(OPE-L) [Bendien on] Karl Marx on realization and valorisation

From: glevy@PRATT.EDU
Date: Sun Mar 07 2004 - 08:22:15 EST


-------- Original Message --------
Subject: Karl Marx on realization and valorisation
From: "Jurriaan Bendien" <bendien@tomaatnet.nl>
Date: Sat, March 6, 2004 8:34 pm
To: <pollin@counterpunch.org>

Dear Prof. Pollin,

In your reminiscence of the late Paul Sweezy in the magazine
"Counterpunch", you wrote:

"At the time, the first English translation of the Grundrisse had just
been published. Paul was extremely upset about the way it had turned
out, and mentioned it to us repeatedly. As I recall, it all hinged on a
mistranslation of the word from German, "Realization" I really don't
remember the problem exactly, but on reflection it all definitely had to
do with Paul's focus on the issue of underconsumption, or "realization
failure" in understanding Marx's theory of economic crisis."

Marx's German term "Kapital-verwertung" referred to the "valorisation of
capital", and not to the "realisation of capital". The specialist term
"valorisation" in Marx's text refers to the production of output,
"realisation" refers to circulation (distribution through exchange) of
output. In other words, Kapitalverwertung refers to the
value-augmentation process whereby capital increases in value within the
production process, such that the total price of output sold, turns out
to have been greater than the total price of inputs bought, creating
both net new income, and net new capital which can be reinvested. In
Marx's theory, this production value, as distinct from prices realised,
is not established by individual enterprises, but by all enterprises
taken together.

Specifically, for Marx, capitalist production combined a labor process
creating use-values (either tangible products or specific labor
services) with a valorisation process which creates a net additional
value beyond the value of the capital consumed, i.e. the surplus-value,
or Mehrwert. This is described in his book Capital Vol. 1.

However, Marx recognises in his value theory that this newly created
value must be realised first, through the actual sale of output, before
the owner of the enterprise can appropriate it, and thus realise the
increment as profit, as extra money in his account. A new output may be
produced, but this does not automatically mean that it is sold, there is
obviously an expectation of sale, but the "value" of that output is only
potential or theoretical. It cannot be known with complete certainty in
advance, what will be the aggregate effect of all competing enterprises
and the changes in monetarily effective demand for output on the market
prices actually obtained for output by individual enterprises.

Paul Sweezy then pointed out that this created the possibility of a
"realisation crisis", and thus an overproduction of goods for sale,
which is perfectly true. Corporations, he noted, therefore responded to
this with, among others:

(1) an attempt to develop new markets (including marketing activities);

(2) an attempt to monopolise markets with government assistance, both at
the supply side and the demand side;

(3) underutilising installed production capacity if market demand sags
(excess capacity);

(4) creative accounting;

(5) extending greater financial control over both suppliers and buyers
of products through e.g. greater control over product chains.

(6) flexibly adjusting credit facilities and the division of distributed
and undistributed profits.

Sweezy noted all this activity occupied an increasing portion of the
workforce, which is true, since e.g. in the USA nowadays around
one-sixth of the total workforce is directly employed in sales and
marketing work, credit intermediation and various other financial
occupations.

Contrary to what "post-Marxist" economists argued, Marx's distinction
between "value and price" is in truth a basic business reality, even
just because it cannot be known with absolute certainty in advance how
exactly the new output value produced will be actually priced by the
market. This is a difference between a theoretical (potential or
anticipated) price, and a real price obtained in actual sales. In
reality, businesspeople work all the time with imputed or estimated
values, which perhaps have nothing much to do with any real prices,
although obviously they hope they can predict real prices accurately. So
even if post-Marxist economists deny the relevance of value theory,
business people use it all the time. Price aggregates implicitly assume
a value theory; Marx only makes it explicit.

This distinction between value and price is not an especially original
insight by Marx, but Marx's original argument is that, as far as real
production is concerned, this economic "value" which is established
prior to sale is determined by relative quantities of work-time
necessary to produce the output, in other words, the actual quantity of
labor hours worked establishes the total new value which can be
distributed, sets limits to relative prices and price levels, and
governs the way prices will move in the longer term. Business people
know this very well, and hence they focus on GDP, because GDP refers to
new net incomes generated by production, the new value added (GDP does
not of course refer to total net income receipts of the population). If
the growth of capital did not ultimately depend on the growth of
production, if it was just a matter of trading activity only, then GDP
would be an irrelevant measure.

Marx argues that a given quantity of work-time is performed in real
production, and this is equal to the value of total new output, but how
this value would then exactly be expressed and distributed by the market
as money-income from sales, is a separate question. Nevertheless Marx
argues there is a systemic relationship between production values of
output and realised market prices, such that, whatever monetary, credit
or demand conditions may be, the actual pattern of relative market
prices paid for the output of real production must ultimately always
follow the actual distribution of quantities of work-time performed
within a given framework of private ownership relations. At best,
monetary and credit manipulations can only mask or delay this process
for some finite time.

Many English translations of Marx's Capital translated the German
Kapitalvertwertung as "the self-expansion of capital" and Martin
Nicolaus translated this word in his version of Marx's Grundrisse
(Penguin edition) as "the realisation of capital". But this could
mislead the reader of Marx's text, because:

(1) For Marx, a capital asset never "expands itself" in value
automatically without using real, living workers who both conserve its
value, and increase it; to talk about capital's "self-expansion"
mystifies the capital-relation through which capital employs, and has
command over, workers and their work effort;

(2) Unless you believe Say's Law is true, capital does not automatically
"realise" itself through market sales; given market uncertainty, there
are no such guarantees. All there is, is the expectation that with the
help of credit facilities, a stable currency, sufficient effective
demand, and relevant market expectations, the output will be sold at the
anticipated price.

(3) The capitalist market does not expand automatically by itself
either, because this expansion depends on a distribution of buying power
in a pattern which permits that expansion to occur, and this isn't
automatic either, but dependent on the bargaining strength and the
quantity of specific groups and classes of buyers and sellers active in
the market.

(4) for Marx, a given quantity of value is conserved and produced by a
given quantity of work-time by the direct producers, and this value
itself cannot change in magnitude through the distribution of value, in
numerous transactions, to recipients of products and incomes; a capital
value may also be valorised in production (i.e. increased or augmented
in value), but that expanded value may not be realised, or not fully
realised, because some or all of the output cannot be sold, or cannot be
sold at the required price.

(5) The realisation of output values through market sales and the
resultant appropriation of net income mystifies the valorisation process
which has preceded it, because the growth of capital seems to be created
by market conditions rather than by unpaid human work effort
(surplus-labor). If profit is simply market sales less input costs, all
inputs seem to contribute equally to the profit realised.

A similar problem arises in the translation of Marx's concept of
"Kapital-entwertung", that is, the process of the devalorisation of
capital, whereby the existing stock of capital assets loses part of its
value. This is often translated as "devaluation" (of capital),
suggesting either a monetary devaluation or a fall in the value of
equity shares, but that is only one possible source of devaluation of
capital assets. For Marx, the represented only the external, observable
expression of the real process (physical capital assets could of course
also lose value, for example, simply  not being maintained by workers,
or because they are not being actively used).

What Marx really refers to with the "devalorisation process" in the
economic sense, is an overall adjustment of the market, whereby the
previously existing pattern of input and output prices changes, as a
result of the aggregate effects of increased labor productivity. Marx's
argument specifically is that:

(1) the higher the productivity of human work, the lower the unit
labor-cost of outputs and consequently the lower the real value of those
outputs.

(2) ultimately, prices must follow and reflect this basic decline in
value, even if financial claims to output are, for some considerable
time, redistributed in such a way that the decline in real value is
masked or staved off.

(3) because of competition between private enterprises and countries,
this market adjustment cannot occur without interruptions, in a way
which permits continual steady economic growth, but rather, it occurs
through constant economic fluctuations, disturbances and recurrent
economic crises. Say's Law that supply creates its own demand is
therefore mistaken, because there exists no institutional guarantee
which insures the market will always necessarily clear. That would
require a level of coordination of production and consumption which
doesn't exist in a private enterprise economy. Even if Says Law was
true, this does not mean that supply sells at a price yielding an
adequate profit.

(4) The occurrence of an economic crisis is merely the most acute
expression of the devalorisation of capital, meaning market prices are
drastically realigned with real underlying production values.

This has led to a convoluted controversy among Marxian economists about
how economic crises could then be explained, which is not always easy to
understand.

The Marxist Paul Mattick, for example, argued in his book "Krisen und
Krisen Theorien" (Frankfurt, 1974) that "The accumulation of capital
thus does not depend upon the realization of surplus-value, but the
realisation of surplus-value depends on the accumulation  of capital"
(p. 111). Implicitly, therefore, Mattick accepts Say's Law that supply
will find its own demand here. But a few pages lateron, he argues "When
[total] surplus-value is not sufficient to continue the accumulation
process in a profitable way, it can also not be realised through
accumulation; it becomes unrealised
surplus-value, or over-production." (p. 115).

So then first Mattick is arguing that not enough surplus-value is
produced to augment the value of all the previously accumulated capital
assets. Then subsequently he argues there is enough additional
surplus-value realised, but that additional surplus-value is not
re-invested, because a competitive rate of profit can no longer be
realised on the additional capital. This ambiguity really implies:

(1) a misunderstanding of markets, since falling market prices for
output which reduce profitability to an unsustainable low level under
competitive conditions, reflect both overproduction of output and
over-investment in productive capital assets used to make that output.

(2) a conflation of the valorisation process and the realisation
process, between which both Marx and Sweezy distinguish, and a
conflation of the increase in the total capital stock and the
re-investment of realised surplus-value.

(3) a failure to understand that in an economic downturn, overproduction
of output and overaccumulation of productive capital assets co-exist;
commodity capital (output) and production capital (productive assets)
are merely two different forms of capital, thus overproduction and
overaccumulation entail each other.

(4) ignoring that accumulation of capital may continue through (1) trade
in already existing productive and unproductive assets, or trade in
claims to future output and future assets, assisted by credit
facilities, (2) trade which displaces the burden of stagnating domestic
demand to other countries with less bargaining power in the market.

In truth, Marx's basic argument in value theory is just that the rising
productivity of human work must cause the rate of profit in real
production to decline over time, irrespective of what the precise demand
conditions might be, ultimately creating a situation of "excess capital"
which can no longer be reinvested at the previously ruling rate of
profit. That is, ultimately rising labor productivity sets a limit to
the total volume of surplus-values which can be distributed as net
income.

But this obviously does not mean:

(1) that crisis phenomena must always repeat themselves in the same
specific sequence;

(2) that fluctuations in final demand cannot influence the volume of
profit realised - because it does; falling unit labor costs ultimately
imply a reduction of employment requirements, hence also a reduction of
buying power by wage & salary earners, creating the necessity for the
extension of more and more credit.

(3) that falling domestic demand could not be offset by international
transactions based on a favourable bargaining position in international
trade.

In this sense, I think Sweezy was undoubtedly correct; if today the
total US debt (public + private) is approximately four times the size of
US GDP, this signifies a realisation crisis; the real longterm economic
problem then is how profitability and final demand could be raised at
the same time. But corporations normally have little control over their
fixed costs; the only thing they have much control over is their
labor-costs. However, each reduction of labor-costs aiming to increase
profitability implies a new reduction of total employment and monetarily
effective demand.

Following Marx's argument, the trend towards the internationalisation of
production processes and "outsourcing" therefore really occurs in
function of the law of value operating in the capitalist system, and not
in spite of it; it is an attempt to reduce costs, increase sales and
increase profits by means of buying and selling at more competitive
prices somewhere else, based on a superior bargaining position, defended
militarily if need be. But ultimately this superior bargaining position
and the proliferation of financial claims are itself sustained by a
relative productivity advantage, which is however eventually undermined
by internationalisation and outsourcing.

Jurriaan Bendien

Amsterdam


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