[OPE-L:4839] Re: business cycles

Duncan K. Foley (dkf2@columbia.edu)
Tue, 22 Apr 1997 12:45:05 -0700 (PDT)

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Some comments on Gerry's OPE-L:4824

>Duncan wrote in [OPE-L:4823]:
>> In principle the "stratification" of fixed investment could lead to
>> waves in real output, but in fact these waves seem to be highly damped and
>> not much related to the main business cycle movements. Most evidence points
>> to circulating capital fluctuations as the main component of most business
>> cycles.
>Well ... this raises some interesting questions.
>To begin with, I have some questions about the empirical "evidence" here.
>a) fluctuations in "circulating" and "fixed" capital are measured using
>the neoclassical conception of those two terms. Yet, the Marxian
>definition(s) of those concepts are quite different.

I agree that Marx's distinction between "constant" and "variable" capital
is foreign to neoclassical economics, but the distinction between "fixed"
and "circulating" capital seems essentially the same, since in both
theories the issue is the length of time the capital remains in the
production process. It is also true that Marx's careful emphasis on
stock-flow relations using the concept of turnover time in Volume II of
_Capital_ is rarely matched in neoclassical production function theory. But
when mainstream economists consider inventories as part of the capital
stock they account for the Marxian circulating variable capital as part of
the inventories of goods in process. The evidence I spoke of mostly comes
from Keynesian business cycle studies, which show that the lion's share of
the business cycle fluctuations in output involve inventory investment and

>What empirical studies
>of trade cycle variations have there been using Marxian concepts of
>constant fixed capital, constant circulating capital, and variable

Andrew Senchak studied the circuit of capital for the U.S. economy from
1963-77 in his 1981 Columbia Ph.D. dissertation. Piruz Alemi is just
finishing a major extension of this study covering 1947-1995 for a New
School PhD. Hamid Azari's University of Utah PhD (1996) measures turnover
times for U.S. capital. Related work can be found in Dumenil and Levy's
_Economics of the Profit Rate_ and Peter Matthews' 1995 Yale PhD on the
circuit of capital.

>b) In these empirical studies what accounts for changes in labor
>productivity over the course of the business cycle? (Marxian and
>neoclassical definitions of labor productivity are also different).

It's true that Marxian economics makes a distinction between productive and
unproductive labor that mainstream economics rejects, and that leads to
different measures of the productivity of productive labor. But I don't see
why Marxists should measure productivity of use-values any differently from
anybody else. The studies I mentioned above focus primarily on value flows
measured either in money or in labor time equivalents, and don't address
the problem of cyclical movements in use-value productivity.

>Other questions include:
>a) How do we observe and measure changes in constant fixed capital over
>the course of the business cycle? E.g. if we only look at the price of
>elements of constant fixed capital and aggregate investment in constant c,
>then how do we observe changes in the *quality* of constant c during the
>trade cycle? Wouldn't we have to have some measure of how changes in
>constant c affect the production of relative s and the productivity of
>labor to account for its impact on the business cycle? (I think this ties
>into the question of "stratification" of constant fixed capital that John

I'm not sure I understand the concept of "quality of constant c", nor why
one should expect it to vary systematically over the business cycle.
(Marx's favorite example of c is cotton thread.) There is a systematic
procyclical movement of labor productivity due to what the Keynesians call
"labor-hoarding", the tendency of firms not to lay off workers in full
proportion to the fall in output. There are also important cyclical
regularities in the wage share (see the literature going back to Boddy and
Crotty and Kalecki), though I doubt that they reflect a full adjustment of
the system at business cycle time scales to things like the reproduction
cost of the labor force.

>b) In looking at the evidence on "circulating" capital, we should break
>the neoclassical concept down into both constant circulating capital and
>variable capital. With regard to the latter, we would have to look at how
>the demand for labour-power and wages change during the course of the
>trade cycle. With regard to variations in circulating constant capital, we
>would have to look at changes in the price and quality of those elements
>of constant circulating capital.

Leaving aside the issue of "quality", the circuit of capital studies I
mentioned above do measure precisely these aspects though the concept of
"composition of costs", which I used the symbol "k" for in _Understanding


>if as you say, waves of investment in constant fixed
>capital are highly "damped"), have to look at changes in *capacity
>utilization*? I.e. *if* investment in constant c is held constant *and*
>the social productivity of labor remains the same, then firms can expand
>or contract output by expanding or contracting the rate of capacity
>utilization _if_ there is excess capacity. In that case, firms could
>using the existing constant fixed capital to produce more output with
>more labour-power and more constant circulating capital _rather than_
>expanding investment in constant fixed capital. We would also, I
>think, have to look at how changes in the availability of credit, changes
>in interest rates, and aggregate demand affect the demand by firms for
>labour-power and constant circulating capital during the cycle.

The idea of the investment waves is that if there is a lot of investment at
one time period, one would expect to see an echo effect due to the tendency
for all those capital goods to wear out around the same time in the future.
If, for example, all fixed capital were "one-hoss shay" and lasted exactly
10 years, you would expect to see a big demand for replacement capital
exactly 10 years after a positive blip in investment. The damping comes
from the fact that not all elements of fixed capital have the same
lifetime, so the blip gets spread out over future time, and from the fact
that the economy is growing, so the replacement wave tends to be smaller
proportionally to the new investment at the future time.


Duncan K. Foley
Department of Economics
Barnard College
New York, NY 10027
fax: (212)-854-8947
e-mail: dkf2@columbia.edu