Organic Composition of Capital - Historical Trends

Historical Trends

There has been a lengthy theoretical and statistical dispute among 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 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 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, 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 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 in the developed countries. For example, does the widespread use of computers in labour-intensive services lower the OCC?