Sunday 4 August 2019

The Tie-up and Release of Capital - Part 6 of 6

Examples 


Marx deals with the question of appreciation, depreciation and the Tie-up and Release of Capital in Section II, of Capital III, Chapter 6. But, he also deals with this issue, and the illusion of profit/losses associated with it that results from the use of historic prices rather than values, as the basis for the calculation of the rate of profit, in Theories of Surplus Value, Chapter 22, Section 2. There he deals with the errors made by Ramsay, resulting from an assumption of the circuit of industrial capital being M – C … P … C` - M`, rather than P … C` - M`. M – C … P, i.e. an assumption that the purpose of capitalism is an expansion of monetary value, rather than an expansion of capital as a social relation. The error is founded on an assumption, therefore, that capitalist production is not ongoing and continuous, and thereby simultaneous, but is comprised of a series of discrete circuits that simply follow sequentially one after another. 

In relation to appreciation and depreciation, Marx writes in Chapter 6, 

“All they mean, therefore, is that the value of a capital invested in production rises or falls, irrespective of its self-expansion by virtue of the surplus-labour employed by it... 

Appreciation and depreciation may affect either constant or variable capital, or both, and in the case of constant capital it may, in turn, affect either the fixed, or the circulating portion, or both.” 

In other words, capital self-expands as a function of production, and the creation of surplus value. It is surplus value that is the real source of profit. However, in addition to this self-expansion in production, capital values can change outside the production process, because the component parts of capital, are themselves commodities, and the values of these commodities, as with any other, can change as a consequence of changes in social productivity, or their market prices may change, simply as a consequence of market conditions, demand and supply. These changes, because they affect the proportion of current production required to physically replace those elements of capital, “on a like for like basis” affect the rate of profit, but they also result in the creation of nominal capital gains or losses, as well as the associated tie-up or release of capital, discussed above. 

In Theories of Surplus Value, Chapter 22, Marx takes an example from Ramsay. A farmer uses 20 kilos of seed corn, and produces 100 kilos of corn. (The example, here can be viewed in the same way that Marx set out in Capital I, that different parts of the end product are used to reproduce the constant and variable-capital, or can be viewed that a portion is handed to workers who exchange it for wage goods, and to suppliers of constant capital in exchange for their commodities). 20 kilos are paid as wages, 20 kilos are required for other constant capital, leaving 40 kilos as surplus product/value. In the next year, output doubles to 200 kilos, i.e. the value of corn, and thereby also of seed corn is halved. Twice as much corn must be allocated as wages, and to cover the purchase of constant capital, but still only the same physical quantity, 20 kilos of seed corn is required. Cost of production is then 100 kilos, leaving a surplus product of 100 kilos. Given that the value of corn has halved, this 100 kilos of profit is the equivalent of 50 kilos of corn in the previous year. There appears then to have arisen a surplus profit of 10 kilos (£20), because previously the profit was equal to 40 kilos, even though the rate and amount of surplus value produced by labour has not changed. This is the illusion of profit that arises from this depreciation of the constant capital, and consequent release of capital. 

It is not, in fact, that additional profit has been created, but that 20 kilos (£20) of constant capital (seed corn) has been released, from current production, as a result in the fall in its value. This is due precisely to the fact that it is its physical use value that must be replaced, “on a like for like basis” out of current production, not its value. The amount of corn that had to be set aside as wages, and other constant capital doubled, because, again, it is the physical quantity of wage goods, and items of constant capital that have to be reproduced, and the exchange value of corn has halved relative to these other commodities. But, the seed corn itself has halved in value, because it is the same use value as the corn. It is only the same 20 kilos of corn that must be set aside to replace it. This is what causes a release of 20 kilos of corn, out of current production to arise, which does not need to be used to replace seed-corn (constant capital), and is thereby released as additional revenue

The opposite situation would arise if the output fell from 100 kilos to, say, 80 kilos. The value of corn would rise. Less corn would be exchanged to cover wages and other constant capital, but the same 20 kilos would be required to replace seed corn, and consequently capital that would previously have formed revenue (profit) is tied up.  Seed corn would constitute a greater proportion of current output.

By failing to view capitalist production as continuous and ongoing, Ramsay became confused over this, and the same error arises with the proponents of historic pricing. Marx describes the situation where the assumption is made that the farmer is ceasing production. He assumes that the price of a kilo of corn is £2 initially, and falls to £1 as a result of the rise in productivity. The farmer lays out £40 for seed corn, £40 for wages, and £40 for other constant capital = £120 in total. As output doubles, and the value of a kilo falls to £1, he must sell 120 kilos to cover his outlay, leaving 80 kilos surplus = £80. That gives the same amount of profit as in the previous year (40 kilos x £2 per kilo), and same rate of profit – 66.66%. It is a calculation of the rate of profit based on the historic prices paid for the capital. But, Marx shows that this is wrong, precisely because to replace the 20 kilos of seed corn, now no longer costs £40, but only £20. 

“For the farmer replaces the 20 quarters of seed corn in kind out of his own product.” 

On the one hand, the depreciation of the seed corn represents a £20 capital loss. On the other hand, assuming continuous production, the depreciation of the seed corn means that the farmer only needs to advance £20 of value to replace it, and not £40, as previously, which results in a £20 release of capital. 

“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.” 

Ramsay confused this £20 release of capital with an increased mass of profit, but as demonstrated this is simply an illusion, because there is no change in the surplus value. If productivity remains at the same level, there is no such additional profit in the following year. However, what does change, as Marx demonstrates, is the rate of profit, so that rather than the rate of profit being 66.66%, which is the result of calculating the rate of profit on the basis of historic costs, then, even setting aside the £20 of illusory profit, the rate of profit, rises to 80%. 

“He now has to advance £20 to buy 20 quarters of seed, £40 as previously [to buy the other elements of constant capital], £40 to pay wages, so that his outlay of capital amounts to £100. His profit is £80, that is, 80 per cent. The amount of profit has remained the same, but the rate of profit has increased by 20 per cent. Thus one can see that the fall in the value of seed (or of the price which has to be paid to replace the seed) has in itself nothing to do with the increase in [the amount of] profit, but implies merely an increase in the rate of profit.” 

In other words, when we assume that capitalism is defined by continuous and ongoing production, with money-capital being only a moment within its circuit, not a termination point, we see that the fall in the value of the seed corn, here, means that aside from the illusion of additional profit caused by the release of capital, the effect is to cause the rate of profit to rise, because profit becomes a larger proportion of the value of the advanced capital, as less labour-time is required to reproduce the consumed capital “on a like for like basis”

Marx then gives the example of a manufacturer, to show that this situation is not due to the particular conditions where a farmer reproduces seed corn, in kind, from their own production. 

“Let us [now] consider the manufacturer. Let us assume that he has laid out £100 in cotton twist and made a profit of £20. The product therefore amounts to £120. It is assumed that £80 out of the outlay of £100 has been paid for cotton. If the price of cotton falls by half, he will now need to spend only £40 on the cotton and £20 on the rest, that is £60 in all (instead of £100) and the profit will be £20 as previously, the total product will amount to £80 (if he does not increase the scale of his production). £40 thus remains in his pocket.” 

Initially, the rate of profit is 20%. Having sold yarn for £120, £20 profit is made, but now the price of cotton falls to £40 from £80. £40 of capital that would have been required to replace cotton is released. Now, only £60 of capital must be advanced, whilst the surplus value/profit remains £20, so that the rate of profit rises to 33.33%. 

“Thus it is not the fact that the farmer replaces his seed corn in kind which is the key, for the manufacturer buys his cotton and does not replace it out of his own product. What this phenomenon amounts to is this: release of a portion of the capital previously tied up in constant capital, or the conversion of a portion of the capital into revenue. If exactly the same amount of capital is laid out in the reproduction process as previously, then it is the same as if additional capital had been employed on the old scale of production. This is therefore a kind of accumulation which arises from the increased productivity of those branches of industry which supply the productive ingredients of capital.” 

By, "exactly the same amount of capital", Marx means capital valueSo, previously £80 of capital was laid out for cotton, if £80 is laid out again, it will buy twice as much cottonIt will be the same "as if additional capital had been employed".  In other words, as a result of the release of £40 of capital, due to the fall in the value of cotton, this £40 could be used to accumulate additional capital. The manufacturer could spend £26.66 on additional cotton, and £13.33 on additional labour. The additional labour would then create additional surplus value, so that the mass of profit would then actually rise. 

Whether a release of capital occurs or not, the fall in the value of capital (constant or variable) which causes such releases, results in the rise in the rate of profit as set out. If the price of cotton fell prior to the sale of the yarn, the value of output would have fallen to £80. again with the same £20 profit. A nominal £40 capital loss would have been incurred on the stock of cotton (bought for £80, current value £40), and no compensating release of capital would arise. However, the replacement cost of cotton remains £40, rather than £80, so on the basis of continuous and ongoing production, the rate of profit is 33.33%. Put another way, on the basis of the current value of capital, the £20 of profit represents a 33.33% expansion, and not a 20% expansion as before. It means that a third more means of production and labour-power can be accumulated. 

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