The 20% Drop in GDP

UK GDP fell by just over 20% in April. That is the biggest drop on record, but less than the 30% that has been predicted for many developed economies, as a result of government imposed lockdowns. It shows, however, that the lockdown was one in which, in reality, 80% of labour continued to be done. Various TV news and business channels have claimed that this 20% drop means that the UK economy has now shrunk to the same size it was 18 years ago, in 2002. That isn't true. Its only the GDP, i.e. the amount of new labour undertaken that is smaller, not the economy itself, because the economy, i.e. the value of total output is much greater than the amount of new labour performed in it. The biggest component of the economy, of the value of output comes from the value of the raw and auxiliary materials consumed in production, and whose value and use value is simply reproduced out of current production, as well as the value of the wear and tear of fixed capital consumed in, and reproduced out of current production. None of this value of output appears in the GDP figure. 

The following table illustrates this. In it, I assume for simplicity that all surplus value is accumulated, and is accumulated in the existing proportions. So in Year 2, £40 of surplus value is divided £360 to c, and 40 to v.  (Numbers are roughly rounded)

Constant Capital	New Labour/Value		GDP	Output	Increase GDP	Increase Output
C	V	S	V + S	C + V + S	%	%
900	100	40	140	1040	-	-
936	104	41	145	1081	4	4
973	108	43	151	1124	4	4
1012	112	45	157	1169	4	4
1052	117	46	163	1216	4	4
1095	121	48	170	1265	4	4
1138	126	50	177	1316	4	4
1184	131	52	184	1368	4	4
1231	136	54	191	1423	4	4
1281	142	57	199	1480	4	4

Now, if we assume a 20% fall in GDP. Taking us back five years, its true that GDP now falls to £160, a fall of £40, but, there is no reason that this fall in GDP, i.e. of the current labour undertaken means that the size of the economy itself has fallen back to the level of five years earlier. All of that value of constant capital, of raw and auxiliary materials, or the normal wear and tear of fixed capital still exists, precisely because all of this production was undertaken by labour last year, and in previous years. Its value still exists, and is simply waiting to be consumed in production, and thereby to reproduce itself, both in terms of use value and value. 

If we deduct that actual reduction in the size of the economy of £40, this still gives us a total value of potential output of £1,440, which is, in fact, still greater than the value of output, in the previous year. In reality, here, I have underestimated the effect, because in modern economies, the ratio of constant capital (raw and auxiliary materials plus wear and tear of fixed capital) to new value created is much greater than this. Its more like 100:1, as opposed to the more or less 6:1 assumed here, in order to facilitate calculation and exposition. In addition, the rate of surplus value is also more like 2000%, as against the 40% assumed, here, but, on the other hand, a considerable portion of that surplus value goes to fund unproductive consumption of capitalists, landlords and the state rather than to finance capital accumulation. 

But, having accounted for all that, its quite clear that contrary to what the TV and business presenters claim, this fall in GDP, is not at all the same as a fall in the size of the economy. Of course, if the lockdown were to persist, then as I have written previously, some of that constant capital, would indeed be physically destroyed, and so its value would be destroyed along with it. Food products have a limited lifespan, if they are not used in food processing, they are destroyed, and the same applies to other agricultural raw materials. Fixed capital does not just lose value as a result of wear and tear arising from usage, but also from depreciation arising from non-usage. Machines rust and so on, as well as suffering moral depreciation as newer, better and cheaper machines are developed. The longer any lockdown persists, and so such depreciation occurs, the greater the capital losses for firms, and then, the more capital they must introduce just to replace these capital losses, rather than to expand, which also, thereby results in a fall in the rate of profit, and reduction in potential growth.