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Second Conference of INTERNATIONAL FORUM ON COMPARATIVE POLITICAL ECONOMY OF GLOBALIZATION “The Rate of Surplus Value, the Composition of Capital, and the Rate of Profit in the Chinese Manufacturing Industry: 1978－2005” Zhang Yu & Zhao Feng Renmin University of China Paper presented at the Second Annual Conference of the International Forum on the Comparative Political Economy of Globalization, 1-3 September 2006, Renmin University of China, Beijing, China. 1 The Rate of Surplus Value, the Composition of Capital, and the Rate of Profit in the Chinese Manufacturing Industry: 1978－ 2005 Zhang Yu and Zhao Feng (Department of Economics, Renmin University of China) 1. Introduction In neoclassical economics, the overall level of rate of profit plays a negligible role in the determination of the dynamics of a capitalist economy. essentially, in the long-run the growth rate of a typical capitalist economy is determined by some exogenous factors: in Solow-type models the exogenous technological progress contributes to the most part of the development, and in the so-called new-growth-theory-type models the exogenous parameters which reflect the subjective preferences and the technology to produce some accumulable factors (such as human capital, the diversity of products, the knowledge). (Barro and Sala-i-Martin, 1995; Glyn, 19971) And in the short-run the fluctuations of a capitalist economy are governed by some exogenous technological shocks (The real business models), the demand fall bellow the supply for the subjective of consumers and investors, or simple by the imperfection of the market, such as information imperfection, the monopolistic factors etc. (Lucas,1977; Kydland and Prescott,1982; Mankiw and Romer, 1994). Contrast to the view of neoclassical tradition, the overall level of rate of profit occupied a central role in the determination of the dynamics of a capitalist economy in the classical economics and especially in Marxian tradition theory. (Glyn, 1997; Howard and King, 19902) Marx wrote that: ’the rate of profit is the compelling power of capitalist production, and only such things are produced as yield a profit.’3The rate of profit influences the dynamic process of the economy through three main routes. Firstly, the rate of profit reflects the capacity of the capitalist class to accumulate capital: if the profit rate is considerably high, the capitalist gain more from the past investment and given the propensity to consume there are more fund to invest in the next period; if the profit rate is relatively low, the capitalist get less from the past investment and given the propensity to consume there are less fund to suffice the investment needs of capitalist in the next period. And according to Marxian theory the capital accumulation is the main shaper of the economic-social dynamics of the capitalist economy. Secondly, the level of the rate of profit affects the achievement of the firms to the credit. If the level of the profit rate is relatively high, the firm can easily get the credit from the financial system and then have greater potential to expand it. Conversely, if the level of the profit rate is relatively low, it is hard for the firm to get credit from the financial institutions. Thirdly, share with the same view with Keynesian economics tradition, the rate of profit figures the expectation of the capitalist. If the profit rate is relatively high, the 1 Barro and Sala-i-Martin, Economic Growth (1st edition), ; Glyn, A. , Does Aggregate profitability really matter?, Cambridge Journal of Economics, 1997,21, 593-619. 2 M. Howard and J. E. King, The 'second slump'- Marxian theories of crisis after 1973, Review of Political Economy, 1990,pp267-91. 3 Marx, Capital, Vol. 3, pp304. 2 capitalist will be optimistic and given the surplus draw from the business they will increase the ratio of investment, thus leads to growth; if the profit rate is relatively low, the capitalist will have pessimistic expectation about the future and then reduce the investment on the production, then leads to stagnation. Thus to Marxian theory, the performance of capitalist economies depends above all else on the overall level of the rate of profit. When the rate of profit is relative high, the capitalist economy is prosperous: business investment is high, unemployment is relatively low, and the living standards of workers generally rise. However, when the rate of profit is low, prosperity turns into stagnation and depression: investment is low or nonexistent, unemployment is high, and living standards decline. (Moseley, 2003) 2. An Overview of Previous Studies Since the overall level of the rate of profit plays such an important role in the dynamics of the capitalist system, generations of Marxist economists pay a mass of attentions to study the movement of the rate of profit. We can roughly divide those studies into two categories, one is theoretical study and another is empirical ones, although almost each study contains both sides. We will review them successively. 2.1 Theories of the Movement of Rate of Profit To make our review more traceable, we’d better to review some basic points in the Marxian theory. i. Value-create and Value-transfer: in the analysis framework of Marxian theory, there are tow kinds of movement of value in the production process, one is the value-transfer process in which the value imbedded in the production means and rare materials is transferred into the new product, and another is value-create process in which the workers create new value through their use of labor power. The new created value is distributed between capitalist and workers, the part distribute to workers is used to recover the used labor power and the part to capitalist is the only source of profit to capitalist as a whole. Thus we can divide the value of the new product into three part: one is to recover the consume of the product means and rare materials and we call this constant capital(we label this part as , because the value of those materials do not increase and just transferred in the production process), one is to recover the use of labor power and we call this variable capital(we label this part as , just because the consume of the labor power can bring capitalist more value than he invest on the buy of labor power), and the one which is created by the workers and draw by capitalist as profit is surplus value(we label this part as ). In a more complex capitalist system the surplus value is the source of other kinds of income, such as interest income, corporation tax, and dividend. c v s ii. The surplus value, thus profit for capitalist can only be created through the capitalist production by labor power. To perform the production, the capitalist must firstly can get the product means, rare material and labor power in the market. iii. The purpose of capitalist production is to get more and more profit, then after the process of marketing of production means, rare materials and labor power 3 and the process of production, capitalist must sell out those products and get the money. If capitalists can not realize the value (include the surplus value) in the market, not only they can not recover the material used in the production process and pay wages to workers, but also they have no fund to finance their further expand-activities. And because the value is quality-indifferent and only quantity-different, the capitalist who act as the anthropomorphized-capital have to reinvest into the capitalist production. iv. There are kinds of contradictions contained in the processes described above. Firstly, the capitalist must compete with the workers in the areas of labor market and production process. Secondly, the capitalist must compete with each other in the areas of factor markets and product markets. And thirdly, the capitalist have to compete with the state and international capitalist. All those competitions can affect the production and realization of the surplus value (profit). We can summaries those points in the framework of the diagram of capital circulation: { )(' MMMQL P M sale process productionbuy Δ+=…… ⎩⎨ ⎧ 321321 ———— To draw profit from the capitalist production system, capitalist must guarantee the capital get through the three stages successively and fluently. And further this kinds of circulation must not be fulfilled once but be done time after time. Any thing can influence one or more stages of those processes can influence the rate of profit. Actually different theories on the movement of the rate of profit just emphasizes different influent factor which affect different stage in the capital circulate process. Stage 1: Prepare for the capitalist production Stage 2: Produce the new product and at the same time transfer and create new value Stage 3: Realization of value of product 2.1.1 Rising Organic Composition of Capital as the Main Cause of Falling Rate of Profit In the Vol. III of Capital, Marx discusses the general movement tendency of the rate of profit in a typical capitalist economy. This tendency was termed by Marx as the ‘the law of the tendency of the rate of profit to fall’.4 To Marx himself this law may be …in every respect the most important law of the modern political economy and the most essential one for understanding the most complicated relationship. It is the most important law from the historical standpoint. …5 Marx focus his argument on the second stage of the circulation of capital, that is the production stage. This is consistent with Marx’s method that the production plays a crucial role in a social system. 4 Marx, Capital, Vol. III, Part III 5 Marx, Grundrisse, http://www.marxists.org/archive/marx/works/download/pdf.htm 4 Marx’s arguments follow: in the capitalist system, the most essential relationship is the relationship between capitalist class and working class and this relationship is essentially antagonistic. This antagonistic relationship roots deep into the capitalist production process: the use of workers’ labor power is the only source of the new created value, and what the capitalist get is just what the workers create and exceeds the value of the labor power. That is the relationship between them is exploit relation. In the term of modern game theory, the relationship between them in the problem of dividing-new-created-value is zero-sum game. To be dominating in the process of dividing the new created value, the capitalist must control the production process. And this effort leads to a progressive mechanization of the process of production.6 In the term of Marxian theory this process is called the rising organic composition of capital. And this leads to the rate of profit to fall: if we define the rate of profit as the ratio of the surplus value to the advanced value of the capitalist in the first stage, vc sr += All variables are measured in real unit. After some algebraic arrangement, we will get a new formula ( ) ( )vc vsr += 1 The term ( vs ) is the rate of surplus value, and ( )vc is the measure of the organic composition of capital. Given the rate of surplus value, a rise in the organic composition of capital leads the rate of profit to decrease. Derivate both sides of above formula with time, we get ( ) ( )••⋅• −= vcvsr This means that the movement of the rate of profit is governed by the relative movement of the rate of surplus value and the organic composition of capital. Even the rate of surplus value increases with the process of mechanization, the rate of profit will decline if the ratio of the organic composition of capital increases is larger than that of the rate of surplus value.7 Marx himself also enumerates six factors which act as the contracting causes to the falling tendency of the rate of profit, such as cheapening of the elements of the constant capital, raising the intensity of exploitation, depression of wages below their value, reserve army of the labor power, foreign trade and the increases of stock capital. Even though those factors can counteract the influence of the rising organic composition of capital on the rate of capital, this influence will eventually overcome them and leads the rate of profit to fall. So we can classify Marx’s argument which emphasizes the rising organic composition of capital as the one which focus the structure change in the process of the second stage of the circulation of capital.8 6 In Communist Manifesto (1848), Marx wrote:” the bourgeoisie cannot exist without constantly revolutionizing the instruments of the production, and thereby the relations of production and with them the whole relation of society”. And in Capital he deepens this insight. 7 Shaikh (1978) provide another argument: the rate of profit, ( ) ( )vcsr += , definitely have a upper limit csr maxmax = . If increases infinitely, then will fall. And then we can expect the rate of profit will trend to fall. This argument was criticized by Van Parijs (1980) who insisted that the upper limit trend to fall needs not contradict with a rising tendency of the real rate of profit(this rate is quite different with ). c maxr maxr 8 Like Marx’s other famous arguments, the theory of rising organic composition of capital bears a lots of criticisms. One of the most important criticisms is termed as the Okishio theorem (Roemer, 1979; Bowles, 1981). The 5 2.1.2 Profit-Squeeze as the Main Cause of Falling Rate of Profit The argument of theories of profit-squeeze shifts its focus from the second stage of the circulation of capital to the first stage of the circulation, i.e. from the area of production to the area of distribution. 9The logic of those theories is essentially simple. We can redefine the rate of profit as the ratio of the total revenue of the capitalist to the rate of the value of the advanced capital. And further we assume that the value of the workers’ labor power is recovered after the value of the production have realized, i.e. the advanced capital is not include variable capital. So we can write the rate of profit as K Rr = in which the variables R and K denote to the total profit and total constant capital (advanced capital to buy machine and rare materials). After some algebraic arrangement, we get a new formula K Y Y W K Y Y WY K Y Y Rr ⋅⎟⎠ ⎞⎜⎝ ⎛ −=⋅⎟⎠ ⎞⎜⎝ ⎛ −=⋅= 1 in which the variables and W Y denote the total income of the workers and the total new added-value in the process of production. Thus Y W is the share of the working class in the national distribution. And K Y can be interpreted as the productivity of the capital and similar to the term of organic composition of capital. It is clear that the rate of profit is in inverse proportion to the variable Y W and in proportion to K Y . And among the two variables, Y W and K Y , which can affect the rate of profit, the theories of profit-squeeze believe that the raising Y W is the main cause of the falling of the rate of profit. And this raising Y W is rooted in the relative increase strength of the working class. This relative increase in the strength of working class roots in the change of the social-economic structure of the capitalist system. Not like the neoclassical economics, the wage share in the national income is not merely determined by the exogenous given preference and technology in the framework of Marxian theory. Rather the its determination is a social-economic process, many social factors can influence it, such as: (1). the reserve army of labor, if there exist abundant of unemployed workers, the relative strength, thus relative wage theorem said that it to be impossible for a cost-reducing innovation to lower the rate of profit without simultaneously increasing the real wage. To defense Marx’s argument, the orthodox Marxist economists extent the theorem and made it clear that under some condition (such as the joint production and the existence of reserve army of labor) the profit rate will fall with the development of technology. (Shaikh ,1978; Salvadori,1981; Lipietz, 1986) 9 Profit-squeeze explanation of falling rate of profit rise mainly in the late of 1970s. See Glyn and Sutcliffe (1972) Boddy and Crotty (1975) and Weisskopf (1979). 6 share in the national income is low; (2). the solidarity of the working class, if the working class unites firmly, the relative strength, thus relative wage share in the national income is high. (3). the cost of lost job,10 the larger the cost, the relative weaker strength of the working class, and the relative low share of wage in the national income. With the raising strength of working class, the working class makes the distribution move along their favorable direction. And if the growth of the share of wage bill in the national income overcomes the growth rate of the productivity of the capital, the rate of profit will inevitably fall. 2.1.3 Realization Problem as the Main Cause of the Falling Rate of Profit The third effort to explain the movement of the rate of profit focuses on the third stage of the circulation of capital, i.e. the realization of the created value. As we have mentioned above it will cause very serious consequences that the product cannot sale out on the market: on the one hand, the value transferred from the used rare materials and depreciated machines and the advanced wage bills can not be recovered, on the other hand, the new created surplus value contained in the products can not realized and this leads the income of the capitalist to fall and so do the rate of profit. We can prove this argument as follows: Let us redefine the rate of profit as the rate of realized surplus value to the total advanced capital: VC Sr + ⋅= θ in which θ is the proportion of product that have been soled. It is clear that the rate of profit increase with the raising of θ . This kind of argument have to explain why θ will fall below 1. We can divide those explanations into two categories. One is termed as the underconsumptionist theory and the other is termed as the coordination failure theory. Both of them can trace directly back to Marx himself. (1). Underconsumptionist explanation: Marx writes Always remains the poverty and restricted consumption of the masses as compared to the tendency of capitalist production to develop the productive force in such a way, that only the absolute power of consumption of the entire society would be their limit. (Capital, Vol. III) To make the effective demand equal to the ever-grows production, the growth rate of them must be same. But in the capitalist system the individual capitalist always trends to low the growth of the wage bill and thus limits the growth of the workers, and this inevitably leads to the effective demand of the society fall below the aggregate demand.11 (2). Coordination failure explanation: in the volume two of Capital, Marx constructs a simple two-sector reproduction scheme to illustrate the conditions that must be fulfilled so as to guarantee the operation of the capitalist system. And since the character of a typical capitalist system is that individual capitalist bears no authority 10 Schor