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.
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“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?”
Do you think? In Cv1 Ch.5 we already saw that prices do not equal values, so the search for a direct correspondence between labour inputs and money price is futile, no? (Though I think that it is ultimately true: a generic plastic comb, requiring fewer hours of input, will always cost less than a television.)
I have to admit, I don’t know the answer.
Still, I agree that the mere juxtaposition of the two aggregates does not signify a causal relationship. However, I don’t know what the answer is. I am reminded of Marx’s famous 1868 letter to Ludwig Kugelmann:
“The chatter about the need to prove the concept of value arises only from complete ignorance both of the subject under discussion and of the method of science. Every child knows that any nation that stopped working, not for a year, but let us say, just for a few weeks, would perish. And every child knows, too, that the amounts of products corresponding to the differing amounts of needs demand differing and quantitatively determined amounts of society’s aggregate labour. It is self-evident that this necessity of the distribution of social labour in specific proportions is certainly not abolished by the specific form of social production; it can only change its form of manifestation.”
As for old Bohm-Bawerk and time preference theory. I do think it’s a load of rubbish. According to this theory, the price of something is determined by the time you are prepared to wait for it. Thus, an widget costs more now than it would in the future. In some sense that’s true enough, though it can be easily explained by supply and demand. Yet if I remember rightly, there is no consideration in time preference theory of the position of the vendor. As a vendor I want to sell all of my stuff as quickly as possible. According to time preference theory, the more I want of something now, the more I should have to pay for it. That is, if a widget costs more now than it does later, then the more widgets the more they will cost in relation to, say, six months down the line. But in the real world, if as a consumer I buy in bulk, I get a discount. This is because on the other side of the relationship the seller’s intention is to get rid of his stock as fast as possible and then produce more and increase his profits, ie increase turnover time.
As for the concept of “roundaboutness”, it is meaningless. In one sense it corresponds to Marx’s concept of the rising organic composition of capital. But whereas Marx’s concept implies the tendency of the rate of profit to fall, Bohm-Bawerk’s notion is that of rising productivity as well as rising profitability. It is a physical measure of output. However, if rising productivity equates to a more “roundabout” method, which leads to more profits, it only becomes possible to speak of more “roundaboutness” in terms of profits, and thus we are back at the question of inputs-outputs and rates of profit and thus we do not need this concept at all.
But Bohm-Bawerk has to say that a more “roundabout” – and thus lengthier – production time leads to more profits because, for him, “interest is the time value of money”. All profit is ultimately a form of interest. Profit does not arise from the social relations of production. Instead it arises from how things are: it is because it is. We are back at the Trinity Formula: capital = interest, labour = wages and land = rent. Austrian economics is just a form of vulgar economy.
Finally, another dig at Austrian Business Cycle Theory, one of its precepts is that an increase in the money supply will lead to an unwarranted increase in “roundabout” methods of production. But there’s actually no evidence that this is the case. Instead, what happens with lots of cheap credit is that money pours into short-term investments in securities. The “structure of production” is not lengthened (ie made more “roundabout”) at all.
Diego Guerrero – Input-Output And Dynamic Values: A Spanish Perspective
http://bit.ly/aIMN4
this is also an interesting study on the topic of empirical testing of the LTV. In general I think that if the LTV is indeed a superior theory for analysing the dynamic of capitalist economies, than this superiority should be possible to demonstrate empirically as well, not just on the level of conceptual analysis.
Thanks for the link. I got round to reading it quickly this afternoon. In my message above, I was thinking in terms of individual commodities or firms themselves, rather than aggregations of data across national economies and different sectors of the economy within. I agree that the labour theory of value is a superior theory for analysing capitalist economies and that it can be – and is – empirically demonstrable.
The Guerrero piece is like the Anwar Shaikh article that Brendan refers to in the article, and also a similar to other studies, a prominent one being the study of the United Kingdom econommy by Cockshott, Cottrell and Michaelson which I think is refered to by Guerrero.
There is an issue raised by Cockshott et al that goes back to the transformation problem. It is something that I am only just getting to grips with. I don’t have a personal copy of Andrew Kliman’s book yet, so I can’t just now refer back to it. There is also a problem, seemingly, with the concept of the equalisation of the rate of profit, though I am not sure that this poses tremendous difficulty as, the way I read it, rates of profits only tend towards long-term averages and disequilibrium is the key.
It would be nice, though, if we had lots of dis-aggregated data from all individual firms within an economy, rather than national statistics.
Andrew Trigg has done disaggregated studies of firm rates of profit
I’m wondering if anyone reading this can clarify something for me: at the end of Engels’s calculation he notes that a different turnover period for capital I would have a different effect. (This on page 166 in my version – Penguin Edition)
5 turnovers annually for Capital I would be:
1,000c (depreciation) +2500c+2500v+2500s = 8,500;
THEN he calculates the rate of profit with a total capital (C) of 11,000.
Would it not be in this case 6,000 C (1000c+2500c+2500v) ? Am I missing something?
Because Engels is calculating the annual rate of profit, the ratio between the total mass of surplus-value produced over the year and the total capital originally laid out for the first turnover period. His explanation is not very clear in my opinion; maybe my notes will help:
Here: http://readingmarx.wordpress.com/2012/04/11/capital-volume-3-chapter-4-the-effect-of-turnover-on-the-rate-of-profit/
I think it is possible to empirically test the law of value. IThe relative differences between the average time to make different commodities in a society should clearly be related to the relative differences between the prices of these commodities (for example ratio of 2/1 in both dimensions of a commodity). I would say that this relation would be pretty exact in a society. Capitalism is worldwide (with exception of certain places) but it would be easier to apply it on for example the usa. Any voluteers.