The Value Composition of Capital - Summary

• The Value Composition of Capital is the ratio of the value of constant capital to variable capital, assuming any given technical composition of capital. It, is thereby distinguished from the Organic Composition of Capital, which is the value composition as determined by the technical composition. It thereby measures changes in the relative unit prices of the elements of constant capital, as against the unit price of labour-power, wages.
• If the technical composition of capital is such that 10 kgs of cotton are processed by 10 hours of labour, and the rate of surplus value is 100%, then, if the price of 1 kg of cotton is £10, and wages are £10 per hour, £100 of cotton (constant capital) is processed by 10 hours of labour, the wages for which (variable-capital) are £100, so that the organic composition of capital is 1:1.
• There are several ways in which the organic composition can change.
  • The technical composition of capital might change. So, if productivity in spinning rises, 10 kgs might be spun in, say, 8 hours. Wages for this 8 hours are only £80, so that the organic composition rises from 1:1 to 5:4, or 1.25:1. If productivity in spinning declined, the opposite would occur, and the organic composition of capital would fall.
  • The value composition of capital might change.
    • The price of elements of constant capital might change.
    • Wages might change.
• Constant capital comprises fixed capital and circulating constant capital. If the price of buildings, machines, or materials rises, whilst wages remain the same, the value composition of capital will rise, and it will cause a consequent rise in the organic composition.
  • The unit value of constant capital may change as a result of a change in productivity, but the unit price may change simply as a consequence of a change in demand and supply. The effect, Marx says, in Capital III, Chapter 6, is the same.
  • The rise in the unit value/price of constant capital will cause a fall in the rate of profit s/(c + v), because the amount of labour employed v, has not changed, and so the amount of new value created by labour, and consequently the amount of surplus value, s, produced remains the same whilst c has risen, causing (c + v) to rise.
  • The rise in the unit value/price of c, means that any given amount of capital will now buy less of it, and so given an unchanged technical composition of capital, less labour will be required to process this smaller quantity of material. Marx calls this a tie-up of capital. Either less labour is employed, so that the quantity of new value, and surplus value is reduced directly, or else more capital must be advanced (tied-up) in order to continue production on the same scale. This creates the illusion of a reduction in profit, because a portion of profit must now be allocated simply to continue production on the same scale, but the amount of surplus value has not changed.
  • The opposite occurs where the unit value/price of elements of constant capital falls. It causes the value composition of capital to fall, with a consequent fall in the organic composition. It causes the rate of profit to rise. It creates a release of capital, which creates the illusion that the mass of profit has risen, even though the amount of surplus value is unchanged.
  • If the unit price of elements of constant capital rises, it may not be possible to continue production efficiently on a smaller scale. Producers must continue to produce the same level of output, which requires that demand also not fall. Producers may not be able to pass on the increase in the unit value/price of elements of constant capital without demand falling significantly. So, producers must absorb some or all of the rise in the price of elements of constant capital out of their profits, causing a squeeze on profits.
• The value composition may change as a result of a change in wages, with the unit value/price of elements of constant capital remaining unchanged.
  • The value of labour-power may change as a result of a change in social productivity, which changes the value of wage goods.
  • Wages may change as a result of demand and supply for labour-power.
  • If wages rise, and the normal working-day remains the same, the rate of surplus value will fall. Assuming no change in the unit value/price of elements of constant capital, the value composition of capital will fall, and the organic composition of capital will also fall. The rate of profit will also fall for two reasons. Firstly, assuming production continues on the same scale, the mass of surplus value falls, as a result of the fall in the rate of surplus value. So, s/(c + v) falls. But, also v rises, as a result of the rise in wages, so that (c + v) rises. This is the opposite of the situation described by Marx in relation to his Law of the Tendency for the Rate of Profit to Fall, in which the rate of profit rises, when the organic composition of capital falls. This is, rather, the explanation of a tendency for the rate of profit to fall provided by Marx's predecessors, such as Smith, Malthus and Ricardo, and is predicated on diminishing returns, i.e. falling social productivity, whereas Marx's law is predicated on rising social productivity.
  • Smith assumed that capital accumulates faster than labour supply, so that demand and supply causes wages to rise and profits to fall. This causes profits to be squeezed, and the rate of profit to fall.
  • Ricardo accepted Malthus' fallacious population theory, and believed that labour supply would rise to meet the demands of capital for additional labour, as wages rose. A rising supply of labour checks the rise in wages. However, he argued that this population growth meant that more wage goods would have to be produced, particularly food. More land would have to be brought into cultivation that would be less fertile, i.e. diminishing returns. Food prices would rise, so that the value of labour-power, and, so wages must rise, causing profits to fall. In addition, he argued that this would also cause the prices of raw materials, produced on or from the land, to rise, causing a squeeze on industrial profits, and a fall in the industrial rate of profit. That would mean that the surplus profit in agriculture rises, causing rents to rise, which creates an additional squeeze on profits.
  • A rise in hourly wages also results in a tie-up of capital. Either the mass of variable-capital remains the same, in which case less labour is employed, so that also less material is processed, less new value, and so less surplus value is produced, or else a portion of profit, must now be set aside as wages so that production can continue on the same scale.
• Marx, in analysing Hodgskin's explanation of falling profits, in Theories of Surplus Value, Chapter 21, points out that, even on Malthus' calculation of population growth, labour supply would not keep pace with capital accumulation. So, a limit to absolute surplus value would be reached. Beyond that point, therefore, surplus value itself would not increase, and so, any additional capital would have been overproduced. The rate of profit would fall. However, Hodgskin failed to take into account, the growth of productivity, and the effect in creating a relative surplus population. In the short-term, following a prolonged period of extensive accumulation, labour supplies get used up, as Smith had suggested, which creates the limit on the expansion of the social working day, and of absolute surplus value. It also causes wages to rise, and so relative surplus value to fall, as Smith suggests, and as described by Marx in Capital III, Chapter 15. However, this crisis of overproduction, then provokes a response by capital. It innovates, and introduces new labour-saving technologies, which create a relative surplus population, and cause wages to fall, the rate of surplus value to rise, and the rate of profit to rise.
• Ricardo is wrong, because Malthus' population theory is wrong, and because the assumption of diminishing returns is wrong. There may be short-run diminishing returns, short-run rises in marginal cost, but, in the medium and long-term, marginal costs fall, and there is increasing not diminishing returns to scale. This is a function and determinant of the long wave cycle, as short run costs might rise, only to provoke the opening up of new more fertile lands, mines and so on, and the application of new technologies.

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