenditure [expressed in quarters] increases in the same ratio as the quarter is devalued (provided wages do not fall). To replace the remaining portion of constant capital, the farmer now needs 40 quarters and not 20 as previously, and to replace wages he also needs 40 quarters instead of 20. Altogether he must now lay out 100 quarters, compared to 60 quarters previously; but he need not lay out 120 quarters, the amount corresponding to the depreciation of the corn, because the 20 quarters used [as seed] which were worth £40, are replaced by 20 [quarters] (since in this context only their use-value matters) which are worth £20. So evidently he has made a gain of these 20 qrs., now worth £20. His surplus is therefore not £80 but £100, not 80 qrs., but 100. (Expressed in quarters of the old value, not 40 quarters but 50.) This is an unquestionable fact, and if the market price does not fall as a result of abundance, the farmer can sell 20 quarters more at the new value, thus gaining £20.”
(ibid)
This creates the illusion of additional profit, but it is, in fact, only the release of capital as revenue. If, as seen earlier, we remove this illusory 20 kilos of surplus grain, that leaves us with a surplus of 80 kilos, with a value of £80, and so a rate of profit of 80%. That is the basis on which Marx says the rate of profit should be calculated, i.e. the current reproduction cost, and not the historic cost, which would have returned a rate of profit of only 66.6%.
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