Re: [OPE-L] Obstacles to movement of capital

From: Paul Cockshott (wpc@DCS.GLA.AC.UK)
Date: Fri Nov 02 2007 - 06:02:34 EDT

The point is Rakesh that some industries with high organic compositions of capital
have large stocks of fixed capital. The Railways are the classic example. The capital
stock here depreciates slowly over as much as 100 years. 100 year old tracks and bridges
are still quite functional.

The mechanism that is supposed to bring about an equalisation of profits is that the
high organic compositions sector, starting with initially lower rate of profit, has
capital withdrawn from it to be reinvested into other industries. In consequence the
scale of the industry contracts, and the shortage of supply then forces prices up
until the rate of profit on the large capital stock is sufficient to prevent further
capital outflow.

Try applying this to the railways. The rate at which capital can be withdrawn will
be no faster than the depreciation allowances of the industry. This means that the
rate of withdrawal is going to be relatively slow - say 50 years. Over that period
there will be technological revolutions. These will make it difficult for even
a contracting railway industry to obtain the same rate of profit as say the 
airline industry let alone the software industry.

This is very evident with the channel tunnel, which was a huge absorber of constant
capital in the UK in the 80s, but by the 90s was unable to make a rate of return
even as high as the rate of interest. Over a long time horizon, the use of electric
railways makes sense as an energy efficient, and labour time efficient way of
moving people about, but the advent of budget airlines has made the railways
uncompetitive for journeys above about 200 miles. The investors in the tunnel
have had precious little success in recouping their capital and transfering
it to other more profitable fields.

In addition, those operating the railway can not afford to let 
major infrastructure like tunnels and bridges to totally 
run down unles they are proposing to close down the industry
alltogether. If they did this, they would be faced with the
loss of almost all of their capital. They would be left only
with the land price of the ground on which the assets stood.
Unless they are willing to do that, they will be forced to
spend part of the depreciation account on actual repairs rather
than investing the depreciation account in the shares of
new startups in other industries.
2. Workers getting higher wages in high OCC branches does not matter in
itself one way or another whether the profit rate equalizes. Don't get
your second point.
try telling that to employers who are   paying the higher wages!

Suppose the hypothetical mechanism for profit rate equalisation is
working without fault. The telephone industry, having a high organic
composition of capital, restricts its growth to ensure sufficiently
high prices to win the average rate of profit. 

Suppose that for every $1 in annual wages the telephone industry has
$20 in capital invested in lines, exchanges etc. Suppose that the
average rate of profit is 10%, this implies that they earn $2.10 on
each $1 paid in wages.

If the average composition of capital is more like $3 per $1 of
wages, the average firm would be earning $0.40 per $1 on wages.

This implies that profit of the telecoms industry
as a share of current turnover will be higher than average. The telecoms
workers union will not fail to notice that the firms are making say $2.10 profit
for every $1 paid out as wages. They will go to the bargaining table saying
that thanks to the hard work of our members the industry is enjoying large
profits, we want a share of those. They then, over several years, strike and win wage rises
bringing the wage bill up by perhaps 50%. The industry now has 
makes profits of $1.60 on wages of $1.50,using a   capital of $21.50,
so their rate of profit has fallen to 1.5/21.5 or just over 7%, which
is below the putative national average of 10%.

The proponents of the theory of profit equalisation must assume
workers are totally supine. They take on entirely the perspective
of the capitalist and ignore the class struggle.

This is the sort of picture that the empirical data for the UK and US
throw up. High organic composition industries in those countries do tend to
earn more profit per $1 of wages, but it is not enough to compensate
for their higher organic composition. However, subsequent empirical
work shows that this relationship does not hold for all capitalist economies.

Paul Cockshott

-----Original Message-----
From: OPE-L on behalf of Rakesh Bhandari
Sent: Fri 11/2/2007 3:29 AM
Subject: Re: [OPE-L] Marx on the general rate of profit/rate of interest: a translation error
1. I don't see why existing physical capital has to be mobile for the rate
of profit to equalize. New capital investments should force price
adjustments for profit rate equalization. And there probably wouldn't have
to be a lot of new capital investment to force price adjustments.
2. Workers getting higher wages in high OCC branches does not matter in
itself one way or another whether the profit rate equalizes. Don't get
your second point.
3 Are you saying that value added relative to capital investment (s+v/c+v)
rather than the rate of profit (s/c+v) does tend to equalize across
4. Perhaps some of the profit in higher OCC branches appears as
compensation for higher level managers, so the profit rate only seems
lower in higher OCC branches.
5. There is no reason why difficulties in shifting output in higher OCC
branches could not be solved by price adjustments which would allow profit
rate to tendentially equalize.

I hope others respond but I really don't see the theoretical or empirical
proof for the adduced barriers to profit rate equalization.

Again I think it's important that this defining issue of OPE-L discussion
be settled one way or the other.


> The first point is that the empirical evidence collated for some 28
> countries
> By Dave Z indicates that the tendancy, if it occurs, only occurs in a
> few
> Capitalist economies, not in all of them.
> As to why, one can think of several reasons:
> 1. Physical capital is not easily mobile. The Channel Tunnel for example
> earns a very low
> Rate of profit, but EuroTunnel can not readily convert the invested
> labour embodied in tunnels and train lines into , for example,
> restaurants even if the latter are more profitable.
> 2. If a sector is earning a higher rate of return per worker than the
> average, then the relative position of labour vis a vis capital in that
> sector improves, and workers are able to win higher wages. This tends to
> frustrate a tendancy for high organic composition industries to earn
> higher profit per worker.
> 3. If the composition of demand is constantly changing, sectors with
> high capital to labour ratios will find it harder to shift output than
> those with low capital to labour ratios. This will again impede
> profitability in high organic composition sectors. It is easier for the
> toy car industry to adjust the models it makes in response to achange in
> fashion than it is for the car industry for example.
> -----Original Message-----
> From: OPE-L [mailto:OPE-L@SUS.CSUCHICO.EDU] On Behalf Of Rakesh Bhandari
> Sent: 01 November 2007 15:04
> Subject: Re: [OPE-L] Marx on the general rate of profit/rate of
> interest: a translation error
> Paul,
> I don't see how you are providing an explanation for what is frustrating
> the tendency towards
> an intersectoral equalization of the profit rate. Occam's Razor aside,
> it's easy to see why there
> would be such a tendency but you are not making it easy to see why such
> a
> tendency has effectively no kind of existence. Which is what you seem to
> be implying.
> Rakesh
>> You have to realise that there will not be a single rate of profit
>> within a sector. The rate of profit within sectors will itself be
>> normally distributed. A sector where the mean rate is low, has two
>> possibilities:
>> 1) Either a significant fraction falls into the loss making state, in
>> which case the sector will contract.
>> 2) The sectoral coefficient of variation of the profit rate may be
>> narrower than the economy wide dispersion which may be enough to keep
>> only a small proportion of the firms loss making. This second
>> alternative seems less likely unless one can produce specific reasons
>> for it.
>> Note that I am not disputing that an almost equal rate of return can
> be
>> achieved on equities -- this is what 'shareholder value' achieves, but
>> the means by which this occurs is the writing up or down of the
>> valuation of the companies share capital. This rate of return on
>> equities is quite distinct from the rate of return discussed by Marx
> and
>> the Classicals.
>> You are right in saying that random fluctuations around prices of
>> production are just as likely as random fluctuations around values. If
>> the random fluctuations of market around prices of production are just
>> as great as the random fluctuations of market prices around values,
> then
>> prices of production have no additional explanatory power as compared
> to
>> values, and by Occams razor, we should prefer the simpler theory -
> that
>> labour values determine prices.
>> The only justification for the additional complexity of price of
>> production theory would be if it significantly improves our predictive
>> ability with respect to real prices. If it does not, then it is not
> even
>> an epi-cycle, it becomes in Gould's terms a Spandrel.
>> -----Original Message-----
>> From: OPE-L [mailto:OPE-L@SUS.CSUCHICO.EDU] On Behalf Of Rakesh
> Bhandari
>> Sent: 30 October 2007 22:50
>> Subject: Re: [OPE-L] Marx on the general rate of profit/rate of
>> interest: a translation error
>> Paul,
>> I must say that I am not following your explanation of what is
>> frustrating
>> even in this day age of unleashed capital flows and shareholder value
>> the
>> tendency towards an equal profit rate.
>> I don't get the point about firm death either. Wouldn't there be some
>> tendency for all firms which within a branch are not achieving average
>> profitability to die? Why would that disrupt the tendency to the equal
>> profit rate?
>> I am distracted, and I am asking you to start the argument from
> scratch.
>> I
>> apologize. I know for years you have said that Marx had no need to
>> transform (just as for years Gil assailed Marx's assumption of price
>> value
>> equivalence, these two points have been defining criticisms for OPE-L,
>> so
>> I want to understand what you are saying because I just don't get the
>> logic of these defining criticisms). So if possible I would just like
> a
>> post which explains why. Random fluctuations around value are no less
>> likely than random fluctuations around price of production?
>> Sorry to take the discussion back so far.
>> Rakesh

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