This is a response to Andrew's (3476). I apologize for the length of the
post, but it seemed necessary to address the important question of whether
or not Marx assumed that the stock of constant capital, the denominator in
the rate of profit, is valued at historical costs.
I argued in (3460) that there is an inconsistency in Andrew's interpretation
of constant capital: the FLOW of constant capital is measured in current
costs (and therefore is revalued as a result of technological change), but
the STOCK of constant capital is measured in historical costs (and therefore
is not revalued as a result of technological change).
I argued that there is no textual evidenced to support this dual
interpretation of the determination of the stock and the flow of constant
capital, and that there is considerable to support the contrary
interpretation: that the flow of constant capital is derived from the stock
of constant capital, and that therefore both the flow and the stock of
constant capital are valued in the same way, and specifically that both are
valued in current costs (so that both are revalued as a result of
technological change).
Andrew acknowledged in (3476) that there is no explicit discussion by Marx
of different methods of valuation of the stock and the flow of constant
capital. However, Andrew argues that there is indirect evidence to support
his interpretation. Andrew's indirect evidence will be examined below. In
addition, Andrew criticizes the textual evidence I have presented to support
the contrary interpretation, which I will discuss first.
One of the main passages that I have presented is from Chapter 8 of Volume 1
("Constant capital and variable capital") and an early draft of this chapter
in the 1861-63 manuscript. In my view, these key passages clearly say that
technological change will reduce BOTH the stock and the flow of the existing
constant capital.
Andrew has replied that I am confusing the value of the means of production
and the stock of constant capital, i.e. that what these passages say is that
technological change will reduce the total value of the machinery, etc.; but
they do not say that technological change will reduce the value of the
constant capital.
However, it should be recalled that these passages are in a chapter entitled
"Constant capital and variable capital." The main point of the chapter is
to define the concepts of constant capital and variable capital and to
derive the distinction between them. The passage that I have quoted comes
two paragraphs after Marx's definition of constant capital ("that part of
capital that is turned into means of production"). The paragraph begins:
The definition of constant capital given above by no means excludes the
possibility of a change of value in its elements.
In other words, the term "constant" does not mean that the magnitude of
constant capital cannot change. Marx then went on to discuss how
technological change reduces both the value transferred from the means of
production (the flow of constant capital) and the total value of the
existing means of production (the stock of constant capital). Andrew agrees
that technological change reduces the flow of constant capital, but argues
that it does not reduce the stock of constant capital. He argues that
technological change reduces another stock variable - the total value of the
means of production - and that this stock variable is not the same as the
stock of constant capital. The stock of constant capital, according to
Andrew, cannot change. But this directly contradicts the general meaning of
these paragraphs as indicated by the first sentence quoted above - that the
term "constant" does not mean that constant capital cannot change in
magnitude. Andrew suggests that this sentence applies only to the flow of
constant capital, but not to the stock of constant capital. But then, why
didn't Marx say this explicitly, especially since the purpose of the chapter
was to define the concepts of constant capital and variable capital. Why
didn't Marx say something like: "This change in the value of the means of
production does not mean a change in the stock of constant capital." But
then Marx would have had to add: "In contrast to the flow of constant
capital, the stock of constant capital cannot change as a result of
technological change." It seems to me that what Marx was saying in these
paragraphs, given the general purpose of this chapter and the specific topic
of these paragraphs, is that technological change changes both the stock and
the flow of constant capital.
Even clearer passages that support my interpretation are from Chapter 6 of
Volume 3 of Capital. The title of Section 1 of Chapter 6 is: "Fluctuations
in the Price of Raw Materials; their Effect on the Rate of Profit". A
change in the price of raw materials affects the rate of profit because it
affects the magnitude of the stock of constant capital, the denominator in
the rate of profit. If a change in the price of raw materials did not
affect the stock of constant capital, then it would not affect the rate of
profit, because this change does not affect the amount of profit, the
numerator in the rate of profit. Marx states this point explicitly in the
opening pages of Chapter 6:
Since the rate of profit is s/C or s/(c+v), it is clear that everything
that gives rise to a change in the magnitude of c, and therefore of C,
also brings about a change in the rate of profit ... If the price of raw
materials falls by a sum we shall call d, then s/C or s/(c+v) is changed
to s/(C-d) or s/((c-d)+v).
Section 2 of Chapter 6 is entitled "Revaluation and Devaluation of Capital:
Release and Tying-up of Capital". This section is about the "revaluation
and devaluation" of the existing capital and the effect of these changes on
the rate of profit. In opening paragraphs of this section, Marx defined the
"revaluation and devaluation" of the existing capital as follows:
We simply mean that the CAPITAL PRESENT INCREASES OR DECREASES IN VALUE as
the result of certain general economic conditions (since what is involved
here is not the particular fate of one single private capital); i.e. that
THE VALUE OF THE CAPITAL ADVANCED TO PRODUCTION RISES OR FALLS
independently of its valorization by the surplus labor it employs.
(C.III., p. 206; emphases added)
The emphasized phrases explicitly state my interpretation.
A few paragraphs later, Marx stated explicitly that this revaluation of the
existing capital applies to both the existing fixed and the existing
circulating capital.
The revaluation or devaluation of capital value may affect either constant
or variable capital or both, and in the case of constant capital, it can
relate either to the FIXED or the constant portion or both.
(emphasis added)
The word "constant" in the last line would seem to be a mistake, that should
read "circulating" (this is clear from the surrounding paragraphs, where
constant capital is divided into fixed and circulating components). But the
main point is that here Marx explicitly says here that THE FIXED CAPITAL IS
DEVALUED, i.e. that the stock of constant capital is devalued.
Marx continued in the next two paragraphs:
In the case of constant capital we have to consider both raw materials ...
and also machinery and other fixed capital.
Previously we considered variation in the price or value of the raw
material, with particular respect to the influence of this on the rate of
profit, and put forward the general law that, with other things being
equal, the rate of profit varies inversely with the value of the raw
material.
As noted above, a change in the price of raw materials can affect the rate
of profit only if it changes the stock of constant capital.
Marx continued that this law is not only true for newly invested capital,
but also true for capital that has already been invested. Then he said:
Let us firstly leave all fixed capital out of account for the sake of
simplification and simply consider the part of the constant capital that
consists of raw and ancillary materials ...
The important point here is that fixed capital is initially left out of
account (it is later considered briefly, as we shall see below) for the sake
of simplification, not on the basis of principle, or because this
revaluation applied only to circulating capital and not to fixed capital.
Next we come to the passages we have discussed before on pp. 207-08, in
which Marx states that a change in the price of raw materials changes the
value of the constant capital and therefore changes (in the opposite
direction) the rate of profit. As noted above, this can only be true only
if the change in the price of raw materials affects the stock of constant
capital.
Finally, Marx briefly considered the reevaluation of the existing fixed capital:
As far as the other portion of constant capital is concerned, machinery
and FIXED CAPITAL in general, the revaluation that takes place here and
particularly affects buildings, land, etc, cannot be explained here
without the theory of ground-rent and thus does not belong here. The
following points, however, are of general importance for devaluation:
(1) The constant improvements which rob existing machinery, factories,
etc., of a part of their use-value, and hence a part of their
exchange-value. This process is especially significant at times when new
machinery is first introduced, before it has reached a certain degree of
maturity, and where it thus constantly becomes outmoded before it has a
chance to reproduce its value...
Once machines, factory buildings or any other kind of fixed capital have
reached a certain degree of maturity, so that they remain unchanged for a
long while at least in their basis construction, a further development
takes place as a result of improvements in the methods of reproduction of
this fixed capital. The value of the machines, etc. now falls not
because they are quickly supplanted or partially devalued by newer, more
productive machines, etc., but because they can now be reproduced more
cheaply. (C.III., pp. 208-09)
Here Marx is clearly using synonymously a change in the value of machines
and a change is the stock of constant capital. The general topic of the
paragraphs is the revaluation of the existing fixed capital.
Another very clear passage that I have recently come across is from the
short Chapter 7 of Volume 3 (entitled "Supplementary Remarks")
Fluctuations in the rate of profit that are independent of changes in
either the capital's organic composition or its absolute magnitude are
possible only if the VALUE OF THE CAPITAL ADVANCED, WHATEVER MIGHT BE
THE FORM - FIXED OR CIRCULATING - RISES OR FALLS as a result of an
increase or decrease in the labor-time necessary for its reproduction, an
increase or decrease that is independent of the capital already in
existence. The value of any commodity - and thus also of the commodities
which capital consists of - is determined by the socially necessary
labor-time required for its reproduction. This reproduction may
differ from the conditions of its original production by taking place
under easier or more difficult circumstances. If the changed
circumstances means twice as much time, or alternatively only half as
much, is required for the same physical capital to be reproduced, then
given an unchanged value of money, this capital, if it was previously
worth $100, would now be worth $200, or alternatively $50.
(C.III, pp. 237-38; emphasis added)
Here Marx is clearly saying that THE VALUE OF THE EXISTING CAPITAL,
INCLUDING THE FIXED CAPITAL, RISES OR FALLS as a result of changes in the
conditions of production of the machinery, etc. (An earlier draft of the
"supplementary remark" in the 1861-63 manuscript in MECW, vol. 33, p. 105.)
(I wonder how these "supplementary remarks" were put together by Engels and
what additional discussion of this point we might find in Marx's unedited
manuscript for volume 3 (the 1864-65 manuscript) which was published in
German for the first time only two years ago and has not yet been published
in English.)
Another explicit statement of the revaluation of fixed capital is found in
the 1861-63 manuscript, as a bracketed paragraph in the middle of a general
discussion of how the rate of profit can be increased by a reduction of the
constant capital as a result of increased productivity in the production of
means of production:
In reality the part of capital which exists as FIXED CAPITAL ...
is *relatively devalued* by this increase in the productive power
or the relative devaluation of this capital. (MECW, vol. 33, p. 88;
first emphasis mine; second emphasis Marx's)
Therefore, I conclude that the textual evidence is very strong and at times
unambiguous that technological change that reduces the value of the means of
production will reduce both the stock and the flow of the existing constant
capital. In other words, the stock of constant capital is NOT valued at
historical costs and unaffected by technological change, while the flow of
constant capital is valued in current costs, as in Andrew's interpretation.
Now I turn to Andrew's indirect evidence for his dual interpretation of the
flow and the stock of constant capital. Most of the evidence presented has
to do with why the stock of constant capital should be valued at historical
costs. If Andrew's evidence were convincing, given the clear evidence for
my contrary interpretation discussed above, then one would have to conclude
that Marx contradicted himself on this important issue. But I do not think
that Andrew's evidence is convincing or that Marx contradicted himself on
this issue.
1. ANDREW: The initial capital invested is referred to by Marx as the
"advanced" capital and the term "advanced" necessarily means that a certain
magnitude of capital was invested in the past and that this magnitude cannot
be revalued.
FRED: There is no reason why the term "advanced" capital necessarily means
that the capital cannot be revalued. "Advanced" simply means that the
money-capital was "cast into circulation" in order later to be recovered.
This characteristic of being "advanced", which is shared by all
money-capital, is distinguished by Marx from money that is spend to purchase
consumer goods, and therefore not "advanced" and recovered. This meaning of
the term advanced in discussed in Chapter 4 of Volume 1 where Marx
introduced the "general formula for capital"
(see especially p. 249).
The flow of constant capital consumed in a given period was also advanced in
the past as a certain magnitude, just as much as the stock of constant
capital that has not yet been consumed. Andrew agrees that this magnitude
of the flow of constant capital will change as a result of technological
change. Therefore, in the case of the flow of constant capital the fact
that it was "advanced" in the past does not mean that its magnitude cannot
change. Why, in the case of the stock of constant capital, should the fact
that it too is advanced mean that its magnitude cannot change?
That the capital advanced may change is also indicated by the definition of
the revaluation or devaluation of capital given in Chapter 6 of Volume 3
which was quoted above:
We simply mean that the capital present increases or decreases in value
as the result of certain general economic conditions (since what is
involved here is not the particular fate of one single private capital);
i.e. that the value of the capital ADVANCED to production RISES OR
FALLS independently of its valorization by the surplus-value it employs.
(C.III., p. 206; emphases added)
I repeat: "the value of the capital ADVANCED to production RISES OR
FALLS ... Even though capital is advanced, its value may still change if
general conditions of productivity change. The term "advanced" does not
imply that the value of the capital cannot change.
This is also clear from the passage quoted above from Chapter 7 of Volume 3:
Fluctuations in the rate of profit that are independent of changes in
either the capital's organic composition or its absolute magnitude are
possible only if the value of the capital ADVANCED, whatever might be the
form - fixed or circulating - RISES OR FALLS as a result of an increase or
decrease in the labor-time necessary for its reproduction ...
2. ANDREW: The phrase "the self-expansion of capital" necessarily means
the self-expansion of the "advanced" capital, which as we have seen is
assumed to mean that it cannot be revalued.
FRED: This is another assertion without support. There is no reason why the
"self-expansion of capital" has to be defined in terms of the actual
historical amount of "advanced" capital, i.e. no reason why the
"self-expansion of capital" may not be defined in terms of other valuations
of capital, e.g. the current cost of capital. The precise meaning of the
"self-expansion of capital" depends on one's specific definition of capital.
The concept of "self-expansion" does not necessarily imply the
self-expansion of "advanced" capital.
3. ANDREW: Marx's concept of "moral depreciation" also necessarily
implies that the stock of constant capital is valued at historical costs.
"Moral depreciation" is the difference between the constant capital values
at historical costs and constant capital valued at current costs. It is a
loss of capital that occurs as a result of technological change. If the
stock of constant capital is valued at current costs, then there will be no
"moral depreciation".
FRED: No, the concept of "moral depreciation" does not necessarily imply
that the stock of constant capital must be valued at historical costs. I
essentially agree with Andrew's concept of "moral depreciation", but this
concept is entirely consistent with the valuation of the stock of constant
capital at current costs. I agree that a certain amount of capital was
actually invested in the past ("historical costs"). But I argue that,
because of technological change, the current value of this capital is less
than its historical value. The difference between the "historical cost" and
the "current cost" is the "moral depreciation". The current cost
interpretation of the current value of the capital does not deny that the
actual historical investment was made or that the "moral depreciation"
occurs. So my interpretation of current cost valuation is consistent with
the same concept of "moral depreciation" as Andrew's interpretation. The
only difference is that according to my interpretation, the "moral
depreciation" is assumed to occur continually from period to period, so that
the current value of the capital is its current costs, and in Andrew's
interpretation the "moral depreciation" happens only during the next crisis
of devaluation, so that until the crisis of devaluation happens the current
value of the capital is its historical costs.
4. ANDREW: The stock and the flow of constant capital are also treated
differently in the transformation of values into prices of production: the
flow of constant capital is valued at current costs and the stock of
constant capital is valued at historical costs. Therefore, Andrew's
equation for the determination of prices of production may be written as:
ppd(I) = c(I) + v(I) + r [C(I)]
where c(I) is valued in CURRENT costs, C(I) is valued at HISTORICAL costs,
and r is the historical cost rate of profit. The reason why the stock of
constant capital should be valued at historical costs is the same as #1
above: because the actual historical capital has been "advanced" and
therefore cannot change in future periods.
FRED: This is just a reassertion of Andrew's dual interpretation of the
determination of the stock and the flow of constant capital, as applied to
the transformation problem. No textual evidence is presented to support
this interpretation of the transformation problem. I know of no explicit
statement, in all of Marx's discussions of the transformation problem, that
the flow and the stock of constant capital should be valued differently in
the determination of prices of production.
5. ANDREW: The historical cost interpretation is able to replicate the main
results of Marx's theory related to the rate of profit and the current cost
interpretation is not able to replicate these results (the "scorecard").
The main result is of course the falling rate of profit. The other results
mentioned are that
the rate of profit in luxury production affects the general rate, the
distribution of profit across firms/branches does not affect the general
rate, and the determinants of the profit rate are value sums and are
irreducible to technology and the real wage.
FRED: It is certainly true that it is easier to derive a falling rate of
profit if one assumes historical costs than if one assumes current costs.
That is, if one also assumes a constant value of money. However, if the
value of money is declining, then it is more difficult to derive a falling
rate of profit with historical costs than with current costs. So, with a
declining value of money, Andrew's argument works the other way.
Furthermore, even with a constant value of money, the fact that it is easier
to derive a falling rate of profit with historical costs than with current
costs does not necessarily mean that this is the rate of profit Marx had in
mind in his theory of the falling rate of profit.
The other results mentioned by Andrew have been the subject of prior
discussions and remain in dispute. I have argued and will continue to argue
that my "current cost" interpretation - which takes the quantities of
money-capital, not the physical quantities of inputs and outputs, as the
fundamental givens in Marx's theory, reaches all the conclusions mentioned
by Andrew. I have also argued that Andrew's "historical cost"
interpretation ultimately depends on physical quantities of inputs and
outputs as the fundamental givens as one moves from period to period,
contrary to Marx's method. Therefore, in my view Andrew's "replication of
results" criterion works against the "historical cost" interpretation.
In summary, Andrew's indirect evidence to support his dual interpretation of
the determination of the stock and the flow of constant capital consists of
the following: unsupported and erroneous assertions that the meanings of
the terms "advanced" capital and the "rate of self-expansion" of capital
necessarily imply that the magnitude of capital cannot be revalued; an
erroneous assertion that the concept of "moral depreciation" is inconsistent
with current cost valuation; an assertion without textual evidence that the
flow and the stock of constant capital are valued differently in the
determination of prices of production; and a debatable argument that his
interpretation better replicates Marx's theoretical results (I come to the
opposite conclusion).
This "evidence" is extremely weak and certainly very much weaker than the
direct and explicit statements examined above that both the stock and the
flow of constant capital are valued in parallel fashion, that both are
valued in current costs, and therefore that both are revalued as a result of
technological change.
I will leave open for now the issue of our discussion last Fall - whether
constant capital is valued at the beginning of the end of the current
period. But it seems very clear that constant capital is NOT valued at
historical costs and that this conclusion applies to the stock of constant
capital as well as to the flow of constant capital.
Comradely,
Fred