Friday, 28 October 2016

Capital III, Chapter 49 - Part 11

None of the output equal to the capital component of the total output comprises an income for anyone. Just as that portion of output that comprises means of production cannot simultaneously be means of consumption, so that portion that comprises capital, cannot simultaneously be revenue. If all of Department I is considered as one giant enterprise, then its clear that what is true of the farmer and the use of a portion of his output simply to reproduce the seed used in this year's production, is also true for the whole of Department I, however, differently this may appear on the surface, as a consequence of competition, and a multitude of individual purchases and sales amongst Department I firms.

What then appears, on the surface, as a sale of coal to the steel producer, which generates an income for the coal producer – divided into wages, profits, interest and rent – can be seen, when taken in the context of the totality of such transactions, as no such thing. If the coal producer and steel producer are seen as only different departments, within one large single capital, it becomes clear that the coal supplied to the steel producer, to replace that consumed, is no different to the grain produced by the farmer, part of which is used as seed. It is not the revenue of the steel producer (workers, capitalists and landlords) that consumes the coal, but the capital of the steel producer, and the steel producer does not produce consumption goods to be consumed by the coal producer (workers, capitalists and landlords), but likewise produces means of production consumed by the coal producer's capital.

The only portion of the value of Department I, which creates revenues – wages, profits, interest and rent – is that represented by the new labour expended, which creates new additional value, to that represented by the constant capital, itself consumed within the Department, i.e. consumed by capital rather than revenue.

“Thus, the value of the annual commodity-product, just like the value of the commodity-product produced by some particular investment of capital, and like the value of any individual commodity, resolves itself into two component parts: A, which replaces the value of the advanced constant capital, and B, which is represented in the form of revenue — wages, profit and rent. The latter component part of value, B, is counterposed to the former A, in so far as A, under otherwise equal circumstances: 1) never assumes the form of revenue and 2) always flows back in the form of capital, and indeed constant capital. The other component, B, however, carries within itself, in turn, an antithesis. Profit and rent have this in common with wages: all three are forms of revenue. Nevertheless they differ essentially in that profit and rent represent surplus-value, i.e., unpaid labour, whereas wages represent paid labour.” (p 838-9)

One portion of the value of this product is then equal to wages, which, under the assumptions made, is equal to the variable capital. This portion then has a two-fold function. On the one hand, as variable capital, it is a sum of money-capital that is metamorphosed into productive-capital, labour-power. This is its function from the perspective of capital. But, from the perspective of the worker, this portion of value appears not as capital but as revenue, money wages, obtained in exchange for the sale of their commodity, labour-power, and required for its reproduction via the purchase of wage goods.

“If we imagine the circulation of money to be eliminated, then a part of the labourer’s product is in the hands of the capitalist in the form of available capital. He advances this part as capital, gives it to the labourer for new labour-power, while the labourer consumes it as revenue directly or indirectly through exchange for other commodities. That portion of the value of the product, then, which is destined in the course of reproduction to be converted into wages, into revenue for the labourers, first flows back into the hands of the capitalist in the form of capital, or more accurately variable capital. It is an essential requirement that it should flow back in this form in order for labour as wage-labour, the means of production as capital, and the process of production itself as a capitalist process, to be continually reproduced anew.” (p 839)

Thursday, 27 October 2016

Profit, Rent, Interest and Asset Prices - Part 11 of 19

Objectively, rent is surplus profit. The landlord is able to pocket this surplus profit rather than the capitalist farmer, because unless the farmer hands it over to the landlord, the landlord will not allow the farmer to use the land. Competition between capitalist farmers will cause them to demand land wherever it is possible to still make above average profits, and this increased demand for land acts to push up rents. But, the objective limit to rent is this mass of surplus agricultural profits, because if landlords push rents to a level beyond it, farmers will make below average profits, and leave agriculture to invest in industry. A similar thing arises with builders. If landowners seek high rents, for land, from building developers, builders will not be able to build houses at prices that tenants will be able to afford. If landowners seek high land prices (capitalised rents) builders will not be able to build houses at prices the buyers will be able to afford.

However, as with money-capital and interest, things are not entirely that simple, in reality. In the case of money-capital, if it is in such excess supply as to cause interest rates to fall to very low levels, the owners of that money-capital may decide to use it instead as revenue. They may decide to simply spend a larger proportion of their money hoards, and revenues in luxury consumption, or speculation. Alternatively, they may decide to turn themselves into industrial capitalists, metamorphosing their money-capital into productive-capital or commercial capital, in order to directly obtain profit of enterprise. In that way, the supply of money-capital is reduced, which acts to push the average rate of interest higher.

We see that today. Low rates of interest have caused the owners of money-capital to engage in higher levels of luxury spending, but they have also engaged in vast amounts of speculation, gambling on the prices of financial assets, such as shares, bonds and property, as well as in other assets from which they expect to obtain speculative capital gains, such as gold, diamonds, art, and so on. In so far as such speculation has also driven the prices of fictitious capital higher, it has been self-fulfilling, and the more those engaged in such speculation believe that it is likely to continue – especially when for the last thirty years such speculation has been underpinned by central banks – the more they become fixated on a desire for such speculative capital gains, rather than yield. But, that has thereby diminished the supply of money-capital available for the accumulation of real capital.

Similarly, Marx outlines the way landlords are able to divert their land to alternative uses, whenever they feel that the rent produced from it falls to a low level. They can make the land available for other uses, for example, urban development, as well as turning it into recreational areas for hunting and so on, as well as just leaving it uncultivated. And, in the last thirty years, as speculation has driven land prices, particularly development land prices, ever higher, there is an inevitable incentive for landowners – including builders with land banks – to hold on to their land hoards, in the expectation that by doing so they will make large capital gains, on those assets. As Marx notes, this is why huge swathes of land are always uncultivated, because to make them available as additional supply, would hugely depreciate rents, undermining the revenue of the landowners, and also causing the capitalised value of the land to fall significantly, which would thereby undermine the fictitious wealth of the landlords, and of those money-lending capitalists holding mortgages on the land and property.

There is then a difference between the owners of loanable money-capital, and of land, as compared with the owners of industrial capital (productive-capital and commercial capital, including money-dealing capital). As far as industrial capital is concerned, the individual private industrial capitalist is torn, as Marx described earlier. On the one hand, as their profits expand, they are pulled towards wanting to use it as revenue, to enjoy a more luxurious lifestyle. On the other hand, the objective requirement of industrial capital is to expand.

As the market expands, because population expands and living standards rise, new use values are developed, causing a rise in demand for commodities, each individual capital is necessarily driven to try to capture a share of this expanding market. Unless it does so, its mass of profits will fall relative to its competitors, its own competitive position will be undermined, and ultimately it will, thereby cease to act as capital. Consequently, as Marx says, there is no minimum level of the rate of profit, below which capital will stop accumulating. It may be that in the era of private capitalist property, the private capitalist who took their revenue as profit, might choose to accumulate less of it, if the rate fell below a certain level, but as these capitals grew larger it became the mass of profit rather than the rate of profit that became more important to the bigger, private capitalist owner.

If meeting an expansion of the market could only be achieved by an accumulation of capital that resulted in a lower rate of profit, the larger private capitalists would still be led to undertake such investment, both because they could not risk losing market share, and because the increase in the mass of profit obtained was more important for them than the lower rate of profit. Moreover, when the era of private capitalist property ends, and is replaced by socialised industrial capital, in the form of joint stock companies, co-operatives, trusts and corporations the individual private industrial capitalist is replaced by the “functioning capitalists”, the army of professional managers, technicians, and administrators who carry out the previous social function of the capitalist, in organising production efficiently, so as to maximise the production of surplus value, and accumulation of capital. Unlike, the private industrial capitalist, who took their revenue as profit, these functioning capitalists, are salaried employees, who take their revenue as wages, as part of the variable capital of the business. In a more pure form than the private capitalist, they are the personification of the industrial capital itself, and its drive to maximise surplus value, and its accumulation.

No such objective constraints apply to the owners of loanable money-capital, or landed property, i.e. the owners of fictitious capital. The only constraint, which applies to them, is that they are able to obtain sufficient revenue from the ownership of this fictitious capital to afford them the means of subsistence. If someone owns £1 million in the shape of a bond, which produces for them 5%, or £50,000 of interest, each year, and which affords them a standard of living that is sufficient, there is no objective necessity for them to accumulate additional loanable money-capital.

Unlike a productive or commercial capital, that would lose competitiveness if it did not accumulate, this £1 million of fictitious capital does not suffer any competitive deterioration, by not being increased to £2 million. If the average rate of interest is 5%, it will produce this same 5% whether the money-lending capitalist has £1 million in a bond, or £2 million. Here the only difference is the absolute amount of interest obtained - £100,000 rather than £50,000. The only necessity for it to be increased, is if the owner of that capital decides that they desire a higher standard of living than £50,000 provides them, or if the rate of interest were to fall, thereby reducing the revenue produced by it. 

The same applies to the rent obtained by a landlord. A capitalist farmer, like any other industrial capitalist is objectively driven to try to expand their capital, and to farm larger expanses of land, in order to maximise their profits, to increase or maintain their market share, and thereby to maintain or improve their competitiveness, so as to survive. But, no such objective compulsion applies to the landowner. Provided the rent they obtain from say 1,000 hectares of land, provides them with sufficient rent to sustain the standard of living they require, there is no objective requirement for them to have to expand their land ownership to 2,000 hectares. The only requirement on them in that respect is a subjective requirement to do so in order to obtain additional rent as revenue, in order to enjoy a higher standard of living.

Of course, that doesn't mean that the owners of loanable money-capital, or landed property are not driven by subjective factors, i.e. greed, social status etc., to accumulate more loanable money-capital, or more landed property, but such subjective drivers are not the same as the objective compulsion for industrial capital to accumulate or die.

Capital III, Chapter 49 - Part 10

The more society develops, and the more social productivity rises, so that the quantity and value of the circulating constant capital increases, as a consequence of accumulation, the greater this component of the national output becomes, and so the greater becomes the difference between the annual product/National Income, and the national output.  It is also another expression of the law of the tendency for the rate of profit to fall.  It illustrates the fact that, as social productivity rises, although the annual rate of profit, and so the general annual rate of profit rises (because the annual rate of surplus value and rate of turnover of capital rises) as the advanced capital rises at a slower rate than the rise in surplus value, this very same rise in social productivity causes a proportionally greater rise in the mass of raw materials consumed in production.  The mass of laid-out capital, as opposed to advanced capital rises at a faster rate than the rise in variable-capital and surplus value, so that the rate of profit, i.e. the profit margin falls.

This is only mitigated to the extent that rises in productivity and improvements in technology enable the amount of labour-time required for the production of this constant capital to be reduced.

“In Class I the product consists of the same constituents, as regards form. But that part which here forms revenue, wages + profit + rent, in short, the variable portion of capital + surplus-value, is not consumed here in the natural form of products of this Class I, but in products of Class II. The value of the revenues of Class I must, therefore, be consumed in that portion of products of Class II which forms the constant capital of II to be replaced. The portion of the product of Class II which must replace its constant capital is consumed in its natural form by the labourers, capitalists and landlords of Class I. They spend their revenue for this product of II. On the other hand, the product of I, to the extent that it represents a revenue of Class I, is productively consumed in its natural form by Class II, whose constant capital it replaces in kind. Finally, the used-up constant portion of capital of Class I is replaced out of the very products of this class, which consist precisely of means of labour, raw and auxiliary materials, etc., partly through exchange by capitalists of I among themselves, partly so that some of these capitalists can directly use their own product once more as means of production.” (p 837-8)

In other words, as already described, the output of Department I is not consumed by its workers, capitalists and landowners, but part of it (equal to the new value added by labour [v + s] equal to £2,000) is exchanged with Department II. It constitutes Department II's constant capital, i.e. intermediate production. Department II exchanges consumer goods for it, and these are consumed by Department I workers, capitalists and landlords.

Of the £4,000 of additional Department I output, some will be exchanged within the Department, so coal producers exchange with steel producers and so on, whilst, for example, part of the grain of the farmer will be used as seed, to replace that used in production, part of the coal produced by the coal mine will be used to fuel steam engines used to pump water from mines, in the process of producing coal.

None of this output comprises an income for anyone, even though it constitutes a growing component of the value of national output. Its quite clear, for example, that the grain produced by the farmer, which is not sold but is used as seed for the following year, produces no income for him, just as it forms no part of the consumption fund of society, i.e. it is not consumed by anyone. Just as society's production must divide into the production of means of production and consumption goods, so the value equivalent of that production divides into capital and revenue.

The proportion of the value of current output (on current reproduction costs rather than historic prices) equal to the constant capital used in current production comprises this capital component, and is set aside, for the physical replacement of the constant capital on a like for like basis. By the same token, the proportion of the value of current production, due to the newly added value contributed by labour, comprises the revenue part. This revenue divided into wages, profits, interest and rent, is then able to purchase the remaining physical output, and thereby to reproduce the variable capital, to meet the consumption needs of exploiters, and also the needs of capital accumulation.

Wednesday, 26 October 2016

Wear and Tear

Wear and tear of fixed capital is often confused with depreciation. The essential differences are that wear and tear is a function of use, whereas depreciation is a function of time; wear and tear of fixed capital represents a transfer of value, to the final product, and is thereby reproduced and recovered within it, whereas depreciation forms no part of the production process, so that no value is transferred to the end product, and is not, therefore, reproduced or recovered within it, meaning it represents an absolute capital loss; wear and tear applies only to fixed capital, representing a portion of the fixed capital's use value consumed in production, whereas depreciation can apply both to fixed capital and to circulating capital, for example, materials can deteriorate in storage.

This last point illustrates Marx's distinction between fixed capital and circulating constant capital. Circulating constant capital is used up entirely in the production process. It transfers all of its use value to the end product, or to put it another way, its wear and tear is always equal to 100%. By contrast, fixed capital continues to physically exist beyond the end of the production process. A portion of its value, therefore, remains fixed within this physical use value.

A screwdriver, used by a joiner, suffers wear and tear as it is used to insert screws into the joiner's products, but when the joiner has finished the labour process, and produced a cabinet, the screwdriver still exists, and can be used, by the joiner, in another labour process to produce another cabinet, or other product. In the cabinet, the wood used by the joiner, along with the screws and other materials are all used up in its production. They constitute circulating constant capital. If the wood has a value of £5, the screws £1, and various auxiliary materials a further £1, all of this constant capital value is transferred to the value of the cabinet. If the joiner's labour adds a further £5 of value that too is recovered along with the value of the constant capital, when the cabinet is sold, and the capital is thereby turned over.

The screwdriver, however, may have a value of £20, but this value is not wholly transferred to the end product. If the screwdriver, on average, can be used to produce 1,000 such cabinets, before it is worn out from use, it will only transfer, on average, £0.02 to the value of each cabinet. After, it has been used for the first time, £1.98 of value will remain fixed within it. How quickly, the screwdriver loses all of its use value, i.e. becomes worn out, and so its value, will then depend upon how much it is used. If the joiner produces one cabinet per week, the screwdriver will last for twenty years, but if the joiner produces ten cabinets per week, it will only last for two years.

By comparison, the wood, screws etc, transfer all of their use value, and so value to the end product in one go. But, suppose the joiner has to keep the wood, and screws in poor conditions. Then the wood and screws may lose some of their use value even before they take part in the production process. As the use value of the materials is reduced, so the value of those materials, transferred to the end product is also thereby reduced, and cannot be recovered in the value of that end product. It represents an absolute capital loss. They have not suffered wear and tear, but depreciation. As a result, the use value of the end product will itself be reduced. They will still transfer all of their use value and value to the end product, but this use value and value will already have been diminished prior to them even taking part in that process.

In each production process, therefore, such as the production of a cabinet, fixed capital will lose a portion of its use value, and thereby transfer a proportion of its value to the end product. A screwdriver each time it is used to drive in screws, loses some of the metal of its blade, and the action of screwing, causes wear of the handle of the screwdriver. None of that, however, prevents the screwdriver from being used again and again, until such time as this cumulative wear and tear from use, does make the screwdriver unfit for purpose, at which point it needs to be replaced.

As Marx sets out in Capital Volume II, this forms the basis of one type of capitalist crisis arising from disproportion. Suppose there are just two producers in an economy. One is a machine maker, and the other is a farmer. The former produces machines required by the latter, who, in turn produces food that they sell to the machine maker. Suppose the machine maker produces a machine with a value of £1,000, which they sell to the farmer. The machine will last for ten years, given its current level of usage. The machine maker requires £100 of food each year from the farmer, to cover their subsistence.

Over ten years, therefore, the farmer would supply the machine maker with £1,000 of food, and the machine-maker would supply the farmer with a machine of equal value. However, one problem here is obvious. The machine maker wants £1,000 straight away from the farmer, and not £1,000 of food spread out over ten years. The farmer would then have to sell £100 of food to the machine maker, and make up the other £900 from their own cash hoard. But, this is also not a very good situation for the machine maker, as they would not have any work, or income for another ten years.

They would, of course, be able to use the £900 of cash, they now have, to cover their purchases of food for the next nine years. However, one potential cause of a crisis is illustrated here, because if the farmer were to find that the machine they bought lasted not for ten years as expected, but for eleven or twelve years, the anticipated income for the machine maker would not materialise, and they would have no money to be able to buy food from the farmer, which would be bad both for the machine maker who would not be able to subsist, and for the farmer, who would not be able to sell all of their output.

Of course, in reality, as Marx describes, in Capital II, one aspect of this requirement for proportionality is that the right quantity of fixed capital is produced each year relative to the amount of circulating capital to be processed. So, instead of the machine maker producing a machine once every ten years for the farmer, what would actually develop would be that one machine maker would produce machines for ten farmers, and on average each of these farmers would require a replacement machine each year, keeping the machine maker fully employed.

Suppose the value of output of each farmer is £1,000 each year. This might comprise £300 of circulating constant capital in the shape of seeds, £600 of new value created by labour, making £900. But, it will also comprise £100 of wear and tear of the machinery bought from the machine maker. Farmer 1 sells £100 of food to the machine maker, required for their own subsistence. They hand over a further £900 to the machine maker in money. The machine maker requires this money to buy their own materials required to replace those consumed in the machine sold to the farmer.

The machine maker has thereby been able to reproduce their own labour-power for the next year (£100 of food) and also to reproduce their own constant capital. They can then proceed to produce another machine. They sell this machine to Farmer 2, who also produces £1,000 of food, £100 of whose value comprises wear and tear of their existing machine. Whether the machine maker now buys £50 of food from Farmer 1 and £50 from Farmer 2, or whether he continues to buy all of his food from Farmer 1 does not matter. Both farmers must sell all of their output in the market, and in that way they also recover the £100 of value of wear and tear contained in it.

Taking the situation of all the farmers together, they produce each year food to the value of £10,000, and of this a total of £1,000 includes the value of wear and tear of machinery. For each farmer, however, the amount of wear and tear, contained in the value of their output is only £100. Each farmer, recovers this in the value of their output, but does not immediately use it to buy replacement fixed capital. They are able to set this money to one side, so that, at the end of ten years, when their machine is worn out, they have the necessary cash to buy the replacement machine.

If all of the machines were new, the fixed capital stock would be £10,000, but in any year, only 10% of this value enters into the cost of production of food, and is reproduced in the value of that food. This is the position also that Marx describes in relation to national output and social reproduction. In the value of national output, it is only this value of wear and tear of fixed capital that is reproduced, just as equally, it is the equivalent use value that is produced, and for which a proportion of social labour-time is set aside. In other words, as in this example, the value of output represented by wear and tear is £1,000. Although, nine out of the ten farmers do not replace their machines, because only 10% of the use value of each machine is used up during the year, one farmer replaces the use value of an entire machine. Social labour-time equal to £1,000 is set aside for the production of this machine.

Its on this basis that Marx says that, on average, the amount of value set aside to cover wear and tear of fixed capital within the economy is equal to the amount of value represented by the production of fixed capital to replace that which is actually worn out in any one year. However, as set out above, this is only an average or approximation. If existing fixed capital is made to last longer than this average, value will continue to be taken out of circulation, to cover the value of wear and tear, but this value will not be thrown back into circulation for the purchase of fixed capital. The consequence as Marx says in Capital II, is that even with a constant level of output, an overproduction of fixed capital would arise.

Moreover, this average is based upon each individual capital replacing its fixed capital at more or less uniformly spread intervals. As new capitals are constantly arising, there is some basis for such an assumption, and as each capital accumulates additional machines, over a period of years, this would again tend to mean that they would wear out and require replacement at such intervals. However, as capital becomes increasingly concentrated in huge firms, the proportion of fixed capital accounted for by new capitals becomes smaller and smaller. Furthermore, as the process of moral depreciation arises, when the development of technology means that machines are replaced, not because they are worn out, but because a revolutionary type of new machine makes them obsolete, means that whole swathes of fixed capital, of the same type, can come up for replacement, at the same time, across the economy, followed by periods when no such replacement is required. As Marx says, this is one important factor that plays into the determination of the duration of the business cycle.

Another factor here is the difference between periods of intensive as opposed to extensive accumulation. In a period of intensive accumulation, firms may replace their existing machines, but they replace them with new types of machines. By definition, these newer machines are more productive. Each one replaces two or more of the older machines. Take the situation that Marx describes in Capital I.  In England, each person employed in a cotton spinning factory was complemented by 74 spindles, whereas in France it was just one person to 14 spindles. That reflected a constant revolutionising of machinery in England. One new machine was able to replace five of the older machines.

Consequently, even if the price of such a new machine was greater than that of an older machine, it would represent proportionately less value per unit of output. A machine with 74 spindles, even if it was twice as expensive as a machine with 14 spindles, would still transfer only a third as much value in wear and tear to the end product. Moreover, where the machine maker would previously have expected to have sold five machines, they would now sell only one, and the loss of output would not be compensated by the fact that this one new machine represented twice as much value as one old machine.

But, in reality, the same causes of the development of the new machine, i.e. the development of technology, always tends to also reduce the value of the new machines too, because as productivity rises, so the cost of producing these new machines also falls. That is why, as Marx says in Capital III, Chapter 6, the value of wear and tear of fixed capital, as a proportion of the value of the end product always tends to fall, whilst the value of the materials processed by that fixed capital tends to rise as a proportion of the value of the end product. It is that which also lies behind the long-term tendency for the rate of profit/profit margin to fall.

The reason that this process, whereby one new machine replaces several older machines, does not lead to a permanent state of overproduction is several fold. Firstly, as Marx says in Capital III, Chapter 15, the periods of rapid technological change are matched by periods when no such rapid change occurs. Its when a period of extensive accumulation has lasted for some time, and existing supplies of labour-power have started to get used up, pushing up wages, and squeezing profits, that firms start to seek out new labour-saving technologies, to overcome that problem. It takes time for such new technologies to be developed, and then turned into practical machines.

But, secondly, as Marx also describes, during the periods of intensive accumulation, the falling value of fixed capital, and of circulating capital causes the annual rate and mass of profit to rise. At a certain point, therefore, although each new machine may replace two older machines, the increased mass of profit produced, means that capital is accumulated at a faster rate, so that although maybe only one replacement machine was required, an additional one, two or more machines is also employed.

As Marx sets out, in Capital II, this process is facilitated by the fact that for each firm the money hoard set aside for the replacement of worn out fixed capital, becomes merged with the money hoard of realised profits set aside for accumulation, so that at one time, funds intended for replacement are used for accumulation, and vice versa. At the level of the total social capital, this is intensified by the pooling of these money hoards and reserves by the banks, so that money-capital can be provided to finance such expansion.

In Capital II, Marx sets out that the potential disproportion discussed above, arising from fixed capital wearing out at different rates, and thereby causing an overproduction, is not one limited to capitalist production. It will apply under socialist production too. As a result, Marx says, it will always be necessary under socialist production to have a degree of overproduction. However, where under capitalism such overproduction is a potential cause of crisis, under socialism it would be a boon, an amount of additional production that could be utilised for the benefit of society.

“This sort of over-production is tantamount to control by society over the material means of its own reproduction. But within capitalist society it is an element of anarchy.”

(Capital II, Chapter 20)

Capital III, Chapter 49 - Part 9

“In Class II, for the products of which wages, profit and rent are expended, in short, the revenues consumed, the product itself consists of three components so far as its value is concerned. One component is equal to the value of the constant portion of capital consumed in production; a second component is equal to the value of the variable advanced capital laid out in wages; finally, a third component is equal to the produced surplus-value, thus = profit + rent.” (p 837)

In other words, if we take the example given previously, which is taken from Capital II, the output of Department II is made up:

2000 c + 500 v + 500 s = 3000

So, Department II has £2,000 of means of production, which are processed into items of consumption. In this process, the Department II workers are paid £500 in wages. They create £1,000 of new value, which leaves £500 as surplus value. Of the total value of output of Department II, which is equal to the annual product, or National Income, of £3,000, the Department II workers, therefore, spend their wages of £500 buying consumption goods, leaving £2,500 of goods left to be bought. A further £500 of new value was produced in Department II, and has been distributed as surplus value, in revenues – profit, interest and rent. Some will have gone as profit of enterprise to functioning capitalists, some will have gone as interest payments to money-lending capitalists (dividends to shareholders, coupon interest to bondholders etc.) who have lent money to Department II capitalists, and some as rent to landlords, who have rented land to Department II capitalists.

This further £500 in the possession of these capitalists and landlords is then expended as revenue, to buy another £500 of consumption goods, leaving £2,000 of these commodities to buy.

It may be objected that part of the value of the annual product is not made solely of the value of new labour added, but also of the value of the constant capital used for its production, equal to £2,000. But, a closer inspection shows that this £2,000 of constant capital, used in the production of the annual product, is itself only equal to the value of the labour expended in Department I, for the production of that constant capital, i.e. the intermediate production.

A look at Department I shows its output to be:

c 4000 + v 1000 + s 1000 = 6,000

The workers of Department I create £2,000 of new value, in the shape of means of production, which represents intermediate production, bought by Department II.

The workers of Department I are paid £1,000 in wages, and use this to buy consumption goods from Department II. Department II is thereby left with £1,000 of consumption goods still to sell. Of the £2,000 of new value created in Department II, £1,000 has been paid to workers as wages, leaving £1,000 of surplus value, paid as profit, interest and rent to Department I functioning-capitalists, share and bondholders, and landlords.

They spend the £1,000 buying the remaining £1,000 of consumption goods produced by Department II.

All of the national product of £3,000 is, therefore, bought and consumed, with the national income of £3,000, divided into wages, profits, interest and rent. However, a look at the national output shows that, in addition to the £2,000 of means of production, produced by Department I, and exchanged for consumer goods with Department II, i.e. the intermediate production, Department I produced a further £4,000 of output, which was not traded.

This additional £4,000 of output value was not the consequence of new value produced in the current year, nor is it the consequence of the value of fixed capital, which has been excluded from the analysis. This £4,000 of additional output value comes from the value of labour expended in previous years, and contained in the value of circulating constant capital, used in Department I. By the same token, this £4,000 of additional output value plays no part in the exchange with Department II, and so creates no revenue for anyone. It does not arise as either wages, profit, nor interest for anyone. Its value, as with its physical product, goes solely to reproduce that circulating constant capital, consumed in production.

Tuesday, 25 October 2016

Profit, Rent, Interest and Asset Prices - Part 10 of 19

Prices are an expression of the value of some amount of a particular use value, in its universal equivalent form, i.e. as a quantity of the money commodity. The price of a coat is £20, the price of 10 kilos of corn is £5, and so on. In the same way, it might be thought that the price of a hectare of land can be similarly determined. However, land, like capital, is not the product of labour, and so has no value. But land is different to capital, in that its use value, like other commodities, is measured by some physical unit, e.g. a hectare, whereas the use value of capital is itself measured as a quantity of money.

I cannot rationally ask what is the price of £10, because it is tautologically £10. However, I can ask what is the price of £10 of capital, by which is meant the use value of £10, used as capital, to self-expand its value. That price will be determined, in the market, as a result of the demand and supply for this £10 of capital value. That price will be the rate of interest.

In the same way, I can ask what is the price of an hectare of land, but it is equally irrational, because land like capital has no value. Because it has no value, it also has no price of production, and therefore, no objectively determinable point around which its market price can revolve. But, land like capital has become a commodity, which is bought and sold in the market, and which, therefore, does have a market price.

Marx has a means of resolving this problem. The rate of interest determines the amount of interest/revenue obtained from a given amount of capital value. Conversely, given any rate of interest, the capitalised value of any revenue producing asset can be determined on the basis of the actual revenue produced by the asset. A hectare of land, that produces rent is a revenue producing asset. If the rent produced is £1,000 per annum, and the average rate of interest is 10%, then the capitalised value of the land is £10,000. In other words, if I had £10,000 of money-capital, I would, with a 10% rate of interest, expect to receive £1,000 of interest/revenue from it. If I used the £10,000 of money-capital to buy a hectare of land, I would expect to obtain the same revenue of £1,000, now in the form of rent rather than interest.

Discounting factors such as risk, I would not pay more than £10,000 for the land, because I could simply use my £10,000 of money-capital to buy a bond that guaranteed me £1,000 of interest p.a. Similarly, if I bought the land for £10,000, and subsequently the rate of interest fell to 5%, the capitalised value of the land would rise to £20,000, and I would not sell it for less. The land, produces £1,000 of revenue, in the form of rent, each year. But, with an average rate of interest of 5%, I would require £20,000 of money-capital, to generate an equivalent amount of income. If I sold the land for the original £10,000, and used the proceeds to buy a bond, it would only provide me with £500 of revenue per year.

So, for Marx, the answer to determining the price of land, on an objective basis, becomes this capitalised value of the rent. In order to determine the objective basis for the rent, Marx again turns to the rate of profit. The rent, he argues is merely the surplus profit. In industry, this surplus profit is competed away. An individual capital within an industry that enjoys surplus profit, because it has introduced some lower cost means of production, loses that advantage when other capitals introduce the same methods. An industry that enjoys surplus profits, because it has a lower organic composition of capital, or a higher than average rate of turnover of capital, encourages additional capital to enter that industry, thereby raising the supply of that industry's commodities, and so reducing market prices to the price of production, where only average profits are obtained.

This does not happen in agriculture (or mining etc.), because the land is owned by landowners, who demand rent for the land, before they will allow it to be used. But, agricultural capitalists will only start production when they are able to make at least the average annual rate of profit, after having paid this rent. The objective basis for this rent then seems to be established. The average annual rate of profit is determined in industry. Let us say that the average annual rate of profit is 10%. In that case, a capitalist farmer with £10,000 of capital, will need to be able to sell their output for £11,000, in order to make £1,000 of profit, equal to the average annual rate of profit. However, if the landlord requires the farmer to pay £200 a year in rent, the farmer will need to be able to sell their output for £11,200. Only when agricultural prices rise to a level where this is possible, will the farmer commit their capital to production.

However, this raises the question what causes the landlord to demand £200 in rent, rather than £300, or £50, or £10? The answer Marx says, is that it again comes down to competition, and objective limits set by the rate of profit. As with the loaning of money-capital, the owner of landed property, like the owner of money-capital, has an incentive to lend it, because it is only by doing so that they obtain revenue, rent in one case, interest in the other. This is the pressure on one side creating supply. But, precisely because they undertake this action in order to obtain revenue, they will not supply either money-capital, nor land for free.

On the other side, the demand for land, will rise as the rate of profit in agriculture rises, because capitalist farmers will seek to expand their production, so as to make more profit. The greater the difference between agricultural profits and industrial profits, the more capital will want to enter agriculture, increasing the demand for land, and so pushing up rents. But, it will only do so to the extent that the rents charged do not reduce those profits below the average annual rate of profit in industry. So, as with the rate of interest, although land, like capital, has no value, and so no objective basis for determining its price of production, or natural price, objective constraints exist that determine the conditions for the demand and supply of land, and the limits within which rent can be levied.

Capital Volume II Now Available

My modern translation of Volume II Marx's Capital is now available.  The book comes with an Introduction covering the role that Volume II plays within Marx's overall project.  As its says,

"Volume II of Marx's Capital is probably the least read of the three volumes. It is less “sexy” than Volume I or Volume III...

Volume II is the engine room of Marx's Capital. Not only does it provide a bridge between Volume I and Volume III, in that it starts from an analysis of the circulation of capital at the level of “many capitals”, and arrives at an analysis of the circulation of the total social capital, via the exchange between Department I and II, but in doing so, it also sets out the dynamic mechanism by which the production of capital at an individual level is transformed into a production and realisation of profit at a systemic level, along with all of the contradictions, and potential breakdowns that such a process necessitates."

It is impossible to understand Marx and Engels' Theories of Crisis without reading and understanding Capital Volume II.  In setting out his Theory of Crises, in Theories of Surplus Value, Chapter 17, Marx sets out the four causes of crisis that arise with commodity production and exchange.  Firstly,  at the heart of the commodity itself is the contradiction between use value and exchange value. Secondly, production and consumption is separated.  Thirdly, money acts as a means of circulation, and unit of account, but also acts as a means of payment. Fourthly, there is the disproportion that arises in the production of fixed as opposed to circulating capital.

But, in Capital II, Marx sets out how these potential causes of crises under all forms of commodity production and exchange, manifest themselves as inevitable crises under specifically capitalist commodity production and exchange. It is impossible to properly understand this without fully understanding the process of the circulation of capital, money and commodities, the metamorphosis of capital from productive-capital to commodity-capital to money-capital, and back to productive-capital that Marx sets out in detail in Volume II.

The modern translation of Volume III of Marx's Capital will appear next year.