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OPEL # 3507
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.
A. MY TEXTUAL EVIDENCE
1. 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.
2. 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 clearly 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.
3. 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.)
4. 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.
B. ANDREW'S INDIRECT EVIDENCE
Most of the evidence presented by Andrew 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 nor 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 ... ; 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.
6. 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