Reflections on Fine and Filho's "Marx's Capital"

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[Source and Courtesy: Marx's Capital, Ben Fine and Saad Filho, Pg. 62, Figure 5.1] 

This post is a specific reflection on the above Diagram- Economic Reproduction in Capitalism[1], as depicted in the worth-studying book- Marx's Capital by Ben Fine and Alfredo Saad-Filho. This book is one of the most reliable introductions to all the four volumes of Marx's Capital. The above diagram shows, in essence, how economic activities- specific to capitalist mode of production[2], are reproduced, in simple[3] as well as expanded[4] commodity production. More such commentaries on other concepts dealt in the book, shall be put in future.

Preliminary Observations:

Some important preliminary observations may be noted here-

1. The circuit above correctly brings out the geo-spatial motion of 'capital'. It necessarily presents a dynamic[5] view of the economy, which is constantly in motion.

2. The process of reproduction may be divided into two parts:

[A] Department 1(D1)- 'Means of Production' department: Thus, the lower half part of the circuit is D1.

[D1- Department 1, of means of production]

[B] Department 2(D2)- 'Means of Consumption' department: Thus, the upper half part of the circuit is D2. 

[D2- Department 2, of means of consumption]

3. The areas of circuit representing P1 and P2 depict the Production part of the entire process.

4. Consequently, the area representing 'Exchange' depicts that part of circuit wherein the sales and realization of commodities produced is done in the economy. In other words, it represents the market exchanges.

Some reflections:

'M' represents the total pool of money in the given economy. Looking at this model from a macro level will give a better understanding of how Marx's system analyzes the capitalist economy, giving an alternative view to other approaches. As we are analyzing two departments, D1 and D2, 

M = m1 + m2 

and also

M = m'1 + m'2

where, m1 = total money with the producers of D1, and m2 = total money with the producers of D2. At the end of the numerous transactions, entire amount, assuming zero savings, returns to the money pool M. This movement of money, to the extent it is capital advanced and then sales realized, is constant, disrupting frequently thought, and causing crisis[more on this in future posts].

The capitals advanced are:

for D1: c1+v1

for D2: c2+v2; 

where, c1 and c2 are "constant capitals", and v1 and v2 are variable capitals[6].

The capitals- raw materials, etc.,[represented by C1 and C2 ] of respective departments flow within the economic unit of production- firm, pass through Production[P1 and P2], then get converted into commodities ready for sale[C'1 and C'2]. These are then sold, i.e. exchanged for money through market exchange. 

The point of production is Profit. What if the same amount of Money M returns back in the hands of the owner? This would negate the entire purpose of production of commodities. Hence, it is very much essential for an excess amount to be received, which surpasses the original capital advanced. This, we call as per the model- m'1 and m'2 respectively for Departments 1 and 2.

m'1 in the model above is c1+v1+s1, m'2 is c2+v2+s2 respectively for their concerned departments. The mystery then is this 's'- surplus value. The orthodox belief will suggest that this surplus value- the amount excess to the original capital advanced[M1 and M2] has come through the market exchange. But as the model suggests, that's not the case. As soon as the production process is over- P1 and P2, we find the  emergence of surplus values- s1 and s2. Hence, we have a mystery.

This mystery, we shall keep unsolved till future posts. 

Notes and References:

1. Economic Reproduction means the constant generation/production of given social-economic conditions of production, and the production of commodities in a particular given manner, that reinforces the particular mode of production.

2. Capitalist mode of production may also be called, for the sake of simplicity- Capitalism.

3. Simple economic reproduction is wherein the surplus value produced- 's', is not ploughed back into production, but utilized for personal consumption. 

4.Expanded reproduction is where this surplus value 's' is put into production of commodities[Goods or Services], which thus increases the pool of money 'M', every time this happens.

5. By dynamic, we mean an economy constantly in motion rather than a static version of it. This constant movement is seen in the national and global economy as a whole.

6. Variable capital here means the amount of money advanced as 'wages' to the workers[in any enterprise producing any commodity(goods or services)]. Constant capital means the amount of money put into raw materials, machines, tools , equipments, other expenditures, etc. These definitions are different than mainstream definitions.

Consumer is the King, And King never bargains! Part I

This is the philosophy of modern day service/goods providers, at least in many developing cities of India. Bargaining is opposed even before it can begin. This post attempts to trace this emerging[or maybe inherent] concept of anti-bargaining culture, mostly in the 'booming' middle class. It also explains how the notions of consumer freedom, sovereignty, liberty, etc. are merely theoretical deductions to showcase a merrier image of modern society as it is. Finally, it proposes an alternative view to look at consumers and pricing, criticizing the traditional beliefs that price is determined by demand and supply and that profit arises in market exchanges.

Note: This issue will be dealt with, in a series of articles, Part I is presented below.

Bargaining: A crucial feature of market

Bargaining is what brings demand and supply in equilibrium[1]. Demand and Supply aren't some living phenomenons that act and react on their own will. Humans, living and organic, do so. Demand and Supply, just like other economic categories[Capital, Labour, Rent, Profit, Value, Price, etc] is a bearer of 'social production relationships'. In other words, Demand represents 'consumers' and supply- 'producers/sellers'. Hence the popular way of talking about Demand and Supply as some human-independent phenomenon that functions through some magical 'invisible hand'[2] is purely a sophistry.

When Demand exceeds supply, humans, in form of consumers and sellers bargain, take decisions and react, hence resulting in a given price prevailing- where Demand and Supply intersect. This means that bargaining, especially on the side of buyers is an essential element for an equilibrium to occur.

Markets, Perfect competition and Consumer choice:

With the emergence of organized[3] sellers[modern day goods/service providers], bargaining has begun to loose its importance as a crucial characteristic of markets. Indeed, in local markets where many unorganized sellers are present[4], bargaining is prevalent and normal. But in more organized markets and selling centres{cafes, cybers, jewelry stores, large hotels, etc.}, bargaining is of least necessity. Also, with the emergence of the 'booming' middle class whose ultimate goal of life, it appears, is maximizing its marginal utilities, bargaining is deployed carefully, only where one's economic/social status isn't put at stake if she is found bargaining.

This raises an important question:

Is Consumer really the King?

The philosophy 'Consumer is King, and King never bargains' implies that consumers must quitely accept whatever price prevails, and if they do not want to, then may find another place to buy. It clearly is a violation of the so-asserted consumer sovereignty. It merely shows the hollowness of those who proclaim that markets provide freedom through choices, while these choices being decided and established by non-individual factors, or maybe by the sellers themselves. More on this issue later.

We thus understand that when bargaining is made to loose its prevalence and when buyers are forced to accept the prices as given, except of course their right to find some another seller[5], it reduces consumers' decision making ability, her freedom to ask for a change in price which doesn't suit her. 

An industrial phenomenon:

Bargaining being made to look as 'low standard', 'poor' and 'non-king' behaviour is not a special but an industry-wide phenomenon. Many industries such as cyber cafe, precious metals, garments, luxury items, and some more have such a culture creeping in. This means bargaining is made to look as a shameful phenomenon which a consumer must avoid so as to preserve her standard in society. Of course, social and cultural variables too are responsible for this, but when such phenomenons are asserted in stores, malls and shops, it reinforces and multiplies such a culture.

Hence, the options for choosing another seller looses its significance once it is understood that this is not limited to a single firm, but spread throughout an industry. If Consumers cannot bargain, then the notions of consumer freedom are utterly foolish and useless. The worst part is, the consumers themselves accept and reinforce such a culture, which at the end harms their own 'marginal utility'.

References and Notes:

1. It means that when buyers and sellers actively negotiate with each other, only then and then can an equilibrium occur. If, one party were to be completely mum, the price reached would have been dictated by another side, which is against the so-cherished consumer freedom, consumer choice, etc.

2. This obviously is not a reference to Adam Smith. He didn't use the term in the manner that modern day Economists have made it out to be. For more information on this issue/controversy, refer here. Of course this blog of Mr. Gavin Kennedy is plagued with all sorts of fallacious thinking about Karl Marx and his economics, it still defends Smith well, and is a worth looking at apologetic of Smith.

3. The term "Organized" here is meant to signify far more institutionalized, coordinated and centralized sellers. For eg. cyber cafes, branded garments sellers, etc. 

4. Such as mandis, local vegetable markets, grocery stores, local bazaars{eg. of electronics} and so on. 

5. This option is superficial as explained in the next part, because it is an industry-wide phenomenon. Some exceptions might exist, but only rarely.

Commodities, Production & Poverty- Part 1

Commodities. How essential and omnipresent this phenomenon is. It embodies a sort of magical character, phantom-like as Marx would say. A key difference between human species and other animals is that of possession of commodities. Before we embark upon a brief journey about this phenomenon, lets look at the its meaning:

Commodity: 

A Good or Service that has a use-value(utility) for users and an exchange-value(price) on market. Food, House, Cars, Pens, Fan, Tubelight, Petrol, Diesel, Bed, Spoon, Mobiles, Laptops, Facebook, Google, you name it! How fascinating this is. We humans are surrounded by a plethora of commodities. It is the prime objective phenomenon that differentiates us from other animal species.

Human Kingdom vs. Animal Kingdom:

Homo sapiens produce, distribute, exchange and consume commodities(both Goods and Services) on a large scale, not matched by any other organic species. Our lives are 'defined' by the commodities we use. A basic difference between a poor and a rich is the differences in the 'possession and utilization of commodities', isn't it? A rich family would be characterized by qualitatively and quantitatively better consumption as compared to a poor household. Suppose if all had the same houses, cars, &c, i.e. exactly same amenities. there wouldn't be any differentiation in rich and poor.

Of course, some of the readers might argue that its the amount of 'money' owned that makes this difference. I shall have two arguments against this proposition:

1. Money, in itself is not the end- though its a debatable issue in today's commodity fetish society. Its the amount of 'purchasing power' that money commands is what makes it an end; thus in the end the amount of commodities it can purchase.

2. Even if money were an end in itself- again, today this might be so in many cases, still money too is a commodity.  Thus money as an end, is after all a commodity as an end.

Why commodities are essential to human existence?

Commodities give shape to human life. They define our method of survival(even in Darwinian sense). They also smoothen  our organic processes. We wouldn't go in detail of this role of commodities, but briefly putting it, these add to the enrichment and easing of our day-to-day processes; Eg. Sleeping, Eating, Working, Travelling, Communicating, Thinking and so many more. Thus, commodities are very essential for leading a better life- both materially and immaterially. 

Economics and Commodities:

Marx begins in his magnum opus Capital-Volume 1:

"The wealth of those societies in which the capitalist mode of production prevails, presents itself as ―an immense accumulation of commodities, its unit being a single commodity. Our investigation must therefore begin with the analysis of a commodity."(1)

An a priori assertion, though a valuable one. He's one of the few Economists who give a completely fresh way of looking at the society and economy around us. Here, we can understand that accumulation of commodities is an essential feature of a capitalist society. Indeed it is. The prime aim of majority of population is gathering(or in market terms- earning) money, it being a commodity or commodity-buying power. The constant consumption of commodities is what keeps the flow of Economy going. 

A simple model of Economy: The PEDEC model

Production > Exchange > Distribution > Exchange > Consumption   

{PEDEC model}

Two stages are of prime importance. One- Consumption and Two- Production. Production is the source of Consumption and Consumption is the reason for Production.

Thus, we find an interconnected, contradictory but unitary relation between these two processes of Economy. It becomes crucial then, to point out that modern economics is mainly 'Consumption-focused' economic theory. Not just that. We as consumers are hardly concerned about the Production side of the commodity under our scrutiny. What matters is its objective appearance, its use-value and its exchange value.

Production and Economics:

Having said that, Production is still a very important process that needs to be emphasized for a better understanding about the Economy around us. One may call it capitalistic, socialistic, mixed, based on whatever one's ideological standpoint. But, production side of the coin remains equally crucial to focus. Modern Economics is the culmination of years of combustion and application of many competing ideas. Still, the excess focus on Consumption process of the Economy is debatable. 

Production: Two major components:  

We may thus define Production as the expenditure of human labour on natural resources and other raw materials to transform them into consumable commodities. Note that Capital Goods such as Machinary, Equipments, etc. are all the product of human labour. We consider them here as non-natural resources of production. Natural Resources are the Primary source of all the production that occurs. 

Then comes Human labour, that transforms the natural resources into the commodities we use as consumers. Here, we may include the Entrepreneurs who perform specific important functions in the economy(2){more on 'Entrepreneur' in future posts}. Hence, every commodity is a product of many different sorts of labour(3){more on types of labour in future posts}. The pencil that comes in our hand, is but a product of numerous labourers and the expenditure of their labour. The breakfast on our tables is a product of so many labourers. Its fascinating how wonderful the Production process can be if we can just rewind the many economic activities behind any given commodity. Human labour hence is the Secondary source of all production that occurs.

GDP- A mass of numerous commodities:

GDP- Gross Domestic Product, is today the most essential indicator of Economic growth of an Economy. Globally, policy-making is extremely sensitive to GDP growth rate and its trend. Recent RBI's monetary tightening vs. economic growth(4) phenomenon was an important indicator of the importance of GDP and its effects on the growth of a nation.

Let us try to understand GDP's importance from the above discussion we had. GDP, as said above is a mammoth mass of numerous commodities(both Goods and Services) which indicate the available wealth of a nation. This wealth, then has to percolate through the entire economic spectrum of a nation. This shall result  in, argue Macroeconomists, upliftment of the poor section of the society.

If we look at this statement, a crucial fact emerges. A poor is one who has very less or no access to commodities, as simple as this! Lack of commodities and access to them is poverty. The scale of this 'lack of access' may change as per the nation, need, economy, &c. But the fact remains that Poverty removal means enhanced availability of Commodities. Once enough commodities are available to a poor household, they are uplifted from the poverty trap. This availability may be in the form of increased money availability, but as argued above in the beginning, money is but a commodity. 

Hence, the key reason on GDP growth lies in the fact that more the commodities, more its availability, subsequently more access to them for the deprived. Again, access to commodities is an issue that cannot be solved by merely having increased GDP growth. This requires sufficient measures to facilitate percolation of increased wealth to the "Bottom of the pyramid" to quote C.K. Prahald(5). Also, an active and a major involvement of the Private sector is needed. This is possible if rural India is seen as a huge and potential market opportunity, both by the Private and Public sector.

Conclusion

Commodities. How essential and omnipresent this phenomenon is indeed. It provides a fresh new way of looking at Capitalism. They surround us everywhere, that is what differentiates human species from other animal species. Excessive focus on Consumption process in modern economics must give some more space to Production process too. Commodities are not merely the products of the magic of markets, but a product of numerous diversified labourer and representative of expended human labour- including that of the Entrepreneurs.

GDP is a huge mass of commodities of numerous kinds that satisfy human needs. High importance of this measure of economic growth lies in the fact that it can enable enhanced access to commodities for the poor and deprived. Poverty is merely the absence of sufficient commodities to consume. This sufficiency is based on many variables and differ as per the country in question. Both public and private sector must look at Rural India, as brought out by the late C.K. Prahlad in his book "Bottom of the Pyramid", as a huge, untapped market opportunity.

References and Notes:

1. Capital, Volume 1, Karl Marx, 1890, Chapter 1, Section 1, Paragraph 1.

2. Entrepreneurs are Labourers after all. Labour here is used in terms of expenditure of human labour power. In Economics, Labour and Entrepreneurs are two different Factors of Production.

3. Here we refer to concrete labour in Marx's language. This means different types of labour such as weaving, tailoring, singing, &c.

4. Recently, headline inflation came down form +9% levels to below 7% figures. This succeeded a crucial debate nationally about the constraints RBI had over its tightening monetary stance. After more than 13 consecutive hikes in lending rate, RBI had to stop for two major reasons: A). GDP growth constraint and B). Waiting for the lag-effect of tightened policy to show results. Indeed, it has shown positive results, at least for now.

5. Bottom of the Pyramid is an excellent work by a Management Professor- Late Shri C.K. Prahlad. It brings out the hidden, untapped market opportunity in the Rural regions of India which represent a dynamic and a brand-conscious consumer segment. It busts many of the myths about Poor, their consumption habits and much more. Interested readers may purchase it here.

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