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.