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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