Tuesday, 24 December 2019

Theories of Surplus Value, Part III, Addenda - Part 14

Marx also describes, as in Capital III, the difference between interest rates and the rate of profit is this: interest rates are based on the lending of money, and money is homogeneous. One Pound is identical to another, in terms of its function as money. The rate of interest is determined by the demand and supply for this money, as money-capital. On one side stand the suppliers of this one homogeneous commodity, and on the other side all of the demand for it. When the demand for this money-capital rises, the rate of interest will rise. The rise in the rate of interest will deter some of the additional demand, whilst encouraging some additional supply, causing interest rates to fall back somewhat. In other words, there is the possibility of a more or less immediate response of interest rates to changes in demand and supply for money-capital, just as there is such a response of demand and supply to the change in interest rate in its turn. 

But, no such thing exists with the average rate of profit. Firstly, instead of one single homogeneous commodity, capital is involved in the production of a myriad of different commodities, and the rate of profit for the capitals involved in these different spheres all, themselves, in practice, vary one from the other, and from any idealised average rate of profit. The demand and supply for each of the different commodities continually fluctuates, causing market prices to fluctuate around the price of production, so that the actual rate of profit, of each industry, continually fluctuates. And, especially where production occurs on an ever larger scale, it is simply not practical for capital to move from one sphere, where the rate of profit is lower than the notional average to one where it is higher. As I've written previously, the means by which capital moves, so as to bring about the tendency towards an average rate of profit, is not by such actual movement from one sphere to another, but by faster rates of accumulation in higher profit spheres. 

“A decline in the rate of profit below the ideal average in any particular sphere, if prolonged, suffices to bring about a withdrawal of capital from this sphere, or to prevent the entry of the average amount of new capital into it. For it is the inflow of new, additional capital, even more than the redistribution of capital already invested, that equalises the distribution of capital in the different spheres. The surplus profit in the different spheres, on the other hand, is discernible only by comparison of the market prices with cost-prices. As soon as any difference becomes apparent in one way or another, then an outflow or inflow of capital from or to the particular spheres [begins]. Apart from the fact that this act of equalisation requires time, the average profit in each sphere becomes evident only in the average profit rates obtained, for example, over a cycle of seven years, etc., according to the nature of the capital.” (p 464) 

In fact, the timescales will now be more prolonged than that, because of the huge amounts of fixed capital investment involved. 

“Mere fluctuations—below and above [the general rate of profit]—if they do not exceed the average extent and do not assume extraordinary forms, are therefore not sufficient to bring about a transfer of capital, and in addition the transfer of fixed capital presents certain difficulties.” (p 464) 

In fact, as I've written elsewhere, its precisely because of the difficulty in moving actual capital from one sphere to another, and so equalising the rate of profit, that the effect is to shift the equalisation process to the realm of fictitious capital. Firms involved in those spheres where the rate of profit is falling see their earnings per share fall, which in turn means their ability to pay dividends at the same rate declines. The owners of these shares then sell them, in order to buy shares of companies in those spheres where the rate of profit, and so dividends is rising. The share price of the former falls, and of the latter rises, thereby equalising the dividend yield, i.e. the ratio of dividend to share price. 

“Momentary booms can only have a limited effect, and are more likely to attract or repel additional capital than to bring about a redistribution of the capital invested in the different spheres.” (p 464) 

Marx also makes a point I have described elsewhere. The process whereby the rate of profit is equalised is via the movement of market prices in accordance with changes in supply, relative to demand, consequent to a more or less rapid accumulation of capital in the particular sphere. In other words, if the rate of profit is higher than average, capital accumulates in that sphere more rapidly, supply rises relative to demand causing market prices for that commodity to fall. This means that the process of equalisation is not at all straightforward, but is a complex of many moving parts, including the particular and relative price elasticities of demand for the various commodities. 

In one sphere, a small rise in supply may bring about a large fall in market price, so that the price of production is achieved with only a relatively small accumulation of additional capital. In another sphere, a rise in supply causing a small fall in prices may cause demand to rise, so that prices rise, requiring much larger amounts of additional capital accumulation, and rises in supply to bring about the required price of production. This tends to be the case with all new commodities. They start with low levels of demand, high prices and profits, but any fall in price provokes a large increase in demand, which prevents prices and profits falling further. As demand rises, and output also rises, economies of scale also reduce costs of production, so that profit rates remain high, prompting additional capital accumulation, production and so on. 

“One can see that all this involves a very complex movement in which, on the one hand, the market prices in each particular sphere, the relative cost-prices of the different commodities, the position with regard to demand and supply within each individual sphere, and, on the other hand, competition among the capitalists in the different spheres, play a part, and, in addition, the speed of the equalisation process, whether it is quicker or slower, depends on the particular organic composition of the different capitals (more fixed or circulating capital, for example) and on the particular nature of their commodities, that is, whether their nature as use-values facilitates rapid withdrawal from the market and the diminution or increase of supply, in accordance with the level of the market prices.” (p 464) 

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