Appendix

Measuring the rate of profit

by Michael Roberts

Marx’s law of profitability suggests a cyclical and a secular process combined.  The causes of both the cyclical and secular movements in profitability are broadly two-fold.  The first is driven by the change in the organic composition of capital.  This change is brought about through crisis and the destruction of the value of accumulated capital.

The second is driven by the change in the share of unproductive to productive labour and a long term tendency for the organic composition of capital to rise.  A rising organic composition of capital will eventually lead to a fall in the rate of profit and vice versa.  A rising share of unproductive to productive labour will lead to a fall in the rate of profit and vice versa[i].

This is displayed by the following graphics, measured by both current and historic costs.  In the first graphic, the secular decline in profitability is exposed, whichever way you measure it.  The cyclical movement in profitability is revealed clearly in the second graphic (measured by replacement or current costs) and its inverse relationship with the organic composition of capital. 

                       

 

The cause of a crisis like the Great Recession must lie with the key laws of motion of capitalism.  The most important law of motion of capitalism, Marx argued, was the law of the tendency of the rate of profit to fall.  So it must be relevant to a Marxist explanation.

Marx was clear on what his definition of the rate of profit (ROP) was – the general or overall rate of profit in an economy was the surplus value generated by the labour force divided by the cost of employing that labour force and the cost of physical or tangible capital:  P = S/C +V, where P is the rate of profit; S is surplus value; C is constant capital (means of production) and V is the cost of the labour power.

Marx is clear that the ROP applies to the whole economy.  It is a general rate of profit derived from the total surplus value produced in an economy as a ratio to the total costs of capitalist production.  All that surplus is produced by the labour power of workers employed in the ‘productive’ capitalist sectors of production.  But some of that value is also transferred to unproductive sectors in the form of wages and profits and to non-capitalist sectors in the form of wages and taxes. 

So the rate of profit is the total surplus value divided by total value of labour in all sectors and the cost of fixed and circulating assets in the capitalist sector.  That means the fixed and circulating capital in the non-capitalist sector are not counted in the denominator for calculating the ROP.  But the wages are.

Profit as a category applies to the capitalist sector of the economy.  Wages as a category applies to the non-capitalist sector too.   The value measured in the non-capitalist sector has been transferred from the capitalist sector through taxation, sales of non-capitalist production to the capitalist sector and through the raising of debt.

There are many ways of measuring a rate of profit.  Take constant capital.  This is fixed assets of capitalist production plus raw materials used in the production process (circulating capital).  In measuring the rate of profit, we must therefore exclude the residential assets (homes) of households and the assets of government and other non-profit activities. 

A capitalist economy can be divided between a productive and unproductive sector.  The productive sector (goods producing, transport and communications) creates all the value and surplus value.  The unproductive sector (commercial trading, real estate, financial services) appropriates some of that value.

Then you could just look at the business sector of the capitalist economy for all parts of Marx’s ROP formula and exclude the wages of public sector workers.  You could narrow it further and exclude the wages of unproductive workers within the productive sector (supervisors, marketing staff etc).  You can measure constant capital in current costs or in historic costs.   And you can measure profit before or after tax. 

In my view, the simplest is the best.  My graphic for the US economy follows a simple formula.  S = net national product (that’s GDP less depreciation) less v (employee compensation); C = net fixed assets (either on an historic or current cost basis); and v = employee compensation i.e. wages plus benefits.  My measure of value is for the whole economy and not just for the corporate sector (which would exclude employee costs or the product appropriated by government from the private sector through taxation).  It also includes the value and profits appropriated by the financial sector, even though it is not productive in the Marxist sense.  My measure of constant capital is for the capitalist sector only and so excludes household investment in homes and government investment.

In one way, it does not seem to matter how you measure the Marxist rate of profit.  All measures show that for the US economy, the largest capitalist economy with 25% of annual world GDP and twice as large as the next largest capitalist economy, there has been a secular trend downwards in the rate of profit for any period in which we have data.  And this is correlated with a trend upwards in the organic composition of capital, suggesting that Marx’s most important law of motion of capitalism, namely the tendency of the rate of profit to fall as the organic composition capital rises, is confirmed by the evidence.

 


[i] See Roberts-The Great Recession, chapter 7. We completely agree with Michael Roberts on this, and we have commented on it elsewhere. (See, for instance, Mick Brooks-Productive and unproductive labour.)There is little discussion of the difference between productive and unproductive labour or the productive sectors of the capitalist economy (those that produce surplus value) and the unproductive sectors in the text. That is because the book is concerned with the capitalist cycle as it was manifested in the Great Recession. Secular trends in capitalism are only dealt with incidentally. (MB)

 

 

 

 

 

 

 

 

 

 

 

Glossary

This is a quick reference guide to Marxist terminology and other technical terms.

Absolute surplus value: the surplus value produced by prolongation of the working day.

Abstract labour: labour from the general pool of labour power available to any society. Abstract labour is the substance of value.

Accumulation of capital: once surplus value has been produced and realised, the capitalist can either spend it on personal consumption or reinvest it to increase the scale of production. The latter is called accumulation.

BRICs: Brazil, Russia, India and China.  Large, fast growing emerging economies.

Constant capital: that part of the capital laid out by the capitalist which consists of machinery, raw materials, and everything else but labour power. Constant capital passes its value unchanged to the final product.

Deflation: a situation when prices are falling generally. This is an indication of severe economic difficulties and can become a trap.

Destruction of capital: the physical destruction of capital or destruction of capital values during a slump, in addition to the ongoing devaluation of capital. This lowers the organic composition of capital and prepares the conditions for a new boom in time.

Devaluation of capital (moral depreciation): the cheapening of existing constant capital because of rises in productivity in the capital goods sector and falls in the prices of capital goods. This lowers the organic composition of capital.

Disproportion crisis: view that capitalist crisis occurs because of the failure of the capitalist system to produce use values in the correct proportions for reproduction to take place.

Exchange value: commodities have to have a common property in order to be compared and exchanged with one another. According to Marx this common property is that they are products of abstract labour.

Exploitation: the process of extracting surplus labour (unpaid labour) in addition to labour necessary to maintain the exploited class (paid labour).

Fictitious capital: paper claims on a share of the surplus value, such as a share certificate. To be contrasted with real capital, real values incorporated in the means of production such as a car plant, ownership of which also entitles the capitalist to exploit the workers.

Financialisation thesis: advocates the view that financialisation represents a whole new phase of capitalist development and the cause of the Great Recession.

Fiscal policy: a policy instrument intended to influence the level of economic activity or prices in a capitalist economy. Fiscal policy usually consists of government spending and taxing decisions, which may involve the government running a deficit or a surplus on its budget.

Fixed exchange rate: the situation where a government fixes the value of its currency (and therefore the exchange rate of imports and exports) against another currency  or gold. The government may occasionally devalue or revalue its currency. Alternatively the government may abandon the national currency altogether. The Euro is an example of the latter policy.

Floating exchange rate: the situation where a government allows market forces to set the value of its currency against other currencies, so that it can fluctuate daily. The national currency may appreciate or depreciate. The government may try to influence the exchange rate, for instance by manipulating interest rates. Sterling is currently on a floating exchange rate.

Gross Domestic Product (GDP): the total value of new goods and services produced in a country over a period of time, usually a year. National income is often used as an equivalent expression in this book.

Inflation: a general rise in prices. The rate of inflation is the rate at which prices are rising. Inflation is only referred to incidentally in this book.

Labour power: the capacity to work. The workers are paid for their subsistence, not for the value of the labour they perform. The capitalist buys a capacity, not a predefined lump of work. How much he gets out of that capacity is up to him. The workers are exploited because the value of the labour they perform, the use value of labour power, is different from the value of their labour power.

Monetary policy: a policy instrument intended to influence the level of economic activity or prices in a capitalist economy. Monetary policy usually consists of attempting to control interest rates or the money supply.

Necessary labour time: the time the workers spend producing the value of the elements of their own subsistence. After that they are performing surplus (unpaid) labour. Then they are being exploited.

Organic composition of capital: the relative proportion of the price of dead labour (constant capital) to living labour (variable capital) employed in the production process. The formula for this is C/V.

Overaccumulation: the overproduction of capital.

Overproduction: the form of appearance of capitalist crisis. The capitalists are unable to sell the commodities produced at a price that will realise the surplus value congealed within them. By contrast all previous economic crises have taken the form of famines, physical shortages of the means of subsistence.

Profit share: the share of national income that goes to profit. It is assumed that the rest goes to wages, so the wages share is inversely related to the profit share, if the national income is just divided into those two classes of revenue. Profit share should be carefully distinguished from the rate of profit, which is calculated by dividing the amount of profit by the capital invested.

Rate of profit: surplus value divided by the constant capital and variable capital laid out by the capitalist. The formula for this is S/(C + V). Note that, in contrast to the value of a commodity, the rate of profit is calculated on the whole of the value of constant capital laid out, whether used up or not.

Relative surplus value: the surplus value arising from reducing the necessary labour time, and thus from increasing the time the workers produce surplus value. This is done by raising the productivity of labour.

Reproduction of capital: when a capitalist has successfully extracted surplus value from his workforce and realised it, he needs to find use values in the correct proportions in the market to begin the cycle of production again. Since capitalism is an unplanned system, this is not guaranteed to happen.

Socially necessary labour time: this determines the value of a commodity. It is the amount of labour required on average to produce an article under the normal conditions of production, and with the average degree of skill and intensity of labour prevalent at the time.

Surplus value: the surplus extracted from the exploited class, the working class, under capitalism. After the workers have produced values that go to pay for their subsistence, necessary labour, they perform unpaid labour for the capitalist class.

Underconsumptionism: view that capitalist crisis occurs because the working class are not paid enough to buy all the values they produce

Use value: a useful object. Being a use value is a precondition for a commodity, but is not a determinant of its value. A use value has to be useful to someone or nobody will buy it. Different commodities have different use values which are incommensurable.

Value of a commodity: this consists of the constant capital that passes its value to the final product, the capitalist’s outlay on wages and the surplus value generated in production. The value is thus resolved into C + V + S.

Variable capital: that part of the capital laid out by the capitalist on labour power, which goes to pay the workers’ wages. It is called variable capital because it potentially yields the capitalist surplus value.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Bibliography

 

Anderson-Is China export-led?, http://www.allroadsleadtochina.com/reports/prc_270907.pdf

Armstrong, Glyn and Harrison-Capitalism since 1945, Blackwell 1991

Brenner-The boom and the bubble: the US in the world economy, Verso Books 2002

Brenner-The economics of global turbulence, New Left Review no. 229 May/June 1998

Brenner-The economics of global turbulence, Verso Books 2nd 2006

Brenner-What is good for Goldman Sachs is good for America, May 2009 Prologue to the Spanish edition of The economics of global turbulence, http://escholarship.org/uc/item/0sg0782h

Brooks-1929 ­­— can in happen again?, http://www.marxist.com/1929-can-it-happen-again.htm

Brooks-Productive and unproductive labour, http://www.marxist.com/unproductive-labour1981.htm

Brooks-Rate of profit and capitalist crisis, http://www.marxist.com/brenner-rate-profit-capitalist-crisis150403.htm

Brooks-The Marxist theory of crisis, http://www.socialist.net/marxist-theory-crisis.htm

Buchanan-Commentary on the minimum wage, Wall Street Journal, 25.04.96

Buiter et al.-Debt of nations, http://www.nber.org/~wbuiter/DoN.pdf

Callinicos-Bonfire of illusions, Polity Press 2010

Clement-Interview with David Card, The Region, December 2006

Cassidy-How markets fail, Penguin Books 2009

Dow-Major recessions, Oxford 1998

Economakis, Anastasiadis and Markaki-An empirical investigation on the US economic performance from 1929 to 2008, http://www.informaworld.com/smpp/cont

Engels-Anti-Duhring, Foreign Languages Publishing House, Moscow 1959

Engels-The housing question, Progress Publishers 1970

Engels-The origin of the family, private property and the state, Progress Publishers 1968

Epstein (ed)-Financialization and the world economy, Introduction, Edward Elgar 2005

Fama interviewed by John Cassidy, http://www.newyorker.com/online/blogs/johncassidy/2010/01/interview-with-eugene-fama.html

Foster-The financialization of accumulation, Monthly Review, October 2010

Foster and Magdoff-The great financial crisis, Monthly Review Press 2008

Fox-Is the market rational?, Fortune 09.12.02, http://money.cnn.com/magazines/fortune/fortune_archive/2002/12/09/333473/index.htm

Freeman-What makes the US profit rate fall?, http://mpra.ub.uni-muenchen.de/14147/

Froud, Moran, Nilsson and Williams-Opportunity lost, in Socialist Register 2011, Merlin Press 2010

Glyn and Sutcliffe-British capitalism, workers and the profits squeeze, Penguin Books 1972

Glyn-Capitalism unleashed, Oxford University Press 2006

Grant-Will there be a slump?, http://www.tedgrant.org/archive/grant/1960/slump.htm

Haldane- Rethinking the financial network, http://www.bankofengland.co.uk/publications/speeches/2009/speech386.pdf

Haldane-The $100 billion question, http://www.bankofengland.co.uk/publications/speeches/2010/speech433.pdf

Harman-Zombie capitalism, Bookmarks 2009

Harvey-The enigma of capital, Profile Books 2010

Hearse-Socialists and the capitalist recession, Introduction, Resistance Books 2009

Hilferding-Finance capital, Routledge and Kegan Paul 1981

Husson-Financial crisis or crisis of capitalism?, http://www.oid-ido.org/imprimer.php3?id_article=1148

Husson-Les coûts historiques d’Andrew Kliman, http://www.npa2009.org/content/les-co%C3%BBts-historiques-d%E2%80%99andrew-kliman-par-michel-husson-d%C3%A9cembre-2009

Husson-The debate on the rate of profit, http://www.internationalviewpoint.org/spip.php?article1894

Hutton-Them and us, Little, Brown, 2010

Itoh and Lapavitsas-Political economy of money and finance, Macmillan 1999

Kemp-The Climax of capitalism, Longman, 1990

Kindleberger-Manias, panics and crashes, Wiley 3rd 1996

Kindleberger-The world in depression 1929-1939, Penguin Books 1987

Kliman-A crisis of capitalism, http://www.marxisthumanistinitiative.org/cc2010/andrew-kliman

Kliman- Master of words, http://www.marxisthumanistinitiative.org/economic-crisis/reply-to-michel-husson-on-the-character-of-the-latest-economic-crisis.html

Kliman-Reclaiming Marx’s ‘Capital,’ Lexington Books 2007

Kliman-The persistent fall in profitability underlying the current crisis: new temporalist evidence, http://akliman.squarespace.com/persistent-fall/

Lapavitsas-Financialisation and capitalist accumulation: structural accounts of the crisis of 2007-9, http://www.researchonmoneyandfinance.org/media/papers/RMF-16-Lapavitsas.pdf

Lenin-Imperialism, the highest stage of capitalism, Progress Publishers 1966

Lipsey-An introduction to positive economics, Weidenfeld and Nicholson 7th 1989

McNally-Global slump: the economics and politics of crisis and resistance, Merlin Press 2011

Maddison- Contours of the World Economy 1-2030 AD, Oxford 2007

Marx-A contribution to the critique of political economy, Lawrence and Wishart 1971

Marx-Grundrisse, Penguin Books 1973

Marx-Capital Volume I, Penguin Books 1976

Marx-Capital Volume II, Penguin Books 1978

Marx-Capital Volume III, Penguin Books 1981

Marx-Theories of surplus value Volume II, Lawrence and Wishart 1969

Marx-Theories of surplus value Volume III, Lawrence and Wishart 1972

Marx and Engels-Communist manifesto, Merlin Press 1998

Marx-Engels Collected Works Volume 33, Lawrence and Wishart 1991

Marx-Engels Selected Correspondence, Progress Publishers 1965

Mason – Meltdown, Verso 2010

Minsky-Stabilizing an unstable economy, McGraw-Hill 2008

Moseley-The long trend of profit, http://www.workersliberty.org/story/2008/03/19/marxists-capitalist-crisis-1-fred-moseley-long-trends-profit

PerelmanRailroading economics, Monthly Review Press 2006

Perelman-The invisible handcuffs of capitalism, Monthly Review Press, 2011

Preobrazhensky-From N.E.P. to socialism, New Park Publications 1973

Reinhart and Reinhart-After the fall, http://www.kansascityfed.org/publicat/sympos/2010/2010-08-17-reinhart.pdf

Reinhart and Rogoff- This time is different, Princeton 2009

Roberts-The Great Recession, 2009

Michael Roberts’ blog, http://thenextrecession.wordpress.com/

Saad-Filho-Crisis in neoliberalism or crisis of neoliberalism, in Socialist Register 2011, Merlin Press 2010

Sanders-A real jaw dropper at the Federal Reserve, http://www.huffingtonpost.com/rep-bernie-sanders/a-real-jaw-dropper-at-the_b_791091.html

Saul-The motor industry in Britain to 1914, Business History 5

Schmitz-The growth of big business in the United States and Western Europe, 1850-1939, Macmillan 1993

Shilling-Irrational exuberance, Broadway Books 2000

Shilling-The age of deleveraging, Wiley 2011

Sinclair-The Flivver King, Charles H. Kerr Publishing Company 1984

Smith-Wealth of nations, http://www.econlib.org/library/Smith/smWN1.html#B.I

Soros-The crash of 2008 and what it means, Public Affairs 2009

Stiglitz-Freefall, Penguin 2010

Temin – Did monetary forces cause the great depression?, Norton 1976

Trotsky-History of the Russian Revolution Volume One, Sphere Books 1967

Turner-No way to run an economy, Pluto 2009

United Kingdom National Accounts: Blue Book 2007, Office for National Statistics

United States: Bureau of Economic Analysis, http://www.bea.gov/national/index.htm#corporate

 

 

 

 

 

 

 

 

 

Measuring the rate of profit

by Michael Roberts

Marx’s law of profitability suggests a cyclical and a secular process combined.  The causes of both the cyclical and secular movements in profitability are broadly two-fold.  The first is driven by the change in the organic composition of capital.  This change is brought about through crisis and the destruction of the value of accumulated capital.

The second is driven by the change in the share of unproductive to productive labour and a long term tendency for the organic composition of capital to rise.  A rising organic composition of capital will eventually lead to a fall in the rate of profit and vice versa.  A rising share of unproductive to productive labour will lead to a fall in the rate of profit and vice versa[i].

This is displayed by the following graphics, measured by both current and historic costs.  In the first graphic, the secular decline in profitability is exposed, whichever way you measure it.  The cyclical movement in profitability is revealed clearly in the second graphic (measured by replacement or current costs) and its inverse relationship with the organic composition of capital. 

                       

 

The cause of a crisis like the Great Recession must lie with the key laws of motion of capitalism.  The most important law of motion of capitalism, Marx argued, was the law of the tendency of the rate of profit to fall.  So it must be relevant to a Marxist explanation.

Marx was clear on what his definition of the rate of profit (ROP) was – the general or overall rate of profit in an economy was the surplus value generated by the labour force divided by the cost of employing that labour force and the cost of physical or tangible capital:  P = S/C +V, where P is the rate of profit; S is surplus value; C is constant capital (means of production) and V is the cost of the labour power.

Marx is clear that the ROP applies to the whole economy.  It is a general rate of profit derived from the total surplus value produced in an economy as a ratio to the total costs of capitalist production.  All that surplus is produced by the labour power of workers employed in the ‘productive’ capitalist sectors of production.  But some of that value is also transferred to unproductive sectors in the form of wages and profits and to non-capitalist sectors in the form of wages and taxes. 

So the rate of profit is the total surplus value divided by total value of labour in all sectors and the cost of fixed and circulating assets in the capitalist sector.  That means the fixed and circulating capital in the non-capitalist sector are not counted in the denominator for calculating the ROP.  But the wages are.

Profit as a category applies to the capitalist sector of the economy.  Wages as a category applies to the non-capitalist sector too.   The value measured in the non-capitalist sector has been transferred from the capitalist sector through taxation, sales of non-capitalist production to the capitalist sector and through the raising of debt.

There are many ways of measuring a rate of profit.  Take constant capital.  This is fixed assets of capitalist production plus raw materials used in the production process (circulating capital).  In measuring the rate of profit, we must therefore exclude the residential assets (homes) of households and the assets of government and other non-profit activities. 

A capitalist economy can be divided between a productive and unproductive sector.  The productive sector (goods producing, transport and communications) creates all the value and surplus value.  The unproductive sector (commercial trading, real estate, financial services) appropriates some of that value.

Then you could just look at the business sector of the capitalist economy for all parts of Marx’s ROP formula and exclude the wages of public sector workers.  You could narrow it further and exclude the wages of unproductive workers within the productive sector (supervisors, marketing staff etc).  You can measure constant capital in current costs or in historic costs.   And you can measure profit before or after tax. 

In my view, the simplest is the best.  My graphic for the US economy follows a simple formula.  S = net national product (that’s GDP less depreciation) less v (employee compensation); C = net fixed assets (either on an historic or current cost basis); and v = employee compensation i.e. wages plus benefits.  My measure of value is for the whole economy and not just for the corporate sector (which would exclude employee costs or the product appropriated by government from the private sector through taxation).  It also includes the value and profits appropriated by the financial sector, even though it is not productive in the Marxist sense.  My measure of constant capital is for the capitalist sector only and so excludes household investment in homes and government investment.

In one way, it does not seem to matter how you measure the Marxist rate of profit.  All measures show that for the US economy, the largest capitalist economy with 25% of annual world GDP and twice as large as the next largest capitalist economy, there has been a secular trend downwards in the rate of profit for any period in which we have data.  And this is correlated with a trend upwards in the organic composition of capital, suggesting that Marx’s most important law of motion of capitalism, namely the tendency of the rate of profit to fall as the organic composition capital rises, is confirmed by the evidence.

 


[i] See Roberts-The Great Recession, chapter 7. We completely agree with Michael Roberts on this, and we have commented on it elsewhere. (See, for instance, Mick Brooks-Productive and unproductive labour.)There is little discussion of the difference between productive and unproductive labour or the productive sectors of the capitalist economy (those that produce surplus value) and the unproductive sectors in the text. That is because the book is concerned with the capitalist cycle as it was manifested in the Great Recession. Secular trends in capitalism are only dealt with incidentally. (MB)

 

 

 

 

 

 

 

 

 

 

 

Glossary

This is a quick reference guide to Marxist terminology and other technical terms.

Absolute surplus value: the surplus value produced by prolongation of the working day.

Abstract labour: labour from the general pool of labour power available to any society. Abstract labour is the substance of value.

Accumulation of capital: once surplus value has been produced and realised, the capitalist can either spend it on personal consumption or reinvest it to increase the scale of production. The latter is called accumulation.

BRICs: Brazil, Russia, India and China.  Large, fast growing emerging economies.

Constant capital: that part of the capital laid out by the capitalist which consists of machinery, raw materials, and everything else but labour power. Constant capital passes its value unchanged to the final product.

Deflation: a situation when prices are falling generally. This is an indication of severe economic difficulties and can become a trap.

Destruction of capital: the physical destruction of capital or destruction of capital values during a slump, in addition to the ongoing devaluation of capital. This lowers the organic composition of capital and prepares the conditions for a new boom in time.

Devaluation of capital (moral depreciation): the cheapening of existing constant capital because of rises in productivity in the capital goods sector and falls in the prices of capital goods. This lowers the organic composition of capital.

Disproportion crisis: view that capitalist crisis occurs because of the failure of the capitalist system to produce use values in the correct proportions for reproduction to take place.

Exchange value: commodities have to have a common property in order to be compared and exchanged with one another. According to Marx this common property is that they are products of abstract labour.

Exploitation: the process of extracting surplus labour (unpaid labour) in addition to labour necessary to maintain the exploited class (paid labour).

Fictitious capital: paper claims on a share of the surplus value, such as a share certificate. To be contrasted with real capital, real values incorporated in the means of production such as a car plant, ownership of which also entitles the capitalist to exploit the workers.

Financialisation thesis: advocates the view that financialisation represents a whole new phase of capitalist development and the cause of the Great Recession.

Fiscal policy: a policy instrument intended to influence the level of economic activity or prices in a capitalist economy. Fiscal policy usually consists of government spending and taxing decisions, which may involve the government running a deficit or a surplus on its budget.

Fixed exchange rate: the situation where a government fixes the value of its currency (and therefore the exchange rate of imports and exports) against another currency  or gold. The government may occasionally devalue or revalue its currency. Alternatively the government may abandon the national currency altogether. The Euro is an example of the latter policy.

Floating exchange rate: the situation where a government allows market forces to set the value of its currency against other currencies, so that it can fluctuate daily. The national currency may appreciate or depreciate. The government may try to influence the exchange rate, for instance by manipulating interest rates. Sterling is currently on a floating exchange rate.

Gross Domestic Product (GDP): the total value of new goods and services produced in a country over a period of time, usually a year. National income is often used as an equivalent expression in this book.

Inflation: a general rise in prices. The rate of inflation is the rate at which prices are rising. Inflation is only referred to incidentally in this book.

Labour power: the capacity to work. The workers are paid for their subsistence, not for the value of the labour they perform. The capitalist buys a capacity, not a predefined lump of work. How much he gets out of that capacity is up to him. The workers are exploited because the value of the labour they perform, the use value of labour power, is different from the value of their labour power.

Monetary policy: a policy instrument intended to influence the level of economic activity or prices in a capitalist economy. Monetary policy usually consists of attempting to control interest rates or the money supply.

Necessary labour time: the time the workers spend producing the value of the elements of their own subsistence. After that they are performing surplus (unpaid) labour. Then they are being exploited.

Organic composition of capital: the relative proportion of the price of dead labour (constant capital) to living labour (variable capital) employed in the production process. The formula for this is C/V.

Overaccumulation: the overproduction of capital.

Overproduction: the form of appearance of capitalist crisis. The capitalists are unable to sell the commodities produced at a price that will realise the surplus value congealed within them. By contrast all previous economic crises have taken the form of famines, physical shortages of the means of subsistence.

Profit share: the share of national income that goes to profit. It is assumed that the rest goes to wages, so the wages share is inversely related to the profit share, if the national income is just divided into those two classes of revenue. Profit share should be carefully distinguished from the rate of profit, which is calculated by dividing the amount of profit by the capital invested.

Rate of profit: surplus value divided by the constant capital and variable capital laid out by the capitalist. The formula for this is S/(C + V). Note that, in contrast to the value of a commodity, the rate of profit is calculated on the whole of the value of constant capital laid out, whether used up or not.

Relative surplus value: the surplus value arising from reducing the necessary labour time, and thus from increasing the time the workers produce surplus value. This is done by raising the productivity of labour.

Reproduction of capital: when a capitalist has successfully extracted surplus value from his workforce and realised it, he needs to find use values in the correct proportions in the market to begin the cycle of production again. Since capitalism is an unplanned system, this is not guaranteed to happen.

Socially necessary labour time: this determines the value of a commodity. It is the amount of labour required on average to produce an article under the normal conditions of production, and with the average degree of skill and intensity of labour prevalent at the time.

Surplus value: the surplus extracted from the exploited class, the working class, under capitalism. After the workers have produced values that go to pay for their subsistence, necessary labour, they perform unpaid labour for the capitalist class.

Underconsumptionism: view that capitalist crisis occurs because the working class are not paid enough to buy all the values they produce

Use value: a useful object. Being a use value is a precondition for a commodity, but is not a determinant of its value. A use value has to be useful to someone or nobody will buy it. Different commodities have different use values which are incommensurable.

Value of a commodity: this consists of the constant capital that passes its value to the final product, the capitalist’s outlay on wages and the surplus value generated in production. The value is thus resolved into C + V + S.

Variable capital: that part of the capital laid out by the capitalist on labour power, which goes to pay the workers’ wages. It is called variable capital because it potentially yields the capitalist surplus value.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Bibliography

 

Anderson-Is China export-led?, http://www.allroadsleadtochina.com/reports/prc_270907.pdf

Armstrong, Glyn and Harrison-Capitalism since 1945, Blackwell 1991

Brenner-The boom and the bubble: the US in the world economy, Verso Books 2002

Brenner-The economics of global turbulence, New Left Review no. 229 May/June 1998

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