Rethinking Marxism: Temporal Value Theory in a Moment of Crisis; Roundtable on the Economic Crisis

Andrew Kliman: Contradictions of Capitalist Value Production: Internal, Inevitable, Insuperable

Alan Freeman: How Did 1929 End?

Radhika Desai: The Demand Problem in the Current Crisis

David Calnitsky: Capitalist Competition, Self-Organization and Crisis

Brendan Cooney: Crisis, Value and Marx’s Order of Operations

This is video from a roundtable on the economic crisis held during this year’s Rethinking Marxism conference in Amherst Mass. Each panelist’s presentation stands on its own so they need not be viewed in any specific order.  A brief bio proceeds each video as well as my own short summary of their argument. This is merely to help viewers decide what to watch and to give some brief context for the uninitated. The paper which my own talk is based on will be linked beneath my video.

Andrew Kliman is a professor of economics at Pace University in New York. He is a leading figure in the Temporal Single System Interpretation (TSSI) which seeks to refute various claims of inconsistency within Marx’s value theory. His book “Reclaiming Marx’s Capital” is an important work in the field. I have discussed these ideas in my video “What Transformation Problem?”. I have posted an interview with Kliman from April of 2009. The TSSI also has important implications over debates as to the validity of Marx’s theory of the Tendency of the Rate of Profit to Fall. Kliman has just completed some important empirical research into the origins of the current crisis which claims that the profit rate has been falling since the 1940’s and that this long-term decline in profit rate sets the context for understanding this crisis. Kliman’s paper for the Rethinking Marxism conference connects the theory of the falling rate of profit to the contradiction within the commodity form itself, between the use-value and exchange value of a commodity. He then meditates on the political implications of such an understanding of capitalist crisis.

AlanFeeman works as an economist for the Greater London Authority and is currently a visiting professor at the University of Manitoba. He and Andrew Kliman edit the journal “Critique of Political Economy”. He and panelist Radhika Desai co-edit the book series “The Future of World Capitalism”. Freeman is an influential figure in the TSSI field. You can find his papers at his website. In this talk Freeman extends his critique of contemporary marxist academia into a critique of the way in which the concept of an economic “law” is understood. Seeking to distance Marx from positivist conceptions of law Freeman invites us to think about the way in which free will and human action are brought to the foreground during a crisis, requiring great, potentially violent, exogenous acts in order to restore capital accumulation. As far as I know Freeman has not published any papers on this topic yet though you can hear him speaking about similar matters at his Left Forum talk. If you write to him he might be able to send you a finished draft of this paper.

Radhika Desai is professor of political studies at the University of Manitoba. As well as fore-mentioned collaborations with Alan Freeman, she is author of “Slouching Towards Ayodhya: From Congress to Hindutva in Indian Politics” and “Intellectuals and Socialism: ‘Social Democrats’ and the Labour Party”.  Interested viewers might check out her article Neoliberalism Self-Destructs and her inteview on Against The Grain on the topic of imperialism. Desai is a defender of Keynes and sees him as presenting a more radical critique of capitalism than is usually acknowledged. See Desai and Freeman’s “Keynes and the Crisis” for more on this angle. Her paper in this panel follows in that spirit, arguing that a full understanding of this crisis is not possible without addressing problems of effective demand. The relevance of the demand problem is much debated among Marxists so viewers may want to pay extra attention to her argument.

David Calnitsky is a graduate student at the University of Wisconsin-Madison. He is one of the people behind the fantastic website “Radical Perspectives on the Crisis” which I highly recommend. Calnitsky’s paper was a critique of the “Monthly Review school” and their theory of crisis. This is a theoretical tradition associated with Paul Baran and Paul Sweezy and their notion that in the 20th century capitalism entered a monopoly stage which differed in key ways from the competitive capitalism of Marx’s time. Monopoly prices meant that the law of value did not hold in the same way and that capitalism’s crisis came, rather than from a falling rate of profit, from long stagnation caused by underconsumption. Calnitsky’s paper deals less with a critique of underconsumption and more with a critique of the notion of monopoly used by the Monthly Review school.

Brendan Cooney is the handsome author of this blog. The text of my paper is here.

Value, Crisis and Marx’s Order of Operations- final draft

I significantly rushed through portions of this paper and omitted sections in my talk at the Rethinking Marxism conference. I have also added more material since posting the draft of the paper the week before the conference. So if you find my talk of interest you might want to read this later version.

Crisis, Value and Marx’s “Order of Operations”

Brendan Cooney
kapitalism101.wordpress.com

Abstract:
An economic crisis manifests itself in many different forms simultaneously: stock market crashes, housing market crashes, over capacity, unemployment, etc. For every aspect of the crisis there is some theorist who mistakes this surface appearance for the inner mechanism of crisis. But a proper analysis of crisis needs to have some reason for selecting some phenomena as causes and others as effects. There must be a proper ordering of the relations between different economic factors in order for our analysis to avoid being arbitrary and piecemeal. Marx gives us a very clear, though complex, ordering of these relations. This paper will attempt to critique credit-centered and underconsumptionist theories of crisis from the perspective of Marx’s “order of operations”. It will close with some brief remarks about the Falling Rate of Profit.

The Prophet Elijah

Marx was not averse to using all sorts of biblical analogies to illustrate his points and so neither should we be averse to appropriating from “the good book” when it suits our purposes.

The prophet Elijah is having a bad day because everybody wants to kill him. He goes into the desert looking for Yahweh, walks for 40 days and 40 nights, crawls into a cave and waits there for Yahweh to appear to him. The Bible says, “A mighty hurricane shattered the mountain and split the rocks before Yahweh. But Yahweh was not in the hurricane. And after the hurricane, an earthquake. But Yahweh was not in the earthquake. And after the earthquake, a fire. But Yahweh, was not in the fire.” Finally Elijah hears a light murmuring sound, goes out of the cave and encounters Yahweh himself who reveals a prophecy to him. (1)

And why do I bring up this old-testament acid-trip? Because it is a great distillation of early human ontology. We know from the old-testament that “God created all heaven and earth,” that he “Laveth the thirsty land…” that biblical man interpreted the phenomenological world around him as having a common, divine creator. Yet here, in the book of Kings, we get this crucial ontological distinction: God may create hurricanes, earthquakes and fires but God is not in the hurricane, earthquake and fire. To mistake one of these forms of appearance for God himself would be the most gauche of religious fetishism.

Now, perhaps, you see where I am going with my analogy. Here in 2009, peering out from our caves at a world of destruction and crisis raging all around us we too must remember this same lesson. “There was a great crisis in the housing market. But the fundamental social antagonism of capital was not in the housing market. After the housing bubble there was a collapse of the financial system, but the fundamental social antagonism of capital was not in the financial system. After the collapse of the financial system overcapacity, overproduction and underconsumption were revealed, but the fundamental social antagonism of capital was not in overcapacity, overproduction or underconsumption.”

The prophet Elijah had a luxury that we do not have. After the forms of appearance pass by, the creator himself appears before Elijah. (The old testament could even be read as a history of humans trying to see God in this pure form through trances, drugs, divination, etc. and learning to live with this lack of direct revelation.) But Marx’s fundamental starting point is the idea that in a capitalist society we don’t see these antagonisms in some pure form. They can only be expressed through various forms of appearance: through money, commodities and capital. A crisis is the closest we come to seeing these social antagonisms laid bare, yet here in this current crisis its obvious how easy it still is to mistake credit bubbles and the like for root causes. For our present purposes there are two lessons to learn from Marx’s fetishism argument. 1. We cannot expect to witness the social antagonisms in their pure form. Thus we must avoid mistaking a form of appearance for the thing in itself. (2)  2. We mustn’t err too far in the opposite direction. We cannot dismiss this world of appearance as a completely uninteresting world of illusion. The manner in which these social antagonisms are expressed are crucial to our understanding of them. I think that in some of the erroneous theories of crisis I talk about here there is still a kernel of truth. Here I want to extract what is important about the phenomenal forms of the expression of crisis as well as to critique those theories which dwell too long on the phenomenal form without identifying the root causes of crisis.

order of operations

Peering out of our caves in 2009 we are confronted with a variety of phenomenon, all which express the social antagonisms of capital: housing bubble, predatory banks, decline of the dollar, competition, competitive devaluation, excess capacity, stagnant wages, etc. How do we discover what is fundamental about these? What is the relation of all of these different phenomenon to each other? Marx gives us a logical structure with which to understand the inter-relations of these phenomenon. It is not like a mess of billiard balls all colliding with one another with equal force and mass. It is not like that obnoxious string-of-causes so popular in postmodern theory, “race, class, gender, sexual-orientation, ethnicity, religion…”, where all things are given equal weight and no attempt is made to actually understand the relations between different elements. There is a priority of relations in Marx. The question is always, “What proceeds what logically?” (3) So, for instance, we can’t understand the relations between capitalists until we first understand what it means to be a capitalist in the first place. Thus the labor-capital relation logically proceeds the relations between capitalists. This is why Marx said that one of the two most important discoveries of Capital was his treatment of surplus value independent of its division between different factions of the capitalist class.(4) The other important point involves the relation of the labor-capital relation to the value relation. The labor-capital relation presupposes commodity production, the sale of the products of labor in the marketplace which forms the law of value. Since all of the interactions between actors in a capitalist society take the form of commodity exchange, the law of value is the fundamental relation.

Errors can be made here. This “order of operations” is not an historical ordering. For instance, we know that money existed before capital. Yet with the historical appearance of capital money becomes subservient to capital. Usury becomes transformed into a credit system which serves capital’s needs. Fred Moseley might be reproached here for claiming that “this is not a Marx crisis but a Minsky crisis”, as if the various historical phenomenal forms of crisis somehow erased this subservience of money to capital. (5)

We could mention other instances of confusion of historical with logical ordering. Engels himself (as well as other great Marxists like Hilferding and Mandel) insisted that the law of value existed historically in the form of simple commodity production prior to capitalist production. I sympathize with Rubin’s critique of this notion. (6) The primacy of the law of value can be understood purely as a logical primacy, not an historical precedent. Clearly we need to understand the history of trade in an analysis of the evolution of capital. But this doesn’t mean that the law of value functioned in some pure form, that commodities traded at their socially necessary labor time, prior to capitalist social relations.

In the same way that this order of operations is not historical, it also isn’t a simple logic of cause-and-effect. It’s not that value causes capitalism and capitalism causes relations between capitalists. The operation of the law of value can only take hold once capital has cleared away barriers to free exchange. The law of value is dialectically wedded to the laws of capital. We cannot have C-M-C without M-C-M. These two things, the value relation and the labor-capital relation, both merely inversions of one another, subjugate all other forces to their power. As much as we may make powerful insights into the ruthless antagonisms expressed in various parts of the economy they can only be forms of appearance of the basic antagonisms of capital.

Credit theories

With this being said we are already half-way done critiquing the credit-centered theories of crisis of Duncan Foley, Fred Moseley and the host of bourgeois pundits who also take this route. (7) (At the Rethinking Marxism conference I jokingly called these “stock-jock theories” of crisis: that stock jocks flapping their wings on Wall Street cause factories to close in Shanghai.) What does it mean to say there is a credit bubble? It means that the size of the paper-symbols of value that are floating around on Wall Street have grown larger than the actual amount of real value produced in the economy. But why did so much investment flow into speculative investments instead of flowing into the production of real profits in the “real economy”? And why couldn’t enough value be created to realize the value of this bubble? Why must assets be written down? Obviously theories of finance always beg other questions about the production of real value. Thus we can’t understand investments and bubbles in the financial world without a theory of capital accumulation.

This is why credit/finance/financial theories of crisis rely on theoretical attempts to uncouple the financial system from capital. It is argued that developments in the world of finance have created an independent internal logic which can create a crisis independent of the logic of capital. Some credit-crisis theorists, in an effort to clearly separate theories of capital from theoreis of credit, even argue that capital is not in a crisis. This is Moseley’s approach. It is beyond the scope of this paper to critique these theories of “uncoupling”. Rather I want to make it clear how they relate to the structure of Marx’s argument.

Yet the financial world is not entirely a realm of illusion. Real changes have taken place in the form of world money and these are important for Marxists to include in their analysis. In the 1970’s when Nixon took the dollar off the gold standard he severed the link between world money and its basis in real value. (There is actually a lot of debate about whether or not the US dollar has a de facto commodity basis. Is the dollar based on the value of oil? of the mass of commodities?) This liberated world money allowing it to become incredibly good at being a medium of circulation, of lubricating exchange. Problems in production and demand could all be easily papered over with a rapidly expanding flow of credit. Fortunes could be made just through the manipulation of currency exchange rates, bypassing the world of production altogether. Yet as world money became better and better at lubricating exchange it became worse and worse at measuring value. It has become increasingly unclear what the real value of a mortgage-backed security, a pension, or even a dollar is. (8)

This phenomenon is exactly what Marx was talking about in those difficult, highly abstract opening chapters to Kapital. When Marx says that the contradiction between a commodity’s use-value and value is resolved in the money form only for money to internalize this contradiction as a contradiction between the measure of value and the medium of exchange…. Marx is giving us the theoretical framework to understand real phenomenon like the current contradictory nature of world money. Yet these opening chapters on money are directly followed by the chapters on capital. This is because capital effectively resolves the problems of money. It constantly throws more and more value into the economy, subordinating all production and exchange to its rhythms. When credit is advanced, capital creates the value to pay back this loan.

In this sense leftist credit-based theories of the crisis make the same mistake that Austrian conspiracy crisis-theories do with their obsessive paranoia about central banking. They neglect to mention that the amazing powers of world money to lubricate exchange only come into conflict with money as a measure of value when capital is not able to generate enough value to pay back those loans. This is because money is absorbed into the circuit of capital and subordinated to the rhythm of capital. Financial bubbles do not arise because of some fluke in state regulation. They arise as an attempt to compensate for the contradictions of capital.

Underconsumption

Underconsumption theories have become very popular now-a-days amongst Marxists and non-Marxists. For those unfamiliar with the argument or with the term “underconsumptionist”, the idea is that the drive by capitalists to suppress wages ends up coming back to kick them in the butt because low-wages means there isn’t enough demand in the economy to buy back all the commodities workers are producing.

Underconsumption does appear to veer closer to Marx’s logic in that it stresses the antagonism between labor and capital. It also considers the process of reproduction as a whole. It acknowledges that crisis is not a question of just the financial sector but of the ability of the antagonistic social relations of capitalism to reproduce themselves through this same antagonistic logic. Yet for a lot of Marxists the term “underconsumptionist” has always been an insult directed at theories that claim capitalism can avoid crisis by raising wages a little bit. The critics claim that underconsumptionists unjustly privilege problems of exchange instead of looking to production for the true source of the social antagonisms of capital. In the debates between the underconsumptionists and the falling rate of profit theorists one can sometimes feel caught in a dialectical chicken and egg argument: which has primacy production or exchange?

Rather than providing a full-scale critique of the underconsumptionist position, I want to offer two points which I think help to situation problems of consumption/demand/realization within the logical structure of Marx’s argument.

Point 1: The difference between the potential for crisis and the “cause” of crisis.

I will use a slightly awkward and simplistic analogy to illustrate my point.

A bicycle has the potential to crash. It is narrow, hard to balance and is beset on all sides by the forces of gravity. Yet a bicycle has a means of overcoming this potential: a rider who propels the bike forward. This forward momentum overcomes the forces of gravity, actually using gravity to its own purpose in moving the bike forward. If the bike crashes we will see the forces of gravity kicking in, pulling it to the ground. Yet if it crashes we don’t say that the bike crashed because of gravity. We instead try to explain why the forward momentum of the rider failed to overcome gravity: ie. it was hit by a car, or hit a pothole, etc.

In Marx’s  understanding of the circulation of capital there is also a similar logical distinction between the possibility for a crisis and those forces that actually move capitalism into a crisis. The fact that production only becomes social in exchange, the fact that money must serve as a mediating link in the organization of the labor process means that the potential for crisis exists. Money separates production and exchange. It separates a purchase and a sale. It makes it theoretically possible that the social product might not be bought or that demand might not be met. Even with the evolution of money into credit, money can’t necessarily resolve all of the difficulties of exchange which require money to be thrown into and withdrawn from circulation to adjust to changing masses of commodities entering and exiting the market.

But as we have already seen, capital provides a forward momentum that overcomes these problems. Capital takes the potential instability of C-M-C and inverts it into M-C-M. If a crisis erupts it is because something has gone wrong with the capital’s ability to provide this forward motion. Yet, this crisis will appear as the separation of a purchase and sale. The circuit of capital will freeze in all of its stages and we will see unsold products, unused capital and unemployed workers. It will look like the problem is in the exchange of these things in the market. But just like we don’t say gravity is the cause of bike accidents, we also don’t say a separation of purchase and sale is the cause of crisis. The underconsumptionist gaze is too fixated on the market when the real determination of market phenomenon comes from production. (9)

Sometimes it is argued that that this idea of a “forward momentum” provided by capital which overcomes the potential for purchase and sale to create a crisis is a version of Say’s Law. (For a Marxist “them’s fightin’ words.” J.B Say had argued that sellers bring their own buyers to the market, that supplies are always sold, that the possibility of a general glut of commodities didn’t exist. Marx hated Say. Marx really hated Say. Marx really really hated Say. Really.) I think it is unfair to characterize my above argument as a version of Say’s Law. In fact the distinction is a really crucial one which gets to the heart of the underconsumptionist debate.

Products go unsold all the time in a capitalist society. This is the way supply and demand works. If there is a shortage of goods prices and profits rise and capital rushes in. If there is a glut of commodities in a sector prices and profits fall and capital rushes out. This is the mechanism whereby labor is reapportioned. This is the mechanism by which prices coordinate the division of labor. The labor theory of value requires that there be constant disproportions, unsold commodities, reallocation of labor between sectors, etc. if price is to serve its role of reallocating labor. As productivity changes, as demand changes, the disproportions of the market constantly fluctuate to reapportion labor. But labor is reapportioned. It continues to move in and out of sectors in search of the highest profit for capital. This is part of the “forward motion” of capital which overcomes the possibility that the separation of purchase and sale can create a crisis.

The underconsumptionst must therefore always argue that there is an absolute limit to how much capital can flow out of the consumer goods sector. If wages are falling and there is therefore less and less demand for consumer goods, then capital will constantly flow into the producer goods sector- the sector which produces machines and other inputs for other capitalists. Critics of underconsumption argue that producer goods sector can continue to grow and grow, furnishing all of the demand needed for accumulation to move forward. Capitalists can sell to each other as the consumer goods sector shrinks.

Underconsumptionists respond by arguing that there is some absolute limit to how much the consumer goods sector can shrink. Sometimes it is even argued that all production is ultimately production for consumer goods. This usually gets underconsumptionists in trouble for falling for the bourgeois idea that demand, not capital accumulation, drives the economy. But isn’t there a limit to how small the consumer goods sector can shrink? I actually think there is, but that the limit is not set by problems of demand. Imagine an economy in which there were no consumer goods and therefore no workers. Production is totally automated. requiring no workers, and capitalists produce for each other. In such a hypothetical world there would be no law of value and exchange would breakdown. But the lack of consumer demand would not be the problem. It would be the lack of labor which forms the basis of value. This leads naturally to my second theoretical point…

Point 2: The difference between the total value and the distribution of value in the determination of prices and profit.

When productivity rises why do the prices of individual commodities fall? Because less labor is contained in them. But what is the mechanism which actually forces these prices to fall? There is only so much value in the economy at a given time with which to purchase the mass of use-values created. Capitalists are not free to set any price they like. They are constrained by the amount of value in the form of purchasing power which they confront in the market. (10) When the products of labor meet in the market, when the commodities that make up the entire social product are exchanged with each other, the social relations between producers take on the form of relative prices between their products. In this way the total amount of value constrains the total price. The process of exchange, of realization, is essential to establishing prices and profits. That’s why as productivity increases prices must fall. When these falling prices correspond to a rising cost of production then we get a falling rate of profit.

But underconsumption theory does not focus on the total value, or the cost of producing this value. Instead it focuses on the distribution of value between workers and capitalists. The distribution of value between wages and profits does effect the profit rate in the sense that less wages mean higher profits. But the distribution of purchasing power between wages and profits does nothing to alter the total amount of value that acts as a constraint on prices and profits. This distribution of consumptive power could effect the prices of commodities in the consumer goods sector, but not the profit rate. If wages fall then there is less value in the economy with which to buy back consumer goods (that is, if the capitalist cannot absorb these goods.) This could cause consumer goods to go unsold or for prices to fall below their value as capitalists compete to sell off this excess of commodities. But this can’t actually cause the profit rate to fall. This is because the unpaid labor of the worker costs the capitalist nothing. If $100 in lower wages means that $100 of toothbrushes aren’t sold to workers then the profit rate is exactly where it was before the wage cuts. (11) Furthermore, as pointed out above, a glut of toothbrushes would signal capital to leave this sector and move to another sector where potential profits are higher.

It is not the distribution of purchasing power between labor and capital which is crucial for crisis theory. It is the total mass of value, the total mass of surplus value and the cost of producing this surplus value. This, of course, is the theory of the falling rate of profit.

Falling Rate of Profit

The theory of the tendency of the falling rate of profit succeeds where these other theories fail. It correctly identifies the central dynamics of a capitalist society in the dialectical interrelation between value and capital, the mutual interdependence of C-M-C and M-C-M. Capital contains a contradiction: it incorporates the the body of the worker into its cold, machine-like logic. The worker becomes a commodity, embodying the contradiction of all commodities: that commodities are both use-values and exchange values. The contradiction of the commodity form becomes the contradiction of capital.

Capital plays out this contradiction through the commodity form. It raises the social productivity of labor, thus increasing the mass of use-values produced and increasing the mass of use-values that the worker confronts on the shopfloor. But as it develops the social productivity of labor, the efficiency with which use-values are produced, it undermines its ability to produce surplus value- its own social basis. The production of use-value and exchange value come into conflict.

Thus the theory of the falling rate of profit properly situates Marx’s crisis theory within Marx’s larger historical analysis of the evolution of the forces and relations of production. Capital develops the forces of production beyond the point at which they can continue to support the relations of production. This is why Marx says that the FRP exposes the historical limit to capitalist social relations. (12) Of course capitalist crisis is cyclical. The falling rate of profit is not a theory of some terminal stage of crisis. But it does relate the theory of crisis to Marx’s larger project of identifying the historical nature of capitalism. Other crisis theories do not do this. (13) We will not see the emergence of some new historical form of derivatives that harkens the coming revolution. We will not see some new development of wages that paves the road for socialism. But in the evolution of the forces of production we can see the historical limits to capital. I think that these historical limits are worth thinking about when we analyze the evolution of value, especially now-a-days in the realm of information production. (14)

Footnotes:

(1) Bible. 1 Kings 19:11

(2) I haven’t read enough Autonomist Marxist literature to put forth a criticism of their ideas on crisis here. When surveying the autonomist literature I would keep this aspect of fetishism in mind. To what extent does the focus on the autonomy of the worker in autonomist thinking represent a desire to see the social antagonism of capital in some pure form, free from forms of appearance?

(3) This notion of logical priority is articulated well in I.I. Rubin’s “Essays on Marx’s Theory of Value”. This is a great book, with an extremely careful and detailed analysis of the logical structure of Marx’s argument.

(4) Marx and Engels, “Selected Correspondence”, from a letter from Marx to Engels, August 24th 1867. Marx writes, “The best points in my book are: 1) the two-fold character of labor, according to whether it is expressed in use-value or exchange value. (All understanding of the facts depend upon this.) It is emphasized immediately in the first chapter; 2) the treatment of surplus value independently of its particular forms as profit, interest, ground rent, etc.”

(5) See Fred Moseley’s piece June 08 in the journal International Socialism. http://www.isj.org.uk/?id=463; For a more detailed piece by Moseley see http://www.isreview.org/issues/64/feat-moseley.shtml
For more criticism of Moseley see Andrew Kliman’s “On the Roots of the Financial Crisis and some Proposed Solutions”
http://marxisthumanistinitiative.org/2009/04/17/on-the-roots-of-the-current-economic-crisis-and-some-proposed-solutions/

(6) See Hilferding’s “Response to Bohm-Bawerk” for the classic defense of this theory of the historical precedence of simple commodity production. Also see Ernest Mandel’s introduction to Vo. 1 of Capital. I am convinced by Rubin’ s criticism of this theory in “Essays on Marx’s Theory of Value.” Also see the brief criticism in David Harvey’s “Limits to Capital.”

(7) See Duncan Foley’s trippy graphs in his paper “The Anatomy of Financial and Economic Crisis”: http://sites.google.com/site/radicalperspectivesonthecrisis/finance-crisis/on-the-origins-of-the-crisis-beyond-finance/foleytheanatomyoffinancialandeconomiccrisis
While I have a deal of respect for a lot of the other theorists I critique in this paper, Foley’s paper does not garnish one iota of respect outside of the trippy graphs.

(8) See David McNally’s great 2008 paper on this subject: “From Financial Crisis to World Slump”
http://marxandthefinancialcrisisof2008.blogspot.com/2008/12/david-mcnally-from-financial-crisis-to.html

(9) Anwar Shaikh’s criticism of underconsumption as lacking a theory of the rate of accumulation is what I had in mind when constructing this argument. See his “And Introduction to the History of Crisis Theories” on his homepage: http://homepage.newschool.edu/~AShaikh/

Also useful is Harvey’s discussion of the way capital solves the effective demand problem at the end of chapter 3 of his “Limits to Capital.

(10) Here, actually, I feel ambivalent. Is it the total value or the total value in the form of purchasing power that sets the limit on prices? Is there a difference?

(11) see G. Carchedi “Return from the Grave”  http://sites.google.com/site/radicalperspectivesonthecrisis/finance-crisis/on-the-origins-of-the-crisis-beyond-finance/carchedireturnfromthegrave

(12) Das Kapital, Vol. 3. Chapter 15

(13) Much has already been written by falling rate of profit theorists about the problematic “solutions” recommended by proponents of erroneous crisis theories. The financial-centered theorists call for nationalization of finance or closer regulation. This makes sense because they see the problem emanating from a faction of the capitalist class, or from the money form, but not from capital and the value form. It thus seems logical from their perspective for the capitalist state to solve the problem. Rick Wolf, representing the underconsumption school, advocates a worker-owned factory, market-socialism type of society to replace capitalism. This makes sense coming from the perspective that the chief antagonism is in the distribution of wages and profits. Because the dialectical relation between C-M-C and M-C-M is not present in Wolfe’s theory there would be no reason for him to question commodity production0 to ask to what extent commodity production eventually reproduces the capital relation.

(14) Here is theoretical terrain that is in desperate need of more theorizing. Marx’s optimism for a post-capitalist future came from his analysis of the development of the forces of production under capitalism. He writes about the way in which the centralization of means of production leads to a truly social labor process, and how abstract labor creates a truly universal class. In our lifetime we have seen the stagnation and death of many industries whose ownership of the means of production have been eroded by the evolution of digital information technologies- technologies which have eliminated productive labor from the task of duplicating and distributing information. This has created an under-theorized collective commons of information creation that has struggled to find a stable commodity basis. The open-source software movement is perhaps the best example of this emerging terrain of conflict. Capital’s response is increasingly reactionary. Rather than establish a new basis in real value production it relies on narrow legal enclosures, threatening to turn the information age into a new period of primitive accumulation. But can capitalist production be anything but reactionary and parasitic in the realm of information production? What does this mean for theories of revolution? I don’t know. I am influenced by Tessa-Morris-Suzuki’s writing on this topic. See her essays in the book “Cutting Edge” edited by Jim Davis.

Crisis, Value and Marx’s “Order of Operations”

This is a draft of a paper I will be delivering, in some form, Saturday Nov. 7, on a panel called “Temporal Value Theory at a Moment of Crisis” at the “Rethinking Marxism” conference in Amherst. I hope to post a video of the panel next week. My apologies for the incomplete footnotes. I welcome comments.

Brendan Cooney
kapitalism101.wordpress.com

Abstract:
An economic crisis manifests itself in many different forms simultaneously: stock market crashes, housing market crashes, over capacity, unemployment, etc. For every aspect of the crisis there is some theorist who mistakes this surface appearance for the inner mechanism of crisis. But a proper analysis of crisis needs to have some reason for selecting some phenomena as causes and others as effects. There must be a proper ordering of the relations between different economic factors in order for our analysis to avoid being arbitrary and piecemeal. Marx gives us a very clear, though complex, ordering of these relations. This paper will attempt to critique credit-centered and underconsumptionist theories of crisis from the perspective of Marx’s “order of operations”. It will close with some brief remarks about the Falling Rate of Profit.

The Prophet Elijah

Marx was not averse to using all sorts of biblical analogies to illustrate his points and so neither should we be averse to appropriating from “the good book” when it suits our purposes.

The prophet Elijah is having a bad day because everybody wants to kill him. He goes into the desert looking for Yahweh, walks for 40 days and 40 nights, crawls into a cave and waits there for Yahweh to appear to him. The Bible says, “A mighty hurricane shattered the mountain and split the rocks before Yahweh. But Yahweh was not in the hurricane. And after the hurricane, an earthquake. But Yahweh was not in the earthquake. And after the earthquake, a fire. But Yahweh, was not in the fire.” Finally Elijah hears a light murmuring sound, goes out of the cave and encounters Yahweh himself who reveals a prophecy to him. (1)

[And why do I bring up this old-testament acid-trip? Because it is a great distillation of early human ontology. We know from the old-testament that "God created all heaven and earth," that he "Laveth the thirsty land..." that biblical man interpreted the phenomenological world around him as having a common, divine creator. Yet here, in the book of Kings, we get this crucial ontological distinction: God may create hurricanes, earthquakes and fires but God is not in the hurricane, earthquake and fire. To mistake one of these forms of appearance for God himself would be the most gauche of religious fetishism.]

Now, perhaps, you see where I am going with my analogy. Here in 2009, peering out from our caves at a world of destruction and crisis raging all around us we too must remember this same lesson. “There was a great crisis in the housing market. But the fundamental social antagonism of capital was not in the housing market. After the housing bubble there was a collapse of the financial system, but the fundamental social antagonism of capital was not in the financial system. After the collapse of the financial system overcapacity, overproduction and underconsumption were revealed, but the fundamental social antagonism of capital was not in overcapacity, overproduction or underconsumption.”

The prophet Elijah had a luxury that we do not have. After the forms of appearance pass by, the creator himself appears before Elijah. (The old testament could even be read as a history of humans trying to see God in this pure form through trances, drugs, divination, etc. and learning to live with this lack of direct revelation.) But Marx’s fundamental starting point is the idea that in a capitalist society we don’t see these antagonisms in some pure form. They can only be expressed through various forms of appearance: through money, commodities and capital. A crisis is the closest we come to seeing these social antagonisms laid bare, yet here in this current crisis its obvious how easy it still is to mistake credit bubbles and the like for root causes. For our present purposes there are two lessons to learn from Marx’s fetishism argument. 1. We cannot expect to witness the social antagonisms in their pure form. Thus we must avoid mistaking a form of appearance for the thing in itself. (2)  2. We mustn’t err too far in the opposite direction. We cannot dismiss this world of appearance as a completely uninteresting world of illusion. The manner in which these social antagonisms are expressed are crucial to our understanding of them. I think that in some of the erroneous theories of crisis I talk about here there is still a kernel of truth. Here I want to extract what is important about the phenomenal forms of the expression of crisis as well as to critique those theories which dwell too long on the phenomenal form without identifying the root causes of crisis.

order of operations

Peering out of our caves in 2009 we are confronted with a variety of phenomenon, all which express the social antagonisms of capital: housing bubble, predatory banks, decline of the dollar, competition, competitive devaluation, excess capacity, stagnant wages, etc. How do we discover what is fundamental about these? What is the relation of all of these different phenomenon to each other? Marx gives us a logical structure with which to understand the inter-relations of these phenomenon. It is not like a mess of billiard balls all colliding with one another with equal force and mass. It is not like that obnoxious string-of-causes so popular in postmodern theory, “race, class, gender, sexual-orientation, ethnicity, religion…”, where all things are given equal weight and no attempt is made to actually understand the relations between different elements. There is a priority of relations in Marx. The question is always, “What proceeds what logically?” (3) So, for instance, we can’t understand the relations between capitalists until we first understand what it means to be a capitalist in the first place. Thus the labor-capital relation logically proceeds the relations between capitalists. This is why Marx said that one of the two most important discoveries of Capital was his treatment of surplus value independent of its division between different factions of the capitalist class.(4) The labor-capital relation presupposes commodity production, the sale of the products of labor in the marketplace which forms the law of value. Since all of the interactions between actors in a capitalist society take the form of commodity exchange, the law of value is the fundamental relation.

Errors can be made here. This “order of operations” is not an historical ordering. For instance, we know that money existed before capital. Yet with the historical appearance of capital money becomes subservient to capital. Usury becomes transformed into a credit system which serves capital’s needs. Fred Moseley might be reproached here for claiming that “this is not a Marx crisis but a Minsky crisis”, as if the various historical phenomenal forms of crisis somehow erased this subservience of money to capital. (5)

[We could mention other instances of confusion of historical with logical ordering. Engels himself (as well as other great Marxists like Hilferding and Mandel) insisted that the law of value existed historically in the form of simple commodity production prior to capitalist production. But the attempts to theorize this fail- see I.I. Rubin. (6)]

In the same way that this order of operations is not historical, it also isn’t a simple logic of cause-and-effect. It’s not that value causes capitalism and capitalism causes relations between capitalists. The operation of the law of value can only take hold once capital has cleared away barriers to free exchange. The law of value is dialectically wedded to the laws of capital. We cannot have C-M-C without M-C-M. These two things, the value relation and the labor-capital relation, both merely inversions of one another, subjugate all other forces to their power. As much as we may make powerful insights into the ruthless antagonisms expressed in various parts of the economy they can only be forms of appearance of the basic antagonisms of capital.

Credit theories

With this being said we are already half-way done critiquing the credit-centered theories of crisis of Duncan Foley, Fred Moseley and the host of bourgeois pundits who also take this route. (7) What does it mean to say there is a credit bubble? It means that the size of the paper-symbols of value that are floating around on Wall Street have grown larger than the actual amount of real value produced in the economy. But why did so much investment flow into speculative investments instead of flowing into the production of real profits in the “real economy”? And why couldn’t enough value be created to realize the value of this bubble? Why must assets be written down? Obviously theories of finance always beg other questions about the production of real value. Thus we can’t understand investments and bubbles in the financial world without a theory of capital accumulation.

Yet the financial world is not entirely a realm of illusion. Real changes have taken place in the form of world money and these are important for Marxists to include in their analysis. In the 1970’s when Nixon took the dollar off the gold standard he severed the link between world money and its basis in real value (fix this). This liberated world money allowing it to become incredibly good at being a medium of circulation, of lubricating exchange. Problems in production and demand could all be easily papered over with a rapidly expanding flow of credit. Fortunes could be made just through the manipulation of currency exchange rates, bypassing the world of production altogether. Yet as world money became better and better at lubricating exchange it became worse and worse at measuring value. It has become increasingly unclear what the real value of a mortgage-backed security, a pension, or even a dollar is. (8)

This phenomenon is exactly what Marx was talking about in those difficult, highly abstract opening chapters to Kapital. When Marx says that the contradiction between a commodity’s use-value and value is resolved in the money form only for money to internalize this contradiction as a contradiction between the measure of value and the medium of exchange…. Marx is giving us the theoretical framework to understand real phenomenon like the current contradictory nature of world money. Yet these opening chapters on money are directly followed by the chapters on capital. This is because capital effectively resolves the problems of money. It constantly throws more and more value into the economy, subordinating all production and exchange to its rhythms. When credit is advanced, capital creates the value to pay back this loan.

In this sense leftist credit-based theories of the crisis make the same mistake that Austrian conspiracy crisis-theories do with their obsessive paranoia about central banking. They neglect to mention that the amazing powers of world money to lubricate exchange only come into conflict with money as a measure of value when capital is not able to generate enough value to (pay back those loans.) This is because money is absorbed into the circuit of capital and subordinated to the rhythm of capital. Financial bubbles do not arise because of some fluke in state regulation. They arise as an attempt to compensate for the contradictions of capital.

Underconsumption

Underconsumption does appear to veer closer to Marx’s logic in that it stresses the antagonism between labor and capital. It also considers the process of reproduction as a whole. It acknowledges that crisis is not a question of just the financial sector but of the ability of the antagonistic social relations of capitalism to reproduce themselves through this same antagonistic logic. Yet, in addition to the basic logical flaw in the underconsumptionist argument, there is a mistake in the “order of operations”. The mistake is two-fold:

mistake 1: Mistaking the potential for crisis for the cause of crisis.

I will use a slightly awkward and simplistic analogy to illustrate my point.

A bicycle has the potential to crash. It is narrow, hard to balance and is beset on all sides by the forces of gravity. Yet a bicycle has a means of overcoming this potential: a rider who propels the bike forward. This forward momentum overcomes the forces of gravity, actually using gravity to its own purpose in moving the bike forward. If the bike crashes we will see the forces of gravity kicking in, pulling it to the ground. Yet if it crashes we don’t say that the bike crashed because of gravity. We instead try to explain why the forward momentum of the rider failed to overcome gravity: ie. it was hit by a car, or hit a pothole, etc.

In Marx’s  understanding of the circulation of capital there is also a similar logical distinction between the possibility for a crisis and those forces that actually cause a crisis. The fact that production only becomes social in exchange, the fact that money must serve as a mediating link in the organization of the labor process means that the potential for crisis exists. Money separates production and exchange. It separates a purchase and a sale. It makes it theoretically possible that the social product might not be bought or that demand might not be met. Even with the evolution of money into credit, money can’t necessarily resolve all of the difficulties of exchange which require money to be thrown into and withdrawn from circulation to adjust to changing masses of commodities entering and exiting the market.

But as we have already seen, capital provides a forward momentum that overcomes these problems. Capital takes the potential instability of C-M-C and inverts it into M-C-M. If a crisis erupts it is because something has gone wrong with the capital’s ability to provide this forward motion. Yet, this crisis will appear as the separation of a purchase and sale. The circuit of capital will freeze in all of its stages and we will see unsold products, unused capital and unemployed workers. It will look like the problem is in the exchange of these things in the market. But just like we don’t say gravity is the cause of bike accidents, we also don’t say a separation of purchase and sale is the cause of crisis. The underconsumptionist gaze is too fixated on the market when the real determination of market phenomenon comes from production. (9)

mistake 2 (which I give an obnoxiously long title in homage to Marx): confusing the role of total value with the role of the distribution of value in the determination of prices and profit.

When productivity rises why do the prices of individual commodities fall? Because less labor is contained in them. But what is the mechanism which actually forces these prices to fall? There is only so much value in the economy at a given time with which to purchase the mass of use-values created. Capitalists are not free to set any prices they like. They are constrained by the amount of value in the form of purchasing power they confront in the market. (10) When the products of labor meet in the market, when the commodities that make up the entire social product are exchanged with each other, the social relations between producers take on the form of relative prices between their products. In this way the total amount of value constrains the total price. The process of exchange, of realization, is essential to establishing prices and profits. That’s why as productivity increases prices must fall. When these falling prices correspond to a rising cost of production then we get a falling rate of profit.

But underconsumption theory does not focus on the total value, or the cost of producing this value. Instead it focuses on the distribution of value between workers and capitalists. The distribution of value between wages and profits does effect the profit rate in the sense that less wages mean higher profits. But the distribution of purchasing power between wages and profits does nothing to alter the total amount of value that acts as a constraint on prices and profits. This distribution of consumptive power could effect the prices of commodities in the consumer goods sector, but not the profit rate. If wages fall then there is less value in the economy with which to buy back consumer goods (that is, if the capital cannot absorb these goods.) This could cause consumer goods to go unsold or for prices to fall below their value as capitalists compete to sell off this excess of commodities. But this can’t actually cause the profit rate to fall. This is because the unpaid labor of the worker costs the capitalist nothing. If $100 in lower wages means that $100 of toothbrushes aren’t sold to workers then the profit rate is exactly where it was before the wage cuts. (11)

It is not the distribution of purchasing power between labor and capital which is crucial for crisis theory. It is the total mass of value, the total mass of surplus value and the cost of producing this surplus value. This, of course, is the theory of the falling rate of profit.

Falling Rate of Profit

The theory of the tendency of the falling rate of profit succeeds where these other theories fail. It correctly identifies the central dynamics of a capitalist society in the dialectical interrelation between value and capital, the mutual interdependence of C-M-C and M-C-M. Capital contains a contradiction: it incorporates the the body of the worker into its cold, machine-like logic. The worker becomes a commodity, embodying the contradiction of all commodities: that commodities are both use-values and exchange values. The contradiction of the commodity form becomes the contradiction of capital.

Capital plays out this contradiction through the commodity form. It raises the social productivity of labor, thus increasing the mass of use-values produced and increasing the mass of use-values that the worker confronts on the shopfloor. But as it develops the social productivity of labor, the efficiency with which use-values are produced, it undermines its ability to produce surplus value- its own social basis. The production of use-value and exchange value come into conflict.

Thus the theory of the falling rate of profit properly situates Marx’s crisis theory within Marx’s larger historical analysis of the evolution of the forces and relations of production. Capital develops the forces of production beyond the point at which they can continue to support the relations of production. This is why Marx says that the FRP exposes the historical limit to capitalist social relations. (12) Of course capitalist crisis is cyclical. The falling rate of profit is not a theory of some terminal stage of crisis. But it does relate the theory of crisis to Marx’s larger project of identifying the historical nature of capitalism. Other crisis theories do not do this. (13) We will not see the emergence of some new historical form of derivatives that harkens the coming revolution. We will not see some new development of wages that paves the road for socialism. But in the evolution of the forces of production we can see the historical limits to capital. I think that these historical limits are worth thinking about when we analyze the evolution of value, especially now-a-days in the realm of information production. (14)

Footnotes:

(1) Bible. 1 Kings 19:11

(2) I haven’t read enough Autonomist Marxist literature to put forth a criticism of their ideas on crisis here. When surveying the autonomist literature I would keep this aspect of fetishism in mind. To what extent does the focus on the autonomy of the worker in autonomist thinking represent a desire to see the social antagonism of capital in some pure form, free from forms of appearance?

(3) This notion of logical priority is articulated well in I.I. Rubin’s “Essays on Marx’s Theory of Value”. This is a great book, with an extremely careful and detailed analysis of the logical structure of Marx’s argument.

(4) Marx and Engels, “Selected Correspondence”, from a letter from Marx to Engels, August 24th 1867. Marx writes, “The best points in my book are: 1) the two-fold character of labor, according to whether it is expressed in use-value or exchange value. (All understanding of the facts depend upon this.) It is emphasized immediately in the first chapter; 2) the treatment of surplus value independently of its particular forms as profit, interest, ground rent, etc.”

(5) See Fred Moseley’s piece June 08 in the journal International Socialism. http://www.isj.org.uk/?id=463; For a more detailed piece by Moseley see http://www.isreview.org/issues/64/feat-moseley.shtml
For more criticism of Moseley see Andrew Kliman’s “On the Roots of the Financial Crisis and some Proposed Solutions”
http://marxisthumanistinitiative.org/2009/04/17/on-the-roots-of-the-current-economic-crisis-and-some-proposed-solutions/

(6) See Hilferding’s “Response to Bohm-Bawerk” for the classic defense of this theory of the historical precedence of simple commodity production. Also see Ernest Mandel’s introduction to Vo. 1 of Capital. I am convinced by Rubin’ s criticism of this theory in “Essays on Marx’s Theory of Value.” Also see the brief criticism in David Harvey’s “Limits to Capital.”

(7) See Duncan Foley’s trippy graphs in his paper “The Anatomy of Financial and Economic Crisis”: http://sites.google.com/site/radicalperspectivesonthecrisis/finance-crisis/on-the-origins-of-the-crisis-beyond-finance/foleytheanatomyoffinancialandeconomiccrisis
While I have a deal of respect for a lot of the other theorists I critique in this paper, Foley’s paper does not garnish one iota of respect outside of the trippy graphs.

(8) See David McNally’s great 2008 paper on this subject: “From Financial Crisis to World Slump”
http://marxandthefinancialcrisisof2008.blogspot.com/2008/12/david-mcnally-from-financial-crisis-to.html

(9) Anwar Shaikh’s criticism of underconsumption as lacking a theory of the rate of accumulation is what I had in mind when constructing this argument. See his “And Introduction to the History of Crisis Theories” on his homepage: http://homepage.newschool.edu/~AShaikh/

Also useful is Harvey’s discussion of the way capital solves the effective demand problem at the end of chapter 3 of his “Limits to Capital.

(10) Here, actually, I feel ambivalent. Is it the total value or the total value in the form of purchasing power that sets the limit on prices? Is there a difference?

(11) see G. Carchedi “Return from the Grave”  http://sites.google.com/site/radicalperspectivesonthecrisis/finance-crisis/on-the-origins-of-the-crisis-beyond-finance/carchedireturnfromthegrave

(12) Das Kapital, Vol. 3. Chapter 15

(13) Much has already been written by falling rate of profit theorists about the problematic “solutions” recommended by proponents of erroneous crisis theories. The financial-centered theorists call for nationalization of finance or closer regulation. This makes sense because they see the problem emanating from a faction of the capitalist class, or from the money form, but not from capital and the value form. It thus seems logical from their perspective for the capitalist state to solve the problem. Rick Wolf, representing the underconsumption school, advocates a worker-owned factory, market-socialism type of society to replace capitalism. This makes sense coming from the perspective that the chief antagonism is in the distribution of wages and profits. Because the dialectical relation between C-M-C and M-C-M is not present in Wolfe’s theory there would be no reason for him to question commodity production0 to ask to what extent commodity production eventually reproduces the capital relation.

(14) Here is theoretical terrain that is in desperate need of more theorizing. Marx’s optimism for a post-capitalist future came from his analysis of the development of the forces of production under capitalism. He writes about the way in which the centralization of means of production leads to a truly social labor process, and how abstract labor creates a truly universal class. In our lifetime we have seen the stagnation and death of many industries whose ownership of the means of production have been eroded by the evolution of digital information technologies- technologies which have eliminated productive labor from the task of duplicating and distributing information. This has created an under-theorized collective commons of information creation that has struggled to find a stable commodity basis. The open-source software movement is perhaps the best example of this emerging terrain of conflict. What does this mean for theories of revolution? I don’t know. I am influenced by Tessa-Morris-Suzuki’s writing on this topic. See her essays in the book “Cutting Edge” edited by Jim Davis.

Das Kapital vol. 3 Part 2 chapter 8 Different Compositions of Capitals in Different Branches of Production and Resulting Differences in Rates of Profit

Part 2
The Conversion of Profit into Average Profit

(This post is part of an ongoing project: a close reading of volume 3 of Kapital, one post per chapter. I hope that others who are tackling this book for the first time might find my summaries and thoughts useful. I also hope that others might leave their own thoughts, criticisms, help, etc. here so that this blog might become a good collective resource for those brave souls who take on Vol. 3.)

Chapter 8. Different Compositions of Capitals in Different Branches of Production and Resulting Differences in Rates of Profit

From the title the concept seems clear. The composition of capital is short for the “organic composition of capital” or “value composition of capital” which is the ratio of constant to variable capital. If a firm devotes more investment to constant capital than variable capital it should have a lower profit rate than one which hires lots of workers and no machines.

Marx begins by explaining that he will make the assumption in this chapter that the rate of surplus value is uniform throughout the economy. This could just be a theoretical abstraction for the purpose of examining different value compositions of capital. But instead Marx goes further and argues that he is justified in this simplification by a real trend in the economy toward a uniform rate of surplus value. Yes he says that different levels of skill make it harder to see this, referring us to the distinction between simple and complex labor in Vol. 1, but that the forces of capital tend to press evenly upon all labor everywhere, reducing it to a common ratio of surplus labor to wages. Of course there are obstacles to this process everywhere, but the tendency of capital is to slowly, over time, remove these barriers and create a uniform rate of exploitation. (I was surprised to see him refer to Adam Smith here. If anyone can explain this Smith reference more I’d be much obliged.)

This reasoning is common in many of Marx’s arguments. The idea that capital has inherent tendencies, inherent within the basic form of capital itself is similar to the idea of value. In the same way that, to the extent that markets penetrate the social relations of society, we can make observations about the way in which the law of value breaks down barriers, monopolies, etc. to establish socially necessary labor time, we can also observe capital, to the extent that it dominates production relations, slowly imposing its internal logic around the heterogeneous and uneven world around it.

The next important distinction to make is between mass of profit and rate of profit. In all our previous analysis of profit rates it might be easy to forget that a lower profit rate doesn’t mean less surplus value is being produced. It just means that producing this surplus value is more expensive. The mass of surplus value in society can grow at the same time that profit rates are falling. In fact this is the prediction of the falling rate of profit. That belongs to part 3 of the book but this distinction will also be important in this part because Marx will be distinguishing between the aggregate mass of surplus value created by the whole economy and the amount of surplus value each individual capitalist can claim as their own profit.

In Part 1 we often compared the organic composition or turnover times of one firm against another. But in reality such glaring differences in organic composition or turnover are more likely to exist between different industries. The same process of competition which tends to even out differences in the rate of surplus value also evens out differences in organic composition and turnover within each industry. But between different sectors of the economy these differences are still quite drastic. The service sector employs a lot of people and does not have big expenses in machines and fixed capital. It therefore naturally has a lower organic composition than the automobile industry which employs a lot more constant capital relative to variable. From here on, when Marx talks of the organic or value composition of a sector/sphere/industry he is talking about the average organic composition. Individual firms may fluctuate above or below this average, but competition pulls them back toward it. The average itself may change over time, but pulling stragglers along with it. The same logic goes for discussions of turnover time.

Marx then goes on to define three terms which sometimes cause some trouble for readers: technical composition, value composition and organic composition of capital. Many writers who write about Kapital complain that Marx uses these terms too interchangeably and that he changes his definitions of them. Sometimes this is used to claim that his thinking about them changed over time and even that perhaps his understanding of them was incomplete. A lot of writers stick with organic composition for the most part though David Harvey prefers value composition in his book Limits to Capital. (critique that term of Harvey’s which attempts to show the way in which value composition is embodied in physical forms….)

This, tripartite distinction has a dialectical basis. It is similar to Marx’s distinction between use-value, exchange-value and value. It’s theoretical basis is the idea that in a market social relations become reified in the physical form of commodities. These commodities have all sorts of technical features: smell, taste, particular uses, etc. But they also are the means of coordinating a social labor process. Thus they also have the quality of having a price. Price is abstract. It is not related to any physical-material-technical quality. Price is the mechanism for measuring and apportioning social labor. Thus value is manifest in exchange value and exchange value is attached to particular, concrete use-values.

Similarly the process of production has basic technical features depending on the given level of productivity. No matter how the labor is coordinated (markets, feudalism, socialism, parecon, etc.) the material aspects of the labor process determine the ratio of people to machines to raw materials. This is the technical composition of capital. It is purely a description of use-values which abstracts from the amount of money paid for the different elements of production. The technical composition measures numbers of people, numbers of machines, numbers of bolts, barrels of oil, etc.

But all of these people, machines, bolts and barrels have a price. This price is the mechanism by which social labor is apportioned. This price determines how much a capitalist can afford to spend on each item, and how much to charge for the final product. Thus the value composition of capital measures the values of each element of production. A number of people becomes wage expenses. A number of machines becomes fixed capital expenses.

The technical and value compositions have an inner relation. The technical composition determines the proportions that are needed to produce a given level of  output. The value-composition determines how much each element costs and how much can be invested in production. Both elements are always changing. Changes in productivity might mean less workers are needed when more machines are bought. Changes in the value of raw materials (caused by changes in the technical composition elsewhere) mean that the technical composition can be changed without changing the amount of money invested. These feedback effects require a third term that distinguishes between changes in value due to changes in the technical composition in the firm and changes in value due to changes in value of the elements of capital caused by changes in productivity elsewhere. This is the organic composition of capital. It ties the material world of use-value to the social world of value. It stands with one foot in each world, reflecting their interaction effects. Organic composition refers to changes in the value-composition which are caused by changes in the technical composition, as opposed to changes caused by alterations of the value of raw materials, labor, etc. If a firm decides to build more machines so that it can increase output with the same number of workers this is a rise in the organic composition. If a firm finds cheaper raw materials which allow it to buy the same amount of constant capital for less money this is a change in the value composition.

It is sometimes pointed out that Marx’s use of organic composition and value compositions is inconsistent. Marx apparently started developing these terms later in his writing of Kapital. Their appearance in volume 1 did not occur until the 3rd edition. David Harvey, in his book “Limits to Capital”, quotes a passage from Marx’s “Theories of Surplus Value” in which the relation between value composition and organic composition seems to conflict with the definition given in Kapital. People also complain that Marx uses the two terms quite interchangeably in Volume 3 which blurs the distinction. From the definition I give above it seems like organic composition describes internal changes to the firms composition while value composition describes the feedback effects of productivity on other firms yet Marx will use organic composition to describe the economy as a whole as well. As we read through Vol. 3 we’ll have to pay attention to how this term is used to see if we can make sense of this distinction.

It is obvious that the distinction will be important to our discussion of the falling rate of profit. There is a reason that a rising organic composition is associated with the FRP. The FRP argues that changes in the ratio of machines to workers, the technical composition, alters the value composition. This is what the organic composition seeks to explain. If the value composition was rising because of increased prices of raw materials this would not be related to the FRP argument.

Harvey makes the distinction that the organic composition makes more sense in relation to the individual firm’s value composition changing due to changes in the technical composition. He reserves organic composition for individual firms and uses value composition for referring to the entire economy. But this is Harvey’s own distinction. Marx uses organic composition most of the time.

…………. moving on

What does variable capital measure? It is the sum of money spent on wages. That lets us understand the value composition. But those wages correspond to a given mass of workers. This mass of workers is part of the technical composition. The value created by this mass of workers is greater than their wages, than variable capital, than their contribution to the value composition. We don’t necessarily know what this value is unless the rate exploitation is given. If we know the rate of exploitation then we can look at the value of the variable capital and both know how many workers are represented and how much surplus value they will produce for capital. For our purposes we are assuming that surplus value is the same for all firms. This allows us to see what changes come about from changes in the organic composition or changes in the prices of the elements of capital.

Marx shows, through some examples, that different technical compositions of capital will result in different profit rates. Firms with a lot of workers and little constant capital expenses (low organic composition) create more surplus relative to cost-price. Firms with lots of machines and few workers (high organic composition) create less surplus relative to cost price. The same is also true if the value composition is changing due to the cost of constant capital or variable capital changing.

Here comes the crucial point/problem. The labor theory of value predicts that lower organic compositions must create more surplus value than firms with higher organic compositions. If this were not the case, if in the real world we saw profit accruing to firms with no relation to the ratio of variable to constant capital, then this would seem to question whether exploited labor is really the source of profit. “If this were not so, then value and surplus-value would be something else than materialised labour. Since capitals in different spheres of production viewed in percentages — or as capitals of equal magnitude — are divided differently into variable and constant capital, setting in motion unequal quantities of living labour and producing different surplus-values, and therefore profits, it follows that the rate of profit, which consists precisely of the ratio of surplus-value to total capital in per cent, must also differ.” The profit rate must vary if the organic/value compositions vary!

But, of course, profit rates in a capitalist society tend toward average profit rates even as their organic/value compositions diverge. Why? Higher profit rates attract investment in that industry. More investments raises supply which lowers prices so that supply and demand balance. This brings down profits to an average level. The opposite happens with low profit rates. Of course this is a theoretical abstraction. In a real economy profit rates are always shifting as firms compete. But in the long run, an average level of profits is established. Does this mean that the labor theory of value is wrong? Let us find out.

The phenomenon of average profits is a phenomena in which the magnitude of profit corresponds to the magnitude of capital invested, or cost price. If I invest $100 in my firm, and the average profit rate is 20%, then I will make $20 in profit. If invest $1000 dollars my profit will be $200. It doesn’t matter if 1% or 99% of this capital is invested in labor. I get the same profit either way. This would make it appear that profit comes from capital itself and not from labor. But it is in this world of appearance where Marx always shows his strength. Of course capital is self-expanding. Capital does create value. But it does so because it incorporates the body of the laborer into capital. The worker breathes life into capital. But in doing so he breathes life into an antagonism.

…And we are not quite up to the chapter on average profits yet anyway. There are a few pages left to go in which Marx discusses other things which should vary profit rates.

Differences in surplus value alter the profit rate. Of course, in this chapter we are assuming that surplus value is the same across the economy. But Marx takes this opportunity to point out that differences in the rate of surplus value between countries is usually what causes different profit rates in different countries.

Marx reminds us that changes in turnover time create changes in profit rates as we saw in chapter 4. The ratio of fixed to circulating capital does not effect the profit rate unless this ratio also involves a change in the organic composition of capital or a change in turnover time.

In concluding Marx says, as timpani rumble in the background, that up until now we have assumed that prices equal values, and that profit equals surplus value. But if these two things are the case then we would have unequal rates of profit across the economy. “…differences in the average rate of profit in the various branches of industry do not exist in reality, and could not exist without abolishing the entire system of capitalist production. It would seem, therefore, that here the theory of value is incompatible with the actual process, incompatible with the real phenomena of production, and that for this reason any attempt to understand these phenomena should be given up.”

We are about to solve this riddle, but it will involve relaxing some of the previous assumptions of the model as we introduce the relation of capitalists in competition into the picture.

Das Kapital vol. 3 Part 2- opening thoughts

Part 2
Conversion of Profit into Average Profit

Opening Thoughts

(This post is part of an ongoing project: a close reading of volume 3 of Kapital, one post per chapter. I hope that others who are tackling this book for the first time might find my summaries and thoughts useful. I also hope that others might leave their own thoughts, criticisms, help, etc. here so that this blog might become a good collective resource for those brave souls who take on Vol. 3.)

Herein lies theoretical ideas that have been hotly debated for well over a century now. Up until now we have assumed that price equals value and that profit is directly related to the amount of surplus value produced. But now, 140 pages into the 3rd volume of Kapital Marx explains that in conditions of capitalist competition prices don’t equal values and that profit is not determined by the surplus value produced by a firm. This has raised all manner of criticism and even ridicule from some corners. Bohm Bawerk made much of this in his criticism of Marx.

On the other hand Marx has told us that as we add more and more relations to our analysis of capitalist social relations our picture will become less and less like the rigid model we began with. Those basic relational features will become increasingly blurred as the picture becomes more complex, more varied, and embraces more complications and exceptions. Still those basic features will continue to have a strong influence in the model. In fact they will have some ultimate determining influence. Of course if the addition of more and more relations (capitalist competition, credit system, state regulation, etc.) eventually changes the dynamics of the system so much that our original starting point no longer has any relevance then we must ask whether we were ever justified in choosing that starting point in the first place.

Our starting point is that in the exchange between two free individuals in the market a social relation is expressed. Though it appears to be a fleeting, isolated act of exchange it actually links the two parties in a vast chain of exchanges happening all over the globe. This apparent realm of freedom is actually profoundly limited by this network of relations. We are not free to sell or buy at any price we choose. We must sell at the market price. We are not free to buy as much as we want. We can only buy as much as we can afford given the amount of money we’ve been paid for our labor or the amount of profit we have made from production. What are these forces that constrain our choices in the market? How much choice do we really have?

For the Austrians value is purely subjective. Price appears through competitive valuations between free persons in the market. Surely the act of exchange entails a subjective valuation. But also, clearly, we are not free to reach any compromise in any exchange. The conditions of the market press down upon us at every moment. Once supply and demand balance out how are these prices reached? Why are relative prices so consistent (pencils always worth less than cars, bread always less than football stadiums)? Perhaps there is something very objective about this subjective valuation. Isn’t it true that in a system of market exchange we all have the same motivation: to maximize our gain for minimal effort? If everyone has the same motivation, this seeming realm of subjective freedom seems a little more like a realm objectively predictable behavior within the constraints of an objectively observable system within its own laws of motion. If we are trying to maximize gain for minimal output then we are essentially valuing our labor time when we enter the market.

All these products of labor, these commodities being exchanged, derive their ultimate value from their place in a social labor process. This process is indirectly regulated by the market. We don’t know the value of things before we sell them. We can only guess. The market tells us if we are right. In a model of a world of simple commodity exchange private autonomous consumers meet in the market to exchange the products of their labor. In exchange their private labor takes on a social dimension. Its value is weighed against the value of all other labors. If its production time took more than the socially necessary labor time it doesn’t allow the producer to sell it for more than the average price. The socially necessary labor time acts as a regulator of price, pulling all private labors into accordance with the social average. Of course this average is never reached by all. All private labors will not ever reach the same level of productivity at the same time. That is because socially necessary labor time is an equilibrium point about which prices fluctuate, deviations always being sucked back towards it.

Many uninformed critics of the labor theory of value mistake these deviations for a flaw in the theory. Bohm-Bawerk argued that if deviations kept price from equalling value most of the time then the theory that labor time creates value is worthless. But this ignores the idea of value as a regulator. It ignores the indirect way in which private labor becomes social in a market. We can’t know the market price of our commodity while we are making it. We only discover this in the process of exchange. We throw our labor, embodied in commodities, into the market and we see what price it fetches. Socially necessary labor time isn’t very visible in the immediate act of exchange. But over time we can see it work its power as a regulator of price, as day to day prices fluctuate around average prices. If a product is being sold for prices far above its value this attracts other producers who start producing this commodity. Eventually prices fall. But they can’t fall too far because we must be able to reproduce the commodity the next day- we have to make at least enough to pay for our costs of production, compensation for our labor and money to put food on the table. Thus objective values are indirectly established through the subjective act of exchange.

Many things interfere with this process. Producers hold monopolies and thus can charge monopoly prices. Scarcity can keep prices above their values. Since we have some sort of basic, intuitive concept of value we complain about monopoly prices and scarcity rents. We say, “Damn the oil company is ripping me off!” and “These pharmaceutical companies are robbing me blind with these prescription drugs!” We say this because when prices deviate far from their values we sense that there is an inequality in exchange and all of our basic, ideological assumptions about markets tell us that exchange should always be fair- that this is the fundamental freedom/right of all people.

Should these interferences with the law of value cause us to reject the working of the law? No. All laws have interfering forces. Gravity and barometric pressure follow objective laws yet the weather is impossible to predict with 100% accuracy. It is through the averages that we can see them at work over time. So too with value. Monopolies don’t last forever. Most scarcity doesn’t either once production eventually adjusts to demand. This relation of deviation to the law is appropriate since we are dealing here with indirect regulation of value and labor through the process of market exchange. Maybe if we were dealing with a planned economy we would need a different standard of the relation between deviations and laws. But in market exchange this is most appropriate.

Why does Marx choose this relation- the buying and selling of commodities in the market- as the primary relation of his model? Why not start with the credit system, the money system, capitalist competition or even the labor-capital relation? Marx is following the law of presupposition: he always asks what relation presupposed what other relation? The credit system presupposes a money system. Money presupposes commodity exchange. Capitalist competition presupposes capital which is a capital-labor relation (which is, dialectically, also a relation of capital to itself.) What form does the labor-capital relation take? The exchange of labor-power for wages between formally free individuals in the market. Thus market exchange is the fundamental presupposition and thus value as regulator of labor and price is our key concept.

As we add relations to the model, labor-capital, capital-capital, etc. We see alterations in the way the law of value operates. But at each level the regulating force of the law of value continues to exert influence. In conditions of simple commodity exchange value exerts itself as socially necessary labor time bringing private production in line, creating average prices, and overtime breaking down monopoly and scarcity.

When we add the capital-labor relation we observe the way value creates a fundamental antagonism between these two classes, one owning the means of production, the other nothing. The capitalist can use this monopoly on ownership to appropriate value from the working class, not in the sphere of exchange where a trade is usually fair and equal, but in the sphere of production where a worker’s time literally belongs to the capitalist. We see more ways in which prices can deviate from values through relative surplus value and the rising of wages above or below values. But ultimately it is the value relation which governs this labor-capital relation. It is the quest to expand value, to turn money into more money, which drives the capitalist class to exploit the workforce. But in this process capital itself takes on objective properties. It too has tendencies and laws which govern its motion through a fluctuating process of averages. Capital must always grow. It must do so at the expense of the working class. As we later will learn, this growth has its own internal limits set by the antagonism of the wage relation which is an antagonism of capitalism with itself. This is the theory of crisis. Because this theory of crisis requires an understanding of the capital-capital relation we don’t learn about it until after the later relation is addressed in part two of this video. This is why Marx gives the incomplete version of crisis in Volume One of Kapital. In Volume 1 we merely get a picture of crisis caused by fluctuations in the attraction and repelling of the labor force. This version of crisis solely depends on the labor-capital relation. The falling rate of profit presupposes the capital-capital relation.

When we introduce the other internal relation of capital, the capital-capital relation we see even more dynamic changes in our model. Most importantly individual prices diverge from values. The magnitude of profit a capital makes diverges from the amount of surplus value it creates. This is topic of Part 2 of Volume 3. If this is so, how does value continue to operate as a law of any relevance? Marx holds three aggregate equalities: 1. total, aggregate value created in society= total, aggregate prices, 2. Total profit=total surplus value, and 3. average rate of profit in value terms equals average rate or profit in money terms. Though individual prices and profits my vary from their values, these aggregates remain.

On the other hand, saying that total-price equals total surplus value isn’t enough to make the law of value still relevant. After all, value comes about from the exchange of specific commodities in the market and from the network of social relations that this chain of exchanges represent. The total social product doesn’t get exchanged with anything. Bohm-Bawerk develops this line of criticism. He further argues that putting two aggregates side-by-side doesn’t tell us anything. I could say total prices are equal to the total weight of all commodities, but that individual weights differ from individual prices. This wouldn’t be much of a theory of price. (More on Bohm-Bawerk’s criticism later.) This is why Marx takes great pains to explain how changes in the productivity of labor always mean changes in prices and the rate of profit. Ricardo had argued the same thing. In fact Ricardo abandoned the idea of tying price to direct amounts of labor, instead stressing how changes in labor effected prices. Marx agrees that, at this level of abstraction, we see the law of value operating not in the simple manner of prices=value, but in this more general sense that changes in value create proportional changes in price. Yet Marx goes further than Ricardo in actually showing the mechanism by which labor-time is transformed into these prices with his theory of “prices of production”.

Though “prices of production” don’t have the same exactitude and simplicity of “prices=value”, the quantitative nature of the theory is still real and clearly visible. When workers are paid less profits rise. When productivity rises profits rise, at least in the short run. Commodities that require more labor time (cars, stadiums) are priced higher than products that take little labor time (pencils, staples). And when labor is completely eliminated from a task (like duplicating information which is now done with the click of a button instead of by scribes and copyists) that tasks looses all exchange value. The exact quantitative proportions are altered but the basic movements are all there.

The qualitative dimension is also there. Social labor is still regulated through market exchange. Profit is still made by buying labor-power and exploiting it. Capitalist are still capitalists. Workers are still workers. The social relations which the labor theory of value is meant to explain are still the same. And these social relations are our goal and our starting point. To return to Bohm-Bawerk’s criticism, we are not interested in a weight-theory of value because we know that prices are not meant to apportion weight. Prices apportion labor time. This is an observable phenomenon and it lies at the heart of what is distinctive about a capitalist economy. When we keep this theoretical starting point in mind objections like Bohm-Bawerk’s melt away.

We should keep all of this in mind when reading Part 2 and when considering the various criticisms that have been leveled at Marx for his theory of the Prices of Production.

The other famous controversy over Volume 3, Part 2 is the matter of the transformation problem. I have talked about this more extensively in my video “What Transformation Problem?” and the “Math Supplement” that goes with it so I will merely refer readers to those pages rather than repeat myself here.

Das Kapital vol. 3 part 1 chapter 7: Supplementary Remarks

Capital Vol. III Part I

Chapter 7 Supplementary Remarks

(This post is part of an ongoing project: a close reading of volume 3 of Kapital, one post per chapter. I hope that others who are tackling this book for the first time might find my summaries and thoughts useful. I also hope that others might leave their own thoughts, criticisms, help, etc. here so that this blog might become a good collective resource for those brave souls who take on Vol. 3.)

Marx begins by repeating some points from earlier. The fact that capitalists realize the value of their product in the market causes them to believe that it is through the market that value is created. Marx doesn’t complete this point but if he had perhaps he would remind us that the world of appearance, the subjective valuations between buyer and seller in the market, are the mechanism through which the law of value operates. The law of value is formed through the indirect linkage of all of the social labor process through this act of individual market exchange. Therefore it is easy to confuse the value-creating powers of labor with the subjective valuations that happen in exchange. We have seen, throughout these opening chapters, how that profit comes wholly from surplus value. Yet the rate of profit is modified by a variety of other factors like changes in the value of constant capital, turnover time, changes in value of labor power, etc. This is one more way in which we confuse these changes for the cause of value. We might notice that increased turnover time increases profit but this doesn’t mean that time itself creates value. We might notice that a decrease in constant capital costs causes profits to rise. But this doesn’t mean that constant capital is creating more value.

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Is it possible for a firm to increase in size and maintain the same rate of profit? Obviously the mass of surplus would increase but this surplus would be calculated against a larger cost-price so the rate or profit will stay the same if all of the internal portions of capital stay the same: the organic composition and the rate of exploitation. This distinction between mass of profit and rate of profit will be crucial in Part 3 when Marx discusses the falling rate of profit. _____________________

What causes the rate of profit to change? A change in ratio of surplus value to the price of producing this surplus value is what causes the rate of profit to change. Thus changes in the rate of exploitation, the organic composition of capital, or the market prices of constant and variable capital all act to influence the rate of profit. If the market price of an input is changing this shows us the way productivity is really a social phenomenon. The difference between the labor time it takes a particular, concrete firm to produce a commodity and the labor-time it takes society in general to produce something is the difference between necessary labor time and socially necessary labor time. This explains the devaluation or appreciation of inputs. In general a rising organic composition of capital means a falling rate of profit. A falling organic composition means a rising rate of profit. If just the money value of capital changes due to a change in the value of money itself, then the profit rate only changes in name, not real values.

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These brief remarks don’t tell us anything new but they do a good job of summarizing some of the crucial points from the last 100+ pages. It is now easy to see how the origin of profit in exploitation is obscured by all of the other contingent factors effecting the rate of profit. This obfuscation will be taken further in Part 2.

next post: my opening thoughts about Part 2

Kapital vol. 3 part 1 chapter 6: The Effect of Price Fluctuations

Part 1 Chapter 6

(This post is part of an ongoing project: a close reading of volume 3 of Kapital, one post per chapter. I hope that others who are tackling this book for the first time might find my summaries and thoughts useful. I also hope that others might leave their own thoughts, criticisms, help, etc. here so that this blog might become a good collective resource for those brave souls who take on Vol. 3.)

The Effect of Price Fluctuations

1. Fluctuations in the Price of Raw Materials, and their Direct Effects on the Rate of Profit

We begin with a repetition of the observation from the previous chapter that changes in prices of raw materials change the cost-price and therefore the rate of profit. (Marx is mostly referring to raw materials that form the circulating part of constant capital, not fixed capital, though later he can’t help but move briefly into this topic.) Higher cost-price means lower rate of profit and vice versa. Thus the cost of transport, the efficiency of world trade and the tariff system all play an important role in the way they effect raw material prices and profit rates.

Since raw materials pass directly into the product while fixed capital’s value is transfered a little at a time over the life of the fixed capital this means that price fluctuations in raw materials have more of a direct effect on prices and profit rates than fluctuations in fixed capital costs. As prices of commodities fluctuate so the demand for them fluctuates, causing expansions and contractions in the supply of the commodity on the market.

Marx, giving us a sneak preview into the soon-to-come explanation of prices-of-production, mentions here that these fluctuations of price would not be quite so extreme in a situation of average profit rates and prices of production. We are still assuming that commodities trade at their values. But if they traded at their prices of production instead, the formation of average profit rates would slightly soften this fluctuation in price caused by the fluctuation of raw material prices.

The increasing productivity of labor means that the same amount of workers produce more product per hour. This increasing productivity requires an increase in the raw materials. If workers are making twice as many shoes as before they need twice as much leather, rubber and thread. Thus the price of the commodity contains less and less labor, and less and less fixed capital value but more and more raw material value. Marx refers to this fall in the value added, per commodity, by labor and fixed capital as a “falling tendency” only counter-balanced by a decrease in the price of raw materials.

Marx ends this first section by noting (I think I am understanding this correctly) that when raw material prices grow inordinately high this causes manufacturers to make better use of waste product. We may see a similar process in our lifetime if prices in oil continue to fluctuate in ways the disrupt production.

II. APPRECIATION, DEPRECIATION, RELEASE AND TIE-UP OF CAPITAL

Appreciation or depreciation of capital refer to changes in the value of any of the factors of production after they have been purchased due to general changes in the economy. For instance, after purchasing a 100 barrels of crude oil the market price of oil might go up due to, say, a new war in the Middle East. What does this appreciation in the already purchased raw material inputs mean for the capitalist who has already purchased this oil? Or a capitalist may spend millions of dollars on a new, state-of-the-art, factory that makes cars only to find out that ten years later foreign car companies have invested in even more state-of-the-art factories at lower prices. How does this depreciation of fixed capital effect the profit rate? Marx intends to tell us in this chapter.

He also intends to tells us about the tie-up and release of capital by which he means this: In order for reproduction to occur a capitalist must devote a certain portion of the price of his products to reinvesting back into constant and variable capital. If he sells a football for $10 he can’t spend that entire $10 on booze and comic books. A certain portion of that $10 is “tied-up” in variable and constant capital. Now, if the price the food goes down and wages fall, or if the prices of raw materials fall this means that some of this previously tied-up capital is “released”. The capitalist can then choose to spend all of this released capital on loose-living and luxury goods or to reinvest in expanding production.

At the beginning of the chapter Marx notes that a full understanding of these factors, appreciation, depreciation, tie-up and release, really requires an analysis of the credit system and the world market. These are topics Marx was reserving for much later in his argument. Unfortunately he never got to them.

Now you may be thinking, “Didn’t we just spend a really long time investigating the effects of changes in the prices of constant and variable capital on the profit rate?” Yes we did. All of those prior investigations assumed that changes in prices happened between production periods, as if capitalists bought inputs at the beginning of the week, turned them into commodities which they sold at the end of the week, and then stepped into the market on Monday to encounter a whole new set of prices. In reality, at any given time parts of the total capital are in the market looking to buy or sell goods while other parts are in production making goods. This is why we need to look at appreciation and depreciation separately from our previous analysis. Remember that the law of value is the law whereby the production is regulated indirectly through market exchange. We produce with an eye on exchange. But we don’t know the full value of our product until we realize it in exchange. While one thing is happening in the private sphere of production quite another might be happening in exchange. Values are constantly changing as changes in productivity, circulation, and politics (tarifs, wars, etc.) effect the socially necessary labor time, socially necessary turnover time, monopoly pricing, scarcity rents, etc. (When we add the credit system to the mix an entirely new aspect of price fluctuations are introduced into the picture.)

If the price of cotton goes up then the prices of commodities that contain cotton go up. If I own a t-shirt factory and have already bought a year’s worth of cotton I will actually benefit from the appreciation of my raw materials. I can sell t-shirts at the new market price caused by the increased price of cotton. Because I bought my cotton at the lower, pre-appreciation, price I can pocket the difference as profit. The appreciation of my stock of cotton actually offsets the fall in profit usually caused by a rise in constant capital values. But if all the competing t-shirt making firms have also purchased a year’s worth of cotton the existence of cheaper cotton in our stock piles will press the price of t-shirts below this new appreciated price. The opposite process takes place if cotton prices fall.

This all make for some confusing results. If my capital looses value through depreciation this can still mean that my profit rate goes up since the profit rate is the excess of surplus value above the value of total capital. If my capital gains in value my profit rate my go down for the same reasons.

A discussion of appreciation and depreciation of fixed capital can’t happen without a theory of ground rent so this will have to wait till later in the book. But Marx makes some remarks about machinery here. If the use-value of machinery is quickly going out of date, this causes machines to loose their value- to depreciate- before the labor contained in them can be fully transferred into commodity form. To take my previous example of the US auto-industry, if I build a fancy new Ford factory in 1940 in Detroit and the Japanese build a much fancier and cheaper factory 15 years later this makes my machines depreciate. I can’t sell my cars at prices that will allow me to recoup my investments in fixed capital. I have to sell at the lower market price set by the Japanese. (Or I can resort to tariffs, lay-offs, attacks on unions, “buy American” campaigns, right-wing populism, etc.) Marx calls this “moral depreciation”. This means that when new machinery comes on-line there is often an urgent need to get the most product out of them before they depreciate. In Marx’ time this meant the prolongation of the working day in order to work the machine as much as possible before it became obsolete. We see similar logic today with the use of night-shifts and overtime in factories. (Slightly related is the desperate urgency to get the most profit out of intellectual property before the monopoly rents associated with it disappear.) This all means that the newest entrants into the market are often not the ones that profit from a new technology. They often go out of business because they can’t compete with new competitors. This devalues their fixed capital. The winners buy up this devalued capital at bargain-basement prices which allows them to have a huge profit margin.

Here, in a few paragraphs Marx lays out the part of the picture of the accumulation cycle that characterizes capitalist crisis. It is the coupling of this picture with the Falling Rate of Profit which allows us to see the way the “counter-vailing influences” against a falling profit rate play out in real time. We saw a few chapters back that the falling profit caused by an increase in organic composition can be offset by a falling price of constant capital. Here Marx shows how this works in a world in which huge amounts of investment go into fixed capital. When fixed capital prices fall we get moral depreciation which means a falling rate of profit which can only be reconciled by crisis and devaluation. This line of argument fits quite well with the description of the US economy in the last 70 years, especially the auto-industry. Marxists like Andrew Kliman, David McNally, Allen Freeman, David Harvey and others point to this moral depreciation of fixed capital as a key element in explaining the current crisis. It is this phenomena that Robert Brenner mistakes for competition in his competition-centered account of crisis in “The Economics of Global Turbulence.”

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“There is still variable capital to be considered. “

Obviously- if the means of subsistence appreciate then wages must go up and surplus value falls. The opposite happens with depreciation.

If a capitalist is used to reinvesting so much a week in wages and the wage begins to fall this will then free up some of that variable capital. Some of the variable capital is “released” and become surplus value. This can be used for new golf clubs or vacations to Buenos Aires or it can be reinvested in production. This makes it possible to expand production by hiring more workers to exploit. The opposite happens with an appreciation of wages. More capital is “tied up” in variable capital which means that if production is to continue at the same scale money must be taken out of the surplus value and spent on variable capital. The rate of surplus value and rate of profit falls.

Marx makes the distinction in this section between the effects of this appreciation or depreciation on newly invested capital or previously invested capital. If depreciation effects a newly invested capital all this does is to change the rate of surplus value and profit. If it effects a previously invested capital this depreciation releases variable capital for new investments.

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“The release and tie-up of variable capital, just analysed, is the result of a depreciation or appreciation of the elements of variable capital, that is, of the cost of reproducing labour-power.”

But variable capital can be released by changes in productivity as well. If productivity increases make is possible to get the same amount of commodities out of half as many laborers this means a releases of variable capital. However, as we have already seen, this most often goes along with an increased need for raw materials which means a tie-up in constant capital costs. The relative amounts of the release of variable capital and the tie-up of constant capital determine the effect on profit rates.

Usually a tie-up of more constant capital goes along with increasing productivity but it can also correspond to the opposite. In agriculture, if the fertility of land is declining, more and more constant capital will be needed to get the same amount of product from the land. Here declining productivity ties-up more constant capital.

As constant capital in the form of raw materials starts to take on more and more of the day-to-day cost of production, price changes in raw materials have more violent effects on profit rates. Fixed capital costs are long-run costs and don’t depend much on the day to day fluctuations of prices. But raw materials must constantly be replenished and thus can cause endless fluctuations.

This is especially true of raw materials whose production involves natural forces out of the control of man. Agriculture is the chief example here. A bad harvest, a blight, etc. can make agricultural prices fluctuate. The products of nature are not nearly as steady and predictable as the products of purely human labor in other spheres of production. Agricultural production also can’t immediately increase or decrease to meet fluctuations in demand. Production is planned around yearly crop  cycles and can’t be adjusted until the beginning of the next planting season. This means that there can be shortages and gluts of agricultural goods.

Fixed capital tends to grow steadily- or even rapidly. This means that there is always a growing need for raw material inputs. This leads to overproduction of machinery and under-production of agricultural goods. And this means higher prices in the agricultural sphere.

In times of spikes in raw material prices capitalists often band together in associations to stimulate production of raw materials. This is one of many ways capitalists act collectively as a class when they are threatened as a class. But as soon as production returns to normal the capitalists return to open competition on the market and their ideology of “free trade”. Funny how disposable economic liberalism is when the capitalist class is threatened. Funny also how the libertarian/neo-liberal/Austrian argument is always that these trusts and other such associations are an imposition upon a rationally functioning market when it is clear from this and countless other examples that just the opposite is the case: these are attempts by the capitalist class to impose order upon an irrational market. Marx concludes this segment by saying that capitalism is totally irrational from the standpoint of agricultural production. It requires “either the hand of the small farmer living by his own labour or the control of associated producers.” Is it no wonder that today the agricultural industry depends on massive subsidies and tariffs?

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The last bit of this section lists examples of the above arguments. There are 1858 factory reports about spindle and looms growing faster than sheep. From the same year Marx quotes reports of the cotton trade not being able to keep up with the increase in self-acting mule spindles and looms. This leads us to the 3rd and final part of the chapter.

III. GENERAL ILLUSTRATION. THE COTTON CRISIS OF 1861-65

This might be painful. I have more or less just summarized the history Marx gives. Why have I done this and should you bother reading it? I don’t know the answer to either question. I think I did it to help me understand the gist of the argument. Feel free to skip all of it. I will make a few remarks at the end in summary.

Preliminary History 1845-60
1845: “Golden Age” of cotton. Cotton prices are low and factories are growing.
1846: Factory capacity has already outpaced cotton production. Cotton prices are rising and factories are working short-time (less than full days) because of shortages. Finished cotton products have saturated the market which means that their prices can’t rise to compensate for the rise in raw material prices.
1847, October: A money panic, shortages continue. I assume that the money panic doesn’t relate to the cotton problem. Marx doesn’t expand much on this.
1849: A recovery happens. Perhaps some of the demand which is stimulating production comes from consignments… (Here we allude to the way credit can displace crisis). Cotton prices have fallen considerably allowing production to continue. This fall in price is not explained in the manuscript (unless I am overlooking something.) As the recovery accelerates large producers start to stockpile cotton supplies, causing anxiety for smaller producers.
1850: Scarcity of cotton resumes and prices rise.
1853 April: Prosperity again.
1853 October: Overproduction of cotton. Depression in the industry.
etc. etc.

1861-64. American Civil War. Cotton Famine. The Greatest Example of an Interruption in the Production Process through Scarcity and Dearness of Raw Material

Here Marx discusses the history of the Cotton Famine in England which was caused by a blockade on American cotton imports in 1861 after the start of the US civil war. There was a huge shortage of cotton just at a time when the market had been over-saturated through overproduction. A severe crisis ensued and huge numbers of workers lost their jobs and had to go on public assistance. Wikipedia has a good, brief history: http://en.wikipedia.org/wiki/Lancashire_Cotton_Famine

1860: The massive expansion of investments in mills and other fixed capital continues while a shortage of cotton begins. (I assume this shortage comes from people hoarding cotton in anticipation of the blockade the following year.) Prices are rising and people are beginning to look for new sources of cotton. There is talk of expanding railroads to India in search of cheaper raw materials. India is already helping absorb the excess production from England. This is still the two-part function of a colony today: absorb excess capital, provide cheap raw materials.
1861: It becomes obvious that manufacturers overproduced in the previous year. It takes several years for the market to absorb all this excess production. Cotton prices are way too high due to the blockade and there is a huge shortage of cotton on the market. Many of the bigger firms stockpiled cotton. The value of  this hoarded cotton appreciated  which averted the usual depreciation of the total capital that we might expect in a crisis.

Manufacturers begin adulterating their cotton products by adding other stuff to the cotton in the spinning process. They weave in flour which increases the weight of the products but, of course, lessens their use-value. These substitute materials are harder to work with and break more and so this lowers the productivity of labor. Hours are decreased, wages start to fall and strikes break out.

1862: Unemployment is high, in some districts as high as 15% with larger numbers working short-time. Many producers are small-scale capitalists and they are hit particularly hard by the crisis. Inferior cotton is being used everywhere which slows down production.
1863: The inferior cotton slows down production thus having a severe effect on wages. The cotton workers are on a piece-rate system. This means that the slower they work the less they earn. Wages sink to almost nothing. Meanwhile workers are being fined for making inferior products.
Unemployment and underemployment sky-rocket. The public relief committees employ workers at poverty wages in public works: street paving, rock breaking, etc. Any worker who complains about the wage is struck from the relief rolls. Marx points out that this drastic devaluing of labor power is a great gift to the capitalist class. Urban development is given a free gift from the industrial reserve army.
1884: The public works employ so many people that is becomes hard to keep wages down. The reserve army of labor dwindles and strikes break out in factories. This will not do for the bourgeois who protest until the Public Works Act is repealed. Though the capitalists class looks to free markets and global trade to eventually bring cotton supplies back to normal and absorb surpluses they don’t advocate the mobility of labor. The bourgeoise work against allowing emigration of workers from the cotton factory districts.

And here the manuscript breaks off…

What can we learn from this history? Obviously it is a great example of many of the themes of the chapter: changing prices of raw materials, appreciation and depreciation, agricultural production cycles not synching up with the rhythm of capital accumulation… I’m sure that in Marx’s time there were diverse opinions as to the cause of the crisis. For many it was probably seen as the result of external political causes. But Marx brilliantly outlines the variety of complicated factors the all weave themselves together. We notice that he begins his story before the blockade caused by the American Civil War. Thus he already establishes a cyclical rhythm of boom and bust caused by over-production and the delay in agricultural production to respond to the market signals being given by the industrial sector. Once the external shock of the cottage shortage is introduced, this boom and bust cycle is taken to an extreme. Not only is Marx able to highlight the way in which this external shock merely amplifies an already existing industrial-agricultural cycle, but he also makes some keen observations about the way in which the capitalist class acts as a class to preserve its class interests in such times of crisis. We might take these themes to heart in our own time. It would be easy to blame the crisis of the 1970’s on the OPEC crisis as many historians do. It would be easy to blame our present crisis just on the sub-prime bubble, or our own oil prices. But the problems caused by these fluctuations in prices only serve to expose much more fundamental rhythms of capitalist accumulation. As in the cotton crisis we can see the capitalist class today acting as a class, through the the state, to preserve itself.

next chapter

Part 1 chapter 5 Economy in Employment of Constant Capital

Part 1 chapter 5

Economy in Employment of Constant Capital
(This post is part of an ongoing project: a close reading of volume 3 of Kapital, one post per chapter. I hope that others who are tackling this book for the first time might find my summaries and thoughts useful. I also hope that others might leave their own thoughts, criticisms, help, etc. here so that this blog might become a good collective resource for those brave souls who take on Vol. 3.)

There are no dizzying equations in this chapter. There are some important points that will be of use in our future investigation of the Falling Rate of Profit. The FRP argument will claim that profits fall because the total investment in constant capital rises relative to the variable capital in the aggregate in the long run. Once most of the world’s population has been incorporated into the workforce capitalists cannot increase surplus value by hiring more workers. That surplus must be reinvested in generating relative surplus value instead- that is, invested in machinery which raises the social productivity of labor. But this means a rising concentration of fixed capital and a relatively stable variable capital, which means a falling rate of profit. Of course rising productivity also means that constant capital is made more cheaply. Can this stem the FRP? Many critics of the FRP say so. Let’s see exactly Marx is trying to say about the effects of the social productivity of labor on constant capital costs and the profit rate.

Marx begins by explaining that a rise in absolute surplus value will always raise the rate or profit. Remember that a change in absolute surplus value means a rise or fall in the total amount of surplus value, not a change in the rate of surplus value. A capitalist increases absolute surplus value by lengthening the working day or hiring more workers. This increases both v and s in the same proportion. When more work is being done more raw materials must be used up so the cost of circulating constant capital goes up. But because much of the capital invested in production is fixed capital, things like buildings and machines that wear out over the course of several years, the cost of c does not rise as fast as v and s. Therefore a rise in absolute surplus value means a rise in profits. A prolongation of the working day increases profits, even if overtime pay is paid! In addition, the turnover time of the fixed capital decreases as it is used up faster, thus boosting profit rates (see previous chapter.) Of course if the capitalist is hiring more workers instead of lengthening the work day this may eventually call for the purchase of more fixed capital which could effect the profit rate more dramatically.

Things are otherwise with relative surplus value. Relative surplus value comes from either reducing wages or increasing the productivity of labor. If the productivity is what is raising the surplus value then this means increased expenditures on machinery and raw material, which means a rise in c. Thus an increase in the productivity of labor exerts pressures to both raise and lower the profit rate. Which direction the influence goes depends on the degree of relative surplus value and the expense of the additional constant capital. It is the contention of the falling rate of profit that in the long run capitalists are forced by competition to invest more in constant capital then is actually gained, in aggregate, from relative surplus value. The thing about relative surplus value is that it is relative. The total amount of value being created stays the same. Meanwhile, year by year the mass of surplus value looking to be reinvested grows. More and more is plowed into fixed capital meant to increase relative surplus value. But this growing imbalance between C and s means that profit rates fall over time. But that argument comes later.

The first and foremost way in which capitalists economize on the use of constant capital is through the centralization of production. When machinery is concentrated in one place, on one shop floor, rather than spread out in small machines over many small producers, there is a more efficient use of constant capital. Such concentration of capital also increase the social cooperation of labor. Marx argues early on in Kapital Vol. 1 that cooperation between laborers increases the productivity of labor. By concentrating production in one place, sharing the same large machinery among a mass of workers, the cooperative powers of labor are harnessed and multiplied.

Marx is always making the point that what appears to be the production of value from machinery is actually the production of value by social labor. This is true to his method which asks how social production is coordinated via the exchange of material commodities- commodities that become bearers of value. Machines are commodities that bear value, they pass this value onto the product and they increase the social productivity of labor which increases relative surplus value. In the example here, when concentrated in one place they increase the social cooperation of labor which increases productivity and thus relative surplus value. But they don’t create value. This concentration of production takes the form of large investments in fixed capital: factories with huge machines, transport systems, etc. But this is also a radical economizing on constant capital compared to earlier periods of capitalism where production was dispersed between many independent, smaller factories, or even sub-contractors working from their houses.

[Perhaps reviewing some points about relative surplus value here would be useful. Relative surplus value means, among other things, that more value is not necessarily being produced, just more value relative to other costs or to other capitalists. If the productivity of labor increases in the food industry this means that the cost of subsistence of the working class goes down which causes wages to shrink which raises surplus value. In this example we see how the productivity of labor is truly a social phenomena, with one capitalist's innovations aiding the entire class. But why would a capitalist engage in such an indirect means of increasing surplus value? There is another type of relative surplus value that motivates the capitalist directly. When a capitalist lowers their production cost per commodity below the socially necessary labor time for that commodity they reap relative surplus value. The actual value produced by that capitalist is lower than the socially necessary labor time (SNLT), yet the rest of the industry still prices their commodities at the SNLT. Profit is realized. Of course this encourages competition, imitation of this more efficient production method by competitors and eventually the SNLT lowers itself down to this new level. This type of relative surplus value is fleeting and pulls the capitalist class into a never-ending competition to increase productivity through technological innovation. Relative surplus value that comes from technological innovation makes it appear that machines themselves are creating value. But actually the opposite is happening. Machines are causing less value to go into each product. Meanwhile the cost of the new machinery may cause cost-price to rise.This will all be useful to us in discussing the falling rate of profit.]

Another way of economizing on constant capital is to recycle waste from production. This waste is also a result of the social productivity of labor. Marx doesn’t expand on this point much but we can see that today there are whole industries devoted to recycling productive and consumer waste in an attempt to decrease constant capital costs.

If for any reason surplus value becomes fixed then capitalists much seek to raise profits by decreasing constant capital costs. I can’t think of any real-life examples where surplus value is fixed so I assume that this is more of a theoretical abstraction in order to look at the way savings in constant capital increase the profit rate.

The amount of constant capital used in production is not a function of its exchange value, but of its use-value. To set a given number of workers in motion a certain amount of machines and raw materials are necessary. This number is given by the material-technical aspects of production and is not effected by the price of raw materials and machines. Surely, a capitalist must take their prices into account when deciding how much to invest, but it is the material use-value which determines the proportion of raw materials, machines and people needed in production. If these material-technical proportions change this is a a result of the changing productivity of social labor. The prices of raw materials and machines also may change. These changes are the result of changes in the productivity of labor elsewhere in the economy. If the price of flax falls its because flax production has become more efficient. If the price of office computers fall its because computer production has become more efficient.

Reductions in the wear of machinery decrease constant capital costs. If we factor in regular repair costs to our constant capital calculations then reductions in the wear of machinery mean less repair costs.

The increased productivity of labor in one industry, and subsequent falling of commodity prices, causes a saving in constant capital for other industries that rely on that commodity for production. If the cost of coal goes down, factories that rely on coal experience a fall in constant capital costs. This is a great example of how social production really is in a capitalist society. Changes in productivity in one sphere have rippling effects everywhere. Marx makes a brief aside here to say that changes in productivity come not just from the laborers directly engaged in production but also from the division of labor and from intellectual labor (scientific progress.) The capitalist takes advantage of this entire ensemble of social productivity, not just the productivity of his own workers. His comments about intellectual labor in Vol. 1 are useful on this point. Once an intellectual idea becomes widespread it offers up its value like a force of nature (like a windmill uses the power of wind). It becomes a free social good. I think these points are quite important in our current economic climate where the value of many industries rely so heavily on intellectual property and the legal copyrights that protect them.

On page 82 Marx returns again to point out that efficiency in the use of means of production by concentrating them in one place make possible the large scale use cooperation of labor and thus saves on constant capital. I’m not sure why he repeats the point again here.

If there were no constant capital costs then the rate of surplus value would equal the rate or profit. Adding constant capital costs into the equation only lowers the rate of profit. But we know that the material-technical process of production requires various proportions of constant capital. Therefore the capitalist seeks to get the best machines and raw materials for her money and to use these as efficiently as possible. No waste! Of course there is also the practice of cheating in exchange- of selling adulterated or cheapened products, but this issue involves the process of exchange and so we leave it alone here.

The paragraph on page 84 is doubly important. It begins by reminding us that just because increased productivity may cause the price of constant capital to fall this doesn’t meant that the total, aggregate price of constant capital falls. The interaction effects of this rising productivity are complex but we do know that the total mass of constant capital tends to rise relative to workers. One of the big debates among proponents and opponents of the falling rate of profit thesis is whether or not the cost of aggregate constant capital rises or falls over time. It’s clear that the mass does, but does the value of this mass rise as well or is it offset by the falling cost of constant capital? Marx says “A relative cheapening of the means of production does not, of course, exclude the possible increase of their absolute aggregate value, for the absolute volume in which they are employed grows tremendously with the development of the productive power of labour and the attendant growth of the level of production.” I read this as saying that it is possible for the value of aggregate constant capital to rise even though the per unit values of constant capital may be falling. But in this paragraph Marx does not seem to go further than to say that it is a possibility.

Instead of pursuing the point further Marx moves onto a discussion of the difference between the actual cause of the fall in constant capital cost (the productivity of labor) and the way this productivity appears to the capitalist and worker. When a capitalist buys cheaper constant capital this is a result of an increase in productivity somewhere else in the economy. This is one of the things that links the productivity of all labor together. But to the individual capitalist this decreased cost of raw materials, or more efficient machinery appears as the product of capital itself. Capital appears to create profit all by itself without the worker. But for Marx capital is a self-expanding circuit between money and commodities- a circuit whose powers of self-expansion come from the fact that the body of the worker is incorporated into the circuit.

The worker doesn’t care what the price of the means of production are. The worker only encounters the means of production as use-values. This interconnection of the social productivity of all labors which we observe in the changing value of constant capital- this harnessing of the collective productivity of the working class- appears as an alien force to the worker, a force that dominates him/her in production. But if workers owned the factories themselves, Marx cites the cooperatives of Rochdale as an example, this would not be their experience. (If anyone can cite other mentions of Rochdale in Marx’s writing I would appreciate that.)

While the capitalist is interested in getting the best quality of constant capital per dollar this concern for quality does not always extend to the sphere of safety and health standards. Dangerous machinery, overcrowding of workers in production… etc.- This continual problem of unsafe working conditions is a result of the desire to reduce constant capital costs without any regard for the living part of capital that spend its life working with these means of production.

It is often argued, against the theory of the falling rate of profit, that capitalists have an equal tendency to reduce both variable and constant capital costs and that therefore the organic composition of capital does not necessarily rise. Towards of the end of this section Marx seems to be saying something similar to this: “Just as capital has the tendency to reduce the direct employment of living labour to no more than the necessary labour, and always to cut down the labour required to produce a commodity by exploiting the social productiveness of labour and thus to save a maximum of directly applied living labour, so it has also the tendency to employ this labour, reduced to a minimum, under the most economical conditions, i.e., to reduce to its minimum the value of the employed constant capital.” But this tendency to seek reduced costs in both variable and constant capital doesn’t mean that there is no absolute objective tendency in the composition of capital. A decrease in per unit constant capital cost can only be the result of increased social productivity which necessarily means less and less labor is incorporated into each product. Meanwhile the mass of surplus value is growing, albeit at a decreasing rate, and it has no choice but to invest in more constant capital, thus raising the organic composition.

He then makes the following statement:

“We must make a distinction in economy as regards use of constant capital. If the quantity, and consequently the sum of the value of employed capital, increases, this is primarily only a concentration of more capital in a single hand. Yet it is precisely this greater quantity applied by a single source — attended, as a rule, by an absolutely greater but relatively smaller amount of employed labour — which permits economy of constant capital. To take an individual capitalist, the volume of the necessary investment of capital, especially of its fixed portion, increases. But its value decreases relative to the mass of worked-up materials and exploited labour.”

I believe Marx is saying that even though constant capital costs may rise in a firm this increased concentration of fixed capital can be seen as increased efficiency in the use of means of production. By concentrating capital in one place it permits more efficient use of these means of production even though it costs more to bring all of these means of production into one place.

The rest of the chapter is devoted to examples of these forces. Perhaps these will shed some light.

II. SAVINGS IN LABOUR CONDITIONS AT THE EXPENSE OF THE LABOURERS

Beginning with some dark reports of deadly labor conditions in the coal mines Marx points out that the attempt to save on constant capital outlays can mean a cruel squandering of human life. But instead of just referring to these savings as “savings in constant capital” he says, “Capitalist production… is very economical with the materialised labour incorporated in commodities.” Either way- variable or constant capital- what is being economized on is human labor. (But whether this is direct human labor or embodied human labor is essential for understanding profit rates.) Marx points out the absurdity that this reckless disregard for human life is what forms the basis of the way our social relations are reproduced.

And then, so briefly you might miss it, he slips in a rather romantic description of capitalism as “the epoch of history immediately preceding the conscious reorganisation of society.” It is rare that we hear Marx speak of communism. We should savor every bit we get, no matter how vague. If anything can sum up the radical potential in the idea of communism it is this phrase “conscious reorganization of society.” Not a society indirectly organized through competing self-interest but a consciously reorganized society of direct social relations.

There is a long passage relating the history of legal efforts to improve safety standards in factories. Nothing of terribly important theoretical important here but I do like the phrase, “killing was no murder when it occurred for the sake of profit.” As the increased social productivity through centralization of production brings workers together in large workplaces the nearness of large groups of humans to each other creates health problems in itself. Poor ventilation creates a huge increase in “consumption and pulmonary disease”. Marx takes pages listing the deaths in the English agricultural districts in 1860 and 1861. As with Vol. 1, my eyes tend to glaze over when Marx veers from theory into these long historical documentations of working conditions, diseases and deaths. But then I have to remind myself that we would know very little of the horror and destruction that capital wrought upon humanity in Marx’s time if it were not for his detailed lists, reports and descriptions. These are people who would have been forgotten by history- empty husks of bodies used up, discarded and forgotten by capital. Marx is taking time out of a very dense and theoretical book to record their stories because they are important. What contemporary Marxist economists devote so much time and writing to descriptions of the atrocities of the modern labor process? The amount of time Marx took to read and copy by hand factory-inspector reports and government hearings is amazing.

III. ECONOMY IN THE GENERATION AND TRANSMISSION OF POWER, AND IN BUILDINGS

The entirety of this section quotes a letter from “the famous engineer James Nasmyth of Patricroft, the inventor of the steam-hammer,” that Marx must have copied into a notebook with the intention of using for this section. It appears to just be an illustration of previously made points about economy of constant capital through more efficient power.

IV. UTILISATION OF THE EXCRETIONS OF PRODUCTION

Excretions come from both production and consumption. Capital tends to waste a lot of this, filling up landfills and polluting the planet. But sometimes the price of raw materials causes capital to seek to reuse these excretions in production. Advances in science allow us to find new ways of using these waste products. Of course in Marx’s time we didn’t have radioactive waste, carbon pollution, or styro-foam. There seems to be a scientific limit to how much of this waste can be reused. Marx points to the irrational waste of human poop which pollutes the Thames river in London rather than being used to fertilize farm land. In a rationally planned society we could put all this waste to good use. But in a capitalist society we must wait for it to be profitable. Our current debate over carbon trading could easily fit into this chapter.

Some of this recycling results in the production of crap. Marx gives the example of “shoddy”- inferior wool garments made from discarded rags and scraps that wear out easily. The poor workers who bought this shoddy had continually buy more of it as it wore out so quickly. This, I believe, is the origin of the word “shoddy” as an adjective to describe inferior goods. It may also be one of the first examples of planned obsolescence.

Reduction of waste is another way of saving costs. Technology which makes more efficient use of raw materials is the means of this reduction.

V. ECONOMY THROUGH INVENTIONS

The important point here is between universal labor and cooperative labor. This is the only place where I can think of seeing “universal labor” used in this way. Often universal labor is used interchangeably with the concept of Abstract Labor but I don’t think this is the intention here. Here universal labor refers to scientific labor, the fruits of which are used over and over again by the whole planet for as long as we deem it appropriate. Today we might use the term “intellectual labor” or “information”. Cooperative labor is the labor directly engaged in production. Once performed it is done with, history.

The trailblazers in an industry invest a lot in this “universal labor”. Their competitors come along later and imitate these technological advances at less cost. Many new ideas, at first used exclusively by one capitalist, become the free property of all of humanity thus offering up their forces like a free force of nature. Secrecy, patent and copyright can preserve the right to exclusively use a new idea and charge monopoly prices. But eventually competition will break down this barrier, liberating this idea.

In today’s economy, where the automation of production has really made intellectual labor one of the last remaining sources of value, we see this dynamic at work with a vengeance. We live in a perpetual innovation, information age where millions are spent on the race to come up with the next big new idea. But as soon as these ideas pass into the public realm we need new ideas to replace them. For more on this check out the book “Cutting Edge” edited by Jim Davis.

next post: Chapter 6

Das Kapital vol.3 part 1, chapter 4: The Effect of Turnover on the Rate of Profit

Part 1 chapter 4
The Effect of Turnover on the Rate of Profit
(This post is part of an ongoing project: a close reading of volume 3 of Kapital, one post per chapter. I hope that others who are tackling this book for the first time might find my summaries and thoughts useful. I also hope that others might leave their own thoughts, criticisms, help, etc. here so that this blog might become a good collective resource for those brave souls who take on Vol. 3.)

Part 1 chapter 4
The Effect of Turnover on the Rate of Profit

This chapter is written entirely by Engels. According to Engels all Marx had completed for this chapter was the title.

Turnover time does not effect any of the basic observations about the rate of profit which we have already made. But it does alter the speed at which profits are made, thus effecting the rate of profit. While this may not be the most exciting chapter ever written there are some important concepts here. Most importantly, the faster the turnover time the higher the rate of profit. This means that capital has a marked tendency to decrease the turnover time both in production and circulation. David Harvey even develops a concept of “socially necessary turnover time” which is created by this competition to accelerate the speed of turnover. When people talk about the telescoping nature of our modern experience of time we must look to this socially necessary turnover time as the most important force in this drive to make all things instantaneous. Capital seeks to make production faster through better technologies, more efficient labor processes, different organizations of production (just-in-time production, small-batch production, etc.). It also seeks to make circulation faster through better transport, faster communication networks, and credit.

Engels starts by reminding us of the discussion on turnover time in Volume 2 of Kapital. There is always a portion of capital which is not fully used up in production. This could be all sorts of things: money capital, machines, factories, partially finished commodities, finished but unsold commodities, etc. The faster capital can turnover this portion, the more efficiently it produces surplus value.

The chief means of reducing production time is to increase labor productivity. If this doesn’t require a massive investment in new fixed capital then the profit rate will rise. The chief means of reducing circulation time are improved communications. Engels discusses the improvements in his time (steam boats,  railroads and canals) and says these have doubled or trebled the global turnover time. Even more interesting is his passing comment about the economic crises of 1825-57 in American and India being softened by their growing integration with the European continent through these improved communication networks. Engels is hinting here at the way both temporal and spacial strategies are used to displace economic crisis. This is the big innovation of David Harvey’s geographical work on crisis theory.

Engels provides a short example of how an increase in turnover time increases the profit rate. If I start out advancing $100 in capital which yields $20 profit I have a 20% rate of profit. But if I turnover that capital twice in the same period I will have $40 in profit, all still from the original $100 capital advance. Therefore, all other factors remaining constant, an increase in turnover time increases the profit rate. This effect is due to an increased efficiency on the part of variable capital which has turned over more product in the same amount of time.

Engels’s next point is that the capitalist actually lumps payment for wages along with all other circulating costs, like the cost for raw materials for that week’s workers to use. Circulating costs come from the cash box and the capitalist, says Engels, doesn’t make much of distinction in his record books between how much of this circulating capital goes to wages and how much to constant capital. Thus the grouping of variable capital with the category of circulating capital masks the value-creating power of variable capital in much the same way that cost-price does. Engels ends by saying that in the United States of America business accounting practices do a better job of differentiating between wages and other expenses in their records of the circulating capital. I don’t know but I would expect that nowadays it is easy to see records of the amount of wages paid relative to other parts of the circulating capital. Still it probably is true that to the capitalist the important distinction is not between constant and variable capital but between fixed and circulating capital. The faster capital turns over the higher the profit rate. Thus fixed and circulating capital have an immediate and visible effect on profit rates. Though variable capital is the source of profits, we experience this value-creating power as a result of other forces like circulating capital or even exchange itself. Thus the social productive relations of capital are expressed in a material form which disguises their social nature. Is this not the basic thesis of Kapital?

This last point of Engels’s also points to another problem: the challenge to provide empirical evidence of the labor theory of value. If value is really congealed labor time we should be able to show a statistical correlation of price and hours worked, right? There are many obstacles to carrying out such a project successfully. For one, as Engels points out here, capitalist bookkeeping uses different categories than Marxist economics. The difference between the wages a worker is paid and the amount of value they create is not directly evidenced by a look at the books. Capitalists often have very different classification of expenditures.

Though this is the only obstacle to empirical confirmation I might list others here. For one, much of Vol. 3 is devoted to an explanation of the way capitalists in competition change the market price of commodities away from their Socially Necessary Labor Time. The formation of average profits, credit and rent change prices. Thus the correlation of value and price can only be statistically correlated in the aggregate, as total price of all commodities on the market and total number of hours worked to make these. But, of course, holding these two aggregates next to each other doesn’t prove any causal correspondence. The proof of the labor theory of value can’t be found here, but in its descriptive power and its logical structure. There have been some efforts to provide empirical data on prices and value. I’m suspicious of these attempts but would be curious if others have more information about any of these. In his book “Reclaiming Marx’s Capital” Andrew Kliman briefly criticizes the attempt by Anwar Sheik to do an empirical study (see his “Empirical Strength of the Labor Theory of Value” here,) but this is because Kliman disputes Sheik’s understanding of the transformation problem.

To end with another aside, I am struck by the contrast between this observation that an increase in turnover time increases profits and the theory of round-aboutness espoused by Bohm-Bawerk. Bohm-Bawerk’s criticism of Marx’s theory of exploitation led him to seek other explanations of profit. Leaning on the work of J.B. Say he postulated that profit was a result of different time-preferences: We value present goods more than future goods. Those able to postpone immediate consumption and invest in production for the future will reap a reward called profit. This all assumes, of course, that value is completely subjective- a problematic proposition for sure. But if Bohm-Bawerk’s theory were true wouldn’t we expect the greater profit to come from longer turnover times rather than shorter ones? I am not an expert at all in Bohm-Bawerk and I suspect I may be missing  pieces of his argument here. If any readers can explain how Bohm-Bawerk would explain the rise in profits with decreased turnover time please write in and explain.

next chapter

Das Kapital vol.3 part1, chapter 3: The Relation of the Rate of Profit to the Rate of Surplus Value

Das Kapital, Volume 3
part 1, chapter 3 The Relation of the Rate of Profit to the Rate of Surplus Value
(This post is part of an ongoing project: a close reading of volume 3 of Kapital, one post per chapter. I hope that others who are tackling this book for the first time might find my summaries and thoughts useful. I also hope that others might leave their own thoughts, criticisms, help, etc. here so that this blog might become a good resource for those brave souls who take on Vol. 3.)This is not the most thrilling of chapters. There are more exciting ones to come. Bear with Marx. It’ll be worth it.

Before we can examine the formation of a general rate of profit and the way this causes prices to diverge from values we have more examining to do of this equation for the rate of profit: s/(v+c).

In order to do this we must make some simplifying assumptions. We assume that profit is not divided up into interest, rent, taxes, etc. This will be the subject of Part 4, 5 and 6. We also assume that there is not an average rate of profit. This will be the subject of part two. Marx is always making such simplifying assumptions. It is crucial to understand that he does so not to avoid analyzing exceptions to the law of value, but to make sure that each social relation is introduced into the equation in the right order. An element introduced into the picture too early could keep us from understanding the real nature of these social relations. We could end up with a fetishistic understanding of things. To take a popular example of such a mistake we might look at popular Austrian/conspiracy attacks on the Federal Reserve. They argue that value can be created by banks merely through debt and that this represents some sort of coercive distortion of the market. But such an analysis introduces the division of surplus value among different portions of the capitalist class before it examines the creation of surplus value in the first place. Of course banks are part of the capitalist class. Of course they extort surplus value by loaning capital. But these loans only create represent once they are repaid with actual value- value created by real people working as wage-laborers.

But back to chapter 3…
Much of chapters 3 through 6 is equations and mathematical examples. The reading is probably made more difficult from the fact that Marx continually introduces new mathematical examples rather than just varying the same one. He also seems determined to make every observation possible about the rate of profit, no matter how mundane. Let’s see if we can discern the reasons behind his tedious methods…

Marx designates the total capital with a capital C. Don’t confuse this with the lower case c used for constant capital. So instead of writing the equation for the rate of profit as s/(v+c) we could just write s/C, since C=v+c. Marx uses p’ to designate the rate of profit. He abbreviates the rate of surplus value (s/v) with s’.

(In my Moscow edition there are some mistakes in this chapter that make the math more confusing. For instance, on the first page of the chapter it should read s=s’v not s=sv. Later on in the first sub-heading it should read “s’ constant v/C variable” and not “c’ constant, v/C variable. I confirmed this by checking the version on marxists.org.)

After a series of fancy equations Marx concludes that the rate of profit is always less than the rate of surplus value because v is always less than C (except in the rare case of an firm where v=C, that is there is no expenditure on constant capital.)

Marx then lists 6 factors that can influence the rate of profit. These are 1. the value of money, 2. turnover time, 3. productivity of labor, 4. length of the working day, 5. intensity of labor, and 6. wages. For different reasons Marx will exclude these factors from the present analysis. Let us briefly review why.

1. The value of money only changes the quantitative expression of the rate of profit, not the actual amount of labor time appropriated by the capitalist. True, rapid changes in the value of money can impact long term investments in capital. But this requires an analysis of inflation and the monetary system and this is not the correct place in the argument to introduce these factors.

2. Turnover time will be discussed in chapter 4.

3. Changes in the productivity of labor are discussed extensively in Book 1. These only effect the rate of profit when an individual capitalist is producing above or below average productivity. This relative surplus value is temporary and thus not important to the present discussion, though of immense importance to us at other times in the argument.

4,5, and 6. Length of working day, intensity of labor and wages are all discussed extensively in Book 1. But Marx reviews their effect on the profit rate here for us anyway. Obviously, any increase in wages decreases the profit rate while an increase in the working day or the intensity of labor increases the profit rate. Marx gives us a couple short mathematical examples of this. Any change in the rate of surplus value implies some change in wages, intensity of labor or length of working day. The proportion between the money spent on wages (v) and the total amount of labor actually performed (v+s) is what is unique about variable capital. Constant capital does not have this property. The total value of constant capital is passed onto the product. It doesn’t matter whether this constant capital represents 100 tons of bricks or 200 yards of cloth. The specific use-value of constant capital is immaterial to the formation of value. But it is very important to know how much use-value a certain some of variable capital yields. If a capitalist can get more labor out of their variable capital for the same amount of money then their profit rate goes up.

Now begins “fun-time with the equation for the rate of profit” where Marx exhausts all possible variations in the equation p=s’(v/C). (I’m actually quite rusty at my algebra, so if anyone can write in and help me understand how Marx gets from p’=s/(v+c) to p=s’(v/C) that would be of great help. For readers who are equally as rusty as I am at algebra, you can get all the same results using the original equation for the rate of profit p=s/(v+c).)

Section 1: s’ constant; varying v/C
We start by holding the rate of profit constant while varying v/C. After some slightly numbing equations Marx concludes that since the rate of surplus value is held constant, changes in the rate of profit will come from the variation of v relative to the total capital, which is basically just a restatement of the equation. Marx then spends about a page apologizing for not being able to use simpler mathematical examples.

case 1: s’ and C constant, v variable
Since C stands for c+v the only way to increase v without changing C is to decrease c at the same rate at which we increase v. Let’s say I own a factory and I have the same amount of money to start the year off with as I did last year. But now they have these new machines that need less workers. So I spend more on machines and less on workers. My total expenditure (my cost price, c+v, C) stays the same but the proportion has changed. Now normally, in reality, I don’t have the exact same amount of money to invest in each production period. But holding this factor constant allows us to see more clearly the relation between v and the rate of profit.

Similarly, if we are holding s’ (which, remember stands for s/v) constant this means that any change in v must involve a simultaneous change in s for the proportion to remain constant. So if s was 5 and v was 5 we would have 5/5, or a 100% rate of exploitation. If v changes to 6, s must also change to 6 for there to remain a 100% rate of profit. Again, in real life there is rarely such a one-to-one change in both factors at once. But holding this ratio constant allows us to, again see what is unique about changes in v.

With these two constraints in place, a fixed rate of surplus value (s/v) and a fixed cost-price (c+v), then any change in v will have a corresponding change in the rate of profit. If the money laid out in wages go up then profit goes up, even though the rate of surplus value stays the same. If variable capital goes down then the rate of profit goes down. In these cases, an increase in v means an increase in the magnitude of surplus without a change in the rate of surplus value. Because c is shrinking with the increase in v, surplus goes up relative to cost. Of course, in real life an increase or decrease in v usually means changes in s and v. But we are holding these ratios constant now to make the point that more money spent on workers means more value created.

A change in v doesn’t just mean a change in wages. It could also be a result of a change in the intensity of labor or the length of the working day. If wages stay the same then an increase in v means an increase in the amount of laborers. Since we are holding C constant this means a decrease in the amount of constant capital. This seems counter to our understanding of the natural tendency of capitalism. We know that it is in the capitalist’s interest to decrease their reliance on wage labor by replacing them with machines, not the other way around. Capitalism tends toward an increase in the productivity of labor, not a decrease. But Marx reminds us that just such an inversion of the typical case can occur in agriculture and extractive industries like mining. When the land yields less and less product up, capital requires more and more workers to get the same output. This is a case of declining productivity of land. In our near future, as resources like oil become scarcer, or environmental degradation has an effect on agricultural productivity, we may see more such cases! But in such cases we usually have an increase in constant capital as well: more and more money poured into new technologies. So this case of rising v and decreasing c really is only found in comparisons between profit rates in different regions rather than changes in one industry over time. For instance, we might notice that rice production in rural china is more labor intensive and less capital intensive than in other parts of China where more productive technologies have replaced workers with modern machinery.

In the case of a rise in v due to an increase in wages, this would require an increase in the working day in order for s to remain the same. This certainly seems like a likely case. If the cost of living is going up and dragging wages up with it then capitalists will try to prolong the work day in order to compensate for this increased expenditure. On the other hand, rises in wages can also come about because of a strong union-movement. In this case it is much harder to increase the length of the working day. Instead, increasing the productivity of labor is the best option- but this involves a change in c/v, which leads us to our next point.

If v falls then the rate of profit falls (again, given constant s’ and constant C). Let’s first see what happens if the decrease in v comes from a decrease in workers employed. For C to remain constant this decrease in workers requires an increase in constant capital. This is a case of rising labor productivity, usually a result of machines displacing workers. But this rising productivity means a falling rate of profit. This case forms the cornerstone of Marx’s explanation for why capitalist economies go into crisis. He will expand more upon this idea in the 3rd part of the book: The Law of the Tendency of the Rate of Profit to Fall.

If the fall in v is due to a fall in wages, and not a decrease in workers, then we would also need to shrink the length of the working day in order to hold s’ constant. As Marx says, this case is highly unlikely. A capitalist would be mad to not jump at the chance to increase surplus value when wages fall.

case 2: s’ constant, v variable, C changes through the variation of v.

Here we set constant capital (little c) constant so that when we vary v then C must change also. (Because C=c+v any, if c is constant, a change in v changes C. In case 1, remember C was held constant which required a inverse change in c every time we changed v.) This means that we are examining changes in the famous “organic composition of capital”, the ratio of c to v (c/v). It will be Marx’s contention that a rise in the organic composition means a falling rate of profit. Much of the criticism of this theory relies on arguments that either there isn’t a tendency toward a rise in organic composition or arguments that a rise in organic composition does not lead to a fall in profits. The former objection lies within the bounds of Marx’s value theory, arguing that the cheapening of the means of production can stabilize profit rates. The latter objection, which goes by the name of the Okishio Theorum, is an assault upon the basic idea of Marx’s value theory, that only human labor can create value in a commodity economy. Okishio holds that an increase in physical productivity always means more value. Okishio’s “Theorum” has been roundly criticized by the Temporal Single System Interpretation of the LTV. But all this should wait for the part of the book on The Tendency Toward a Falling Rate of Profit”.

But I am getting ahead of myself again. Here in case 2 Marx points out that in modern industry the organic composition of capital is rather high already (high ratio machines to workers). This means that changes in v are rather small and don’t have a drastic effect on the profit rate. Perhaps this could be taken as a reason for a rising organic composition of capital. With the relatively small variability of v capitalists are forced to increase c in order to try to raise the productivity of labor.

In the example Marx gives a decrease in the productivity of labor causes a rise in profit. An increase in productivity causes a fall in profits. Timpani rattle. Spooky, orchestral strings tremolo on diminished chords.

case 3: s’ and v constant, c and therfore C variable

Here the capitalist increases or decreases expenditures on machines or raw materials while holding the rate of exploitation and variable capital constant. Thus the organic composition rises and falls freely. Immediately we see that the rate of profit is inversely proportional to the organic composition of capital. The more the organic composition rises, the more the profit falls.

This rise in c could come about through an increase in the actual number of machines or amount of raw material or through an increase in their price in the market. Rising c means a rising productivity of labor- that more stuff is being produced from the same amount of labor. But this “more stuff” doesn’t have more value. It does have higher cost. Thus profits fall.

4. s’ constant, v, c, and C all variable

Now Marx gets really wild and lets two variables vary. From this we learn that:
a. The rate of profit falls is c increases faster than v.
b. If they change in the same direction at the same rate the rate of profit stays the same.
c. The rate of profit rises if v rises faster than c.

None of this adds anything new to the analysis. We have learned all this from the earlier examples where one factor at a time was varied.

Along all of this analysis we have come upon limits where we can’t vary v/c any more without also varying s’. In examining the falling wage, for instance, we said that it is highly unlikely that this will happen without a corresponding increase in surplus value. Thus the next step is to examine changes in the rate of surplus value.

Section 2: s’ variable

This section opens with some equations that don’t particularly stir any great passions in me.

case 1: s’ variable, v/C constant

Obviously, in such a case rises in the rate of exploitation lead to a rise in the profit rate and vice versa.  Since we are holding v/C constant a change in v must have a corresponding change in c in order for the ratio to remain the same.

Marx takes a quick jab at Ricardo who only presents one factor for the variation in profit: changes in wages. It is a brief jab, and not knowing the wider context of the issue I’m not sure if I’m missing anything about Ricardo’s ideas. Marx argues that a change in v can also be the result of changes in the length of the working day or of the intensity of labor. All three factors have the same effect on the rate of profit.

case 2: s’ and v variable, C constant.
There are three possibilities here:
a. v and s’ vary in opposite directions by the same amount. This means that a decrease in wages means more surplus.
b. v and s’ vary in opposite directions but by different amounts. In this case the more rapidly changing variable is the determining element.
c. v and s’ vary in the same direction. In this case the two variables intensify each other. If v and s are shrinking profit falls. If they both rise profit rises.

case 3: s’, v and C variable
There is nothing new about this case that is not covered earlier. (Whew!)

Marx then makes some summary remarks about changes in the rate of surplus value:

1. If v/C is constant then the rate of profit changes in proportion to the rate of surplus value.
2. If v/C changes in the same direction and proportion as s’ then the rate or profit changes faster than the rate of exploitation.
3. If v/C changes inversely to s’ but at a slower rate p’ rises or falls at a slower rate.
4. if v/C changes at a faster rate than s’ then p’ rises while s’ falls, and inversely. This is crucial. It shows that the increase in organic composition can over-rule the increase in the rate of exploitation if it moves faster. A faster increase in the rate of exploitation could offset a falling rate of profit. So for us to establish that the Falling Rate of Profit is inevitable we not only have to show that the organic composition tends to rise, but that this rise outpaces any rise in the rate of exploitation.
5. p’ stays the same if an increase in v/C is proportionally offset by an increase in s’.

When the rate of profit in two different countries are compared it is usually differing rates of surplus value that determine the different profit rate.

From these five cases we notice that a falling or rising rate of profit can result from all sorts of different rates of surplus value. The direct link between surplus value and profit is severed. Thus, we can’t immediately see surplus value in the rate of profit. A firm could have a low rate of profit and a very high rate of surplus value. A firm could have a high rate of profit and a low rate of surplus value.

All in all the rate of profit depends on two factors: the rate of surplus value (s/v) and the value-composition (or organic composition) of capital (c/v). If the rate of surplus value rises, profit rises. If the organic composition rises then profit falls.

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