Turnover Time and Its Relation to the Rate of Profit
Hyun Woong Park UMASS, Zhun Xu UMASS
2010 Oct 17
Economy of time, to this all economy ultimately reduces itself.
Marx, Grundrisse, p.173
I.
Introduction
The rate of profit is the major Marxian variable that indicates overall workings of the
capitalist economy.1 And its falling tendency in relation to crisis has been a subject of intense
debate in Marxian literature. Yet there has been no agreement on the determinants of the
tendency. Profit squeeze theory (Weisskopf 1979, Wolff 1986, etc.) and rising organic
composition of capital (Marx 1981, Shaikh 1978, Weeks 1981, etc.) have been the two most
widely accepted approaches. The increase of the ratio of unproductive labour to productive
labour as a major determinant of the falling rate of profit was also discussed as an alternative
explanation (Moseley 1990, 1997). In addition, the increase in the rate of surplus value was
pointed out as a main factor that generates a counter-tendency.2 However, one important
element which plays no less important role in Marx’s discussion of the rate of profit and crisis
has been more or less downgraded in the literature: i.e. turnover time.
In various places in Capital Volume II Marx indicates turnover as one of the most
important categories in direct relation to profitability. As is well-known, the major theme of
Volume II is the circuit, the life cycle, of capital comprising the production process and the
1
A distinctive feature of capitalist mode of production lies in the fact that its primary aim is
producing more (surplus) value not use-value; thus its production process amounts to valorization
process. For this reason, “the rate of which the total capital is valorized, i.e. the rate of profit is the
spur to capitalist production (in the same way as the valorization of capital is its sole purpose.)” (Marx
1981, p.350-1) The importance of the rate of profit in the analysis of capitalism is well demonstrated
in Dumenil & Levy (1999, p.7)
2
The law of falling rate of profit itself was refuted by the so-called Okishio Theorem (Okishio 1961,
Roemer 1977, Parijs 1980, etc.).
1
circulation process in their unity. The gist is to conceive capital as a process which spans a
certain time period. And turnover is introduced as a fundamental concept that reflects the
time structure of capital. An implication is that, simply put, it takes time or has to risk time to
produce and realize surplus value since the variable capital generating surplus value has to go
through a certain time period of circuit along with its constant counterpart. Therefore a
conclusion is derived that turnover time is one of the factors that significantly affect the profit
rate of capital.
An implication that follows is that manipulating the turnover time is what capitalists can
rely on at times when the profitability conditions get deteriorated. In this regard Marx’s
demonstration of turnover provides an insight in understanding characteristic phenomena of
the modern industrial capitalism where various cutting-edge technology are intensively
utilized in time-management so as to affirmatively respond to the aggravating environment
for the business, and to acquire more profit in a given period of time; as Dell founder Michael
Dell says, “The closer you get to perfect information about demand, the closer you get to zero
inventory. It's a simple formula. More inventories mean you have less information, and more
information means you have fewer inventories.” Indeed, turnover is one of the categories that
distinguish Marx’s theory of capitalist production from that of neoclassical economics which
does not consider time structure.3
Given such an important theoretical status and implications of turnover within Marx’s
theory, it is quite striking to find that the concept has not drawn due attention in the literature.
Among a few articles that came to our view, Webby & Rigby (1986) and Fichtenbaum (1988)
were the ones that directly deal with turnover time in their empirical study of the trend of
profit rate. In large, we adopt their method in constructing the turnover rate and extend their
results, which cover pre-Neoliberal era, into quite recent years. In this way we could compare
the trend of turnover rate in the so-called Golden Age capitalism when the business
environment was rather ‘peaceful’ and in the Neoliberal era when all-round competition
among capitalists drastically increased.
The paper is presented in the following order: In section two we examine Marx’s
discussion on the turnover and its relation to the rate of profit throughout Capital. And in
Pointing at this, Haass (1992, p.118) writes “The problem of evaluating time lags as distinct from
quantities, however, directly challenges the most basic assumption of neoclassical price theory: the
concept of marginal productivity.” Dymski (1990, p.42) relates the absence of a consideration of time
in Walrasian general equilibrium theory to its indifference to money and credit.
3
2
section three Webby & Rigby (1986) and Fichtenbaum (1988) are discussed. Explanations on
the method and data set adopted in this paper will be given in the fourth section. And the
empirical results will be presented in section four. In the last section we provide a case study
of food industry as our conclusion of this paper.
II. Turnover and its relation to the rate of profit
In this section we examine Marx’s analysis of the concept of turnover and its relation to
the profit rate.
Marx on turnover
(i) Theory
The most systematic demonstration of the concept can be found in Part Two of Capital,
Volume Two. In particular Chapter 7, 8, and 9 need a careful examination. There the most
difficult aspect of the concept arises when considered in relation to the fixed capital. In
Chapter 7 Marx introduces the concept of turnover with an assumption of the absence of
fixed capital, and in the following chapter discusses the distinction between fixed capital and
circulating capital. And in chapter 9 the concept is analyzed with the fixed capital taken into
account. Throughout these discussions two conceptually different approaches to ‘turnover’
seem to emerge:
-
1st notion of turnover: ‘the sum of the time of circulation and that of production’; or,
‘the interval between one cyclical period of the capital value and the next.’
-
2nd notion of turnover: time taken for the advanced capital value to return to its initial
form recovering its initial amount.4
Both definitions emerge from the analysis of the circulatory nature of the capital circuit of
the forms M ...M ' (the circuit of money capital) and P...P ' (the circuit of productive
4
The same definition is derived in Chapter 16 as well, where it is emphasized that turnover is directly
related to the concept of ‘advanced.’ According to it, “the capitalist value is always advanced and not
genuinely spent, in that once this value has gone through the various phrases of its circuit, it returns
again to its starting-point, and, moreover, it does so enriched with surplus-value. This is what
characterized it as advanced. The time that elapses between its point of departure and its point of
return is the time for which it is advanced. The entire circuit which the capital value undergoes,
measured by the time from its advance to its reflux, forms its turnover, and the duration of this
turnover is a turnover time.” (Marx 1978, p.382)
3
capital). Namely, the capital value advanced returns to its initial form (either the money form
or the form of productive elements) in order to repeat the same process; what is more, it
repeats the same process in order to be perpetuated and valorized.5 Capital value that has
‘perpetuated valorization’ as its nature is subject to a circular movement, constantly returning
to its initial form after a series of processes. Marx writes “[This] circuit of capital, when [it] is
taken not as an isolated act but as a periodic process, is called its turnover.” 6 One period of
cycle which the advanced capital value goes through and recovers its initial form at the end is
consisted of production and circulation process. From this it necessarily follows that the two
definitions of turnover coincide with each other. In other words, the capital value advanced is
recovered with surplus value only after it has gone through the combined cycle of production
and circulation process. However, this holds only with an unrealistic assumption: the absence
of fixed capital.
The distinction between circulating and fixed capital as resulting from the circulatory
aspect of the capital lies in that the circulating capital goods enter both the labour process and
the valorization process in their entire physical shape, while this is the case for the fixed
capital goods only in the labour process.7 So to speak, contrary to the circulating capital
goods, the fixed capital goods transfer their value to the final output only gradually.
Obviously, the time for the fixed capital goods to completely recover their initially advanced
form cannot be identical with, but should be longer than, the time lasting for one cycle of
production and circulation.
Marx recognizes this so well, and it is in Chapter 9 where he analyzes “how two new forms
which capital obtains as a result of the circulation process [i.e. fixed capital & circulation
capital] … affect the form of its turnover.”8 Now if the first definition of turnover is adopted
the turnover time wouldn’t be affected by the existence of the fixed capital. However when
we take the second definition, the problem arises how to conceptualize the notion of turnover
and its duration in case of the capital constitutive of both circulating capital goods and fixed
capital goods with various turnover times. Marx’s solution is ‘the average turnover of its
different component parts.’ 9 But he merely cites an ‘American economist’ Scrope’s
5
6
7
8
9
Marx 1978, p.235
Marx 1978, p.235
Marx 1978, p.
Marx 1978, p.236
Marx 1978, p.262
4
numerical example of the calculation of the average turnover rather than providing his own
case. We briefly reproduce it here with numbers changed.10
A total capital value advanced is $100,000. One half of it is invested in the first fixed
capital goods which turn once in twenty five years; four tenths of it is invested in the second
fixed capital goods which turn once in five years; the remaining one tenth is invested in
circulation capital goods which turn four times in one year. Then the capitalist’s annual
expenditure would be
$50, 000  25  $2, 000
$40, 000  5  $8, 000
$10, 000  4  $40, 000
____________________________
$50, 000 .
From this Scrope calculates that the average turnover of the various components of the capital
is 2 years by reasoning that the capitalist’s ‘annual expenditure’ is $50,000, and that the total
capital advanced is $100,000.
The fallacy of this approach is immediately obvious. The pinpoint here is the difference
between capital ‘expended’ and capital ‘advanced.’11 In Scrope’s case, capital is said to turn
over when its initial total value is expended in the process of capital circuit regardless of
whether it completely recovers its initial form. Accordingly, turnover time is conceived as
time taken for the entire expenditure of the amount identical to the total capital value.
However, this is not what the second definition of turnover refers to. It is the time taken for
the capital value to recover its initial form in its initial magnitude. The correct calculation
would be as follows: The entire value of circulating capital goods of $10,000 is always
recovered at the end of each cycle and advanced again in the next cycle, and thus the same is
true at the end of each year as well. For the fixed capital goods, $10,000 (depreciation of the
first fixed capital goods
$2,000 + that of the second fixed capital goods $8,000) would be
recovered at the end of each year. Therefore, at the end of year 9 the capitalist would have in
her pocket $10,000 of circulating capital returned and $90,000 of fixed capital returned. The
entire capital value initially advanced $100,000 is fully recovered in 9 years. Thus the correct
10
Notice that Marx assumes there is no surplus values creation, and this assumption does not affect
the result of the examination of the essential relation between fixed capital and turnover of capital.
11
See footnote 6 as for the difference.
5
turnover time should be 9 year.
Whether Marx approves Scrope’s method is somewhat vague since he merely cites it and
does not make any comment on the calculation itself. Yet despite the incomplete and rough
nature of Volume II and the difficulty, as Marx himself admits, of the issue itself, we think the
core idea of the second definition of turnover and of the average turnover time is clear
enough. And according to it, Marx would have rejected Scrope’s approach.
One problem with Marx’s (incomplete) theory of turnover is that he seems to think that the
consideration of fixed capital modifies one concept of turnover to the other. This is also true
with Engels. Observing that “In commercial practice, the turnover is generally worked out
only roughly,” he comments “It is assumed that the capital has turnovered over once as soon
as the sum of commodity price realized reaches the sum of the total capital applied. But the
capital can have completed a whole cycle only if the sum of the cost prices of the
commodities realized equals the sum of the total capital.” (Capital III, p.334-5)
However, better way to theorize turnover is to conceptualize its two distinctive definitions
as referring two different types of turnover. To put it differently, whether or not fixed capital
is existent, we can conceive without any hinderance those two different types of turnover. Of
course they would coincide with each other only in a special case when there are no fixed
capital goods. And we can also measure at least conceptually the first definition of turnover
even when there are fixed capital goods. Actually, this approach is what Marx and Engels
seem to take, as can be verified in their discussion of turnover in relation to the rate of profit
in Volume 3. That is, with the term ‘turnover’, they solely refer to the first type of turnover
(as a sum of production time and circulation time). Measurement issue as well is confined to
this type of turnover, to which we now turn.
(ii) Measurement
First of all, the main problem with measuring the turnover cycle as a sum of production
time and circulation time is that it is not immediately known; indirect ways to calculate it
using accounting data need to be devised. As mentioned above, Engels makes a comment in
an editorial note that “In commercial practice, the turnover is generally worked out only
roughly.”
In Chapter 4, Volume 3 written by Engels, it is suggested to calculate the number of
turnover during the year by dividing the annual expenditure of variable capital by variable
6
capital advanced. That is,
n
V
v
(1)
where n: the annual number of turnover, V: annual expenditure, and v: variable capital
advanced at the start of the year. Actually, this approach is adopted by Marx already in
Chapter 16 of Volume 2 where the turnover of variable capital is discussed. The problem of
this approach however is that, as Engels rightly complaints, “The capitalist himself does not
know in most cases how much variable capital he employs in his business …. Even if he were
to keep a separate record for wages paid, this would simply indicate the total sum paid at the
end of the year, i.e. vn [=V], and not the advanced variable capital v itself.” (Capital III,
p.167) In a word, it is almost impossible to get data for the variable capital advanced; this is
true even to this day!
Since “the only distinction within his capital that impresses itself on the capitalist as
fundamental is the distinction between fixed and circulating capital,” Engels comes up with
an unique way to calculate v so as to eventually measure n as follows: Since circulating
capital ( Cc ), which is consisted of constant part of circulating capital ( cc ) and variable
capital ( v ), is known,12 the ratio by which circulating capital ( Cc ) is consisted of cc and v
would be identical to the ratio of the annual expenditure on constant part of circulation capital
( CC ) to that on variable capital ( V ), both of which are also known data. Thus,
v  Cc 
V
CC  V
(2).
Combining equations (1) and (2) we finally get the annual number of turnover as:
n
CC  V
Cc
(3).
In words, if the sum of the annual expenditures on the constant part and variable part of the
circulating capital is divided by the circulating part of the total capital advanced, we would
get the annual number of turnover.
Marx on the relation of turnover and the profit rate
Marx’s systematic discussion of the relation between the turnover and the rate of profit is
12
The circulating capital would be the total capital advanced less the fixed capital.
7
found in two places throughout Capital13; Chapter 16 of Volume 2 and Chapter 4 of Volume 3.
To begin with, the rate of profit is measured as an annual rate with the annual production of
surplus value divided by the capital value advanced at the start of the year not by the capital
expended or turned over during the year.14 That is, the profit rate measures the ratio of the
annual flow of surplus value on the stock of capital value. Here the turnover time affects the
rate of profit by directly influencing the magnitude of surplus value produced during the year.
Let us examine Marx’s analysis more closely.
First of all, the relation between turnover and production of surplus value is discussed in
Chapter 16 of Volume 2 titled ‘The Turnover of Variable Capital’. As the appropriation of
surplus value is directly associated with the employment of the variable capital in the
production cycle, the more frequently the variable capital goes through the production cycle
along with the constant capital the more surplus value would be appropriated. Thus we have:
S  sn
(4)
where S: annual appropriation of surplus value, s: appropriation of surplus value in only one
production cycle. Now dividing both S and s by variable capital advanced v gives us:
S s
 n , S '  s 'n
v v
(5)
where S’: annual rate of surplus value and s’: real rate of surplus value, using Marx’s
terminology.
Then the discussion is expanded to the rate of profit in Chapter 4 of Volume 3 titled ‘The
Effect of the Turnover on the Rate of Profit.’15 As noted earlier, Marx constructs the annual
rate of profit as an annual flow of surplus value over the stock of capital value advanced as
Turnover as an essential aspect of capital is elaborated in Grundrisse p.537-544. For example, “It
follows from the relation of circulation time to the production process that the sum of values produced,
or the total realization of capital in a given epoch, is determined not simply by the new value which it
creates in the production process, or by the surplus time realized in the production process, but rather
by this surplus time (surplus value) multiplied by the number which expresses how often the
production process of capital can be repeated within a given period of time.” (Grundrisse, p.544)
14
Marx 1981, p.165. See the footnote 6 above for the difference of capital ‘advanced’ and capital
‘expended.’ Dumenil & Levy point out the same idea: “A model with fixed capital accounts for the
fact that capital is not consumed in one period, but lasts several periods and is, consequently, a stock.
It is necessary to distinguish the cost (the productive consumption) from the advance which must be
used in the denominator of the profit rate.” (Dumenil & Levy 1993, p.54)
13
15
This chapter is written by Engels.
8
follows:
S
S
p' 
 v
c  v c 1
v
(6)
Where c: constant capital advanced, v: variable capital advanced.16 Now in order to grasp the
influence the turnover has on the rate of profit, combine (4) and (6) and we have
s
n
sn
p' 
 v ,
c  v c 1
v
(7)
The positive relation of the turnover to the rate of profit is evident in the equation. However,
Marx himself ignores it in Part 3 of Volume III where he analyzes the tendencies and countertendencies of the rate of profit to fall.
c
In Chapter 13 of Volume III a rise in the organic composition of capital ( ) associated
v
with a technological development is discussed as major determinant of the tendential fall of
s
the rate of profit; whereas in Chapter 14, Volume III the rate of surplus value ( ) comes at
v
the center of the analysis of the counter-tendencies. But no word is given to turnover. Marx
does not distinguish surplus value appropriated during the whole year (S) and that during one
production cycle (s). As an editor Engels makes a supplementary remark in a parenthesis that
Marx is assuming that S is identical to s which is the same thing to assume capital turns over
only once during the year. (Capital III, p.334-5)17
The implication is not small. If we are confined to such assumption, our behavioral
analysis of the capitalist in counter-acting to the tendential fall of the profit rate would be
confined to the management strategies within the production site. The elements Marx
discusses in Chapter 14 as counteracting factors all belong to this category.18 The problem
16
To avoid a confusion in notation, notice that total capital value advanced can be think of two ways;
consisting of fixed capital ( C f ) and circulating capital ( Cc ), or of constant capital ( c ) and variable
capital ( v ). Thus it holds C f + Cc = c + v .
17
Also considering the fact that the chapter on the relation between the turnover and the rate of profit,
i.e. Chapter 4 of Volume 3 is written by Engels, Engels seems to be more sensitive than Marx to this
issue at least in Volume 3.
18
They are i) more intense exploitation of labour, ii) reduction of wages below their value, iii)
9
with this is that other possible capitalist strategies related to the circulatory nature of the
capital circuit as a periodic process constituting various phases of production and circulation
escape from our attention. It is our argument that increase of the velocity of capital should
have been included as one of the major counteracting factors to the tendential fall of the profit
rate.
One last comment on Engels’s treatment of turnover in Chapter 4 of Volume 3 relates to
another important issue of fixed capital. Notice that when fixed capital is taken into
consideration the rate of profit is constructed as follows:
p' 
S
sn

C f  Cc C f  Cc
(8)
where C f is the value of fixed capital advanced. The profit rate considered here is an annual
rate; and fixed capital goods may possibly have a life cycle of longer than a year depreciating
across its life span of several years, i.e. C f getting smaller as time goes by until it is entirely
used up and thereby new investment on fixed capital goods is made. As a consequence, the
rate of profit should grow larger as fixed capital depreciates decreasing the denominator of
the profit rate equation. This strange phenomenon is not adequately observed and addressed
in that Chapter. Indeed this issue involves theoretical and practical difficulties in dealing with
turnover and depreciation of fixed capital, which are all left unattended in Engel’s treatment
of them.
III. Previous Studies
In this section we examine Webby & Rigby (1986) and Fichtenbaum (1988). One of the
main methodological advance Webby & Rigby made is to use the accounting scheme that
“distinguishes wages paid (annual cost) from the variable capital advanced [at the beginning
of each cycle].” This method is much more realistic than not so doing as was the usual case
with previous literature. It is because since “wages are paid at fixed intervals, the total wage
bill does not have to be advanced at the beginning of each production period.” (Webby &
Rigby 1986: 43) This exactly confirms to our main interest in the circuitous nature of capital
production. Webby & Rigby explain that distinguishing between, to use our notations, V
cheapening of the elements of constant capital, iv) the relative surplus population, v) foreign trade,
and vi) the increase in share of capital.
10
and v is based on their critique of previous empirical works that makes an unrealistic
assumption that the number of turnover is one each year. Admitting the difficulty faced by the
previous studies of getting data on the turnover, they suggest to calculate it using other
available date.
Their method of measurement is exactly the same with that suggested by Marx & Engels;
equation (1) for the number of turnover i.e. n 
V 19
. And the way they measure variable
v
capital advanced, which is not readily known as we have mentioned, is also the same with
that of Marx & Engels, i.e. equation (2) v  Cc 
V
. Note that as a proxy for the
CC  V
circulating capital Cc , they use ‘the owned inventory’ which is consisted of “raw material
held, goods in process and finished goods of own manufacture at plant and warehouse.”
Actually such ‘owned inventory’ is not a precise proxy for the circulation capital since it is
embodied not only with variable capital advanced ( v ) and circulating part of constant capital
advanced ( cc ) but also the depreciated part of fixed capital. However, we follow Webby &
Rigby’s method due to the lack of better proxy.
And an assumption is made that the ratio by which the owned inventory is consisted by cc
and v is the same with the ratio by which the total annual expenditure on circulating capital is
consisted of annual expenditure on variable capital ( V ) and that on circulating part of
constant capital ( CC ). Remind that this assumption is the same with Engel’s idea for
calculating the variable capital advanced as in equation (2). Lastly, Webby & Rigby calculate
CC as the sum of depreciation, raw material and fuel.
Using this method for the Canadian manufacturing industry and projecting the relation
between the rate of profit and turnover rate during 1950~1980, Webby and Rigby report that
the rate of profit steadily decreased and the number of turnover slightly increased fluctuating
around the average of 4. That is, they identified an inverse relation between the rate of profit
and turnover signifying that the increase of the turnover rate was not sufficiently large to
offset the other forces that cause the fall in the profit rate.
Similarly to Webby & Rigby, Fichtenbaum (1988) points out the confusion between the
19
To be more precise they include another parameter that takes into account the extent to which the
wage payment is delayed as is usually the case in reality. This parameter would have a positive
relation with the number of turnover. However we disregard it to simplify our discussion, which does
not belittle our main discussion.
11
annual rate of surplus value ( S ' ) and the real rate of surplus value or exploitation rate ( s ' ) –
see equation (4) and (5) above – as a major flaw of previous studies caused by not
incorporating the turnover rate in measuring profit rate. Keeping in line with Webby &
Rigby’s 1986 work, Fichtenbaum goes beyond them by examining the effect of turnover on
the business cycle. More concretely, he does a regression analysis of the effect of turnover
along with other parameters such as the real rate of surplus value and organic composition of
capital on the cyclical change of industrial production and capital utilization. And he reports
the affirmative result that the turnover rate and real rate of surplus value have a positive effect
on the two business cycle variables, i.e. the cyclical change of industrial production and
capital utilization, and that the organic composition of capital has a negative effect.
As for the method of measurement, everything is almost the same except one:
Fichtenbaum does not adopt the assumption used in equation (2). Recall that given the
equation for the turnover rate as n 
V
, for Webby & Rigby and Engels V is known and
v
the unknown v could be calculated from the other available data and thus finally n can be
measured. On the other hand Fichtenbaum, who does not accept that v can be calculated with
other known variables, attempts first to calculate n using other data, and then measures v
from V and n . Fichtenbaum’s idea is the following: “Turnover, in general, is measured by
taking the ratio of a flow to a stock which tells us the number of times of the stock is
contained in the flow. Turnover, in the manufacturing sector is therefore calculated by taking
sales (value added less the change in the inventory of finished products) which is a flow, and
dividing it by the total inventory of the manufacturing sector which is a stock.” (Fichtenbaum
1988: 224)
IV. Method and Data
In order to construct consistent series of turnover cycles and profit rates, we use data solely
from bureau of economic analysis (thereafter BEA). The details of variable construction are
briefly explained below.
1) Turnover construction
We have observed above two approaches to empirical measure of turnover rate. The first
12
version is n 
CC  V
, namely the ratio between annual expenditure on the constant and
Cc
variable parts of circulating capital and circulating capital advanced. The second version can
be written as
. The latter is a more loosely defined turnover,
which captures the core information of Marxian turnover, that is the number of production
cycles needed to recover the investment spent by capitalists.
The technical issue here is how to turn these constructions into operational variables. For
the first version, due to lack of information about annual circulating capital from BEA data,
we turn to the closest proxy: annual total expenditure on compensation and other “wear and
tear” costs calculated by subtracting profits from gross income. The circulating capital
advanced is calculated as the sum of depreciation and inventory which is normal practice.
For the second version, since no information of total revenue is available, gross income is
used instead.
Therefore, the two versions of turnover can be rewritten as below20:
Webby & Rigby type:
Fichtenbaum type:
The final complete dataset includes annual turnover in both versions for manufacture
sector as a whole and also separate series on durable and non-durable goods with the said
sector during 1948-2008.
2) Profit rate construction
In this research, only the current cost measure of fixed asset is used to calculate profit rates.
The simple construction of profit rate is:
3) Smooth the dataset
20
The data for these variables are taken from BEA NIPA Table 6.1 B,C,D (gross income), Table 6.16
B, C, D (profits), Table 5.7.5 A, B (inventory), Table 3.4 ES (depreciation), Table 3.3 ES (fixed assets).
13
The remaining technical issue here is how to reconcile the industry classification change
from Standard Industrial Classification (SIC) 1972 to 1987 and to North American Industry
Classification System (NAICS). In this dataset, the fixed assets and depreciation data are both
consistently measured based on NAICS; however, gross income, profits and inventory
experienced classification system changes. In particular, the data between 1972 SIC and 1987
SIC are dramatically different from the break point in 1987, on the other hand, we did not
observe a similar structural break between 1987 SIC and NAICS at the break point 1998.
Although in general the data between systems are not comparable, it makes sense to adjust
the turnover series to make a smooth data as long as the trend does not change, because after
all we are only interested in the trend and its relationship with profit rates. Therefore, the pre1987 data are divided by 4 to make the series smooth; at the same time, separate analysis will
be conducted to examine the issues we are interested at.
V. Results
Figure 1. The rate of profit of US manufacturing for 1948-2008
We have largely the similar result with those reported in the previous literature on the
empirical study on the historical trend of the rate of profit using the current-cost approach. It
shows a downward trend of the rate of profit during the whole the postwar period until
around 1980 where it starts to peak up but not fully, around one third of the highest peak in
1953.
14
Figure 2. The two versions of turnover rate in US manufacturing for 1948-2008
Figure 2 projects the trend of two different versions of turnover rate. As can be seen from
the way they are constructed the only difference is that as for the numerator profit is
subtracted from gross income for the first turnover rate and no such subtraction for the
second one. Therefore, the two trends show a similar pattern with a gap reflecting the profit.
The trend of turnover rate was more or less flat during the post-war period. This flat trend
staying at a high level (approximately 5 in one case and 7 in the other) in this period reflects a
certain character of business environment which does not enforce the capitalists to ardently
rely on turnover strategy to adjust the time structure of their business. That is, we might
conjecture that even though the rate of profit during this period was on the decreasing trend
the business environment was agreeable so that the capitalists were able to maintain the high
level of turnover rate and satisfied with that currently high level.
But the trend went through a steep fall in 1973-1974 when the oil crisis occurred and
stayed low until early 1980s when it started to peak up. And it shows a well-worked out
increasing trend during the so-called neoliberal era almost recovering its post-war period
level at around the middle of 1990s at least for the first version of turnover rate. Probably the
worst profitability and the crisis in the early 1980s, the latter of which can be seen as a
continuation of the one started from around the middle of 1970s, spurted the capitalists to
heavily rely on increasing the turnover rate as one of the main management strategies to
improving the profitability conditions. As the upward trend of the rate of profit during the
same period evidences, the capitalists’ turnover strategy seems to be successful. Yet another
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steep plunge of the turnover rate at around the middle of 2000s where the economy was
experience a boom remains to be explained with more concrete data analysis and case studies.
Figure 3. The relation between profit rate and the turnover rate 1.
Figure 4. The relation between profit rate and the turnover rate 2.
The relations between the profit rate and two different versions of turnover rate respectively
are plotted in figure 3 and 4. Even though the first one shows a rather less consistent relation
compared to the second, both of them largely reflects Marx’s basic idea on turnover as
observed in this paper, namely that the turnover rate is in positive relation to the profit rate. In
the next section we intensify our theoretical arguments and the empirical results through the
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case study on the US food industry.
VI. Case study: The role of turnover in restructuring food industry
It is the nature of capitalism to try to decrease turnover time (or increase turnover) as far as
it could. However, as we have seen in the previous sections, the actual turnover did not
always see an increase. With some abstraction, we can differentiate the determinants of
turnover into three segments: internal labor control, technical progress, market conditions; the
former two determines production time and are often time indistinguishable, while the third
factor is beyond control of individual capitalists but rather determined by general laws of
capitalism such as secular trend of declining profit rate and chronically under-consumption
crisis, etc. Based on the previous empirical results, it can be observed that during the early
neo-liberal era, both the turnover and the profit rate revived a little bit from its bottom from
late 1970s, early 1980s. Thus it will be interesting to for us to look at an individual industry
to see what historical changes happened in the said industry to increase turnover as well as
profit rate at the same time.
By any measure, Food industry is great case to focus on. It is relatively less capital
intensive, and seems to be constrained by lots of natural limits on turnover which are not
easily overcome by capitalists. For example, Marx himself vividly described how farmers
changed the way of feeding animals in order to bring them to the market as soon as possible
due to the natural limits on growth of animals. Nevertheless, increasing turnover in food
manufacturing is not easy; then our question is, how did capitalists manage to do a great job?
As we will see, the changes in food manufacturing sector in USA during recent decades have
been great footnotes for Marx’s insights into the passion of shortening turnover time.
By no means could we provide a complete picture of the evolving food industry. However,
there are several interesting features in this industry that we would like to link to our previous
results, i.e., there has been a pattern change in American manufacturing sector since late
1970s in which production time (one determinant of turnover) was greatly reduced compared
to the “Golden Age” capitalism.
The first feature is the increasing consolidation of food industry and increasing
productivity. This includes both the consolidation among food producers and concentration of
food processing industry. Both are important for us to understand the dynamic in the food
industry.
For example, “the top 20 firms’ share rose from 36 percent of industry sales in
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1987 to 43.7 percent in 1992 and to 51 percent in 1997.” (Harris, et. al., 2002, pp. 6). “In red
meatpacking, market share of the four largest firms rose from 47 percent in 1987 to 61-63
percent since 1993. In steer and heifer slaughter, this same measure rose from 70 percent in
1989 to 81 percent in 1999, with most concentration occurring prior to 1989. Four-firm
concentration in hog slaughter also increased from 30 percent in 1989 to 57 percent in 1999.”
(ibid, pp. 6).
The increasing consolidation is partly the result of the huge wave of merger and acquisition
since 1980s, and this implies increasing competition among food processors. In order to
survive, the capitalists have to become more productive by using more and more machinery
and automation techniques, which are mentioned by lots of authors (McBride et. al. 2003,
Ward et. al. 1997). Moreover, the economy of scale itself provides the possibility to reduce
production time by producing in more units at the same time.
The increased productivity has enabled producers to consider some alternative to mass
production (accompanied by lots of inventories). More importantly, retailers are also
restructuring their supply chain by reducing inventory and shorten cycle time (Van Donk
2001). This also forced food processors to more rely on flexible production and “make to
order” instead of “make to stock”, which in turn relies on increased productivity and
increasing consolidation of the whole industry.
The second feature is the increasing importance of so-called “vertical integration”. This in
essence is the integration of capitalist sectors in different stages of production/circulation, and
it could greatly reduce the circulation time which is needed if firms were to sell products on
market; as we discussed earlier, this would also greatly reduce the negative impact of
turnover time---uncertainty, which has been mentioned as the most important factor in the
vertical integration. In the food industry case, it has taken various forms due to different
market structure in different industries, such as production contract, sale contract, and direct
ownership.
The trend of vertical integration has been very clear to the scholars since 1980s. “Another
feature of the restructuring of the 1970s and 1980s, in particular, has been the development of
vertical links in the food chain as large corporations seek to gain control over a greater
proportion of the production process in order to sustain accumulation. A good example of
vertical integration in the UK is the case of Hillsdown Holdings. Hillsdown is a diversified
food company that grew rapidly during the 1980s to achieve a turnover of well over 3,000
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million through over 150 subsidiary companies. As a major producer of red meat and bacon,
poultry and eggs, Hillsdown supplies the majority of its own animal feed requirements from
its ten mills and its own chicks from its commercial hatcheries.” (Ward et. al. 1997)
Another example comes from meatpacking industry: “the most recent stage of
restructuring in the industry, which began in the late 1970s, has been particularly turbulent.
The major features of this restructuring include changes in the production process, a new
wave of plant relocations, intensified competition, and a significant reduction of wage scales”
(Stanley 1994), “Production in the meatpacking industry also has become more
automated”(ibid). Even in those departments where manual labor remained dominant,
productivity (manifested by time) has been increased because of “a finer division of tasks
(facilitating rapid repetition) and increased chain speeds.” (ibid) For the wave of plant
relocation, the new plants have been built near the feedlots on High Plains so that live
animals could be delivered easily, which saved lots of time (and money). (ibid)
Lots of authors have noticed the dramatic changes happening in hog production, especially
the structural changes of the industry. This took place in both production and circulation
phases, and resulted in reductions in turn over time as well as increase in efficiency.
On production side, there are some evidence of close coordination between packing and
production units (vertical integration), for example, “Tyson, almost a decade after becoming a
mega-producer (500,000 head or more marketed), purchased a packing plant in Missouri
adjoining its production sites centered in Arkansas” (Rhodes 1998). This may not be as
important as it looks (as the author suggested), but at the same time the author concluded that
“…a few packers are increasing their controlled hog production and two large producers,
Cargill and PSF, have recently become pork packers.” (ibid, pp. 237). Moreover, the contract
production has been more and more important since 1970s, for example, “the marketing of
contractors are estimated to have grown from 9.5 million head of market hogs in 1988 to 13.2
million in 1991, and 22.8 million in 1994.” According to one of the authors, approximately
21% of the US swine inventory was being raised by contractees on December 1, 1996 (ibid,
pp. 213). The primary reason for contracting is because it could reduce the capital invested by
the contractor and reduce the production time (more units are producing at the same time).
On circulation side, it is well noted that spot (free) market for slaughter hogs has been less
and less important. Spot market is where price is given by the market and transactions happen
“naturally”. It may take a long time for producers to sell their hogs, especially when they are
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large producers. Actually, according to the authors, “very large producers sold only 10% of
their hogs on the spot market, 78% by formula pricing, 1 percent on fixed price contracts, 2
percent on risk-sharing deals with packers”(ibid, pp. 230), this means that the circulation time
is greatly reduced by the prior price agreements between producers and packers or other large
customers.
Even where packers and producers are not merged, they become quite closely related.
“Uncertain supplies day to day and season to season also impose costs on packers when
facilities are not used to capacity and when labor is underutilized.” (ibid, pp. 213) So instead
of procuring hogs by employing lots of buyers, packers increased coordination with
producers by agreements or contracts. This greatly reduced the uncertainty and waiting in the
overall turnover period, thus contributed to capital accumulation. The author provided an
example that with agreements with several large producers to expand production, Smithfield
Foods successfully built the country’s largest plant in North Carolina when hogs were already
at deficit in this region.(ibid, pp. 213)
To sum up, the recent restructuring in American food processing industry and other
industries along the supply chain clearly shows that capitalists use two main strategies to
reduce turnover time; first is reducing production time by strengthening control on workers
by flexible production and improved techniques; second is to reduce circulation time by
consolidation both horizontally (merger and acquisition) and vertically (vertical integration)
to reduce market transaction time. These restructuring took place as neo-liberalism reached
its height and proved to be useful for quite some time as the revive of turnover in neoliberalism shows. However, no matter how much production time and circulation time
capitalists are able to reduce, they are not able to solve the fundamental realization problem
which is partly directly caused by their pursuit of turnover increase. Therefore, the any
strategy to increase turnover in capitalism cannot work forever, sooner or later, the strategy
will be defeated by the contradiction generated by it. That is what we see in today’s world.
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