Part Six:—Reproduction Of The Means Of Production

Marx had a very interesting model for an economy. In this model there were two types of production:

1) Production of means of production commodities, such as raw materials and means of labour
2) Production of consumption commodities

He called the production of means of production commodities "Department 1" and the production of consumption commodities "Department 2".

In developing this model he started from the premise that the economy was in equilibrium and was content to reproduce production on the same scale as before.

On this basis the figures for each Department were as follows:

Department 1 (Means of Production)
4,000c + 1,000v + 1,000s = 6,000

In this Department the economy uses 4000 of a currency. (This could be millions of euros, millions of pounds. It doesn’t matter) in capital goods. It uses 1,000 in variable capital and 1,000 in surplus value is generated to produce capital goods (i.e. goods used in the means of production) with a value of 6,000.

Department 2 (Consumption Goods)
2,000c + 500v +500s = 3,000

The economy produces 3,000 in consumption goods by using 2,000 constant capital and 500 in variable capital. 500 in surplus value is generated.

Since we are assuming simple reproduction in this economy, the surplus value is consumed by the capitalist. Therefore the workers and capitalists in Department 1 will consume 2,000 in consumption goods. The workers and capitalists in Department 2 will consume 1,000 in consumption goods. The total amount of consumption goods consumed is therefore equal to 3,000. This is also equal to the total amount produced by Department 2. So the consumption and production of consumption goods is in equilibrium.

Department 1 produces 6,000 in means of production commodities. 4,000 of these can be used in Department 1 itself in order for that Department to continue its production. 2,000 can be sold to the capitalists in Department 2 in order for that Department to continue production at its existing level. So, the consumption and production of capital or means of production goods is also in equilibrium.

Another way of looking at this is that the value added (the 1000v + 1000s) in Department 1 should always equal the constant capital in Department 2. Production in Department 1 preserves the value of the capital goods it needs (4000). The extra value added in this Department enables the capitalists in Department 1 to sell 2,000 worth of capital goods to Department 2 in exchange for consumption goods, which the workers and capitalists in Department 1 consume.

Production Of Luxury Goods

Marx further refines the model to include the production of luxury goods.

Within Department 2 he divides production into production of necessary goods (Department 2a) and production of luxury goods (Department 2b). The figures he uses are as follows:

Department 2a
1,600c + 400v + 400s = 2,400

Department 2b
400c + 100v + 100s = 600

In the example Marx uses, the workers will spend all their wages on necessary commodities. Therefore the workers from Department 1 will spend their wages (1,000) on the products of Department 2a. The workers of Department 2a and 2b (400+100) will also spend their money on the products of Department 2a. This will leave 900 of Department 2a (necessary goods) and 600 of Department 2b (luxury goods) giving a total of 1,500, which will be available to the capitalists. Since the surplus value generated in Departments 1, 2a and 2b is also 1,500 (1,000 + 400 + 100) the system is in equilibrium.

To summarise, the workers will consume 1,500 of Department 2a. The capitalists will consume 900 from Department 2a and 600 from Department 2b. This total will equal 3,000 which is equal to the total amount of consumption goods produced.

In order to preserve production at its existing scale the capitalists in Department 1 will buy from other capitalists in Department 1 means of production equal to 4,000. Capitalists in Departments 2a and 2b will buy 1,600 and 400 respectively. The total amount consumed in production equals 6,000, which equals the amount produced by Department 1.

Marx thought that the consumption of luxury goods was the most unstable element of consumption. The products of these industries were very much at the whim of the capitalists and more subject to fashion. Marx believed that often a first sign of a crisis in the economy is a decline in the consumption of luxury goods.

Consumption Of Constant Capital

Marx was aware that even in the simple reproduction model, which he outlined above, there was the potential for instability. For example, in Department 2, what if 200 of the constant capital is represented by depreciation? Or to put it in Marxist terms: 200 of the value added to the consumption products manufactured by Department 2 consists of value transferred from fixed capital (e.g. a machine) to the final product.

This cost or value added is a non-cash cost to the capitalists in Department 2. It represents an amount, which is set aside by the capitalists in Department 2 to enable them to buy fixed capital such as machines etc in the future. But if the capitalists in Department 2 are hoarding in order to buy equipment in the future, they will not be buying goods from the capitalists in Department 1.

In the example outlined above, the capitalists from Department 2 will only buy 1,800 of the goods from Department 1. Since the workers will have been paid 1,000 their consumption patterns will not be affected. However, the capitalists in Department 1 will only have 800 instead of 1,000 to spend. These capitalists will therefore spend 200 less on luxury goods manufactured by capitalists in Department 2b.

We now have a situation where Departments 1 and 2b have goods worth 200 which are unsold. It is possible that the capitalists in such departments will cut back on production, laying off workers in these Departments. This will reduce workers consumption, which will now affect the capitalists in Department 2a. The logic of this is a continued downward spiral into the depths of a depression.

Marx does not suggest a solution to this problem, because in his model no account is taken of the credit system. In the real world, it is unlikely that the capitalists in Department 2, who have no immediate need of investment in fixed capital, will put the money under their mattresses. Perhaps such money would be lent to the banks and the banks would lend to the capitalists in Department 1, who would use the money to sustain their existing level of consumption. The capitalists in Department 1 will be able to use the unsold stock that it has as collateral for such loans.

In effect, the capitalists in Department 2 will be transferring their postponed capital investment to the capitalists in Department 1. This transfer will enable the Department 1 capitalists to sustain their existing level of consumption and encourage them to keep production at the same levels. When the capitalists in Department 2 need to buy the products of Department 1, the latter capitalists will be in a position to repay their loans to the banks and the banks in turn will be in a position to repay the savings of Department 2 capitalists enabling them to buy the machines etc from Department 1.

This is all very well. But it assumes that the future is predictable. The capitalists in Department 1 may not have the confidence to sustain their existing level of consumption despite what appears to be a temporary fall in sales. The banks may not be willing to lend to the capitalists in Department 1 even if the unsold stock of goods in Department 1 is mortgaged to the banks. The banks might believe that the stock is obsolete. However, it must be admitted that the banks will have surplus funds from the savings accumulated from Department 2 and will be in a position to make loans.

Another possible occurrence is if the capitalists in Department 2 need to buy machines before they have accumulated cash reserves to pay for them. Let us again assume the shortfall is 200. In this instance the capitalists in Department 1 have no immediate problems but, in the absence of credit, the capitalists in Department 2 will not be able to sustain their existing level of consumption of products from their own department. This will entail cutbacks in Department 2, which will eventually adversely affect Department 1 because of reduced demand for capital equipment.

However, the equilibrium assumption would entail surplus funds on the part of the capitalists from Department 1. They can use those funds either to give credit to the capitalists in Department 2 or put the funds in the bank and thereby enable the banks to release funds to the Department 2 capitalists, enabling the system to remain stable.

All of the above implies that, even in a society of stable production, the capitalist system is vulnerable to shocks. The source of these shocks is the preponderance of capital goods in society. These by their nature do not give an immediate return. Their value is only released in the production of consumption goods over a period of time. Investment in capital goods is a precondition for the sustenance of the system, but such investment implies confidence in the future, which is uncertain.

Expansion Of Production

The problems of reproduction of the means of production are greater when production is expanded.

Let us assume that production is initially at equilibrium. We will use the same figures as we did when looking at a society which reproduces its existing levels of production.

So, in Department 1 production is as follows:

4,000c + 1,000v + 1,000s = 6,000

and in Department 2:

2,000c + 500v + 500s = 3,000

Now suppose the capitalists wish to expand production. So, instead of consuming all their surplus value they decide to reinvest half in order to increase production.

The immediate effect of this is as follows:

Department 1:
4,000c + 1,000v + 500s + (400c + 100v) = 6,000

Department 2:
2,000c + 500v + 250s + (200c + 50v) = 3,000

The above figures show that half the surplus value is not consumed by the capitalists, but is reinvested. The ratio of constant to variable capital remains the same at 4 to 1.

Given that the decline in consumption by the capitalists will reduce the demand for Department 2 goods (mostly luxury items), it would make sense for the investment to be completely transferred to Department 1 in order for the output of capital goods to be increased.

The new situation will be as follows:

Department 1:
4,600c + 1,150v + 500s = 6,250

Department 2:
2,000c + 500v + 250s = 2,750

Consumption, or the sum of the variable capital and surplus value components, will equal 2,400. This is less than the production of consumption goods in Department 2, which amounts to 2,750. On the other hand the amount of capital goods used in production, 6,600, is less than the total amount produced in Department 1, which is 6,250 (the balance was made up by the capitalists foregoing consumption).

It would be tempting for the capitalists in Department 1 to increase production and for those in Department 2 to reduce production. If this happens, the disparity between production and consumption will be exacerbated. Instead, we’ll assume that the capitalists keep production at the existing level. Therefore we have a situation as follows:

I have assumed that the return on capital has remained the same and the capitalists resume their consumption of surplus value. In this situation the production of capital goods exceeds their consumption by 300 and the consumption of Department 2 goods exceeds their production by 300 as well. This is possible because in the previous period production in Department 2 exceeded production in Department 1 by 350.

If the capitalists in Department 1 use the 300 of surplus capital goods to increase production in Department 2, we will eventually arrive at the following situation:

Department 1:
4,600c + 1,150v + 1,150s = 6,900

Department 2:
2,300c + 575v + 575s = 3,450

We have now returned to an equilibrium state. The sum of the variable capital and the surplus value is now equal to 3,450 which is equal to the total production in Department 2. The total constant capital consumed in both Departments amounting to 6,900 is equal to the output of Department 1.

Like all good economic models, this simplifies reality in order to make it comprehensible. The calculations result in expanded output and consumption partly because there is an increased supply of variable capital or labour.

This is not an unrealistic assumption. Historically, capitalism has appropriated to itself an ever increasing supply of labour within its sphere.

As has been indicated earlier, it first does this by undermining other forms of production such as the feudal forms, thereby releasing a new supply of labour. At certain stages of its development the stock of labour is replenished by immigrants from the colonies. Also, the tendency for it to bring new countries under its sphere of influence, utilising cheaper labour, perpetuates the system.

Another feature of the model is that it assumes a world of certainty. When production is increased, a market is found for the products. But often what is produced for the market place has no demand or has not sufficient demand to justify the costs of production (e.g. the 2002 dot com bubble). Nevertheless, notwithstanding the mistakes and grand illusions about what people will buy it is in essence true that there is a tendency for markets to expand under capitalism. Just as more labour is brought under its sphere of influence, there is a tendency for markets to expand. The amount of people who can produce products for their own needs continues to diminish.

A more serious limitation of the model is that it assumes that the ratio of constant to variable capital remains the same. But this is unrealistic. As Marx himself knew, the proportion of constant capital increases as capitalism develops.

Also, to simplify his assumptions, Marx assumed that the fixed capital component of the total capital outlay was zero. The problem with his analysis is that once he has made this simplifying assumption he then proceeds as if fixed capital is irrelevant.

But, as capitalism develops, not only circulating capital, but especially fixed capital, becomes more important in the production process. The preponderance of fixed capital enables massive increases in production, but can also precipitate crises by tying up an ever increasing proportion of society’s resources.

Indeed, it is often the case that massive increases in production are preceded by economic depression. The Soviet Union experienced this capitalist problem in its drive towards industrialisation. Famine preceded the dramatic increases in output during the 1930s. This was because resources which would otherwise be used for consumption goods were diverted towards investment, the benefits of which often do not accrue for many years.

The brunt of such crises is usually borne by the proletariat. The best description of the consequences of the drive to increase output is contained in the classic nineteenth century French novel Germinal by Emile Zola. One of the strengths of this book is that the proletariat is not completely heroic nor is the bourgeoisie completely indolent or self serving. The actions of the characters are influenced by their relationship to the capitalist system. Towards the beginning of the novel some of the capitalists and managers are seen discussing the economic crisis. The most perceptive of them makes the following comments:

"Ah! We are paying for the good years now! Too many factories have been built, too many railways, too much capital has been tied up with a view to getting enormous output. And today money is all lying doggo, you can’t find enough to keep the show going".

Later on the narrator indicates that the problem is not just that resources have been diverted away from consumption goods, but that the demand for the increased output has diminished. This makes it even more difficult to sustain existing industries:

"To the prime causes of the trouble, the falling off of orders from America and the resulting accumulation of capital immobilised in excessive production, was now added unforeseen lack of coal for the few boilers still working. The mines no longer supplied the machines with their food, and that meant death. Scared by the general unrest, the Company had reduced output and starved its miners, with the inevitable result that by the end of December it had found itself without a scrap of coal in its yards. Everything hung together and the wind of disaster blew far and wide: one failure involved another, industries destroyed each other in their crashes in such a crescendo of catastrophes that the effects could be felt throughout the neighbouring cities of Lille, Douai, and Valenciennes, where banks failed and families found themselves penniless".

But ultimately the system survives. The small capitalists are ruined and their businesses are bought cheaply by the large capitalists.

Ethienne, the leader of the miners’ strike realises with despair that neither the strike nor the economic crisis have weakened the big capitalists. On the contrary their power has been consolidated:

"It filled him with fresh discouragement at the invincible power of big capital, which was so strong in battle that, even in defeat, it could still grow fat on the bodies of the less important casualties lying around it".

Conclusion

Emile Zola’s novel shows that Marx, by ignoring the role of fixed capital (i.e. capital that is used in the production process but only transfers its value to products over many years), underestimated the problems of expanded production. But the central point that an economy needs to forego consumption to expand production is well made.

This point of Marx is lost on conventional Economics. The Financial Times, for example, sees the Japanese economy as "…a basket case where an ageing population eschews consumption and saves to excess…" (27.0.03). Marx would have seen this capacity to forego consumption as a strength, not a weakness. And there is no doubt that businessmen operating in the real world, as distinct from economists operating in their fantasy world, know this in their heart and soul.

Sir Tony O’ Reilly has recently expressed the view that "China poses the greatest threat to World trade" (see Sir Tony’s Nightmare in Northern Star November, 2003). Except for the minor quibble that instead of "World trade", O’ Reilly should have said "Western interests", it is difficult to disagree with this businessman. The countries that control production today will become the pre-eminent political powers of tomorrow.

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