Organic composition of capital
Encyclopedia
The organic composition of capital (OCC) is a concept created by Karl Marx
in his critique of political economy
and used in Marxian economics
as a theoretical alternative to neo-classical concepts of factors of production
, production function
s, capital productivity
and capital-output ratios. Marx first referred to the idea in 1847 http://www.marxists.org/archive/marx/works/1847/12/31.htm
and discussed it in detail in Capital Vol. 1, chapter 25 ("The General law of Capitalist Accumulation"). In Capital Vol. 3 Marx demonstrates that the organic composition of capital decisively influences industrial profitability.
The concept does not apply to all capital assets, only to capital invested in production (i.e. production capital). It is normally defined as the ratio of constant capital
(capital invested in plant, equipment and materials) to variable capital (capital invested in the labour-costs involved in hiring employees).
According to Marx, the OCC expresses the specific form which the capitalist mode of production
gives to the relationship between means of production
and labor power
, determining the productivity
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
s and commercial exchange-values are being produced.
Marx calls this capital composition "organic", because it refers to the relationship between "living" and "dead" (or inert) elements in a capital investment. The "living element" is employed labour actively at work. The "dead" parts are the tools, materials and equipment worked with, which are the results of past labour (this analogy becomes dubious e.g. in the case of agriculture and biotechnologies).
Marx argues that a rising organic composition of capital is a necessary effect of capital accumulation
and competition
in the sphere of production
, at least in the long term. This means that the share of constant capital
in the total capital outlay increases, and that labor input per product unit declines.
, where Marx writes:
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
(incidental expenses).
The full importance of the OCC emerges in chapter 8 of the third volume of Das Kapital
http://www.marxists.org/archive/marx/works/1894-c3/ch08.htm)
to variable capital, 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
"), i.e., surplus-value + variable capital 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 of course 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.
), 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
includes more than wages and part of the tax levy constitutes an element of surplus value
.
In modern national accounts
, 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
charges + intermediate consumption
; a stock measure of constant capital would be the fixed capital
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
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.
would tend to have a low OCC. The OCC varies according to differences in production technology
, between sectors of an economy, or according to changes in production technology over time.
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 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:
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, 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
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. However, it is also possible that automation of material production displaces labour into the services sector. Provided sufficient income exists to purchase services, a service economy can grow.
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
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 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.
.
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:
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?
Karl Marx
Karl Heinrich Marx was a German philosopher, economist, sociologist, historian, journalist, and revolutionary socialist. His ideas played a significant role in the development of social science and the socialist political movement...
in his critique of political economy
Political economy
Political economy originally was the term for studying production, buying, and selling, and their relations with law, custom, and government, as well as with the distribution of national income and wealth, including through the budget process. Political economy originated in moral philosophy...
and used in Marxian economics
Marxian economics
Marxian economics refers to economic theories on the functioning of capitalism based on the works of Karl Marx. Adherents of Marxian economics, particularly in academia, distinguish it from Marxism as a political ideology and sociological theory, arguing that Marx's approach to understanding the...
as a theoretical alternative to neo-classical concepts of factors of production
Factors of production
In economics, factors of production means inputs and finished goods means output. Input determines the quantity of output i.e. output depends upon input. Input is the starting point and output is the end point of production process and such input-output relationship is called a production function...
, production function
Production function
In microeconomics and macroeconomics, a production function is a function that specifies the output of a firm, an industry, or an entire economy for all combinations of inputs...
s, capital productivity
Productivity
Productivity is a measure of the efficiency of production. Productivity is a ratio of what is produced to what is required to produce it. Usually this ratio is in the form of an average, expressing the total output divided by the total input...
and capital-output ratios. Marx first referred to the idea in 1847 http://www.marxists.org/archive/marx/works/1847/12/31.htm
and discussed it in detail in Capital Vol. 1, chapter 25 ("The General law of Capitalist Accumulation"). In Capital Vol. 3 Marx demonstrates that the organic composition of capital decisively influences industrial profitability.
The concept does not apply to all capital assets, only to capital invested in production (i.e. production capital). It is normally defined as the ratio of constant capital
Constant capital
Constant capital , 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...
(capital invested in plant, equipment and materials) to variable capital (capital invested in the labour-costs involved in hiring employees).
According to Marx, the OCC expresses the specific form which the capitalist mode of production
Capitalist mode of production
In Marx's critique of political economy, the capitalist mode of production is the production system of capitalist societies, which began in Europe in the 16th century, grew rapidly in Western Europe from the end of the 18th century, and later extended to most of the world...
gives to the relationship between means of production
Means of production
Means of production refers to physical, non-human inputs used in production—the factories, machines, and tools used to produce wealth — along with both infrastructural capital and natural capital. This includes the classical factors of production minus financial capital and minus human capital...
and labor power
Labor power
Labour power is a crucial concept used by Karl Marx in his critique of capitalist political economy. He regarded labour power as the most important of the productive forces of human beings. Labour power can be simply defined as work-capacity, the ability to do work...
, determining the productivity
Productivity
Productivity is a measure of the efficiency of production. Productivity is a ratio of what is produced to what is required to produce it. Usually this ratio is in the form of an average, expressing the total output divided by the total input...
of labor and the creation of a surplus product
Surplus product
Surplus product is a concept explicitly theorised by Karl Marx in his critique of political economy. Marx first began to work out his idea of surplus product in his 1844 notes on James Mill's Elements of political economy...
. This relationship has both technical and social aspects, reflecting the fact that simultaneously consumable use value
Use value
Use value or value in use is the utility of consuming a good; the want-satisfying power of a good or service in classical political economy. In Marx's critique of political economy, any labor-product has a value and a use-value, and if it is traded as a commodity in markets, it additionally has an...
s and commercial exchange-values are being produced.
Marx calls this capital composition "organic", because it refers to the relationship between "living" and "dead" (or inert) elements in a capital investment. The "living element" is employed labour actively at work. The "dead" parts are the tools, materials and equipment worked with, which are the results of past labour (this analogy becomes dubious e.g. in the case of agriculture and biotechnologies).
Marx argues that a rising organic composition of capital is a necessary effect of capital accumulation
Capital accumulation
The accumulation of capital refers to the gathering or amassing of objects of value; the increase in wealth through concentration; or the creation of wealth. Capital is money or a financial asset invested for the purpose of making more money...
and competition
Competition
Competition is a contest between individuals, groups, animals, etc. for territory, a niche, or a location of resources. It arises whenever two and only two strive for a goal which cannot be shared. Competition occurs naturally between living organisms which co-exist in the same environment. For...
in the sphere of production
Manufacturing
Manufacturing is the use of machines, tools and labor to produce goods for use or sale. The term may refer to a range of human activity, from handicraft to high tech, but is most commonly applied to industrial production, in which raw materials are transformed into finished goods on a large scale...
, at least in the long term. This means that the share of constant capital
Constant capital
Constant capital , 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...
in the total capital outlay increases, and that labor input per product unit declines.
Definition
The concept is introduced in chapter 25 of Das KapitalDas Kapital
Das Kapital, Kritik der politischen Ökonomie , by Karl Marx, is a critical analysis of capitalism as political economy, meant to reveal the economic laws of the capitalist mode of production, and how it was the precursor of the socialist mode of production.- Themes :In Capital: Critique of...
, where Marx writes:
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
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 themselves add new value to output...
(incidental expenses).
The full importance of the OCC emerges in chapter 8 of the third volume of Das Kapital
Das Kapital
Das Kapital, Kritik der politischen Ökonomie , by Karl Marx, is a critical analysis of capitalism as political economy, meant to reveal the economic laws of the capitalist mode of production, and how it was the precursor of the socialist mode of production.- Themes :In Capital: Critique of...
http://www.marxists.org/archive/marx/works/1894-c3/ch08.htm)
Ratios
The value composition of capital (VCC) is usually expressed as a ratio of constant capitalConstant capital
Constant capital , 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...
to variable capital, 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 addedValue added
In economics, the difference between the sale price and the production cost of a product is the value added per unit. Summing value added per unit over all units sold is total value added. Total value added is equivalent to Revenue less Outside Purchases...
"), i.e., surplus-value + variable capital and close to the concept of a capital/output ratio. Less common is the measure used by Paul M. Sweezy
Paul Sweezy
Paul Marlor Sweezy was a Marxist economist, political activist, publisher, and founding editor of the long-running magazine Monthly Review...
, i.e.,
, the ratio of constant capital to the total capital invested.The total capital tied up by a capitalist enterprise of course 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 intensityCapital intensity
Capital intensity is the term in economics for the amount of fixed or real capital present in relation to other factors of production, especially labor...
), 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
Circulating capital
Circulating capital refers to physical capital and operating expenses, i.e., short-lived items that are used in production and used up in the process of creating other goods or services. This is roughly equal to Intermediate consumption. It includes raw materials, intermediate goods, inventories,...
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
Compensation of employees
Compensation of employees is a statistical term used in national accounts, balance of payments statistics and sometimes in corporate accounts as well...
includes more than wages and part of the tax levy constitutes an element of surplus value
Surplus value
Surplus value is a concept used famously by Karl Marx in his critique of political economy. Although Marx did not himself invent the term, he developed the concept...
.
In modern national accounts
National accounts
National accounts or national account systems 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 accounting...
, an empirical proxy of the flow
Stock and flow
Economics, business, accounting, and related fields often distinguish between quantities that are stocks and those that are flows. These differ in their units of measurement. A stock variable is measured at one specific time, and represents a quantity existing at that point in time , which may have...
of variable capital is the wage-payments associated with productive activity in an accounting period, and a proxy for constant capital (flow measure
Stock and flow
Economics, business, accounting, and related fields often distinguish between quantities that are stocks and those that are flows. These differ in their units of measurement. A stock variable is measured at one specific time, and represents a quantity existing at that point in time , which may have...
) is depreciation
Consumption of fixed capital
Consumption of fixed capital is a term used in business accounts, tax assessments and national accounts for depreciation of fixed assets...
charges + intermediate consumption
Intermediate consumption
Intermediate consumption is an economic concept used in national accounts, such as the United Nations System of National Accounts , the US National Income and Product Accounts and the European System of Accounts .Conceptually, the aggregate "intermediate consumption" is equal to the amount of the...
; a stock measure of constant capital would be the fixed capital
Fixed capital
Fixed capital is a concept in economics and accounting, first theoretically analysed in some depth by the economist David Ricardo. It refers to any kind of real or physical capital that is not used up in the production of a product and is contrasted with circulating capital such as raw materials,...
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
Intermediate consumption is an economic concept used in national accounts, such as the United Nations System of National Accounts , the US National Income and Product Accounts and the European System of Accounts .Conceptually, the aggregate "intermediate consumption" is equal to the amount of the...
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 would have a high organic composition of capital, while labor-intensive businesses such as cateringCatering
Catering is the business of providing foodservice at a remote site or a site such as a hotel, public house , or other location.-Mobile catering:A mobile caterer serves food directly from a vehicle or cart that is designed for the purpose...
would tend to have a low OCC. The OCC varies according to differences in production technology
Technology
Technology is the making, usage, and knowledge of tools, machines, techniques, crafts, systems or methods of organization in order to solve a problem or perform a specific function. It can also refer to the collection of such tools, machinery, and procedures. The word technology comes ;...
, 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 theoryCrisis theory
Crisis theory is generally associated with Marxian economics. In this context crisis refers to what is called, even currently and outside Marxian theory in many European countries a "conjuncture" or especially sharp bust cycle of the regular boom and bust pattern of what Marxists term "chaotic"...
because of its impact on the average rate of profit
Rate of profit
In economics and finance, the profit rate is the relative profitability of an investment project, of a capitalist enterprise, or of the capitalist economy as a whole...
. The implication of a rise in the organic composition of capital is a declining rate of profit; for every new increase in surplus-value 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
Tendency of the rate of profit to fall
The tendency of the rate of profit to fall is a hypothesis in economics and political economy, most famously expounded by Karl Marx in chapter 13 of Das Kapital Vol. 3. It was generally accepted in the 19th century...
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 powerLabor powerLabour power is a crucial concept used by Karl Marx in his critique of capitalist political economy. He regarded labour power as the most important of the productive forces of human beings. Labour power can be simply defined as work-capacity, the ability to do work...
(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 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, 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
Automation is the use of control systems and information technologies to reduce the need for human work in the production of goods and services. In the scope of industrialization, automation is a step beyond mechanization...
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. However, it is also possible that automation of material production displaces labour into the services sector. Provided sufficient income exists to purchase services, a service economy can grow.
Marx and Ricardo
The different organic compositions of capital of different branches of industry raised a problem for the classical economic schema of David RicardoDavid Ricardo
David Ricardo was an English political economist, often credited with systematising economics, and was one of the most influential of the classical economists, along with Thomas Malthus, Adam Smith, and John Stuart Mill. He was also a member of Parliament, businessman, financier and speculator,...
and others, who could not reconcile their labor-cost theory of price
Labor theory of value
The labor theories of value are heterodox economic theories of value which argue that the value of a commodity is related to the labor needed to produce or obtain that commodity. The concept is most often associated with Marxian economics...
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
Prices of production refers to a concept in Karl Marx's critique of political economy. It is introduced in the third volume of Das Kapital, where Marx considers the operation of capitalist production as the unity of a production process and a circulation process involving commodities, money and...
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 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 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 declineTendency of the rate of profit to fall
The tendency of the rate of profit to fall is a hypothesis in economics and political economy, most famously expounded by Karl Marx in chapter 13 of Das Kapital Vol. 3. It was generally accepted in the 19th century...
.
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 superprofitSuperprofitSuperprofit , is a concept in Karl Marx's critique of political economy, subsequently elaborated by Lenin and other Marxist thinkers.-The origin of the concept in Marx's Capital:...
), 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
Devaluation
Devaluation is a reduction in the value of a currency with respect to those goods, services or other monetary units with which that currency can be exchanged....
, 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
Tertiary sector of industry
The tertiary sector of the economy is one of the three economic sectors, the others being the secondary sector and the primary sector .The service sector consists of the "soft" parts of the economy, i.e...
in the developed countries. For example, does the widespread use of computers in labour-intensive services lower the OCC?
Autonomism
This issue has only tended to be raised by Marxists working in tertiary sectors like administration (for example, the journal Processed World), or by Autonomist Marxists in their concept of the social factory.See also
- law of valueLaw of value-General:The law of value is a central concept in Karl Marx's critique of political economy, first expounded in his polemic The Poverty of Philosophy against Pierre-Joseph Proudhon, with reference to David Ricardo's economics...
- surplus valueSurplus valueSurplus value is a concept used famously by Karl Marx in his critique of political economy. Although Marx did not himself invent the term, he developed the concept...
- capital accumulationCapital accumulationThe accumulation of capital refers to the gathering or amassing of objects of value; the increase in wealth through concentration; or the creation of wealth. Capital is money or a financial asset invested for the purpose of making more money...
- Henryk Grossman's crisis schema
- Tendency of the rate of profit to fallTendency of the rate of profit to fallThe tendency of the rate of profit to fall is a hypothesis in economics and political economy, most famously expounded by Karl Marx in chapter 13 of Das Kapital Vol. 3. It was generally accepted in the 19th century...
- Capital intensityCapital intensityCapital intensity is the term in economics for the amount of fixed or real capital present in relation to other factors of production, especially labor...
- Capital deepeningCapital deepeningCapital deepening is a term used in economics to describe an economy where capital per worker is increasing. This is also referred to as increase in the capital intensity. Capital deepening is often measured by the capital stock per labour hour. Overall, the economy will expand, and productivity...