7 Responses

  1. James April 11, 2010 at 4:33 am |

    What’s the solution?

  2. Jeff White March 5, 2010 at 12:05 am |

    Economist from Hungary:

    In your example, labour accounts for 95% of the value of the finished commodity; the other 5% comes from the consumption of constant capital (raw material, depreciation, and other fixed costs) in the production process. This is a highly labour-intensive operation.

    If the capitalist can reduce the amount of labour required to produce each commodity, he can lower his unit cost and thereby increase his profit margin, or lower his selling price, or both. If he does nothing to reduce his labour cost, his capitalist competitors will do so, and undercut his selling price. He will find that nobody wants to buy his product any more.

    And so, to stay competitive, he makes efforts to reduce the amount of labour required to produce each commodity. He does so by increasing the productivity of his employees’ labour – that is, by increasing the degree of mechanization in the productive process and applying advances in technology that enable the workers to produce more goods per hour of labour time than before. That mechanization and those technological improvements require the investment of more money into the fixed capital of the enterprise.

    In this way, the accumulation of capital increases. This is one form of growth that is inherent in capitalism. Another is the growth represented by increased commodity production due to increases in the productivity of labour; this in turn requires continued growth in sales volumes and expansion into new markets.

  3. Roger Brown March 4, 2010 at 9:06 pm |

    Economicst from Hungary,

    I am not sure what point you are trying make in talking about capital having a postive return without growth. In an economically viable enterprise capital must always do more than reproduce itself; It must also pay a living wage to the people who utilize the capital to produce economic output. In this sense capital must have a postive return. But paying productive workers and paying unproductive investors are entirely different things. Without growth investment income cannot grow without impoverishing workers. In an economy with zero growth the competition to find a resting place for savings drives interest rates to zero. Investment as a zero sum game to preserve wealth does not strike me as an effective strategy.

  4. Economist from Hungary March 3, 2010 at 3:52 am |

    I rephrase my example to show I did not mean growth.

    From the 100 GDP 15 is CONSUMED by the capitalist, 80 by the workers and 5 is spent as replacement of worn assets (depreciation). The capitalist does not leave the profits in the firm, therefore from an accounting point of view assets and capital remains unchanged yoy. What consumed does not add to assets, therefore cannot be accounted as growth. This repeats a zillion times. Then in real terms the annual output of this simple economy is not growing at all! This is why I am saying growth is not required to make return on capital. Best regards…

  5. Jeff White March 3, 2010 at 12:49 am |

    Capitalism’s drive to maximize profits leads inevitably to attempts to increase the productivity of labour, which is the source of those profits. Increasing the productivity of labour means that a worker can produce more commodities – and thus add more surplus value to the commodities she produces – in a given period of time. Capitalists like that idea.

    Marx demonstrated in Capital how the drive to increase the productivity of labour requires capitalists to increase their investment in the means of production; after all, to produce more commodities in the same amount of time, you need to have more raw materials, more equipment, and more of all the other material things that get used up in the making of the commodity. This causes an increase in what Marx called the “organic composition of capital” — that is, the ratio of the value of the materials and fixed costs (constant capital) embodied in production of a commodity to the value of the labour-power (variable capital) used in making it.

    As a result, the portion of the value of the finished commodities that represents surplus value becomes smaller. Since surplus value is the source of the capitalist’s profit, it means the rate of profit has fallen – even though in absolute terms the amount of profit may have increased, due to the increase in productivity.

    This built-in tendency for the rate of profit to fall causes the capitalist to compensate by trying to sell more commodities than before just to keep the same amount of profit. This feeds back into the drive to increase the productivity of labour, thus in turn feeding the vicious cycle of ever-greater accumulation of fixed capital (by reinvesting profits), the tendency towards overproduction and the tendency for the rate of profit to fall.

    This is why capitalism needs constant growth to survive.

  6. Economist from Hungary March 2, 2010 at 5:07 pm |

    I disagree with your view that returns to capitalist MUST come from growth. On a macro scale distribution of GDP to capitalist and workers is only the function of politics. Given 100 GDP produced with an asset base of 100 and 80% given to workers as salary and 20% to capitalists as profits requires no growth whatsoever while still providing a 20% ROE to capitalists… I agree with your view that current expectations rely heavily on GDP growth to provide substantial returns on capital…

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