The latest data, out from the US, indicates that its GDP fell for a second quarter. On some definitions, that makes it a “technical recession”. That is how all of the speculators who see bad news as good news – stock markets again soared on the news – want to portray it, as well as all of the catastrophists who continually predict the next recession as evidence of the unviable nature of capitalism. But, in fact, what these negative GDP numbers show, is simply that GDP is not a measure of output, for the reasons Marx describes in demolishing Adam Smith's absurd dogma, and also in explaining the role of a tie-up of capital.
GDP is not a measure of output (c + v + s), but only of new value created during the current year (v + s). As Wikipedia describes it, it is the value added at each stage of production, or if calculated on an income basis “This method measures GDP by adding incomes that firms pay households for factors of production they hire - wages for labour, interest for capital, rent for land and profits for entrepreneurship.” This latter definition is a perfect reflection of Adam Smith's absurd dogma that the value of output resolves entirely into revenues (v + s), whereas, as Marx describes, that is impossible, because the value of output resolves into c + v + s, and the value of c, represents an income for no one, it is merely the value of constant capital (raw materials, wear and tear of fixed capital produced in previous years) that is transferred to the value of current production, and is directly replaced out of that current production on a like for like basis. The equivalent value, and demand for this constant capital comes not from revenues, but from capital itself.
In Marx's schemas of reproduction, in Capital Volume II, he has total output value at 9,000 comprised as follows:
Department I
c 4000 + v 1000 + s 1000 = 6000
Department II
c 2000 + v 500 + s 500 = 3000
In other words, total incomes (National Income) is 3000, comprising 1000 wages in Department I, 500 wages in Department II, and 1000 profits in Department I, and 500 profits in Department II. Using the definitions used by Wikipedia above, and taken from the OECD, its clear that this is the equivalent of National Income, and of the value added by labour. It is equal to the value of final output for consumption of 3000. But, its equally clear that this 3000 is not the value of output, which is 9000.
As Marx puts it, in Capital II, this value created in the current year is equal to 1 labour year – it couldn't amount to any more, because that is tautologically true – whereas the total value of output for the year is equal to 3 labour years. The other 2 labour years comes not from current labour, but from the value of constant capital produced in previous years and merely transferred to the value of current output. The value of GDP is only the value of the consumption fund, i.e. of revenues (v + s), and not of the constant capital consumed in production, (c). In fact, the GDP is only a small proportion of the value of total output, and a declining proportion of it at that.
So, GDP data is not a measure of output, and changes in GDP are not a measure of changes in output. In fact, a look at the US economy shows this clearly. GDP is a measure of new value created in the current year. Value is labour, and new value is new labour performed. So, if additional labour is being employed, it follows that additional new value is being created. That new value divides into v + s, wages and profits, with profits itself being divided into profit of enterprise, interest/dividends, rent and taxes.
But, we know that additional labour is being employed in the US. Around 9 million new jobs have been created, around 400,000 new jobs are being created each month, on average, and workers are working additional hours as overtime, and moving from part-time and temporary work to full-time permanent employment. So, its clear that a huge amount of new value is being created in the US, as a result of all of this new labour performed, on the basis of Marx's theory.
The fact of how this new value is divided between wages, profits, interest, rent and taxes, on one level, is irrelevant, because it doesn't change the amount of new value created in total, and how it is resolved into incomes. So, how then can the fall in total incomes/GDP be explained? It would appear, on the surface, that Marx's theory must be wrong. But, it isn't, precisely because of the fact that GDP is not a measure of output, and because of another element of Marx's analysis of the process of reproduction, which is the question of the tie-up and release of capital.
As Marx describes in various places (Capital II, Capital III, Chapters 6, 49 et al, and in Theories of Surplus Value, Chapter 22) the process of reproduction is one in which the physical components of capital must be continually replaced “on a like for like basis”. That is, if a million tons of seed is planted and turned into grain, a million tons of seed must be taken from current production to replace it, for reproduction to take place on at least the same scale. But, if the value of this seed (constant capital changes), then either more of current production (tie-up of capital), or less of current production (release of capital) occurs. The effect of this, in the first case is to make it appear that less profit has been produced, and in the second that more profit has been produced.
So, its clear that, if the value of constant capital rises, to replace it on a “like for like basis” a portion of profit has to be used for that purpose. To take the case of a farmer, if they produce a surplus of grain of 100 tons, this year, as last year, but, last year they only needed to plant 10 tons of grain, but this year must plant 12 tons to get the same yield, the amount of their usable surplus falls from 100 tons to 98 tons, even though their actually produced surplus remained 100 tons.
And the same applies with GDP. Over the last year, a number of frictions have arisen, as the global economy expanded. The savings from globalisation have reached a plateau, and might even have declined, as a result of lockdowns, economic wars and so on, and this reduces social productivity, increasing the value of constant capital, so that, in order to reproduce itself on the same scale, a greater proportion of current production has to go to replacing the consumed constant capital, resulting in a tie-up of capital.
But, also, in the last year, there has been rampant inflation, and that inflation has been most marked in relation to Producer Prices, i.e. the prices of elements of constant capital from fixed capital, to raw materials, energy and so on. US Producer Prices are rising at over 11% a year, and yet US Consumer Prices are rising at only 9.4%, meaning that US companies have absorbed some of that increased price of constant capital out of profits, rather than passing it on into final consumer prices. As a result, the element passed into National Income, and into GDP from profits is accordingly reduced, even though that does not represent any actual reduction in output. And, that reality is shown in the fact that company results, overall, continue to show increasing output and demand. This is actually a reverse of what happened in the 1980's and 1990's.
During that time, a technological revolution significantly reduced the value of constant capital. Moral depreciation reduced the value of fixed capital by huge amounts, whilst rising productivity from the use of the new technology also reduced the value of materials, improved ways of using them more efficiently, and so on. The result was a huge release of capital that also went along with a large rise in the rate of profit. I will look at other aspects of this in another post next Tuesday.
A very interesting piece of article. The only thing that could be added, in my opinion, was that a rise in GDP may have nothing to do with increasing new value, but be simply a reflection of expanded liquidity (inflation). so GDP numbers should be adjusted for inflation in order to have real, and not nominal, GDP.
ReplyDeleteCorrect, there is also the question of change in productivity affecting the amount of new value, effects of exports minus imports, but I've discounted them for both ease of explanation.
ReplyDeleteThe point about using the nominal data is that it perhaps best shows the effects of actual prices paid for inputs as against prices received for final output. Hence, an inflation of input prices, as described by Marx in Capital III, Chapter 6, has the same effect as a rise in the value of those inputs, in terms of both a tie-up of capital, where those prices are not reflected in end prices, and even where they are in relation to the rate of profit. The former because it appears as a reduction of profit affects GDP, the latter does not.
I have another post next Tuesday on this and other data, but I feel another specific post might be due at some point, because the understanding of GDP by most economists, including "Marxist" economists, is very bad, as is their failure to understand what is wrong with Smith's "absurd dogma". See my response to Michael Roberts claim, for example, that all demand in the economy comes from revenues (wages and profits), and that the demand for constant capital comes from profits, whereas, as Marx sets out in Capital II, and elsewhere, the vast majority of demand for constant capital, i.e. its replacement on a "like for like basis" comes from capital not revenue, and revenues could not possibly provide the demand for constant capital, other than for accumulation.
It is of course, quite possible for output and the economy to be growing as a consequence of new value expanding - more labour employed, more surplus value created - at the same time that GDP falls, for the reasons described. In other words new value created might expand from £1 million to £2 million, and the rate of surplus value remain constant at 100% so that it divides £0.5 million v and £0.5 million s, rising to £1 million v and £1 million s, but if the rise in the value/price of c rises, causing a tie-up of capital of £1.5 million, then GDP would go from £1 million to just £0.5 million!
In understanding this effect of tie-up of capital, its also important to understand that GDP/NI data is annual data, whereas the national capital turns over several times during a year, and so this question of replacing the constant capital on a like for like basis, with rising prices occurs several times during the year. Firms are continually buying inputs whose prices have risen, and for which the prices received from their final output are, therefore, insufficient, meaning they must use a portion of surplus value/profit to cover the difference.