Monday, 1 September 2014

Maito and The Rate of Turnover of Capital - Part 3

In his paper, on the rate of turnover in Chile etc., Maito says,

“... capital turnover was estimated by dividing the total costs of the economy (intermediate consumption, wages and consumption of fixed capital) by total stock of inventories, according to Fichtenbaum (1988). The fundamental idea of this procedure is that the number of annual turnovers emerges from the number of times the total stock of inventories is expressed in the flow of total costs of the economy.” (p 9)

There is a problem with this methodology to begin with, which has been described previously, and stems from Marx's analysis of the circulation of the total social capital, and his criticism of Smith's Trinity Formula, in Capital II. That is that the national output data does not capture the value of output, in the Marxist definition of C + V + S. It only captures the newly produced value V + S. This is particularly significant, when you are trying to estimate the rate of turnover of capital, and the effect of changes in the circulating constant capital.

But, its also clear why this methodology underestimates the increase in the rate of turnover of industrial capital, because it does not take account of the changing composition of the total social capital, away from manufacturing, towards service industry production. Given the fact, that in Britain, more than 20% of household expenditure is accounted for by these kinds of commodities, (Recreation and Culture 13%, Restaurants and Hotels 8.3%: Source 2012 ONS Household Expenditure Survey) it can be seen why this rate of turnover is significant in relation to the average rate of turnover of the total social capital. The consumers who go to a football match, a pop concert, or some other form of entertainment consume the commodity simultaneously with its production, in the same way as above, in relation to the restaurant, or the prostitute. Given that, in Britain, the proportion of Manufacturing has fallen from 40% in 1976 to 18% in 2013, whilst Service Industry has risen from 57% in 1976 to 81% in 2013, and this is common across developed economies, the effect of this changed composition, of the total social capital, on the rate of turnover, can be seen.

But, its also clear why, for this rapidly growing sector of the economy, Maito's method of guesstimating the rate of turnover, based on inventories, is inadequate, even aside from the question of changing sizes of productive-supply, referred to above. The value and quantity of inventories for manufacturing industries is far greater than for service industries, and for some of the service industries listed above, the category of inventories is essentially meaningless. What is the quantity or value of inventories for a football team, or a pop singer, or for one of the largest and fastest growing types of capital, a computer games producer, for example, compared to those of a steel manufacturer, or a car producer? Yet, Maito claims,

“Capital turnover speed in core countries will not be reduced by the greater relative growth of services activities in relation to manufacturing industries that has occurred in recent decades. Instead, there is a match in services between commodity production and consumption. Thus the turnover speed of circulating capital in these activities is probably higher. However, the latter may not apply equally to services in peripheral countries, where this sector has a significant heterogeneity and is, ultimately, less governed by fully developed capitalist relations.” (p 4)

Not only is the rate of turnover “probably higher”, in these kinds of activities, it quite clearly is higher, and this higher rate is not at all captured by Maito's chosen metric of inventory levels. Moreover, as well as the shift to service industry from manufacturing industry causing a significant increase in the rate of turnover, and one that is not captured by Maito's inventory calculation, its also clear, that this shift to service industry, is not just one restricted to core economies. According to the ILO, the increase in employment, in Services, has, for example, shown the same kind of percentage rise as manufacturing employment, and most of the employment growth has been in developing economies. According to the CIA World Factbook, despite China's massive growth in manufacturing, its service sector already accounts for a larger proportion of the economy, at 46.1%, than its manufacturing sector.

But, let us take another modern industry in the realm of manufacture rather than services – pharmaceuticals. Around 2 million people (more than 6% of the total workforce) are employed in the UK pharmaceutical industry. A large number of these people are highly skilled scientists. The industry accounts for about 13% of gross value added to the UK economy. The value of their output is not determined by the fixed capital they employ, nor by the circulating constant capital involved in their production. Maito's arguments in relation to fixed capital, and his methodology in relation to inventories, therefore, has little relevance to this sector. The value of their output stems from the complex nature of the labour employed.

In fact, however, this example does throw up other complications. The value of the output stems from the complex labour largely involved in product research and development rather than the actual production process itself. This is not even the same as, say, the production time in agriculture, or forestry, where a large amount of labour is employed in planting etc., followed by a long growing period. In that case, the initial labour is related to the quantity of output – aside from natural disasters. But, a large amount of labour can be expended, in pharmaceuticals, in development, without it bearing any fruit. Moreover, even if a successful product is developed, it may only be sold in small quantities, so that the labour expended, in development, is spread across only this small quantity of output. The higher the level of output, the smaller the proportion of this initial labour to each unit, therefore.

In this sense, the labour here is more like fixed capital itself, because it is a fixed cost, irrespective of the level of output. Its value is reproduced, in each commodity unit produced, in a similar manner to the transfer of wear and tear of fixed capital. It is similar to this wear and tear, in another sense, too, in that the value created depreciates over time, as new more effective drugs appear on the market, to replace the particular commodity, or when patents run out, so that other producers can make the drug without having expended labour on its development. 

Yet, its clear how changes in technology affect this area too. If we look at the sequencing of the human genome, it was thought, twenty years ago, to have been an almost impossible task, or at least one that would require decades to achieve. But, the development of computing power made it possible to achieve within 5 years, from the date that the Celera Corporation began work on it in 1998. In fact, because computing power has developed so much, since that time, human DNA can now be sequenced in hours, representing a huge reduction in the rate of turnover of capital, in this area, and the cost of doing so has fallen to around $1,000, compared to an initial cost of $100 million per genome.  Sequencing of DNA has now become a commodity itself, and the rate of turnover of capital in producing this commodity is indicated by the above.

But, even if we take a more traditional industry like car production, Maito's guesstimate of a rate of turnover of 12 looks way too low.  Car producers take orders for production from car dealers, who in turn base their orders on instructions from customers (this is particularly the case in relation to fleet buyers).  An idea of how much the working period for a car producer has shortened is indicated by the fact that, although Henry Ford revolutionised production, with the Model T, it required 93 minutes to produce.  A car rolls off the Toyota production line in Burnaston, Derby today every minute!  That is a reduction in the production time, an increase in the rate of turnover, for this part of the circuit, of 93 times compared to the 1920's.  Yet, according to Maito, the rate of turnover has only risen by 9 times since 1855!

Of course, the production time, per car, is not the whole story, as far as the turnover period is concerned.  The working period includes the time for enough cars to be produced, to be shipped to market.  But, an indication of the pace, of the next part of that circuit, is given by the rate at which cars are shipped from the Volkswagen factory.  Trains take 2,400 cars each and every day from Wolfsburg.  Even allowing for the time of delivery to dealers, the time for the car to be detailed, and administration prior to handing over to the customer, this means that the capital, involved in car production, can complete its turnover period in no more than a week, on average, giving a rate of turnover not of 12, but closer to 52 times per year!  Moreover, the Internet is revolutionising even this rate too, because it is becoming possible for consumers to place their order direct with the producer via the Internet, and have it delivered directly to their home, ready to drive.

The time required for production and distribution of the car to customers is not, of course, equal to the time between a car being ordered and received.  In the 1970's, I worked for a major pottery manufacturer.  The process was as follows.  Orders came in by phone and post, as well as from sales representatives.  The orders were collated and passed to the Production Control department, who scheduled the orders into the plants production schedules.  Orders received this week, may not be scheduled for production for another month, therefore.  This same procedure, basically applies to car production.  But, the time between an order being placed, and that order being scheduled within the production process has nothing to do with the circulation of capital; it sits completely outside that process, which is concerned only from the point that productive-capital is thrown into production to fulfil that order, and the time when the order has been completed, and paid for.

Sunday, 31 August 2014

Capital II, Chapter 19 - Part 5

Smith then is forced to recognise that these revenues are not the end of the matter, because in addition to the wages, profits and rent there is also the value of the constant capital. He then sets up a counter argument to try to escape this problem.

“A fourth part, it may perhaps be thought, is necessary for replacing the stock of the farmer, or for compensating the wear and tear of his labouring cattle, and other instruments of husbandry. But it must be considered that the price of any instrument of husbandry, such as a labouring horse, is itself made up of the same three parts: the rent of the land upon which he is reared, the labour of tending and rearing him, and the profits of the farmer who advances both the rent of this land, and the wages of this labour. Though the price of the corn, therefore, may pay the price as well as the maintenance of the horse, the whole price still resolves itself either immediately or ultimately into the same three parts of rent, labour” (he means wages), “and profit.” (Book I, Ch. 6, p. 42.)” (p 377-8)

In other words, he simply relies on repeating the assertion that everything resolves itself into v + s.

But, Marx points out,

“He forgets, however, to add: and, moreover, into the prices of the means of production consumed in their own creation. He refers us from one branch of production to another, and from that to a third. The contention that the entire price of commodities resolves itself “immediately” or “ultimately” into v + s would not be a hollow subterfuge only if he were able to demonstrate that the commodities whose price resolves itself immediately into c (price of consumed means of production) + v + s, are ultimately compensated by commodities which completely replace those “consumed means of production,” and which are themselves produced by the mere outlay of variable capital, i.e., by a mere investment of capital in labour-power.” (p 378)

But, of course, he can't. All production resolves itself into c + v + s. Unfortunately, some socialist economists, anxious to make the point that all production ultimately comes down to the value created by workers, have also fallen into this error.

The variable capital set in motion by the capitalist results in the production of new value by the workers, i.e. positive value equal to the average social labour expended by the workers. At the same time, those workers preserve the value of any constant capital that is transferred to the end product.

NB. It is only the value of constant capital actually transferred that is preserved. If material or machines are destroyed, depreciated or otherwise wasted, and thereby prevented from entering the final product, then obviously its value is not transferred either.

But, this is all those workers can do. This new value they create is divided into v + s. Assuming the value of the labour-power is less than the new value created by those workers, the surplus will then be appropriated by capital, and some of it may be shared as rent with the landlord, some as interest with the money capitalist and so on.

“And what is true of the industrial labour of one day is true of the labour set in motion by the entire capitalist class during one year. Hence the aggregate mass of the annual value produced by society can resolve itself only into v + s, into an equivalent by which the labourers replace the capital-value expended for the purchase of their own labour-power, and into an additional value which they must deliver over and above this to their employers. But these two elements of commodity-value form at the same time sources of revenue for the various classes engaged in reproduction: the first is the source of wages, the revenue of the labourers; the second that of surplus-value, a portion of which is retained by the industrial capitalist in the form of profit, while another is given up by him as rent, the revenue of the landlord. Where, then, should another portion of value come from, when the annual value-product contains no other elements than v + s?” (p 378-9)

Marx explains.

Adam Smith determines the value of a commodity by the amount of labour a worker adds to the materials he works with. But, this value added is entirely independent of whether those materials had any value to begin with. This new value, embodied in a new commodity, is in part an equivalent to the wages paid to the worker, but also in part, a surplus value, paid as profits etc. Whether or not this surplus is shared with others does not change the fact of it being a surplus, or the amount of that surplus.

What is true for any individual commodity, or business, is true for the whole economy.

“It “fixes” (Adam Smith’s expression) in the annual product of a total value determined by the quantity of the annual labour expended, and this total value resolves itself into one portion determined by that part of the annual labour wherewith the working-class creates an equivalent of its annual wages, in fact, these wages themselves; and into another portion determined by the additional annual labour by which the labourer creates surplus-value for the capitalist class. The annual value-product contained in the annual product consists therefore of but two elements: namely, the equivalent of the annual wages received by the working-class, and the surplus-value annually provided for the capitalist class. Now, the annual wages are the revenue of the working-class, and the annual quantity of surplus-value the revenue of the capitalist class; hence both of them represent the relative shares in the annual fund for consumption (this view is correct when describing simple reproduction) and are realised in it.” (p 380) 

But, of course, as all the previous analysis has shown, the value of a commodity, and therefore of national output, cannot be reduced to just v + s, to the new value created, precisely because those materials used, the constant capital, do already possess value that is transferred into the final product.

“Now Adam Smith’s first mistake consists in equating the value of the annual product to the newly produced annual value. The latter is only the product of labour of the past year, the former includes besides all elements of value consumed in the making of the annual product, but which were produced in the preceding and partly even earlier years: means of production whose value merely re-appears — which, as far as their value is concerned, have been neither produced nor reproduced by the labour expended in the past year.” (p 381)

In part, Smith's error rests upon his confusion between abstract and concrete labour, and between labour and labour-power, which itself rests on the two-fold nature of labour itself. Abstract labour is the essence and measure of value, it creates value through the expenditure of labour-power. But, labour-power can only ever be concrete. Workers do not exist as abstract workers, but as specific kinds of workers, tailors, spinners, teachers etc. It is this concrete labour-power that is sold as a commodity. It is concrete labour that is the source of value, because it is only concrete labour that exists as a material thing, and which produces use values. Abstract labour cannot be sold as a commodity, as labour-power, precisely because it does not exist as a material thing. It is only an abstraction.

“The total quantity of the commodities fabricated annually, in other words, the total annual product is the product of the useful labour active during the past year; it is only due to the fact that socially employed labour was spent in a ramified system of useful kinds of labour that all these commodities exist; it is due to this fact alone that the value of the means of production consumed in the production of commodities and reappearing in a new bodily form is preserved in their total value. The total annual product, then, is the result of the useful labour expended during the year; but only a part of the value of the annual product has been created during the year; this portion is the annual value-product, in which the quantity of labour set in motion during the year is represented.” (p 381)

So, Smith puts forward a one-sided argument when he claims that it is only the useful labour expended during the year which creates the value of the total output, because he forgets the value contributed by all of the materials used in it, the tools and machines used to assist labour and so on, and 

“...therefore, the “annual labour,” while it created value, did not create all the value of the products fabricated by it; that the value newly produced is smaller than the value of the product.” (p 381-2)

The simple answer, in a way, was given by the quote Marx gave from William Thompson earlier in Chapter 17, that a society could continue to consume for a time even if it did not produce. It could consume its existing capital. A portion of that capital always is consumed each year. But, in order to prevent its diminution each year, a portion of production must always be devoted not to consumption, but to the replacement of that capital.

Friday, 29 August 2014

The Law of The Tendency For The Rate of Profit To Fall - Part 35

Fall In the Value Of The Variable Capital (19)

In Part 34, it was shown how the rise in productivity increases the annual rate of profit, but also results in the release of capital, as the period during which variable capital is advanced is continually reduced. But, this release of capital, also has other results. If we take the release of capital in Year 2 above, the advanced variable capital was £670, representing a release of capital of £330.

On the assumptions made so far, the cost of fixed capital is £200. This fixed capital is assumed to last for one year, and each year, it has been replaced by new fixed capital of the same value, but which is progressively more productive. Given the assumptions made, if double the quantity of fixed capital were employed, then assuming twice as many workers were employed to operate it, twice the quantity of material could be processed. But, the consequence of this is interesting.

Currently in Year 2, using £200 of fixed capital, 800 units with a value of £800, is processed by 1400 labour units employed with a variable-capital of £670. If £400 of fixed capital were employed, then to operate it, 2800 labour units would be required. It would then appear that an additional £670 of variable capital would be required, along with an additional £800 of circulating constant capital (material) to be processed. But, in fact, that is not the case.

If the amount of output for a turnover period remains 3000 units, then the material required to produce this 3000 units does not change. It is still the case that only 800 units of material (£800) is required to be advanced for the turnover period. But, also if double the quantity of fixed capital, and double the quantity of labour-power produces double the output in a given period of time, by the same token, the same quantity of output (3,000 units) can be produced in half the time.

In other words, although twice the physical quantity of workers is employed, the variable capital advanced, is advanced for only half the time. Previously it took 29.71 weeks to produce 3000 units, but now with twice the amount of fixed capital, and twice the quantity of labour-power, this 3000 units can be produced in just 14.85 weeks. The amount of variable capital advanced for this turnover period is then still only £670. The annual rate of profit can then be calculated.

The surplus value produced by the 1400 labour units in 29.71 weeks was £930. The surplus value produced by 2800 labour units in 14.85 weeks is, therefore, the same. The total surplus value produced in the year is then s x n = 930 x 3.5 = £3,255. The fixed capital advanced for a turnover period is £400, the circulating constant capital is £800, and the advanced variable capital is £670. The total advanced capital is then £1,870. The annual rate of profit is then 3255/1870 = 174%.

That is a rise from 97%, of 79%. In other words, this rise in the organic composition of capital brought about by a doubling of the fixed capital, results not in a fall in the rate of profit, but a significant rise. This is the reason that so far as it remains possible to find available markets for the output, capital always has an incentive to utilise the released capital to invest in additional fixed capital, so as to increase productive potential, because although this means that the quantity of laid out capital increases, the quantity of advanced capital does not, and consequently the annual rate of profit must rise.

This is a further validation of Marx’s analysis that the very process that results in a tendency for the “Rate of Profit” to fall, simultaneously results in a tendency for the mass of capital to grow, including the mass of variable capital, and for the mass of profits to grow alongside it. It results in an increasing volume of released capital available for yet further accumulation.

Thursday, 28 August 2014

Why The West Wants Russia To Invade Ukraine

NATO, the EU and western governments repeatedly proclaim their concern that Russia may invade Ukraine.  Indeed, they talk as though Russia had virtually already invaded Ukraine, and use that to promote sanctions.  But, in fact, the West wants Russia to invade Ukraine.  Its actions of taking sanctions against Russia and so on have been designed to try to provoke Russia into such an escalation on the basis that if such action was being taken without the invading, they may as well do so.

The West wants Russia to invade Ukraine, because having done so it will have bought the problem, and thereby have let the West off the hook.  Having tried to pry Ukraine away from Russia, the West, as it frequently does, has promoted destruction without creating anything positive in its place.  That was what happened in Russia itself after the fall of Stalinism, when western advisers came in, promoting Austerian, free market policies that wreaked havoc on the economy.  The same policies are being imposed on the EU periphery with the same kind of effect.

In order to put the Ukrainian Humpty Dumpty back together again, far more than the several billions the CIA pumped into Ukraine to promote dissent will be required.  The Ukrainian economy is a total basket case.  In fact, its only hope of regeneration lies in its Eastern industrial heartlands.  Rebuilding Ukraine, is likely to require as much investment as is required in the whole of the EU periphery, perhaps as much as $2 trillion in both cases.  The inevitable collapse of the banks in Ukraine, and the effect on other European banks could drain somewhere between $200 billion to $400 billion.

Neither the US nor the EU shows any appetite for picking up this tab, and yet the failure to ride to the rescue means that the Ukrainian economy in the not too distant future is going to go into meltdown. That is why the government collapsed because it couldn't agree on the spending cuts required. Government employees are not being paid, the country's debts are mounting, and it can no longer get gas from Russia, which will be a major problem in a couple of months time when the weather starts to get colder.

When that happens it will not just be people in the East that oppose the Kiev regime.  On top of economic collapse will come social and political chaos, in conditions where in the West, the most organised, disciplined and ideological coherent forces are those of the fascists.  In other words, the same kinds of conditions that have led to control of the streets falling to militant fascist militias in Libya, Iraq, and Syria as a result of the West seeking to destabilise the previous regimes will unfold right on Europe's doorstep.

If the West can cajole Russia into invading Ukraine, Russia will have to pick up the financial tab, and/or it will have to be the one seen to be quashing the inevitable unrest that breaks out across the country.  If Putin has any sense, he will not fall into that trap.  And, indeed, he has no need to to do so.  He has a much better option.  Over the last few years, Cuba has built a close relation with China.  But, it has also been making closer relations with the US.  Now Russia is drawing closer to Cuba again.  Cuba has just re-opened an old Soviet era spying station, so that Russia can again listen in to US communications.

Moreover, as Russia has responded to western economic sanctions by banning food imports from the US and EU, Russia has the potential to expand its trade with Cuba, as an agricultural producer, in exchange for the oil and gas it requires.  From Russia's perspective putting its efforts into building a relation with Cuba on the US front door is a far better strategic play in response to the West trying to push the borders of NATO up to Russia, than an expensive invasion of Ukraine.

Maito and The Rate of Turnover of Capital - Part 2

If we examine the circuit, for a restaurant, what we see then is that such a restaurant has customers come in, who place orders. Variable capital is advanced, in the production process, (P) as labour-power, which takes the order, as well as the labour-power that cooks the food. Circulating constant capital is advanced in the form of electricity to power the till, to light and heat the restaurant etc., and in the form of the materials used in the food. In fact, in a fast food restaurant, payment for the food (M') will usually be made, even before the commodity has been supplied, but the circuit of this capital is really only complete at the point that the commodity has been supplied to the customer, and payment made, so that the above payment can be used to reproduce the consumed productive-capital, ready to fulfil the next order. It is complete, because not only is this money-capital then available to reproduce the productive-capital, but that productive-capital is itself already immediately on hand, in the form of a productive-supply, i.e. the workers are already there in place, and the materials are already on site, waiting to be advanced to the production process, to replace those consumed in the previous circuit. In reality, the circulating capital advanced is turned over in this way, not just on a daily basis, as I suggested previously, but many times, even just during a single day.

If you want a practical example of how that might occur, it would be of a pimp, who immediately takes the money paid to a prostitute, by a client, and, after taking out their profit and any expenses, pays the remainder to the prostitute, so that they can reproduce their labour-power, and continue to the next client.

If, on average, there are 500 customer orders completed during the day, the variable capital turns over 500 times, (in reality modified by how many orders are on average filled simultaneously) and this is not changed by the fact that, in practice, the value of the commodity is not used, after each completed circuit, to pay the workers, or to buy replacement material, used in that particular production process. The fact remains that, after the completion of each order, the circuit of capital has been completed, the capital required to reproduce the productive-capital, used in the commodity's production and circulation, has been realised, along with additional capital to cover the wear and tear of fixed capital, plus the relevant amount of surplus value, and sits in the till, available for use, or else has been transferred, by electronic means, into the company's bank account, equally available for use. In a 7 day week, the advanced circulating capital will have been turned over 3500 times, even before any money has been paid to workers as wages, or to cover payments to material suppliers.

In fact, if the workers are paid one month in arrears, and the material is supplied on the basis of payment within a month of receipt, no money-capital will need to be advanced for its purchase, because the required capital will be generated from the sale of commodities during that month, made possible by the advance of labour-power and circulating constant capital! That is one reason why Marx calculates the rate of profit on the current reproduction cost of this advanced capital value, and not on the historic money prices paid for it.

But, just as the fact that workers are paid a week or a month in arrears, and materials are paid for on one month's commercial credit from suppliers, does not affect the rate of turnover, of the advanced productive-capital, so it would not matter, either, if they were paid for in advance, rather than in arrears. All that would change here, is that the capital value would assume a different form. As Marx points out, in Capital II, the individual firm, for various reasons, may buy up inputs in advance of the production process, which then constitute, not productive-capital, advanced to the production process, but constitute merely a productive supply, that is in the hands of that particular producer, rather than the hands of the merchant or other producer that supplies them.

If a particular capital has 10,000 units of materials in a productive-supply, but only requires 1,000 of those units to be advanced to meet the needs of production for one turnover period, the advanced capital is not calculated on the value of the 10,000 units, but on the value of the 1,000 units actually advanced to production. The fact, that the capitalist has this additional 9,000 units, simply means they have a capital value equal to that amount in the form of commodities, rather than money-capital (or more accurately in the form of commodities rather than money, because money that is not being used productively so as to expand is not acting as capital, and the same applies to the commodities).

The fact, remains that in order to have continuous production during the whole of the turnover period, the capitalist only requires to advance 1,000 units. When these 1,000 units are processed into commodities, and sold, their value assumes the form of money, which now the capitalist does not need to immediately transform into materials, to reproduce those consumed in production, because they already have a productive supply, of an additional 9,000 units, ready to be advanced to production, without any additional purchases, or advance of money-capital.

The commodity-capital when sold assumes the form of money, not money-capital, precisely because it can be used for unproductive consumption rather than to buy additional productive-capital.  It does not need to immediately buy additional productive-capital, because of the existence of the productive-supply.  At the point that the next 1,000 units of these commodities leave the productive supply and are advanced to production, they cease being merely commodities, and become productive-capital, just as money when it is advanced to buy productive-capital ceases being simply money, and becomes money-capital.

The same is true above. If the pimp immediately took the money, paid by each client, to the prostitute, but only paid the wages, to the prostitute, at the end of the day, and only paid out expenses at the end of the day, this would not change the fact that the variable capital, represented by the labour of the prostitute, had turned over several times during the day, and that the pimp had obtained their surplus value, on it, several times during the day, which would have been available for them, after each circuit, to invest in other ways.

The same is true in relation to the payment for orders provided by a fast food restaurant. But, this also demonstrates the problem with Maito's methodology, of calculating the rate of turnover based on “the number of times the total stock of inventories is expressed in the flow of total costs of the economy.” That is that, besides the problem of accurately determining, in a Marxist sense, what those total costs are, there are numerous reasons why the total stock of inventories may vary, in proportion to those costs, that has nothing to do with changes in the rate of turnover of productive-capital.

Wednesday, 27 August 2014

Capital II, Chapter 19 - Part 4

2) Adam Smith Resolves Exchange Value into v + s 

Smith resolves exchange value and the value of national output into three parts – The Trinity Formula. That is wages, profits and rent. This is also the assumption of orthodox economics, be it the Neoclassical or Keynesian. In fact, Keynes' General Theory is based on the assumption of such an equality i.e. that the value of national output is equal to National Income. Marx sets out to demonstrate that this assumption is most obviously false.

Smith's assumption comes down to saying that exchange value/national output comprises v + s, wages plus surplus value. The fact that Smith refers also to rent does not change this. If a rent is obtained, this only means that workers have created enough surplus value that one could be paid.

Marx quotes Smith himself to demonstrate this. For example, talking about manufacture, Smith says,

“The whole annual produce of the land and labour of every country ...naturally divides itself into two parts. One of them, and frequently the largest, is in the first place, destined for replacing a capital, or for renewing the provisions, materials, and finished work, which had been withdrawn from a capital; the other for constituting a revenue either to the owner of this capital, as the profit of his stock; or to some other person, as the rent of his land. (p. 222.)” (p 375)

In other words, v + s, wages and profits. Then in relation to agriculture, besides,

“the reproduction of a value equal to their own consumption, or to the [variable] capital which employs them, together with its owners’ profits ...” — furthermore, “over and above the capital of the farmer and all its profits regularly occasion the reproduction of the rent of the landlord.” (Book II, Ch. 5, p. 243.)” (p 375)

But, Marx points out, 

“The fact that the rent passes into the hands of the landlord is wholly immaterial for the question under consideration. Before it can pass into his hands, it must be in those of the farmer, i.e., of the industrial capitalist. It must form a component part of the value of the product before it becomes a revenue for anyone. Rent as well as profit are therefore, according to Adam Smith himself, but component parts of surplus-value and these the productive labourer reproduces continually together with his own wages, i.e., with the value of the variable capital. Hence rent and profit are parts of the surplus-value s, and thus, with Adam Smith, the price of all commodities resolves itself into v + s.” (p 375-6) 

Smith conflates the idea of wages, profits and rent being component parts of revenue, which, as seen, could be reduced to just v + s, with them being the original source of revenue. But, Marx points out that although its true that the revenues of all sorts of people, not engaged in production, from a prostitute to a King, comes from a payment by a productive worker or a capitalist, those who receive them do so by virtue of the function they perform,

“and they may, therefore, regard these functions as the original sources of their revenue.” (p 376)

3) The Constant Part of Capital 

There is clearly an important distinction between the source of revenue and its destination. For example, profit may be paid to a capitalist, and all sorts of justifications as to why they should receive it can be formulated. That may be that they have taken a risk, that they have abstained from consumption etc. But, none of these have anything to do with the source of the profit they receive.

A capitalist may take a risk, for example, producing some commodity that nobody wants. Rather than this risk creating a profit, they will make a loss, and the resources used for its production will be wasted. A capitalist may abstain from consumption, and hide their pot of gold in the ground until later. But, when they dig it up, it will have increased in value by not one jot!

So, when Smith says,

“In the price of corn, for example, one part pays the rent of the landlord.” (p 377)

this is not an explanation of the value of the corn, based upon the revenues that are paid to the revenue recipients (the basis of the cost of production argument) but quite the reverse shows that the value of the corn can be divided up so as to provide a revenue to various recipients.

In other words, it is the value of the commodity, which determines how much can be distributed as revenue not how much is distributed as revenue that determines value. Suppose a firm produces without any constant capital. The value of its output is equivalent to 10,000 hours of social labour. If to produce it, it employs 10 workers, who are paid in arrears, the fact that the value of their labour-power amounts to 15,000 hours of social labour does not mean they can be paid it!

The most the firm can pay, from its revenue, is the equivalent of 10,000 hours. If the workers had been paid in advance, the full 15,000 hours, then the capitalist would have made a loss equal to 5,000 hours, which they would have to make up from their capital. The 10,000 hours of value created by the workers is all new, positive value. It is value that did not previously exist. The problem is that this new value, created by the workers, is less than the value of their labour-power consumed in producing it!

In other words,

“This entire price, i.e., the determination of its magnitude, is absolutely independent of its distribution among three kinds of people.” (p 377)