Organic composition of capital
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The organic composition of capital (OCC) is a concept described by Karl Marx, and used in Marxian political economy as a theoretical alternative to neo-classical concepts of factors of production, capital productivity and capital-output ratios.
According to Marx, the OCC expresses the form 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. Marx argues that an increasing organic composition of capital is a necessary effect of capital accumulation and competition in the sphere of production, at least in the long term.
The concept is introduced in chapter 25 of Das Kapital, where Marx writes:
"In this chapter we consider the influence of the growth of capital on the lot of the labouring class. The most important factor in this inquiry is the composition of capital and the changes it undergoes in the course of the process of accumulation. The composition of capital is to be understood in a two-fold sense. On the side of value, it is determined by the proportion in which it is divided into constant capital or value of the means of production, and variable capital or value of labour-power, the sum total of wages. On the side of material, as it functions in the process of production, all capital is divided into means of production and living labour-power. This latter composition is determined by the relation between the mass of the means of production employed, on the one hand, and the mass of labour necessary for their employment on the other. I call the former the value-composition, the latter the technical composition of capital. Between the two there is a strict correlation. To express this, I call the value-composition of capital, in so far as it is determined by its technical composition and mirrors the changes of the latter, the organic composition of capital."
The organic composition of capital may be approximated in terms of value, or in terms of technical composition.
The value composition of capital (VCC) is usually expressed as a ratio of constant capital to variable capital, or c/v. Other measures have been seen in the Marxian literature. One is c/(s + v). 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., c/(c + v), the ratio of constant capital to the total capital invested. Total capital invested of course includes more than fixed assets, materials and wages/salaries.
A empirical proxy measure for the technical composition of capital (TCC) is the average amount of fixed equipment and materials used per worker, or the ratio of the average amount of equipment & materials used to the total hours worked.
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 changes in technology over time. Its magnitude is important in Marxist crisis theory because of its impact on the rate of profit. The implication of a rise in the organic composition of capital is a declining rate of profit. Yet, crisis theory argues that capitalists will be impelled by competition to increase the organic composition of capital. In crisis theory the decline in the rate of profit is expected to approach a limit of zero profitability, infinite production per labour hour, and a "fair price" of zero for all goods. This is argued to herald the end of capitalism's function as both a profit generating economic system for capitalists and as a social system.
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. Marx either solved this problem, or 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 instead of the social nature 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 convincing.
There has been a lengthy theoretical and statistical dispute among economists about whether the organic composition of capital does tend to rise historically, as Marx predicted, or, to put it differently, whether in aggregate technological progress has a "labor-saving bias".
The statistical and historical evidence about the long waves of capitalist development from the 1830s onwards is certainly favourable to Marx's case. It is difficult to find industries where the secular trend is one of an increase in the share of wages in the total capital outlay. However, the value of capital is notoriously difficult to measure empirically in an accurate way; and statistical time-series for economic variables over long periods are susceptible to errors and distortions. In addition, during economic slumps physical capital assets are subject to devaluation, lie idle or are destroyed, while workers become unemployed; the effect is to reduce the organic composition of capital. The effect of destructive wars, and non-profitable war production is seen to be an amplification of the effect of depression on the 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.
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. This issue has only tended to be raised by Marxists working in tertiary sectors like administration (for example, the journal Processed World), or by Autonomist Marxists in their concept of the social factory.
References
Karl Marx, "The General Law of Capitalist Accumulation". http://www.marxists.org/archive/marx/works/1867-c1/ch25.htm
- Anwar Shaikh, "Organic Composition of Capital"