Wallace and Dobbs – The Wrong Prophets

“Cracking dialectics Grommit.”

 Wallace and Dobbs write,

“Comrade Bough presents one of the most confused and confusing arguments imaginable. He attempts to argue that, for instance, chapter 9 of Capital, volume 3 - ‘Formation of a general rate of profit (average rate of profit) and transformation of the values of commodities into prices of production’ - refers to a different rate of profit than in chapters 13-15 on the LTRPF.”

In fact, there is nothing confused or confusing about it at all. But, then its not surprising that Wallace and Dobbs find it to be so, because as was shown recently -  Calculating The Rate of Turnover and Annual Rate of Profit they found the fairly simple matter of the rate of turnover of capital, and the annual rate of profit to also be “complicated”, “problematic” and “tricky”. Its not a question of the wrong profits, but of their apparent inability to understand basic Marxist concepts. In fact, I can't even give them full marks for being able to read simple English, because nowhere in the section they are attacking does it say anything about a different definition in Chapter 9 from Chapter 13!

Throughout Capital Volume I and II, Marx focuses on surplus value, and the rate of surplus value, leaving his analysis of profit and the rate of profit until Volume III. There are good reasons for that. Firstly, profit is the phenomenal form of surplus value. In other words, it is the superficial appearance that surplus value takes. Unless you understand surplus value and its source, you cannot understand profit. Similarly, the rate of surplus value has a determinant effect on the rate of profit, so to understand the formation of the rate of profit, its necessary to understand the rate of surplus value. But, secondly, for Marx, it is the rate of surplus value, not the rate of profit that provides an understanding of the real relation between capital and labour, and the extent to which workers are exploited.

The rate of profit, Marx sets out, must always be lower than the rate of surplus value, because the former measures the amount of surplus value against the total capital employed, whereas the latter measures it only against the labour-power that created it. However, Marx sets out that even the rate of surplus value does not give a true picture of the extent to which workers are exploited. In Capital II, in Chapters 7 to 17, he sets out the role of the rate of turnover of capital. Wallace and Dobbs claim that the main chapter dealing with the rate of turnover, Chapter 16, was not written by Marx at all.

“Bough introduces a phoney novelty in the form of turnover time, which, according to him, masks the real rate of profit. He states: “In Capital, volume 2, Marx analyses the effect of the rate of turnover on the annual rate of surplus value. His analysis is extensive, and central to his study of the circulation of capital.” If only this were true. Marx did not write any of it: Engels wrote it in its entirety.”

They are wrong. It is in manuscript 2, of Marx’s material edited by Engels. I don't know if they have ever actually read Volume II, but if they have, they should have seen in the Preface, on page 20 that it states quite clearly “pp 165-350, all from ms. II”. Chapter 16 starts on page 297 and runs through page 348. 

They should also have seen the following Note 32.

“In the manuscript, the following note is here inserted for future amplification: “Contradiction in the capitalist mode of production: the labourers as buyers of commodities are important for the market. But as sellers of their own commodity — labour-power — capitalist society tends to keep them down to the minimum price.

—Further contradiction: the periods in which capitalist production exerts all its forces regularly turn out to be periods of over-production, because production potentials can never be utilised to such an extent that more value may not only be produced but also realised; but the sale of commodities, the realisation of commodity-capital and thus of surplus-value, is limited, not by the consumer requirements of society in general, but by the consumer requirements of a society in which the vast majority are always poor and must always remain poor. However, this pertains to the next part.”

But, then given that Steve Dobbs, in the past, accused me of being a member of the SPGB, and then of holding a state capitalist analysis on the USSR, both of which he had to quickly retract, it seems that basic fact checking is not one of their strong points, along with their apparent inability to comprehend basic Marxist concepts, like the rate of turnover of capital.

Given that Marx spends ten chapters out of the twenty-one in Volume II, dealing with the basis of the rate of turnover of capital, it also seems fairly obvious that unlike Wallace and Dobbs, he did not consider it a “phoney novelty”.

The reason this is important is that what Marx shows is that workers provide the capital that is used for their own exploitation, so the capital actually provided by the capitalist is only a fraction of what it appears to be. That was the basis of the analysis provided in my post above.

In other words, the capitalist advances an amount of variable-capital, say £100, for wages. This covers let's say a five week period, during which the workers work producing commodities. This period, the turnover period, covers the time required to produce these commodities and to sell them, say four weeks to produce them, and one week to sell them. If, the rate of surplus value is 100%, when the commodities are sold, the capitalist will get back, in their price, not only the capital he advanced, but also this £100 of surplus value. But, the workers have also created, in these commodities, the value which reproduces the variable capital required for them to be employed for another five week period.

In other words, although the workers are exploited for 50 weeks of the year, the capitalist has only put up five weeks of capital for their exploitation. The other 45 weeks of variable capital, required for their exploitation, is actually produced by the workers themselves as new value embodied within the commodities they produce, and appropriated by the capitalist, to use to employ them again in the next turnover period. So, the actual rate of surplus value, the real degree of exploitation of the workers, is then not 100%, as the rate of surplus value suggests, but 1,000%, because the capitalist has only ever advanced £100 of capital, but in the year, the workers have produced £1,000 of surplus value! Marx calls this amended rate of surplus value the annual rate of surplus value.

Wallace and Dobbs seem to be like "a certain Biedermann" cited by Engels in Capital III, Chapter 4.  Based on the data from an actual firm in Manchester, where the annual rate of surplus value is calculated at 1307%, Engels comments.

"The s'n in the formula p' = s'n (v/C) stands, as has been said, for the thing called in Book II [English edition: Vol. II, p. 295. — Ed.] the annual rate of surplus-value. In the above case it is 153 11/13% multiplied by 8½ or in exact figures, 1,307 9/18%. Thus, if a certain Biedermann [Biedermann — Philistine. A pun, being also the name of the editor of the Deutsche Allgemeine Zeitung. — Ed.] was shocked by the abnormity of an annual rate of surplus-value of 1,000% used as an illustration in Book II, he will now perhaps be pacified by this annual rate of surplus-value of more than 1,300% taken from the living experience of Manchester."

In Capital III, Chapter 3, Marx turns to the analysis of the rate of profit, and how the rate of surplus value relates to it. A lot of his calculations in this chapter had to be amended by Engels, with the help of Samuel Moore, but the basic concepts are those of Marx himself. Where the rate of surplus value is determined as the amount of surplus value divided by the variable capital, i.e. s/v, the rate of profit is defined as being the whole capital, divided by the surplus value, i.e. s/c+v, the surplus value divided by the sum of the constant capital and variable capital. This is the first definition of the rate of profit used by Marx.

However, given the above analysis of the difference between the rate of surplus value, and the annual rate of surplus value, its quite obvious, that this rate of profit must give a false picture of the real situation, because the total amount of constant and variable capital here laid-out for the year, is not the same as the capital advanced by the capitalist for one turnover period. It would only be correct if the advanced capital turned over just once in the year. Its then clear that this definition must be amended to take account of the annual rate of surplus value. Once again, I don't know if they have ever actually read Volume III, but if they have, they should have seen Engels comment, again in the Preface, where he says,

“But since its subject-matter, the influence of turnover on the rate of profit, is of vital importance, I have written it myself, for which reason the whole chapter has been placed in brackets. It developed in the course of this work that the formula for the rate of profit given in Chapter III required modification to be generally valid.”

So, they should have known that, in Capital III, we already have here two different definitions of the rate of profit, one in Chapter 3 which does not take account of the annual rate of surplus value, and another in Chapter 4, which does! Engels statement above that “the influence of turnover on the rate of profit, is of vital importance”, is also in stark contrast to Wallace and Dobbs claim that it is a mere “phoney novelty”! Just how much an effect changes in the rate of turnover can have is indicated by Engels.

“The recently discovered methods of producing iron and steel, such as the processes of Bessemer, Siemens, Gilchrist-Thomas, etc., cut to a minimum at relatively small costs the formerly arduous processes. The making of alizarin, a red dye-stuff extracted from coal-tar, requires but a few weeks, and this by means of already existing coal-tar dye-producing installations, to yield the same results which formerly required years. It took a year for the madder to mature, and it was customary to let the roots grow a few years more before they were processed...

The time of circulation of a shipment of commodities to East Asia, at least twelve months in 1847 (cf. Buch II, S. 235 [English edition: Karl Marx, Capital, Vol. II, pp. 251-52. — Ed.]), has now been reduced to almost as many weeks. The two large centres of the crises of 1825-57, America and India, have been brought from 70 to 90 per cent nearer to the European industrial countries by this revolution in transport, and have thereby lost a good deal of their explosive nature. The period of turnover of the total world commerce has been reduced to the same extent, and the efficacy of the capital involved in it has been more than doubled or trebled. It goes without saying that this has not been without effect on the rate of profit.”

(Capital III, Chapter 4)

Just in the reduction of the circulation period, Engels states here that “the efficacy of the capital involved in it has been more than doubled or trebled.” In other words, the effect had been to double or treble its annual rate of profit, by means of what according to Wallace and Dobb is merely a “phoney novelty”!

If we move then to Chapter 9, where Marx deals with the historical and logical development of a general rate of profit, the question arises, which of these two rates of profit does he use? Marx gives the answer at the start of the chapter. He writes,

“It is further assumed that the capitals in the different spheres of production annually realise the same quantities of surplus-value proportionate to the magnitude of their variable parts. For the present, therefore, we disregard the difference which may be produced in this respect by variations in the duration of turnovers. This point will be discussed later.”

In other words, he is basically using the original definition of the rate of profit as s/c+v, and ignoring the effect of the rate of turnover. However, there is a difference between this rate of profit and that used in Chapter 3, for the simple reason that although Marx ignores the role of the rate of turnover, he does make clear that this rate of profit, like that in Chapter 4, must be based upon the capital advanced, i.e. for one turnover period, rather than the capital laid out for the year. The difference with Chapter 4 is that he does not specify the length of the turnover period, so it could be that the turnover period is, in fact one year, as well as it could be a month. 

But, Marx in Chapter 9, makes a further modification, which is to deal with the issue of the fixed capital, which Wallace and Dobbs find to be so,“complicated”, “problematic” and “tricky”. Marx, as with Engels in Chapter 4, resolves it quite simply.

“We must, therefore, remember in comparing the values produced by each 100 of the different capitals, that they will differ in accordance with the different composition of c as to its fixed and circulating parts, and that, in turn, the fixed portions of each of the different capitals depreciate slowly or rapidly as the case may be, thus transferring unequal quantities of their value to the product in equal periods of time. But this is immaterial to the rate of profit. No matter whether the 80c give up a value of 80, or 50, or 5, to the annual product, and the annual product consequently = 80c + 20v + 20s = 120, or 50c + 20v + 20s = 90, or 5v + 20v + 20s = 45; in all these cases the redundance of the product's value over its cost-price = 20, and in calculating the rate of profit these 20 are related to the capital of 100 in all of them.” 

In other, words, where Wallace and Dobbs wittered on ignorantly about how the fixed capital made calculation of the rate of profit “complicated”, “problematic” and “tricky”, Marx simply points out that the issue of the fixed capital and its rate of turnover is irrelevant to the calculation of this rate of profit, because although its wear and tear enters the cost price of the commodity – in other words c + v – it does not enter the calculation of the advanced capital. On the contrary, it is the entire value of the fixed capital that must be included in the calculation, because the whole of the fixed capital must be present, and is thereby advanced. So, we now have a third definition of the rate of profit, one which now also defines the role of the fixed capital.

For the entire social capital, the issue of the different rates of turnover in each sphere is resolved, because the general rate is an average of the annual rate of profit in each sphere, and this annual rate, is calculated in accordance with the formula set out by Engels in Chapter 4, which does take account of the rate of turnover in that sphere. 

“Since the general rate of profit is formed by taking the average of the various rates of profit for each 100 of capital invested in a definite period, e.g., a year, it follows that in it the difference brought about by different periods of turnover of different capitals is also effaced. But these differences have a decisive bearing on the different rates of profit in the various spheres of production whose average forms the general rate of profit.”

Once again, what for Wallace and Dobbs is merely a “phoney novelty”, is for Marx something which has “a decisive bearing on the different rates of profit”. 

So, we come to Chapter 13 then, and the rate of profit used there. Which rate of profit is used here? A look at almost all of the discussion in Chapter 13, is framed in terms of the cost price of commodities, k, plus the profit p. But, such a discussion means that the basis of the definition of the rate of profit here, must be one in which the advanced capital turns over once. The cost-price of commodities is given by the capital advanced as constant and variable capital, plus the amount of wear and tear of fixed capital. However, as seen above, in calculating the annual rate of profit, the wear and tear is not included, because it is the total fixed capital advanced whose value is taken as part of the denominator. The rate of profit used in Chapter 13, which is repeatedly given as p/k, the profit divided by the cost-price, can only be the same as the annual rate of profit set out in Chapter 4, if, and only if, the fixed capital turns over just once during the year, and consequently where the figure for wear and tear is equal to the value of fixed capital itself. But, moreover, it can only be the same if the circulating capital turns over once during the year.

In other words, Marx has used the same rate of profit essentially as was used in Chapter 3. The cost price, k, is taken as being c + v, all of which turns over once. But, you don't have to take my word for that, because Marx and Engels themselves make that clear. Marx states,

“However, the rate of profit, if calculated merely on the elements of the price of an individual commodity, would be different from what it actually is. And for the following reason:”

Engels continues the explanation,

“The rate of profit is calculated on the total capital invested, but for a definite time, actually a year. The rate of profit is the ratio of the surplus-value, or profit, produced and realised in a year, to the total capital calculated in per cent. It is, therefore, not necessarily equal to a rate of profit calculated for the period of turnover of the invested capital rather than for a year. It is only if the capital is turned over exactly in one year that the two coincide.

On the other hand, the profit made in the course of a year is merely the sum of profits on commodities produced and sold during that same year. Now, if we calculate the profit on the cost-price of commodities, we obtain a rate of profit = p/k in which p stands for the profit realised during one year, and k for the sum of the cost-prices of commodities produced and sold within the same period. It is evident that this rate of profit p/k will not coincide with the actual rate of profit p/C, mass of profit divided by total capital, unless k = C, that is, unless the capital is turned over in exactly one year.” 

To illustrate this effect, Engels gives three examples where the capital turns over at different rates, thereby showing the difference between the rate of profit as defined in Chapter 13, and the“ actual rate of profit p/C”.  Example III is as follows.

“Let the capital rise to £15,000 owing to a constant growth of the productiveness of labour, and let it annually produce 30,000 pieces of the commodity at a cost-price of 13s. per piece, each piece being sold at a profit of 2s., or at 15s. The annual turnover therefore = 30,000×15s. = £22,500, of which £19,500 is advanced capital and £3,000 profit. The rate of profit p/k then = 2/13 = 3,000/19,500 = 15 5/13%. But p/C = 3,000/15,000 = 20%...

...in case III, in which the total capital is smaller than the amount of the turnover, it is lower than the actual rate calculated on the total capital. This is a general rule.” 

Why is it that the advanced capital, C, is only £15,000 in this case, whereas the total laid-out-capital, k, is £19,500 (Engels makes a slip in referring to this as advanced rather than laid-out capital)? Its because, the circulating capital turns over more than once during the year.  And, why is it that the capital turns over more than once a year in example III, compared to the situation in the previous two examples, where it doesn't?  Its precisely because of what Engels says at the beginning of the example, "a constant growth of the productiveness of labour".  The same reason that leads to the rising organic composition of capital that is behind the fall in the rate of profit! 

The reason this is important, and the reason why Marx and Engels use this definition of rate of profit, as essentially the profit margin, is because it prepares for the use of that measure in Chapter 15, to demonstrate how, even as the annual rate of profit rises, causing increased levels of investment that creates a plethora of capital, that same process causes the profit margin to fall, and thereby makes crises of overproduction more likely. I described that in the above blog post, showing that with a rate of turnover of 120, a car manufacturer, might have an annual rate of profit of 120%, and yet they might have a profit margin per car of only 1%, or £120, so that even a slight change in market conditions might make it impossible to recover the value of the capital used in its production.

The problem is that because our prophets Wallace and Dobbs do not understand that Marx uses these different definitions of the rate of profit, even though Marx and Engels are at pains to describe the fact that they have done so, they are led to use the wrong profits as the basis of their analysis, such as it is. So, when they say,

“The profit margin is only 3.3%! The fact is that most car manufacturers do not have healthy margins.”

They merely emphasise the lack of their own knowledge of the basic difference between these alternative definitions of the rate of profit used by Marx and Engels.

In Chapter 17,  Marx develops yet a further definition of the rate of profit to include merchant capital as well as productive-capital in the total social capital that determines the general annual rate of profit, and from this point Marx also uses this term general annual rate of profit.  In Chapter 18, Marx also deals with the consequences of the turnover of merchant capital in influencing market prices, and its effect back on the amount of total social capital advanced, which in turn affects the general annual rate of profit.

Calculating The Rate Of Turnover and Annual Rate of Profit

In their very poor response to my recent article in the WW, Bruce Wallace and Steve Dobbs write,

“The ‘turnover time’ argument was well known to Marx and is a bit more complicated than Bough thinks. Constant capital may be fixed or circulating. Fixed constant capital (such as plant and machinery) may be turned over once every 10 years (not, as Bough dreams, 10 times a year). Circulating constant capital (such as raw materials) may be turned over every six weeks. Marx saw this as a complication in presenting the law of value and in working out a general rate of profit (without which you cannot begin to discuss the law of the tendential fall in the rate of profit). He dealt with this mainly in Capital, volume 2 (subtitled The process of circulation of capital). This difficulty makes the calculation of the annual rate of profit, which Bough thinks is a crucial problematic concept, a little tricky.”

No one doubts Marx was well aware of the argument over the rate of turnover, given that he developed it! Fortunately, both he and I understand it rather better than Wallace and Dobbs do it appears. Contrary to their claims, there is nothing complicated, problematic or tricky about it, and not only does Marx spend ten chapters out of twenty-one in Capital II, describing the basis of the rate of turnover, and the annual rate of surplus value, (which Wallace and Dobbs describe as "a phoney novelty") but Engels takes that further in Capital III, Chapter 4, and shows how it results in an annual rate of profit (they also wrongly claim that Chapter 16 where the annual rate of surplus value is developed, was written by Engels! It wasn't. Its in manuscript 2 of Marx’s material edited by Engels. Its Chapter 4 of Capital III on the effect on the rate of profit that was written entirely by Engels. God preserve us from experts!). The first problem for Wallace and Dobbs is that they do not even seem to have grasped, despite all the chapters Marx spent on it, that the rate of turnover is a rate of turnover of circulating capital, and so their wittering on about the rate of turnover of the fixed capital is totally irrelevant. Engels gives several examples, in Chapter 4, to demonstrate how the matter of the fact, set out by Marx, that the fixed capital must always be present, is easily dealt with.

The concept of the annual rate of surplus value, and annual rate of profit is straightforward. It is essentially the same concept as that used in relation to the AER (Annual Equivalent Rate) that banks have to display as opposed to the nominal rate of interest. Suppose I borrow £1,000, and the rate of interest is shown as 10% per month (which is the kind of thing the Pay Day Lenders do). The interest for the month is £100, which I pay at the end of the month. But, I roll the loan over every month for the year on the same basis. At the end of the year, the total interest I have paid is £1200, which against the £1000 I borrowed, means the annual rate of interest was not 10%, but 120%.

Now turn it round the other way. I have £1,000 which I want to lend out at 10% for the month, and which I do. At the end of the month I get back my £1,000 plus £100 in interest. Now, I lend this same £1,000 out again for another month etc. At the end of the year I will have received £1200 in interest. The total value of loans I will have made is £12,000, and so the £1200 of interest on this total amount laid-out is 10%. But, in reality, the situation is no different than the first. Although, the total amount of loans I have made is £12,000, it is still the same £1,000 that has simply been advanced 12 times during the year. The actual amount of “capital” I advanced was only £1,000, it just kept coming back to me to be laid out again. So, in reality, my actual annual rate of profit is again, not 10%, but 120%.

The situation is exactly the same when it comes to the annual rate of surplus value, and annual rate of profit. If I advance £1,000 in wages and materials, made up £100 wages and £900 materials, for example, for a month, and at the end of the month I get back £1100 from the commodities I sell. That means I've made £100 surplus value. For the month, I have made 100% rate of surplus value on the £100 of labour-power advanced, and I have made 10% profit, on the total amount, £1,000, of capital I have advanced.

But, just as with the AER interest on the money I borrow or save, the capital I advanced £1,000, has now returned to me, and I can lay it out again to buy materials and labour-power for another month. At the end of the year I have advanced this £1,000 of capital 12 times, so the total laid out capital for the year is £12,000. If you looked at my account books it would show, I'd spent £1200 on wages, and £10,800 on materials. My profits would appear as £1200, and so measured against this laid out capital, my cost of production, my rate of profit appears to be 10%. But, in actual fact, just as with the AER, I have only ever had £1,000 of capital, its just kept coming back to me to be laid out for wages and materials, over and over again. So my annual rate of profit is not 10%, but 120%!

This is the way, Marx and Engels say, that the capitalists hide the real extent to which workers are exploited, and the real extent of the rate of profit being made. For example, suppose, the capital above is a car maker, like Mercedes, and the figures are in tens of millions of pounds. So, its total sales for the year would be 1100 x 12 = £132 billion. Out of this its costs would be £120 billion, and its profit would be £12 billion. If it produces 10 million cars, the price per car is £13,200, and the profit on each car is £1,200. The cost price of each car is £12,000, and so the profit margin is 10%. Again, its because they present the profit margin as the same thing as the rate of profit, that enables the capitalists to pretend that their actual rate of profit is much less than it really is.

And, as Marx and Engels set out, the consequence of this is that the higher the rate of turnover of capital, the higher the annual rate of profit compared with the nominal rate of profit, or the profit margin. But, this is important for capital also, because say the rate of turnover of this example, was 120 times rather than twelve times, as a result of much higher productivity. Then it might be the case that the annual rate of profit was still 120%, but then the nominal rate of profit or profit margin would be only 1%, not 10%. In that case, they would only make £120 profit on each car. Its obvious that although the annual rate of profit, and total amount of profit hasn't changed here, this much smaller profit margin means that any slight change in the market could make the sale of each car unprofitable!

Now what about this supposedly “complicated”, “problematic” and “tricky” issue of the fixed capital? Let's take the example of a builder. The builder has a variety of fixed capital from excavators, down to the individual hammers used by the joiners. Each of these bits of equipment not only have different values, but they have different lifespans. The reason this issue is tricky for those who use an historic pricing method for calculating the rate of profit as opposed to the reproduction cost method used by Marx, is that the former is really a rate of profit based on invested money-capital, whereas Marx makes clear that his rate of profit is based on the current value of the advanced productive-capital, i.e. the physical productive-capital, not some amount of money-capital invested at some point in the past.

If you use the historic cost model, Marx's analysis of the rate of turnover of capital poses you with problems, because it requires an actual current valuation of the actual fixed capital advanced to production, not some previous advance of money-capital, which may or may not relate to the actual capital currently being used in production. For Marx, however, the solution was simple, take the actual physical fixed capital being used for production, and assess its value in monetary terms. As this fixed capital always has to be present for production to take place, it must always be counted in its entirety as part of the advanced capital.

Suppose, the value of all these diggers, hammers etc. is then £1 million, and they lose as an average 10% of this value each year in wear and tear, which is passed on into the value of the houses they build.

The builder builds uniform houses, and always builds 20 houses at a time, which he knows he can sell on average 1 week after they are completed. Each house requires £80,000 of materials for its construction, and £20,000 has to be spent on wages per house. The builder makes £20,000 of surplus value on each house. It takes 4 weeks to build each development of 20 houses. So, the capital turns over every five weeks, in other words, as seen above, at the end of five weeks, the 20 houses are sold, and the materials and labour used in their construction, along with the wear and tear of the fixed capital used in their construction, has been returned to the builder, so that he can once more advance it to buy materials and labour-power to construct the next 20 houses.

The total cost per house is then:

£80,000 Materials,

£20,000 Labour

£20,000 Surplus Value

The total amount of wear and tear on fixed capital for the year is £100,000, but this covers 10 turnovers of capital. In one turnover period, therefore, the wear and tear is £10,000, and as there are 20 houses built in a turnover period, the wear and tear of fixed capital comes to £500 per house.

The total price of a house is then £120,500. The profit on the house is £20,000, so the profit margin per house is 200/1205 x 100 = 16.6%. If we calculated the rate of profit for the year on this basis, there would be 200 houses built. The total laid out for materials would be £80,000 x 200 = £16 million; the total paid out for wages would be £4 million, the total for wear and tear of fixed capital would be £100,000, and the total profits would be £4 million.

So, the total amount of capital laid-out for the year including wear and tear would be £20,100,00. The firm's total revenue would be £24,100, 000 and its total profit would be £4 million, giving again a rate of profit of 16.6%.

However, as Marx says, the actual rate of profit, the annual rate of profit must be based on the actual capital advanced, not the capital laid out. We saw the effect of that above, which is that here the circulating capital (materials plus labour) is turned over 10 times a year, so the actual circulating capital advanced is only that required for one turnover period – 5 weeks.

That means £1.6 million for materials, plus £400,000 for wages. The wear and tear, however, do not form part of the advanced circulating capital. This is not capital actually advanced, because its the total value of the fixed capital that is advanced. That has to be the case, because as Marx says, the production could not have occurred without all of the fixed capital being present. Rather the value of the fixed capital advanced is then the whole £1 million. We can then calculate the annual rate of profit on the same basis as was done above. That is to take the profit for the year, and measure it against this advanced capital value.

That is £4 million profit and £1 million fixed capital, £1.6 million materials, £400,000 for wages = £3 million. The annual rate of profit is then 4/3 = 133.33%, which contrasts rather sharply with the profit margin of 10%!

The effect then can be seen of a rise in productivity. Suppose, the 20 houses are built in 2 weeks instead of 4. In that case, the turnover period is three weeks instead of five. But, although the same amount of materials will be required to build these houses, the amount paid out in wages will now be 60%, of the previous figure, because only 3 weeks of wages are paid out for the turnover period.

The advanced capital is then £1 million for fixed capital, £1.6 million for materials, £240,000 wages. With the same rate of surplus value of 100%, that means that only £240,000 of surplus value is produced in this turnover period, but by the same token instead of the capital turning over 50/5 = 10 times, it now turns over 50/3 = 16.66 times. The annual profit is then £240,000 x 16.66 = £3,998,400. So, the annual rate of profit becomes 137.88%.

So, it seems the “complicated”, “problematic” and “tricky” issue is not a problem for a “bungling amateur” who understands Marx, to resolve, even if it is for two “experts” who do not.

Just to emphasise that point, and so there is no thought that I have just made up this methodology, let me give one of the examples used by Engels in Chapter 4 to prove that I have used exactly the same method as he and Marx.

“Take capital I, consisting of 10,000 fixed capital whose annual depreciation is 10% = 1,000, of 500 circulating constant and 500 variable capital. Let the variable capital turn over ten times per year at a 100% rate of surplus-value. For the sake of simplicity we assume in all the following examples that the circulating constant capital is turned over in the same time as the variable, which is generally the case in practice. Then the product of one such period of turnover will be:

100c (depreciation) + 500c + 500v + 500s = 1,600

and the product of one entire year, with ten such turnovers, will be

1,000c (depreciation) + 5,000c + 5,000v + 5,000s = 16,000,

C = 11,000, s = 5,000, p' = 5,000/11,000 = 45 5/11 %.”

Note that there is no problem here for Engels in dealing with the fixed capital, which is determined to have an average turnover period of ten years – hence its annual wear and tear of 10%. Note too, that the turnover period is determined only by the turnover time of the variable capital, because as Engels correctly states, the turnover time of the materials is determined by the labour that processes it.

The product of one year is £16,000, and the cost of this production is £11,000 (1,000 wear and tear, 5,000 materials, 5,000 labour). The annual rate of profit here amounts to the same figure, only because the advanced capital total is also £11,000, but comprises £10,000 fixed capital, £500 material and £500 labour. But, Engels goes on,

“But should capital I have only 5 instead of 10 turnovers of its variable part per year, the result would be different. The product of one turnover would then be:

200c (depreciation) + 500c + 500v + 500s = 1,700.

And the annual product:

1,000c (depreciation) + 2,500c + 2,500v + 2,500s = 8,500,

C = 11,000, s = 2,500; p' = 2,500/11,000 = 22 8/11%.

The quantity of surplus-value appropriated in one year is therefore equal to the quantity of surplus-value appropriated in one turnover of the variable capital multiplied by the number of such turnovers per year. Suppose we call the surplus-value, or profit, appropriated in one year S, the surplus-value appropriated in one period of turnover s, the number of turnovers of the variable capital in one year n, then S = sn, and the annual rate of surplus-value S' = s'n, as already demonstrated in Book II, Chapter XVI, I.”

Note that here, the laid-out capital for the year is £6,000, (1,000 wear and tear, 2,500 materials, £2500 labour) whereas the advanced capital is still £11,000, that is £10,000 fixed capital, 500 materials, 500 labour.

Capital II, Chapter 17 - Part 12

It might be thought that if only an amount of gold is imported that is equivalent to goods exported, here linen, this will not be enough to provide all the money required to circulate the mass of commodities within the economy, let alone to pay for imports of commodities from other countries. However, two things have to be born in mind here. Firstly, the amount of gold required for circulation is only a fraction of the total value of commodities because of the velocity of circulation. Secondly, the gold once put into circulation, remains there from year to year, only minus the wear and tear. The only gold needed to be imported then is that to replace the gold worn out.

“According to our assumption the annual production of gold, £500, just covers the annual wear of money. If we keep in mind only these £500 and ignore that portion of the annually produced mass of commodities which is circulated by means of previously accumulated money, the surplus-value produced in commodity-form will find in the circulation process money for its conversion into money for the simple reason that on the other side surplus-value is annually produced in the form of gold. The same applies to the other parts of the gold product of £500 which replace the advanced money-capital.” (p 342)

Here we can treat this as if all the money required had to be produced each year. This gold is produced by workers, who provide all of the money spent by capitalists, either to replace constant capital, to cover wages, or the capitalists' expenditure of surplus value. But, this gold also reproduces the constant capital, and the variable capital, as well as providing the surplus value of the gold producer.

In the first instance, the advance of capital was made by the gold producer to buy constant and variable capital, but, once the gold has been produced, and sold, the return of this value amounts to the workers producing or maintaining the means by which production continues.

“The advance on the part of the capitalist appears here, too, merely as a form which owes its existence to the fact that the labourer is neither the owner of his own means of production nor able to command, during production, the means of subsistence produced by other labourers.” (p 342)

Changes in the rate of turnover mean that the amount of money-capital required varies, and so there has to be some elasticity in the money supply. This is achieved through fluctuations in the amount of money in circulation, and that held in hoards and reserves. But, as demonstrated above, changes in the rate of surplus value i.e. changes in the division of the total social labour between wages and surplus value, has no effect on the amount of money required.

Suppose we have an economy where we have only a division between wages and surplus value i.e. we discount constant capital. The total value of output is £5,000 divided £2,000 to wages, and £3,000 to surplus value. Wages rise to £4,000. But, by the same token surplus value falls to £1,000. The total amount of value has not changed, no more nor less labour-time has been expended.

Consequently, the amount of money required remains the same. True, the capitalist now needs to lay out £4,000 of money-capital compared to £2,000 previously, but now, only £1,000 of money is required to realise the surplus value, to be spent by the capitalist, rather than the £3,000 required previously. This is why as Marx, Ricardo and Smith (in some of his writings) recognised, it is not wages that determines prices, or wage rises that cause inflation.

Back To Part 11

After Obama, What Next? - Part 4

Marx points out that all of the fictitious capital, such as that referred to in Part 3, adds not one iota of real value to the economy, and nothing to a country's wealth. In fact, its destruction is generally beneficial for real capital, and productive development. In 2008, the best thing that could have happened would have been to allow all of this fictitious capital to have been simply destroyed. Rational levels of share and property markets are probably around 10-20% of current levels, requiring prices to fall by around 80-90%. That is around the level they fell in Japan, around the level that the NASDAQ fell in 2000, and slightly more than the 60% falls in property markets in the US, Ireland and Spain after 2008. That would mean that land prices would fall to more reasonable levels, facilitating greater levels of demand and supply of houses, as I pointed out recently - Building More Houses Will Not Cure Britain's Housing Crisis . It would also mean that workers pension fund contributions would buy more shares at these lower prices, giving them a bigger share of the total share capital, and as lower share prices means higher yields, just as lower bond prices would also mean higher yields, so the income from these funds would be more able to meet future pension payments for workers.

But, that would also have meant most banks going bust. It would mean many shareholders losing most of the fictitious wealth they held in the form of these shares, and although this wealth is fictitious, it is very real for the individual, provided they can find some bigger fool to buy it from them at a higher price. As a result, it would have required that the state ensured that there was sufficient liquidity to enable commodity circulation continued, so that the minimum disruption to the real economy occurred. As I've suggested in the past - Sham Rocked – if the banks went bust, socialists would argue for them to be occupied by their workers, and transformed into co-ops, with depositors funds guaranteed by the state, and all of them merged into one worker-owned and controlled co-op bank. Incidentally, the demand I raised at that time, that the trades unions demand an opening of the books of the co-op bank and other mutuals, proved extremely prescient given the subsequent events at the Co-op Bank!

But, its precisely for this reason that neither the capitalist state nor conservative and social democratic governments would adopt this approach in the major economies. The nexus of political power, of financial capital, running into the state, political parties, and the media, as partly uncovered by Leveson, (and the same connections exist in the US), meant that it was always going to be the case that the banks were bailed out, and although a few bankers may lose their honours, they would keep their multi-million pound bonuses, pay-offs, and pensions, whilst the cost of their bail-outs was passed on to the workers. Sraid Marx On Anglo-Irish Bank Tapes

But, equally inevitable was it then that this would provide the ammunition for conservative forces to denounce state intervention to deal with the consequences of their own high debt policies of the last 30 years. In fact, the real problem of high levels of private sector debt, run up as a result of those policies, was largely swept under the carpet, or blamed on central bank intervention, in order to focus entirely on public sector debt, much of which had been run up, as the Sraid Marx post illustrates, to deal with the consequences of the financial crash!

The fact that the bail-out of the banks was undertaken mostly under Bush, was then quickly forgotten, as the Tea Party focussed its attention on Obama. The populist nature of the Tea Party and its appeal to the most ignorant and backward sections of US society, ensured that this opposition would draw in all sorts of lunatic elements, and grounds for opposition. So, the opposition to Obama had significant elements of racism to it, it drew in the conspiracy theorists, who claimed he was a Muslim (as though that should make any difference anyway) that he had not been born in the US (again as though that should make any difference anyway) and so on.

The fact that some of those who put forward this nonsense include very rich people like Donald Trump, and that the Tea Party is funded by people like the Koch brothers, does not invalidate the analysis of its class outlook and general composition, any more than the fact that members of the bourgeoisie like Marx and Engels committed themselves to the working class invalidates their class analysis.

Back To Part 3

Northern Soul Classics - That Beatin' Rhythm - Richard Temple

Getting ready for that beatin' rhythm myself.  Just a week to the Stoke nighter.  All time dancer from Richard Temple, vocal version of Jimmy Conwell's "Cigarette Ashes".

Marx and Engels' Theories of Crisis - Part 111

Conclusion (9)

The final cause of crises is a disproportion between Department I and II. In periods of rapid growth and high profits, capital is motivated to accumulate, in order to expand their market share and increase the mass of profit. Department I capitalists, in anticipation of additional demand for materials, machines etc. reduce their own consumption and increase their investment in production. Department II capitalists reduce their consumption in order to buy more of these Department I commodities, so as to expand their own production in anticipation of rising demand for consumer goods.

But, the obvious contradiction here is that the production and accumulation of Department I goods is only required as a means of increasing the production of consumer goods. But, the increased production of consumer goods is only justified to meet increased demand for such goods. Yet, the reduction of consumption by Department I and II capitalists, in favour of increased investment, means that demand for consumption goods is reduced, even if only relatively, just as the supply of such goods is being increased.

In other words, the potential is being created for a disproportion between Department I and II. Reduced demand for consumption goods means that market prices must fall to absorb the overproduction of commodities, which in turn means, at a certain point, that the capital used in their production had been over-accumulated, and hence over produced.

As Marx outlines such crises arise during the boom periods as a result of over-exuberance, based on high profits. In fact, the crisis of overproduction, which tends to be more acute during such periods, should be distinguished from the periods of stagnation, where the malaise arises not from such over-production and accumulation, but the reverse, low levels of accumulation leading to slow growth and an inability therefore, to absorb the growth of the workforce.

In other words, the crises of overproduction which recurred during the boom period of the 1840's to 1865, should be distinguished from the period of stagnation that comprised the first Great Depression that ran for around twenty years until the early 1890's. Similarly, the crises of overproduction that occurred during the period of the post-war boom have to be distinguished from the condition of stagnation that arises in the 1970's and 80's.

The crisis of overproduction typical of periods of boom is a consequence of the exuberance caused by high rates and volumes of profit typical of the boom. It leads to over-accumulation of capital, which results in a disproportion between Departments I and II, and over-trading, which results in an overproduction of commodity-capital. This pushes up the market price of inputs – both materials and labour-power. The rise in wages directly squeezes the production of surplus value. The rise in material prices indirectly squeezes surplus value, as the higher prices cannot be passed on into final product prices, as Marx describes in Capital III, Chapter 6. As increased masses of use values are flung on to the market, they meet the limits of that market. Market prices fall below costs of production and the capital employed in that production cannot be reproduced. The existence of credit, which allows production to continue on an extended scale, during the circulation period, of these commodities, means that the overproduction can continue way beyond the point at which the actual overproduction existed.

For example, as stated earlier, if the working period for linen bound for India is four weeks, but its circulation period is thirty-two weeks, then if the output of the first working period was itself over produced, the capital advanced to production for the subsequent eight working periods is also over produced, yet this cannot be known until week thirty-six, when the initial overproduction comes to light. It is not credit which has caused the overproduction, it has simply allowed it to continue for longer. Its for this reason that Engels says in Capital III that one factor reducing such overproduction was the speeding up of the circulation time by the improvement in shipping times to the US and India, due to the introduction of steam ships. In other words, the overproduction comes to light sooner, and can be curtailed sooner.

Back To Part 110

Espirito Santo

Portugal's biggest bank appears to be bust – Espirito Santo misses payments. Its not alone. Pretty much all of the world's banks are insolvent. They are dead men walking, zombies that still walk the earth only because they are being given the appearance of life by massively inflated balance sheets, pumped up on a bubble of fictitious capital, and kept inflated by sequential injections of central bank liquidity. That is the real reason for all of the QE and other measures. Its not to stimulate the economy – it would have long since failed had that been the objective – but only to keep the banks going for a while longer while they try to shift the burden on to the state, private individuals, and simply to come up with a solution that does not involve all these banks openly going into bankruptcy.

Espirito Santo, may not seem important. It is Portugal's biggest bank, but Portugal is only a small country. However, Espirito Santo is part of a group based in Luxembourg. Luxembourg too is only a small country, but its exposure to international banks is considerable. It is far greater, for example, than that of Cyprus, whose banks were the last set to go into default. As I wrote at the time – After Cyprus, Who's Next?.

For the last two years, following Mario Draghi's promise to do “whatever it takes” to save EU banks, and sovereign bonds, the yields on those bonds have been falling, as they were seen to have the same kind of central bank backing that the US Federal reserve has given to US bonds. When the US started tapering, it hit emerging market economies, whose currencies began to fall, causing their potential inflation rates to rise, and pushing their interest rates higher. The wash back from that was that money flowed out of their bond markets and into the US, UK, and even peripheral Europe. I pointed out at the time, that this was merely the first round of “volley firing”. At some point, these emerging market currencies would fall, and their interest rates rise to such a level, that they became attractive once more to hot money. Then the attention would fall back on the European periphery. This could be the start of it. Today, as global markets shuddered after the Portuguese news, emerging markets were less badly affected.

 Last year – I pointed out that despite the crash in property prices in the US, Ireland and Spain after 2008, we still have massively inflated property and other asset prices. That is necessary to keep the fictional capital of the banks as a mirage to prevent a global financial crash. As pointed out in those posts,  Moneyweek had set out that Deutsche Bank in Germany had €55 trillion exposure to derivatives, whose purpose it seems it to keep its debt exposure off the balance sheet. For comparison Germany's GDP is just €3 trillion, whereas €55 trillion is equal to the entire global GDP!

According to Espirito Santo, it needs to raise an additional $1 billion in capital, but other banks have estimated that it requires more like $4 billion. That would wipe out its capital buffer, and its hard to see how it would cover this capital apart from a further state bail-out. It has little chance of issuing bonds that any sensible investor would buy, and if it tried to convert its debt to equity, the price of the shares, which have already collapsed, would simply sink to nothing. In fact, its already had an effect in the market, in Spain a so called Co-co, or contingent convertible offering was pulled in the light of the market turbulence.

We should oppose any further state bail-out of these banks. Even if it would work, it would only defer the real solution, which is a massive devaluation of all of the fictitious capital that underpins them. As I wrote recently, the UK property market needs to fall by around 80% to get down to fair value, even after the falls in property in the US, Spain and Ireland, property there is still over valued, especially after price rises in the US and Ireland over the last year or so. Stock markets are similarly over valued. These are bubbles that were originally blow up in the 1980's, and 90's, and that is a measure of how far these asset prices need to fall. In Japan, when its asset price bubble burst in the late 90's, prices fell back to 1983 levels.

As Marx demonstrates, none of this fictitious capital adds any value, or any wealth to the economy. In fact, it does the opposite. It makes property unaffordable, and pushes up the value of labour-power, it pushes up the cost of decent pensions, pushing up the value of labour-power further, and speculation and swindling for fast capital gains, diverts money-capital that could otherwise be used for productive investment. We should simply let the banks and finance houses go bust, and allow the massive bubbles in the property, stock and bond markets to burst.

The state should guarantee the savings of depositors, and should provide whatever liquidity is required to keep the economy itself functioning, and should promise to do so ahead of any such crash, so as to prevent a credit crunch as happened in 2008. When the banks and finance houses have gone bust, and become essentially worthless, their workers should take them over, and begin to run them as a worker owned and controlled co-operative, so that this kind of casino capitalism can be consigned to history.