The organic composition of capital (OCC) is a concept created by Karl Marx in his theory of capitalism, which was simultaneously his critique of the political economy of his time. It is derived from his more basic concepts of 'value composition of capital' and 'technical composition of capital'. Marx defines the organic composition of capital as "the value-composition of capital, in so far as it is determined by its technical composition and mirrors the changes of the latter".[1] The 'technical composition of capital' measures the relation between the elements of constant capital (plant, equipment and materials) and variable capital (wage workers). It is 'technical' because no valuation is here involved. In contrast, the 'value composition of capital' is the ratio between the value of the elements of constant capital involved in production and the value of the labor. Marx found that the special concept of 'organic composition of capital' was sometimes useful in analysis, since it assumes that the relative values of all the elements of capital are constant.
In Book I of Capital, Marx made the simplifying assumption that all valuation was in terms of what is often called labor-values (and he called 'values'). In Book III, however, he states that equilibrium values between industries could not be directly proportional to their labor content. The latter only determined equilibrium values in his pre-capitalist 'Simple Commodity Production', where the producers owned their means of production and natural resources were used freely. In Book III, first he assumed that land could be used freely and showed that the equilibrium prices were his 'prices of production'. Later, when he introduced land ownership and the rent on land, the equilibrium prices were to be 'modified production prices' that took the rent of land into account. The implication of this is that the valuation used for the 'value composition of capital' had to be accordingly modified, since the labor-values used throughout Book I was an expedient he used in order to not excessively complicate the communication of this theory. But Marx was not able to complete to his satisfaction Books II and III.
The various distinct concepts related to the composition of capital are often used in contemporary Marxian economics as a theoretical alternative to similar neo-classical concepts. The neoclassical concept most similar to the increasing organic composition of capital is capital deepening. Marx's concept of constant capital is the monetary value of the plant, equipment and materials that are tied up in the production process. And his concept of variable capital is the money value that is tied up in the payment of wages. The concept of OCC does not apply to all capital assets, only to those invested in production (i.e. it excludes assets that are in the 'sphere of consumption', such as homes).
In Capital Vol. 3 Marx demonstrates that the organic composition of capital decisively influences industrial profitability. According to Marx, the OCC expresses the specific form which the capitalist mode of production gives to the relationship between means of production and labor power, determining the productivity of labor and the creation of a surplus product. This relationship has both technical and social aspects, reflecting the fact that simultaneously consumable use values and commercial exchange-values are being produced.
Marx argues that a rising organic composition of capital is a necessary effect of capital accumulation and competition in the sphere of production, at least in the long term. This means that the share of constant capital in the total capital outlay increases, and that labor input per product unit declines.
In his discussion, Marx leaves out of account components of capital other than labour-power and means of production invested in, such as the faux frais of production (incidental expenses). The full importance of the OCC emerges in chapter 8 of the third volume of Das Kapital.[2]
Ratios
The value composition of capital (VCC) is usually expressed as a ratio of constant capital to variable capital, or . Other measures are also used in the Marxian literature. One is . This is the ratio of constant capital to newly produced value (roughly, what modern economists call "value added"), i.e., surplus-value + variable capital and close to the concept of a capital/output ratio. Less common is the measure used by Paul M. Sweezy, i.e., , the ratio of constant capital to the total capital invested.
The total capital tied up by a capitalist enterprise includes more than fixed assets, materials and wages/salaries; it also includes liquid funds, reserves and other financial assets. For instance, an employer must normally reserve funds to pay for ongoing operating expenses, until these are recouped from product sales.
Measures
An empirical proxy measure for the technical composition of capital (TCC) is the average amount of fixed equipment and materials used per worker (capital intensity), or the ratio of the average amount of equipment & materials used to the total hours worked. The value composition of capital (VCC) is usually measured by summing the value of fixed capital ("Cf") and intermediate expenditures (circulating capital or "Cc") and dividing the total by the value of labour costs (V). The estimation procedure is not simple, for example because compensation of employees includes more than wages and part of the tax levy constitutes an element of surplus value.
In modern national accounts, an empirical proxy of the flow of variable capital is the wage-payments associated with productive activity in an accounting period, and a proxy for constant capital (flow measure) is depreciation charges + intermediate consumption; a stock measure of constant capital would be the fixed capital stock plus the average value of inventories held during the period of account (usually a year). However, because the "circulating" component of constant capital (denoted "Cc") includes purchases of external services and other operating costs, the stock of Cc is sometimes measured as the flow of intermediate consumption divided by the average inventory level.
The variable capital actually tied up by an enterprise at any point in time will usually be less than the annual flow value, because wages can in part be paid out of revenues received from ongoing product sales. Thus, the capital reserves held by an enterprise for paying wages may, at any time, be only 1/10 or so of their annual flow value.
The most accurate quantitative estimates for the OCC refer to the outlays in specific sectors, e.g. manufacturing.
Examples
By any of these measures, the plant- and machinery-intensive oil industry would have a high organic composition of capital, while labor-intensive businesses such as catering would tend to have a low OCC. The OCC varies according to differences in production technology, between sectors of an economy, or according to changes in production technology over time.
The OCC and crises
The magnitude of the OCC is important in Marxistcrisis theory because of its impact on the average rate of profit. The implication of a rise in the organic composition of capital is a declining rate of profit; for every new increase in surplus-value realised as profit from sales, an even larger corresponding increase in constant capital investment becomes necessary.
But this represents only a tendency, Marx argues, because the fall of the rate of profit can be offset by counteracting influences. The main ones include:
a reduction of the turnover-time of constant capital inputs.
the reduction of salaries and labour costs paid.
a pool of abundant cheap labor, at home or abroad.
foreign trade which reduces constant capital-input costs.
technological innovations which reduce constant capital-input costs.
the specific distribution of surplus-value as profit, interest, rent, taxes and fees, and the division between distributed and undistributed components of the new value added.
market expansion (more sales, in less time).
monopolistic or oligopolistic pricing of outputs, or in some way artificially raising output prices.
reduction of the tax burden
criminal methods to reduce costs and increase sales and profits
Because numerous different factors can affect profitability, the overall effects of a rising OCC on average industrial profitability therefore really have to be evaluated empirically in a longer time-span, e.g. 20–25 years.
Insofar as the trajectory of capitalist development is, as Marx argues, ruled by the quest for extra surplus-value, the economic fate of the system can be summarised as an interaction between the tendency of the profit rate to decline, and the factors that counteract it: in other words, the permanent battle to reduce costs, increase sales and increase profits.
The hypothetical final result of the rising OCC would be full automation of the production process, in which case labour-costs would be near-zero. This is argued to herald the end of capitalism's functioning as both a profit generating economic system for capitalists, and as a social system, among other things because the capitalist system does not contain a means for distributing incomes other than that based on labour-effort, and full automation would negate the concept of exploitation.[3]
Marx and Ricardo
The different organic compositions of capital of different branches of industry raised a problem for the classical economic schema of David Ricardo and others, who could not reconcile their labor-cost theory of price with the existence of differences in the OCC between sectors. The latter imply different profit rates in different industries. Also, while market competition would establish a ruling price level for a type of output, different enterprises would use more or less labour to produce it. For these reasons, values produced and prices realised by different producers would quantitatively diverge.
Marx either solved this problem with his theory of prices of production and the tendency for profitability differentials to be levelled out through competition, or he failed to solve it, according to which side of the debate over the transformation problem one finds convincing.
Others see this "problem" (the development of a mathematical relationship between prices and labor-values) as a false one, rejecting the idea that Marx aimed to use his labor theory value to understand relative prices. Here the argument is that he aimed to reveal only the social nature or "deep structure" of capitalist society.
In a third interpretation, Marx aspired both to relate values and prices, and offer a social critique, because both of these were necessary to make his case truly convincing. Here, the separate concepts of product-values and product-prices are regarded as essential for a theory of market dynamics and capitalist competition; it is argued that price behaviour in aggregate cannot be understood or theorised about at all without reference to value-relations, explicitly or implicitly.
Historical trends
There has been a lengthy theoretical and statistical dispute among Marxian economists about whether the organic composition of capital really does tend to, or has to rise historically, as Marx predicted, or, to put it differently, whether in aggregate technological progress has a "labor-saving bias", and causes the average profit rate to decline.
One sort of question asked is, why capitalists would introduce new technology, if doing so would result specifically in a lower profit rate on capital invested? Marx's reply is essentially that:
when a successful new technology or product is first introduced on the market, the pioneering producers typically obtain an additional profit (or superprofit), but when the use of the innovation spreads and is more generally applied, profitability declines for all producers.
competition between capitalists forces the introduction of new technologies, whether they like it or not, since the productivity gains of competitors threaten to put them out of business, or reduce their market-shares.
while average profit rates on capital invested may decline as a result, profit margins (or profit volumes) will increase, because more output can be produced and sold in a given accounting period, using the new technologies (implying unit-costs for products made will decline).
The statistical and historical evidence about the Kondratiev waves of capitalist development from the 1830s onwards is certainly favourable to Marx's theory of the rising organic composition of capital.[4] It is difficult to find industries where the secular historical trend is one of an increase in the share of wages in the total capital outlay. Generally, the opposite is the case.
However, it has been argued that the value of physical capital is notoriously difficult to measure empirically in an accurate way; and statistical time-series for economic variables over long periods are also susceptible to errors and distortions. The owners of a business may not even know exactly what the physical assets they use are currently worth, or what their business is currently worth, as a going concern. That worth is hypothetical until such time as the business is sold and paid for. However, the modern trend in official accounting standards is certainly for assets to be valued more and more at their current market value, or current replacement cost, rather than at historic (original acquisition) cost.
In addition, during severe economic slumps, physical capital assets are subject to devaluation, lie idle or are destroyed, while workers become unemployed; the empirical effect is to reduce the organic composition of capital. Likewise, non-profitable war production can also lower the average OCC.
Finally, a technological revolution can also radically change the proportions between constant and variable capital, reducing the cost of constant capital, and lowering the OCC. In that case, operating costs are reduced in a short span of time, or cheaper alternatives substitute for the inputs traditionally used.
Much less discussed in the economic literature is the effect on the organic composition of capital of the growth of the services sector in the developed countries. For example, does the widespread use of computers in labour-intensive services lower the OCC?
The labor theory of value (LTV) is a theory of value that argues that the economic value of a good or service is determined by the total amount of "socially necessary labor" required to produce it.
In 20th-century discussions of Karl Marx's economics, the transformation problem is the problem of finding a general rule by which to transform the "values" of commodities into the "competitive prices" of the marketplace. This problem was first introduced by Marxist economist Conrad Schmidt and later dealt with by Marx in chapter 9 of the draft of volume 3 of Capital. The essential difficulty was this: given that Marx derived profit, in the form of surplus value, from direct labour inputs, and that the ratio of direct labour input to capital input varied widely between commodities, how could he reconcile this with a tendency toward an average rate of profit on all capital invested among industries, if such a tendency exists?
In economics and finance, the profit rate is the relative profitability of an investment project, a capitalist enterprise or a whole capitalist economy. It is similar to the concept of rate of return on investment.
Capital accumulation is the dynamic that motivates the pursuit of profit, involving the investment of money or any financial asset with the goal of increasing the initial monetary value of said asset as a financial return whether in the form of profit, rent, interest, royalties or capital gains. The aim of capital accumulation is to create new fixed and working capitals, broaden and modernize the existing ones, grow the material basis of social-cultural activities, as well as constituting the necessary resource for reserve and insurance. The process of capital accumulation forms the basis of capitalism, and is one of the defining characteristics of a capitalist economic system.
Labour power is the capacity to do work, a key concept used by Karl Marx in his critique of capitalist political economy. Marx distinguished between the capacity to do work, i.e. labour power, and the physical act of working, i.e. labour. Labour power exists in any kind of society, but on what terms it is traded or combined with means of production to produce goods and services has historically varied greatly.
In Marxism, the valorisation or valorization of capital is the increase in the value of capital assets through the application of value-forming labour in production. The German original term is "Verwertung" but this is difficult to translate. The first translation of Capital by Samuel Moore and Edward Aveling, under Engels' editorship, renders "Verwertung" in different ways depending on the context, for example as "creation of surplus-value", "self-expanding value", "increase in value" and similar expressions. These renderings were also used in the US Untermann revised edition, and the Eden and Cedar Paul translation. It has also been wrongly rendered as "realisation of capital".
The value product (VP) is an economic concept formulated by Karl Marx in his critique of political economy during the 1860s, and used in Marxian social accounting theory for capitalist economies. Its annual monetary value is approximately equal to the netted sum of six flows of income generated by production:
The law of the value of commodities, known simply as the law of value, is a central concept in Karl Marx's critique of political economy first expounded in his polemic The Poverty of Philosophy (1847) against Pierre-Joseph Proudhon with reference to David Ricardo's economics. Most generally, it refers to a regulative principle of the economic exchange of the products of human work, namely that the relative exchange-values of those products in trade, usually expressed by money-prices, are proportional to the average amounts of human labor-time which are currently socially necessary to produce them within the capitalist mode of production.
Prices of production is a concept in Karl Marx's critique of political economy, defined as "cost-price + average profit". A production price can be thought of as a type of supply price for products; it refers to the price levels at which newly produced goods and services would have to be sold by the producers, in order to reach a normal, average profit rate on the capital invested to produce the products.
Productive and unproductive labour are concepts that were used in classical political economy mainly in the 18th and 19th centuries, which survive today to some extent in modern management discussions, economic sociology and Marxist or Marxian economic analysis. The concepts strongly influenced the construction of national accounts in the Soviet Union and other Soviet-type societies.
Unequal exchange is used primarily in Marxist economics, but also in ecological economics, to denote forms of exploitation hidden in or underwriting trade. Unequal exchange is usually calculated by assuming that any trade between a country with a high price level and a country with a low price level, is exploitation. Originating, in the wake of the debate on the Singer–Prebisch thesis, as an explanation of the falling terms of trade for underdeveloped countries, the concept was coined in 1962 by the Greco-French economist Arghiri Emmanuel to denote an exchange taking place where the rate of profit has been internationally equalised, but wage-levels have not. It has since acquired a variety of meanings, often linked to other or older traditions which perhaps then raise claims to priority.
The tendency of the rate of profit to fall (TRPF) is a theory in the crisis theory of political economy, according to which the rate of profit—the ratio of the profit to the amount of invested capital—decreases over time. This hypothesis gained additional prominence from its discussion by Karl Marx in Chapter 13 of Capital, Volume III, but economists as diverse as Adam Smith, John Stuart Mill, David Ricardo and William Stanley Jevons referred explicitly to the TRPF as an empirical phenomenon that demanded further theoretical explanation, although they differed on the reasons why the TRPF should necessarily occur.
Okishio's theorem is a theorem formulated by Japanese economist Nobuo Okishio. It has had a major impact on debates about Marx's theory of value. Intuitively, it can be understood as saying that if one capitalist raises his profits by introducing a new technique that cuts his costs, the collective or general rate of profit in society goes up for all capitalists. In 1961, Okishio established this theorem under the assumption that the real wage remains constant. Thus, the theorem isolates the effect of pure innovation from any consequent changes in the wage.
Capital. A Critique of Political Economy. Volume I: The Process of Production of Capital is the first of three treatises that make up Das Kapital, a critique of political economy by the German philosopher and economist Karl Marx. First published on 14 September 1867, Volume I was the product of a decade of research and redrafting and is the only part of Das Kapital to be completed during Marx's life. It focuses on the aspect of capitalism that Marx refers to as the capitalist mode of production or how capitalism organises society to produce goods and services.
In Marxist theory and Marxian economics, the immiseration thesis, also referred to as emiseration thesis, is derived from Karl Marx's analysis of economic development in capitalism, implying that the nature of capitalist production stabilizes real wages, reducing wage growth relative to total value creation in the economy. Even if real wages rise, therefore, the overall labor share of income decreases, leading to the increasing power of capital in society.
Constant capital (c), is a concept created by Karl Marx and used in Marxian political economy. It refers to one of the forms of capital invested in production, which contrasts with variable capital (v). The distinction between constant and variable refers to an aspect of the economic role of factors of production in creating a new value.
Exploitation is a concept defined as, in its broadest sense, one agent taking unfair advantage of another agent. When applying this to labour it denotes an unjust social relationship based on an asymmetry of power or unequal exchange of value between workers and their employers. When speaking about exploitation, there is a direct affiliation with consumption in social theory and traditionally this would label exploitation as unfairly taking advantage of another person because of their vulnerable position, giving the exploiter the power.
In Karl Marx's critique of political economy and subsequent Marxian analyses, the capitalist mode of production refers to the systems of organizing production and distribution within capitalist societies. Private money-making in various forms preceded the development of the capitalist mode of production as such. The capitalist mode of production proper, based on wage-labour and private ownership of the means of production and on industrial technology, began to grow rapidly in Western Europe from the Industrial Revolution, later extending to most of the world.
In Marxian economics, surplus value is the difference between the amount raised through a sale of a product and the amount it cost to manufacture it: i.e. the amount raised through sale of the product minus the cost of the materials, plant and labour power. The concept originated in Ricardian socialism, with the term "surplus value" itself being coined by William Thompson in 1824; however, it was not consistently distinguished from the related concepts of surplus labor and surplus product. The concept was subsequently developed and popularized by Karl Marx. Marx's formulation is the standard sense and the primary basis for further developments, though how much of Marx's concept is original and distinct from the Ricardian concept is disputed. Marx's term is the German word "Mehrwert", which simply means value added, and is cognate to English "more worth".
Marxian economics, or the Marxian school of economics, is a heterodox school of political economic thought. Its foundations can be traced back to Karl Marx's critique of political economy. However, unlike critics of political economy, Marxian economists tend to accept the concept of the economy prima facie. Marxian economics comprises several different theories and includes multiple schools of thought, which are sometimes opposed to each other; in many cases Marxian analysis is used to complement, or to supplement, other economic approaches. Because one does not necessarily have to be politically Marxist to be economically Marxian, the two adjectives coexist in usage, rather than being synonymous: They share a semantic field, while also allowing both connotative and denotative differences.
References
↑ Capital Vol. 1, Chapter 25 ("The General law of Capitalist Accumulation").
Anwar Shaikh and Ahmet Tonak, Measuring the Wealth of Nations. Cambridge University Press.
Angelo Reati, "The Rate of Profit and the Organic Composition of Capital in the Post-1945 Long Wave: The Case of British Industry from 1959 to 1981". Review [of the Fernand Braudel Centre], Volume IX, Number 4, Spring 1986.
Ramin Ramtin: Capitalism and Automation– Revolution in Technology and Capitalist Breakdown. Pluto Press, London, Concord Mass. 1991.
Angelo Reati, "The Rate of Profit and the Organic Composition of Capital in West German Industry from 1960 to 1981", Review of Radical Political Economics; 18(1/2), Spring/Summer 1986, pages 56–86.
Christian Girschner, Die Dienstleistungsgesellschaft. Zur Kritik einer fixen Idee. Kőln: PapyRossa Verlag, 2003.
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