The organic composition of capital (OCC) is a concept created by
Karl Marx
Karl Heinrich Marx (; 5 May 1818 – 14 March 1883) was a German philosopher, economist, historian, sociologist, political theorist, journalist, critic of political economy, and socialist revolutionary. His best-known titles are the 1848 ...
in his theory of capitalism, which was simultaneously his critique of the
political economy
Political economy is the study of how economic systems (e.g. markets and national economies) and political systems (e.g. law, institutions, government) are linked. Widely studied phenomena within the discipline are systems such as labour ...
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". 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.
Overview
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
Capital deepening is a situation where the capital per worker is increasing in the economy. This is also referred to as increase in the capital intensity. Capital deepening is often measured by the rate of change in capital stock per labour hou ...
.
Marx's concept of
constant capital
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 var ...
is the monetary value of the plant, equipment and materials that are tied up in the production process. And his concept of
variable capital
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 vari ...
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
Production may refer to:
Economics and business
* Production (economics)
* Production, the act of manufacturing goods
* Production, in the outline of industrial organization, the act of making products (goods and services)
* Production as a stati ...
(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
The means of production is a term which describes land, labor and capital that can be used to produce products (such as goods or services); however, the term can also refer to anything that is used to produce products. It can also be used as an ...
and
labor power
Labour power (in german: Arbeitskraft; in french: force de travail) is a key concept used by Karl Marx in his critique of capitalist political economy. Marx distinguished between the capacity to do work, labour power, from the physical act of w ...
, determining the
productivity
Productivity is the efficiency of production of goods or services expressed by some measure. Measurements of productivity are often expressed as a ratio of an aggregate output to a single input or an aggregate input used in a production proces ...
of labor and the creation of a
surplus product. This relationship has both technical and social aspects, reflecting the fact that simultaneously consumable
use value
Use value (german: Gebrauchswert) or value in use is a concept in classical political economy and Marxist economics. It refers to the tangible features of a commodity (a tradeable object) which can satisfy some human requirement, want or need, or ...
s and commercial
exchange-value
In political economy and especially Marxian economics, exchange value (German: ''Tauschwert'') refers to one of the four major attributes of a commodity, i.e., an item or service produced for, and sold on the market, the other three attributes be ...
s are being produced.
Marx argues that a rising organic composition of capital is a necessary effect of
capital accumulation and
competition
Competition is a rivalry where two or more parties strive for a common goal which cannot be shared: where one's gain is the other's loss (an example of which is a zero-sum game). Competition can arise between entities such as organisms, indiv ...
in the sphere of
production
Production may refer to:
Economics and business
* Production (economics)
* Production, the act of manufacturing goods
* Production, in the outline of industrial organization, the act of making products (goods and services)
* Production as a stati ...
, at least in the long term. This means that the share of
constant capital
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 var ...
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
Faux frais of production is a concept used by classical political economists and by Karl Marx in his critique of political economy. It refers to "incidental operating expenses" incurred in the productive investment of capital, which do not themselv ...
(incidental expenses).
The full importance of the OCC emerges in chapter 8 of the third volume of ''Das Kapital''.
Ratios
The value composition of capital (VCC) is usually expressed as a ratio of
constant capital
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 var ...
to
variable capital
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 vari ...
, 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
In business, total value added is calculated by tabulating the unit value added (measured by summing unit profit sale price and production cost">Price.html" ;"title="he difference between Price">sale price and production cost], unit depreciation ...
"), i.e.,
surplus-value
In Marxian economics, surplus value is the difference between the amount raised through a sale of a product and the amount it cost to the owner of that product to manufacture it: i.e. the amount raised through sale of the product minus the cost ...
+
variable capital
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 vari ...
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
Capital intensity is the amount of fixed or real capital present in relation to other factors of production, especially labor. At the level of either a production process or the aggregate economy, it may be estimated by the capital to labor ratio, ...
), 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 {{no footnotes, date=April 2010
Compensation of employees (CE) is a statistical term used in national accounts, balance of payments statistics and sometimes in corporate accounts as well. It refers basically to the total gross (pre-tax) wages paid ...
includes more than wages and part of the tax levy constitutes an element of
surplus value.
In modern
national accounts
National accounts or national account systems (NAS) are the implementation of complete and consistent accounting techniques for measuring the economic activity of a nation. These include detailed underlying measures that rely on double-entry ...
, 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
In accountancy, depreciation is a term that refers to two aspects of the same concept: first, the actual decrease of fair value of an asset, such as the decrease in value of factory equipment each year as it is used and wear, and second, the ...
charges +
intermediate consumption
Intermediate consumption (also called "intermediate expenditure") is an economic concept used in national accounts, such as the United Nations System of National Accounts (UNSNA), the US National Income and Product Accounts (NIPA) and the Europea ...
; a stock measure of constant capital would be the
fixed capital
In accounting, fixed capital is any kind of real, physical asset that is used repeatedly in the production of a product. In economics, fixed capital is a type of capital good that as a real, physical asset is used as a means of production which ...
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
Intermediate consumption (also called "intermediate expenditure") is an economic concept used in national accounts, such as the United Nations System of National Accounts (UNSNA), the US National Income and Product Accounts (NIPA) and the Europea ...
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
The petroleum industry, also known as the oil industry or the oil patch, includes the global processes of exploration, extraction, refining, transportation (often by oil tankers and pipelines), and marketing of petroleum products. The larges ...
would have a high organic composition of capital, while labor-intensive businesses such as
catering
Catering is the business of providing food service at a remote site or a site such as a hotel, hospital, pub, aircraft, cruise ship, park, festival, filming location or film studio.
History of catering
The earliest account of major services be ...
would tend to have a low OCC. The OCC varies according to differences in production
technology
Technology is the application of knowledge to reach practical goals in a specifiable and Reproducibility, reproducible way. The word ''technology'' may also mean the product of such an endeavor. The use of technology is widely prevalent in me ...
, 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
Marxist crisis theory
Crisis theory, concerning the causes and consequences of the tendency for the rate of profit to fall in a capitalist system, is associated with Marxian critique of political economy, and was further popularised through Marxist economics.
Hi ...
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
In Marxian economics, surplus value is the difference between the amount raised through a sale of a product and the amount it cost to the owner of that product to manufacture it: i.e. the amount raised through sale of the product minus the cost ...
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:
*buying constant capital inputs at a lower cost.
*an increase in the
rate of exploitation and productivity of
labour power
Labour power (in german: Arbeitskraft; in french: force de travail) is a key concept used by Karl Marx in his critique of capitalist political economy. Marx distinguished between the capacity to do work, labour power, from the physical act of w ...
(including the intensity of work).
*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
In Marxian economics, surplus value is the difference between the amount raised through a sale of a product and the amount it cost to the owner of that product to manufacture it: i.e. the amount raised through sale of the product minus the cost ...
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
In Marxian economics, surplus value is the difference between the amount raised through a sale of a product and the amount it cost to the owner of that product to manufacture it: i.e. the amount raised through sale of the product minus the cost ...
, 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
Automation describes a wide range of technologies that reduce human intervention in processes, namely by predetermining decision criteria, subprocess relationships, and related actions, as well as embodying those predeterminations in machines ...
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.
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
David Ricardo (18 April 1772 – 11 September 1823) was a British political economist. He was one of the most influential of the classical economists along with Thomas Malthus, Adam Smith and James Mill. Ricardo was also a politician, and a ...
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
Prices of production (or "production prices"; in German ''Produktionspreise'') 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 p ...
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
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 (based on their socially necessary labour content, according to his labou ...
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
Technology is the application of knowledge to reach practical goals in a specifiable and reproducible way. The word ''technology'' may also mean the product of such an endeavor. The use of technology is widely prevalent in medicine, science, ...
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.
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
In mathematics, a time series is a series of data points indexed (or listed or graphed) in time order. Most commonly, a time series is a sequence taken at successive equally spaced points in time. Thus it is a sequence of discrete-time data. Ex ...
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
In macroeconomics and modern monetary policy, a devaluation is an official lowering of the value of a country's currency within a fixed exchange-rate system, in which a monetary authority formally sets a lower exchange rate of the national curre ...
, 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
A technological revolution is a period in which one or more technologies is replaced by another novel technology in a short amount of time. It is an era of accelerated technological progress characterized by new innovations whose rapid applic ...
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
The tertiary sector of the economy, generally known as the service sector, is the third of the three economic sectors in the three-sector model (also known as the economic cycle). The others are the primary sector (raw materials) and the second ...
in the developed countries. For example, does the widespread use of computers in labour-intensive services lower the OCC?
See also
*
Law of value
*
Henryk Grossman's crisis schema
References
Karl Marx, "The General Law of Capitalist Accumulation"
*
Anwar Shaikh (Economist), Anwar Shaikh, "Organic Composition of Capital"''
*
Anwar Shaikh (Economist), 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
f 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.
{{DEFAULTSORT:Organic Composition Of Capital
Marxian economics
Capital (economics)
it:Composizione organica del capitale