Date: Thu Jan 09 2003 - 07:04:48 EST
I have been thinking about the problem of why the rate of profit between sectors does not appear to equalise in the way expected by Marx. Readers will recall that this intersectoral equalisation is supposed to ensure that industries of differing organic compositions of capital will all show the same rate of profit, even though those with a high organic composition produce proportionately less surplus value. This was to be effected by industries with a high organic composition selling their output above its value and contrawise for those of low organic composition. What we have found empirically is that although industries with a high organic composition of capital do sell somewhat above their value, this increment is not sufficient to offset the higher organic composition. It looks as if their is a sort of competition going on between the law of the equalisation of the rate of profit and the law of value. This is consistent with the evidence that labour values and prices of production seem to be almost equally good predictors of market prices. It has occured to me that this apparent competition between the law of value and the law of the equalisation of profit rates may in fact be a reflection of the class struggle between labour and capital. The causal mechanism proposed for the equalisation of profit rates by Marx was the flow of capital from low return to high return sectors. The flow of capital out of low return sectors would in turn lead to shortages of supply in these sectors so that prices would rise until profit rates equalised. Whilst something of this sort probably does occur in the long run, in the short run things are somewhat different. Consider the car industry compared to the software industry. Ford almost certainly has a higher organic composition than Microsoft, it also probably has a lower rate of profit. This sort of difference in profit rates would have contributed to the boom in software stocks relative to heavy industry stocks over the 90s. But what does this mean for Ford. In the short run it is much easier to restrict dividends to shareholders than it is to cut wage bills. A firm can survive not paying a dividend for a year. If it tried paying no wages for a couple of months it would have no workforce. Since it is the need of firms to meet their wage bill that enforces the law of value, this implies that in the short run at least the law of value is more pressing to them. In the medium term, Ford can try laying off workers and intensifying labour. This from the firms point of view has the effect of raising the rate of profit, but from the point of view of the whole automotive sector it is worse than useless. GM will be doing the same thing, and in the absence of a cartel, the lower costs of production for each firm will be reflected in price cutting. The net effect will have been to reduce the labour force in car production but leave the capital stock unchanged - leading to an even higher organic composition of capital relative to the software industry. The mechanism that Marx relies upon to equalise profit rates is only likely to operate smoothly if there is no excess capacity in any sector, and relatively low organic compositions. If there is excess capacity, then the flow of capital into high profit sectors will leave the low profit sectors with considerable excess capacity for a long time. This is particularly the case with sectors that have high organic composition since these have long lived capital stock which only tends to be removed when the factories in question are actually making a loss. If they are making a loss, it will be because the selling price is below the cost of production and thus below value ( assuming this is an industry wide phenomenon ). At this point we are talking about the operation of the law of value not the operation of the law of the equalisation of profit rates. High organic composition industries are also the ones most likely to have excess capacity since large investments in boom times will last for a couple of more business cycles.
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