The question of tie-up and release of capital has to be considered from the perspective of fixed capital, circulating constant capital and variable-capital. It also has to be viewed in terms of what point in the circuit of capital changes in values or market prices occur.
Fixed Capital
Fixed capital always only transfers a portion of its value, via wear and tear, to the value of production, during the labour process. What proportion of its value is transferred depends upon the durability of the fixed capital, and the duration of the labour process. A screwdriver constitutes fixed capital, for example. Its normal lifespan might be say 5 years. Used in the production of kitchen cabinets, which are produced and sent to market every week, the screwdriver transfers (assuming a 50 week year) 1/250 (0.4%)of its value in the labour process. Used in the production of a ship, which is built and sent to market in three years, the screwdriver transfers 60% of its value in the labour process. If the screwdriver had greater durability, say a lifespan of ten years, it would transfer only 1/500 (0.2%), and 30% of its value, respectively.
Because, fixed capital only transfers a portion of its value, via wear and tear, to the value of output, this equivalent value being returned, via the sale of the output, in each turnover of capital, it is more susceptible to changes in its value, over its lifetime. This will have different consequences for different capitals depending upon what stage in the lifespan of a piece of fixed capital a change in its value occurs, as Marx discusses in Theories of Surplus Value, Chapter 23.
Suppose firm A bought a machine ten years ago, for £1,000. It has a lifespan of ten years, thereby losing £100 a year in wear and tear. The firm has recovered the £1,000 value of the machine in the value of its output over that period, and has stored up this value, so as now to be able to replace the machine “on a like for like” basis. Firm B, bought the same type of machine a year ago, for £1,000, and has, so far, recovered, £100 of the wear and tear, it has lost. Now, due to a rise in social productivity, the machine requires only half as much labour-time for its reproduction, so that its value falls in half. If the value of money remains constant, the exchange value/price of the machine will, thereby fall to £500.
Firm A, which has recovered £1,000 in wear and tear, over the ten years, now has a £500 release of capital. It only needs, half of the £1,000 it stored up, to be able to replace the machine “on a like for like basis”. In effect, it has made a £500 capital gain on the money-capital it stored up for this purpose, i.e. its money capital has risen in value relative to the value of the machine. It can use the other £500 of stored up capital as revenue. Either the capitalist might consume this revenue, which will appear as additional profit to them, though that is an illusion, because no additional surplus value has been produced, by increasing their unproductive consumption, or they might again convert this revenue, back into capital, by accumulating additional capital, perhaps by buying a second machine.
For the second firm, however, they have only recovered, £100 of value of wear and tear. For them, they now have a machine that has a value of only £500. Taking away the value of the £100 of wear and tear, the machine that would have had a residual value of £900, now represents to them a capital loss of £400. If they liquidated their assets, the machine that yesterday had a value of £900, today, only has a value of £500. Moreover, when they come to recover the value of wear and tear from the value of the output, they will now only be able to recover £50 per year, rather than £100. Assuming no further changes in the value of the machine, over the ten years of its life, they will recover £550 in wear and tear. That will still mean they have received a £50 release of capital, but that is much less than that obtained by firm A. If we were to consider a third firm C, that has only just bought such a machine, and so far recovered none of its value from wear and tear, they would suffer a £500 capital loss, as a result of the moral depreciation of the machine.
Suppose that, in addition to the machine, both firm A and B, advanced £100 for materials, and £100 for wages, with a 100% rate of surplus value, so that £100 of profit is produced. In the current year, prior to the fall in the value of the machine, the value of output is £100 for wear and tear, £100 for materials, £100 for wages, and £100 for profit = £400. The rate of profit is 33.3%. Next year, with the value of the machine falling to £500, only £50 is transferred as wear and tear, so the value of output falls to £350. But, the amount of surplus value remains the same, at £100. So, now, the rate of profit rises to 40%. The rate of profit rises, even though the mass of surplus value remains constant, because the fall in the value of the machine means that less capital has to be advanced to reproduce the consumed capital, “on a like for like basis”.
The same is true in relation to the annual rate of profit. Previously, £1,000 was advanced for fixed capital, £100 for materials, and £100 for wages = £1200. Profit was £100, giving an annual rate of profit of 8.33%. Now advanced capital falls to £700, and the annual rate of profit rises to 14.29%. This shows what a significant effect on the average annual rate of profit, the moral depreciation of the fixed capital stock, as a result of technological development, can have.
Previously, £100 of profit, accumulated over ten years, was £1,000, which would have bought one additional machine. Now, this same £100 of profit, accumulated over ten years, will buy two machines, because the value of the machine has halved to £500. The rate of profit, which is a measure of how much the capital has self-expanded, has risen, because the value of the capital that itself has to be reproduced has fallen, in relative terms, therefore, the self-expansion is greater, even though the profit in absolute terms is constant.
There are two different things happening here, then, that have to be distinguished. The fall in the value of the machine brings about a release of capital. How much capital is released depends upon the extent to which any particular firm has recovered the original value of the machine via wear and tear, or indeed is a new firm with available money-capital, which it has not yet used to buy such a machine. Firm A experiences a £500 release of capital, because it had already recovered the original £1,000 value of the machine in wear and tear. It is in the same position as a new firm, D, entering this production, that had £1,000 of money-capital ready to buy such a machine, but, now finds that it only requires £500 of that capital leaving it with £500 of released capital. Firm B, experienced a £50 release of capital, because it had only recovered a tenth of the original value of the machine in wear and tear, whereas firm C, obtained no release of capital, because it had only just bought the machine for £1,000, and not yet recovered any of its value in wear and tear.
But, for all of these firms, something else occurs. Firm A, has to replace the machine, “on a like for like basis”, and the value of the machine is now £500. If we measure its profit, against the value of the machine it must replace, then initially the profit represented, over ten years, 100%. But, now, it represents 200%. But, this is true for each of these firms. Firm B, when it comes to replace its machine will have to advance £500, so will firm C, and firm D, which has just entered production, has, from the start, only advanced £500 for its machine. So, the rate of profit measured against the value of the machine, is 200%, in each case, irrespective of whether each of these firms experienced a release of capital or not, and irrespective of whether, they made a capital loss, as a result of a reduction in the value of their existing machine, or made a capital gain, as a result of the money-capital in their possession having risen in value relative to the machine they needed to replace.
In fact, as Marx describes in Theories of Surplus Value, Chapter 23, this effect of a fall in the value of fixed capital causing a rise in the rate of profit, occurs even where this fall in the value of the fixed capital is not due to moral depreciation, but is due simply to the normal fall in its value due to wear and tear. This also illustrates that Marx's calculation of the rate of profit is based on the current value/reproduction cost of capital, and not on its historic cost. Marx gives the example of a coal producer with capital of £100, comprising £50 fixed capital, which loses £5 a year in wear and tear, and variable-capital of £50, which produces £50 of surplus value. In Year 1, the rate of profit is 50%, but in Year 2, the value of the fixed capital is only £45, because it has lost £5 in wear and tear, so that the rate of profit rises to 50/95 = 52.63%.
“In the second year, the fixed capital of the coal producer would amount to 45, variable capital to 50 and surplus-value to 50, that is, the capital advanced would be 95 and the profit would be 50. 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.”
Were social productivity to fall, so that the value of fixed capital were to rise, then instead of this release of capital, there would be a tie-up of capital. Revenue would have to be converted to capital, so that the consumed fixed capital could be replaced “on a like for like basis”, so that reproduction could continue on the same scale. Similarly, instead of the rate of profit rising, the rate of profit would fall.
This fact, that the rate of profit rises, solely because of the reduction in value of fixed capital due to wear and tear, is one means, Marx says, by which firms that employ large amounts of fixed capital protect themselves from becoming uncompetitive relative to new entrants using newer, cheaper equipment. It is also why they seek to use such fixed capital as intensively and extensively as possible, so as to recover its value from wear and tear as quickly as possible, and thereby avoid suffering a capital loss from its depreciation. The more the value of existing stocks of fixed capital is reduced, due to wear and tear, the higher the rate of profit, if those firms continue to sell their output at the previous price. But, if they reduce these prices in accordance with the fall in the value of their fixed capital, they can remain competitive with new entrants, and still make the average 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).”
(Theories of Surplus Value, Chapter 23)
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