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A blog of Post-Capitalist critique in general, economic, philosophical and political analyses, Post-Capitalist poetry and prose, Post-Capitalist philology, book reviews, Postcapitalist news, interviews, praxis, art and much more! For the record, Davide Ferri is a Postcapitalist, who graduated with a B.A.Economics(Honours) degree from Shri Ram College of Commerce, Delhi University, India. He currently lives and works in Mumbai.



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Sunday, 24 June 2012


(Recap of Chapters of Sweezy's "Theory of Capitalist Development (1942)" on Value, Falling rate of Profit and Realisation Crises)

Written by: Davide Ferri
SRCC, Delhi University
First published on: June 24, 2012

Here's to you some academic notes of mine, written in a rush during my hectic examinations session in May-June 2012!
I decided to post the notes (rather than uselessly keeping them in some corner of my hard disk!) in order to give whomever is new to Marx's Labour Theory of Value a general idea regarding the concept of value, Sweezy's (problematic) under-consumption theory and the imbroglio of Tugan-Baranovsky's theory of Disproportionality.
Enjoy these notes and mind not possible errors and grammatical mistakes (in all sincerity, I haven't checked the orthography! Am busy with other works at present.)


The concept of value

All commodities share in common two kinds of value: use-value and exchange value.
Use-value is the value of needs satisfaction. It is excluded by Marx from the field of economic investigation because it doesn’t entail a direct social relation, according to Sweezy.
A commodity, to be sold, must be needed; no one wants a use-less commodity!
Exchange-value expresses a quantitative relation between commodities, entailing human labour.

In fact, according to Marx, the only creator of use-value is human labour. Hence, a commodity — apart from embodying a determined use-value per se — embodies a determined quantitative amount of human labour that is exchanged for other quantitative amounts of human labour, whenever sales take place. A certain quantitative amount of money can be exchanged for another quantitative amount of commodities, insofar as both embodies human labour.
This quantitative relation is defined by human abstract labour, insofar as human labour, to be exchanged, needs to be abstracted, namely, needs to be reduced to simple quality-less labour.
Individual quality doesn’t count in commodity production, due to the achievement of an ever-growing division of labour; personal contribution is valued in quantitative terms, say, in work-hours.
“Time is everything. Man is nothing” says Marx (see Marx’s “The poverty of philosophy”).
This simple labour embodied in commodities, however, must be needed if commodities need to be sold on the market. By no accident, Marx asserts that the exchange-value of one commodity is defined by the socially necessary labour-time embodied in a commodity.

The fetish character of one commodity comes into being whenever a buyer cannot see the effective reality behind a commodity on sale. In Capitalism, whenever a common buyer goes and buys a commodity s/he doesn’t see what all lies beyond the appearance of a commodity, that is to say, an entire production process behind it.
Hence, whenever we regard the value of a commodity as defined by human labour, it may sound ambiguous at first impact.
However, Marx’s analysis remains sound.

Value of labour (w) = c+v+s

c=constant capital
v=variable capital
s=surplus value

Under simple commodity production, the ciculation form as symbolically designed by Marx is C-M-C (commodity-money-commodity).

A commodity is exchanged for money that in its turn will be exchanged for another commodity, embodying the same amount of socially necessary labour (exchange value) but a higher use-value for the Capitalist in question.

C-M-C represents the circulation form for most of the people in Capitalism, namely, the workers, who sell their labour-power (a commodity with a certain use-value for the capitalist) to get a remuneration (money) and purchase necessaries and conveniences of life (commodities).

The Capitalist, in expanded reproduction, goes to the market with money, exchange this money for commodities involved in production and gets a higher amount of money vis-à-vis the money originally invested in production.
The process M-C-M would not make sense, insofar as money in the beginning would have the same magnitude of money in the end.
The Capitalist cares about the exchange-value and not about use-value and by employing labour power and constant capital in his production he aims at achieving a larger amount of money as compared to that utilised for the purchase of variable capital and constant capital.
Since Capitalism is production for profit, that is to say, production for an additional quantitative of money obtained after a given amount of money has been invested in production, the production process would be M-C-M’ (money-commodity-greater amount of money vis-à-vis the money invested in production).
The difference this greater amount of money M’ and M is called surplus value. Its nature, according to Marx, is owed to an appropriation of labour, as human labour is the only creator of use-values.
It is important to point out that money can be expressed in labour terms too (e.g. say, 20Rs=1ounce of gold=1hour of labour). The difference between the value of commodity (in labour terms) and the value of labour power (namely, the amount of labour necessary for the reproduction of one worker) defines the concept of surplus value. (s= w – v- c)
The Capitalist tries out of competition to drive down the value of labour power to the minimum (workers’ survival) so as to get the maximum surplus value

The following relation defines the value of commodity:

C+ v + s = w

Rate of surplus value (or rate of exploitation)—> e = s/v

Organic composition of Capital —> OCC = q = c/c+v

Rate of profit —> p = s/c+v for Marx
P = s/v (1-q) where q=c/c+v

Sweezy says the Marx assumed OCC to be constant among different branches and that is not the case.
In Capital VOL III Marx says it may vary according to different branches of production, but for the sake of analysis he assumes it to be constant.

[Critique: when Karl Marx converted values into prices in the transformation scheme, he referred to the average price and not to the price, as Sweezy argues; which varies according to the OCC (q) of each sector. (O Sweezy!)
It is important to point out that with the tendency of the rate of profit to fall (see p=s’(1-q) or p=s/c+v), the OCC tends to equalise.]


Department I and Department II

Sweezy assumes the industry is divided into two branches, department I, namely, producers’ goods, and department II , namely, consumers’ good. The relations for both departments are following:

C1+v1+s1=w1 —> Department I (producers’ goods)

C2+v2+s2=w2 —> Department II (consumers’ goods)

For the condition of simple reproduction to be satisfied (no expansion of production involved/no accumulation for higher profit) the constant capital used up must be equal to the output of department I (producers’ goods, e.g. machines, tools etc)

Demand for producers’ goods (“industrial consumption”/demand for constant capital)= Supply of dept.1, namely, the supply of producers’ goods at equilibrium in simple reproduction:

DD for producers’ goods = SS of producers’ goods
C1+c2= C1+v1+s1
(capital in all department is produced by department I production)
Also, demand for consumers’ goods (workers’ and capitalists’ consumption) must be equal to the supply of dept. II, namely, the supply of consumers’ goods

DD for consumers’ goods = SS of consumers’goods
(consumers’ goods are demand by both workers and capitalists!!)
V1+s1+v2+s2=c2 +v2+s2

When can reduce both the relations to c2=v1+s1
That is to say, the supply of constant capital, namely, the value of constant capital used up in department 2 is absorbed by the consumption of workers and capitalists

This reproduction scheme lays the bases, the groundwork, for an analysis of the discrepancies between DD and SS

Sweezy, against the abstinence (from consumption) theory, says that a decreased accumulation in favour of consumption would mean for the capitalist an abstinence from accumulation that is as much as painful as an abstinence from consumption.

The capitalist would look for a balance between consumption and accumulation.

The workers, in their case, abstain from accumulation, insofar as they don’t manage the social produce, which is managed by Capitalists!

Sweezy argues that accumulation increases the demand for variable capital. One could argue that the value of variable capital could cancel out the gap between c+v and the value of labour overtime, that is to say, it could eliminate surplus value.
Variable capital would increase leading to higher real wages, in monetary terms. But Marx already proved that a increasing real wages are offset by increasing reserve army of labour as fostered by an increasing population.
Population growth increases labour supply


Falling rate of profit

Marx discovered the tendency of the rate of profit (p=s/(c+v)) to fall overtime, assuming constant surplus value and growing organic composition of capital q=c/(c+v).
Whenever a rise in total constant capital (c) over total capital rises (c+v) - with a change in variable capital (delta v) equal to zero, negative or inferior to the change in constant capital (delta c) - the rate of profit p=s/(c+v) falls.
This is equal to say that the organic composition of capital q=c/(c+v) rises, reflecting an increasing marginal productivity of labour.

Marx enumerates six counteracting tendencies:

•Higher rate of exploitation (s/v) —> lengthening of working day or higher intensity of work imposed
•Wages below the value of labour power (immiseration)
•Lower wages (w/p) due to foreign trade or lower price of constant capital (Pc)
•accumulation of constant capital and lowering of the price of constant capital
•relative overpopulation (Potential labourers>Employed labourers —> say, L>N)

Sweezy challenges Marx’s assumption of constant surplus value. If the rate of surplus value remains constant it means that a rising surplus value (s) is offset by a rising labour productivity.
With a rising organic composition of capital (q or OCC) due to higher change in constant (delta c) as compared to the change in variable capital (delta v) labour productivity rises and a higher rate of surplus value (s’) is achieved as commodities are cheapened and the value of labour (v) – based on the price of necessaries – fall.
In brief, a lesser amount of value is needed for workers’ reproduction and maintenance.
According to Sweezy, a rise in the organic composition of capital (q) goes pari passu with a rising rate of surplus value (s’). Further, he argues, there is no reason to assume that a change in the organic composition of capital can be greater than a change in the rate of surplus value.

Sweezy ends up (problematically) attributing the tendency of the rate of profit to fall to external factors such as:

1. Trade unions and growing bargaining power of workers
2. Pro-workers state action (in the form of legal limitation of the working day, transfer payments etc)

At the same time, he recognises external forces that push up the rate of profit such as:

1. Employers’ organisations
2. Export of Capital
3. Formation of monopolies
4. Pro-Capital State action


This falling rate of profit entails the dynamics of initial accelerated growth and final decelerated growth and breakdown. The Capitalist bases his/her own investment on a calculated rate of profit over, say, a year.
Whenever the rate of profit (p) falls s/he adjusts his/her investment decisions accordingly by withholding it, expecting the rate of profit to rise again.
This leads to a fall in output and to a displacement of workers and can lead to crises. Therefore it is not true that the rate of profit (p) must disappear or become negative to produce a crisis!

Sweezy individuates 2 types of crises.

Crises arising from disproportionality and Tugan-Baranovsky's theory

They occur when Price >Values

The organic composition of Capital (OCC or “q”) varies according to the various branches of production.
The organic composition of capital is not constant among branches [note: as Marx acknowledges but assumes as a necessary condition to describe the dynamics determining the average price of commodity].

This implies disproportionalities of prices with respect to values. In some branch P>W in some other branch Prices <Values
This occurs because of the anarchy of capitalist production, abandoned to market forces.

This disproportionality theory was rendered popular by Russian economist Tugan-Baranovsky.
Tugan-Baranovsky rejected Marx’s law of the falling rate of profit, whereby growing constant capital would decrease the rate of profit (not the absolute amount of profit achieved) and that mass underconsumption would produce stagnation.
Tugan-Baranovsky argued that growing constant capital would even increase the rate of profit!

Crises arising from underconsumption

Recalling Sweezy’s simple reproduction scheme:

C1+v1+s1=w1 —> Department I (producers’ goods)

C2+v2+s2=w2 —> Department II (consumers’ goods)


Demand for producers’ goods (industrial consumption of constant capital) = Supply of producers’ goods at equilibrium

C1+c2= C1+v1+s1


Demand for consumers’ goods (workers’ and capitalists’ consumption) = Supply of consumers’ goods at equilibrium:

V1+s1+v2+s2=c2 +v2+s2

We can reduce the entire relation to:


In passing to the process of accumulation, namely, expanded reproduction, we must assume that the capitalists invest a part of their surplus value into consumption and another part into investment for the sake of expansion of production (and higher profits).

Surplus value — according to Tugan-Baranovsky — can be conveniently divided into surplus value for capitalist consumption, surplus value for accumulation of capitalist consumption, surplus value for accumulation of variable capital, surplus value for accumulation of constant capital, that is to say, respectively, Scons, S∆cons, S∆v, S∆c

Hence a new relation can be established for both department I and II (producers’ goods and consumers’ goods):

C1+v1+scons1+s∆cons1+s∆v1+s∆c1 = w1 (producers’ goods)
C2+v2+scons2+s∆cons2+s∆v2+s∆c2 = w2 (consumers’ goods)

Now, to get the equilibrium in accumulation for both department I and department II (producers’ goods and consumers’ goods)

DD for producers’ goods = SS of consumers’ goods

C1+c2 + acc. of capital = C1+v1+s + acc. of s
C1+c2 + s∆c1 +s∆c2 = C1+v1+scons1+s∆cons1+s∆v1+s∆c1

By simplifying we get:
—>c2 +s∆c2 = v1 +scons1+s∆cons1+ +s∆v1

Tugan believed that stagnation came from accumulation of capital, from expanded reproduction.
If surplus value is not allocated proportionately to each industry and departments there is underconsumption. Tugan asserted that however low the social consumption might be, if the capitalist producers had knowledge over demand they could allocate accumulation so as not to create realisation problems. Hence, according to Tugan underconsumption, as an effect of overproduction, is merely impossible if the capitalist producers know how to allocate resources.

Tugan’s fallacy comes from the fact that he assumes a balance of supply and demand whereas in Capitalism such balance has no place.

Assuming social consumption to be constant, namely, that the capitalist accumulate variable capital and constant capital but don’t accumulate consumption, we get:

C1+v1+scons1+s∆cons1+s∆v1+s∆c1 = w1 (producers’ goods)
C2+v2+scons2+s∆cons2+s∆v2+s∆c2 = w2 (consumers’ goods)

If variable capital and capitalist consumption increase, social consumption also increases. But we assumed the social consumption is constant, reflecting an hypothetical balance between Demand and Supply of both departments. Hence variable capital and increased capitalist consumption are eliminated from the above-mentioned relations.

According to the logic of Tugan-Baranovsky of an all-knowing capitalist, in accumulation we would get:

C1+v1+scons1 +s∆c1 = w1 (producers’ goods)
C2+v2+scons2 +s∆c2 = w2 (consumers’ goods)

and at equilibrium in department I:

DD of consumers’ goods = SS of consumers’ goods:
C1+c2 + acc. of capital = C1+v1+s + surplus elements


C1 + s∆c1 + C2 +s∆c2 = c1 + v1 +scons1+s∆cons1+ +s∆v1 + s∆c1
—> c2 +s∆c2 = v1 +scons1+s∆cons1+ +s∆v1

Because social consumption is assumed by Tugan to be constant:
C2 +s∆c2 = v1 +scons1

where s∆c2 shall be 0.

[Recall that in simple reproduction, at equilibrium of SS and DD we have:

C2= v1 +scons1
where s1 = scons1 (in simple reproduction surplus is consumed)]

If both the relations of expanded reproduction and simple reproduction are correct, the accumulation of constant capital in department II, given the assumption of Tugan, would have to be zero. In order to make constant capital in department II square in algebraic terms, its accumulation would not take place; and this is not a real case.  Capitalism without accumulation can't simply exist.
Tugan-Baranovsky is conceptually wrong when he assumes that supply and demand can be at equilibrium in capitalism.
In brief, to have an organised (and non-anarchic) capitalist production we need to have balance between supply and demand in both departments, in accumulation, insofar as planned production must equal planned social consumption for the realisation of sales.
This implies that social consumption is kept constant.
At this point, expanded reproduction and simple reproduction would be reduced to the same thing, according to the extreme logic of Tugan-Baranovsky!
In fact, if social consumption is to be constant, accumulation of constant capital will have to be zero to make constant capital in department II have the same value that it had in simple reproduction, given the relation of expanded reproduction.

The lack of accumulation of constant capital in department II would be, of course, an impossible scenario. In fact, Capitalist production — whether “planned” or left to the anarchy of market forces — is inseparable from accumulation!

Sweezy's Underconsumption Theory

Sweezy points out that sustainable production in Capitalism is unattainable, insofar as the ration given by:

(Rate of growth of consumption) / (Rate of growth of means of production)
Is perpetually falling, whereas the ratio given by:

Rate of growth of consumption goods / Rate of growth of means of production
is constant.

Assuming growing national income, the rate of investment would an ever growing one and therefore the rate of growth of consumption goods would outstrip the DD for consumption goods. This would mean underconsumption, which Sweezy calls a disease of old age.

1 comment:

  1. Thank you for this. Was very helpful :)