Constant Capital, Accumulation, Sustainability, and Economic Theory
In the Grundrisse, Marx remarked that "all economics is the economics of time." Time,
of course, was important to Marx, as suggested by the prominence he gave to the
subject of the working day and, even more, by the historical perspective that ran
through his whole body of work. Marx's concept of constant capital provides an
especially rich entry point for long-term considerations of time. After all, the acquisition
of constant capital generally provides no immediate benefits; only the means for future
advantages.
A few qualifications are necessary at this point. First, of course, Marx does pay
particular attention to the time workers sacrifice for their employment, but labor time is
generally treated as a kind of short term transaction, which can be repeated daily.
Second, Marx does mention that leisure time can provide workers with the opportunity
to develop their capacity over time. Third, the discussion of constant capital here is
restricted to relatively long-lived fixed capital. Finally, despite these qualifications,
identifying the subject as constant capital is useful because relatively little analysis has
been devoted to this very important category of Marx's.
By sticking its head in the sands, conventional economics tends to avoid looking at the
most crucial problems in the economy. Nonetheless, something akin to Marx's concept
of constant capital reached the boundaries of conventional economic theory in a way
that is worthy of our attention. This near penetration of academic economics came by
way of an unlikely figure, Nicholas Georgescu-Roegen was an anti-Marxist Romanian
monarchist economist, whom Paul Samuelson once described as a “scholar’s scholar,
an economist’s economist." Samuelson, who did more than anyone else to spread the
modern style of conventional economics in the United States, added “I defy any
informed economist to remain complacent after meditating over [Georgescu’s] essay!"
The core of Georgescu-Roegen's work remains virtually unknown outside of a small
group of environmental economists. Even Samuelson resisted his own challenge by
failing to follow up on Georgescu-Roegen's analysis.
The reason for this neglect is not difficult to discover. Although his work is highly
mathematical, his mathematics undermines the simplistic mathematical modeling that
conventional economics has worked so hard to develop. For example, GeorgescuRoegan retrospectively mentioned his three most important contributions to economic
theory, among which was "the proof that the standard production function involves a
crashing absurdity, the necessity of distinguishing between flows and funds, and the
role of idleness in the various modes of production." By funds, he meant stocks of
productive capacity, which take the form of fixed capital or natural resources.
Here, another qualification is necessary. For Marx, natural resources are obviously not
the same as fixed capital. Constant capital is intentionally produced by capitalists. It
represents a quantity of congealed labor. In contrast, Marx correctly treats the
productive capacity of natural resources as an inheritance rather than a product of
labor. However, the function of natural resources and fixed capital are very similar in
that they both augment the productive capacity of labor and are used up in the process
of production. Georgescu-Roegen's analysis of funds emphasizes that both represent a
configuration of material, which the production process diminishes over time as part of
the larger process of the creation of entropy.
The production of entropy violates the sensitivities of conventional economists, who
understand markets as a system that is capable of unlimited output so long as
capitalists continue to accumulate increasing amounts of productive capital. The appeal
of markets' promise of unlimited production probably explains why so few environmental
economists exist in the world of conventional economics.
As a committed critic of Marx, Georgescu-Roegan was familiar enough with his foe to
be able to learn from him. Although he did not approve
of Marx's economics or his
politics, his analysis of funds as well as his emphasis on time comes quite close to
some of Marx's treatment of constant capital, especially with respect to the question of
time.
Based on no more than a few short visits to Chinese universities, I have the impression
that an epidemic of conventional economics seems to be spreading through some parts
of China's academic world. In this respect, Georgescu-Roegan's demolition of
conventional economics from the inside seems worthy of your attention.
Getting back to the subject of time, the great lengths to which conventional economics
goes in order to eliminate time from its analysis worthy of our attention. This inattention
to time is not an oversight, but intentional. In fact, this oversight is necessary in order to
manufacture purported proofs of market efficiency. One key tactic that conventional
economics uses is to remove time from consideration is to emphasize transactions,
which occur almost instantaneously as funds move from the buyer or seller. Second,
conventional economics teaches that prices tend toward marginal costs, which
eliminates the role of long-lived fixed capital. (Much of the rest of this paper will expand
on this last assertion). This move is very important. Otherwise, economists would have
to take into account the durability of such capital, which contain the congealed labor of
the past, which is used to produce means of production during a future period, the
duration is generally unknown. Whether such capital will produce a profit or not will
probably depend on unknown future market conditions and technologies. To consider
an analysis of capitalism without taking the nature of fixed capital into account is
ridiculous. But then again, conventional economics presents itself as a scientific
analysis of a profit-driven mode of production without a serious theory of profit.
Finally, conventional economics goes even further in eliminating considerations of time
by assuming that capitalists have a statistically accurate probability distribution of the
future, which allows them to effortlessly deal with the complications of time.
Ironically, William Stanley Jevons, Carl Menger, and Leon Walras developed the
modern theory of market efficiency in the midst of the panic caused by the Paris
Commune. Even more ironically, their basic analysis was disproven because the world
was already in the midst of what was then known as the Great Depression, which can
be dated from around 1873 to the early 1890s. That depression created a great deal of
resistance to conventional economic theory. At the time, the most important economists
in the United States received their graduate training in Germany, home to the most
advanced universities in the world. Their training was somewhat similar that which
Marx experienced.
Like Georgescu Roegan, these German-trained economists had no love for Marx's
politics, but they could see that his economics was more grounded in reality than the
prevailing abstract academic theory in the United States. These economists formed the
American Economic Association, which was intended to promote a study of economics
that paralleled some of Marx's technical work, while supporting a political analysis quite
close to that which was common in Germany at the time.
In my book, Railroading Economics, I showed how the railroad industry, which held the
majority of capital in the country, experienced repeated bankruptcies because
competitive prices that were approaching marginal costs would not permit the railroads
to cover their fixed costs, which were largely payments due for the bonds that they
floated. This serious market failure affected most industries that relied on heavy
amounts of fixed capital.
During this time, industry was first learning to effectively harness fossil fuel.
Competitive pressures along with the development of increasingly efficient technologies
forced business to quickly adopt new methods with great economies of scale.
Technical change in the United States during this period was extraordinarily rapid.
However, all was not well for the capitalists. These economies of scale meant
increases in output, which made competitive pressure even more destructive. At the
same time, new technological change rapidly devalued existing capital stocks, putting
further downward pressure on profits. The end result was the Great Depression. What
is fascinating about this period is that the behavior of the economy so closely paralleled
Marx's description of modern industry, which had been published not long before this
crisis emerged.
This crisis also illustrates that investment in fixed capital is a speculation that depends
upon future changes in technology and market conditions. The English economist,
John Hicks, one of the earliest economists to win a so-called Nobel Prize, pointed to the
obvious problem: "an entrepreneur by investing in fixed capital gives hostages to the
future" (Hicks 1932, p. 183).
Marx was well aware of this phenomenon. To make his point, he used a dramatic
example of capital devaluation from an observation of Charles Babbage, who reported
how a new piece of equipment for making frames for patent net, which cost originally
1200 pounds, within a few years sold for 60 pounds.
Seeing the buildup to the crisis of the late 19th century may well have given Marx a
suggestion about the effects of overaccumulation and the route by which a rising
organic composition of capital may create crises.
The temporary solution in the 19th century American economy was a wave of mergers
as a means of avoiding competition. However, the mergers created new problems. For
example, corporations, freed from competitive pressures, did little to advance technical
change, which put an end to the period of rapid progress.
Conventional economists implicitly recognize this serious problem inherent in markets
for commodities with low marginal and high fixed costs, but they restrict this analysis to
the case of intellectual property. Granting property owners monopoly rights avoids the
danger of destructive competition, but economists fail to recognize how comparable
competitive pressures can affect other parts of industry as well. Capital can avoid such
repeated bankruptcies only through anticompetitive means such as mergers,
protectionist international trade policies, regulatory protections, and other forms of
government support. However, such defenses create problems of their own in the
same way that anti-competitive mergers put an end to periods of rapid technological
change.
Return now to the question of constant capital. First, the negligible attention to constant
capital compared with other Marxian concepts is striking. Perhaps, the reason is
constant capital creates complications for those who would regard value theory as
something that lends itself to quantitative measurement and could be treated
mathematically. The problem is that constant capital defies measurement. Capitalists
buy capital in the expectation that its operation can provide future profits. For many
kinds of capital, physical depreciation can be calculated, in the same way restaurants
can measure the gradual diminution of a salami as slices are removed for making
sandwiches. However, moral depreciation by way of technical change or deteriorating
market conditions cannot be measured. Yet, constant capital is an important element of
the accumulation of capital in general -- perhaps, the most important element.
Like Georgescu-Roegen, Marx clearly recognized the importance of protecting natural
resources, even referring to careless forestry as a hidden socialist tendency.
This discussion of constant capital suggests several messages. The first is probably
already obvious: the intellectual bankruptcy of conventional economics, as well as the
dangers that result from an adherence to the policies that follow from that theory.
The experience of Georgescu-Roegen offers a second message. Although he was
trying to improve conventional economics, his work never garnered much attention. No
economist to my knowledge ever attempted to show why his ideas should be ignored.
This stubborn resistance to new ideas makes conventional economics even more
dangerous because it impairs any potential to be on the lookout for warning signs about
future problems, which are not consistent with pre-existing ideas.
A more subtle third message is that close attention to constant capital warns us that
attempts to squeeze economic theory into a mathematical straitjacket is
counterproductive because of the uncertainty associated with any investment in fixed
capital, as Hicks' observation makes clear. Probability distributions, used in
conventional economics, have no grounding in reality because the future remains
unknown. As the American baseball player, Yogi Berra, is reputed to have said,
"Prediction is difficult, especially for the future."
The third message is the need to think of the economy within a broad timeframe -- an
approach, which is in line with traditional Chinese culture. That timeline must include
considerations of how our actions might affect the future. Toward what ends will the
accumulation of capital be directed? While the accumulation of constant capital is
intended to produce future private advantages, the appropriate goal of the accumulation
of the means of production should be social advantages.
This perspective raises several questions that the profit-oriented accumulation of
constant capital answers negatively: How would it ensure the elimination of poverty?
What will it contribute to environmental sustainability or the cultivation of knowledge and
the creativity of the population? In short, how would it produce appropriate
opportunities to better our future prospects?
Knowing these answers, we all need to get to work on creating a better world in which
categories, such as constant capital, abstract labor, and the like become historical
curiosities, relevant only to a distant past. Good luck to all of us.
Daly, Herman E. 1995. “On Nicholas Georgescu-Roegen’s contributions to
Economics: an obituary essay.” Ecological Economics: 149-54