Organic Composition of Capital

Definition

Marx distinguishes two proportions of capital. On the side of value, capital divides into constant capital (the value of means of production) and variable capital (the value of labour-power, the sum of wages); on the side of material, into means of production and living labour-power. The latter is the technical composition.

In Capital Volume I Marx writes: "I call the former the value-composition, the latter the technical composition of capital. ... I call the value-composition of capital, in so far as it is determined by its technical composition and mirrors the changes of the latter, the organic composition of capital. Wherever I refer to the composition of capital, without further qualification, its organic composition is always understood." The German original is "organische Zusammensetzung des Kapitals", abbreviated OCC in the Marxian literature; Marx also writes simply "die Zusammensetzung des Kapitals", by which he always means the organic composition.

Two cautions follow. The technical composition is a value-free proportion of concrete labour, while the value-relation of the two portions of capital may vary while the technical composition is constant, or remain the same while the technical composition varies; the concepts are not identical. And a low organic composition means, counter-intuitively, a high share of variable capital, that is, a high degree of value creation, while a high OCC means a low degree of value creation.

History

Marx coined and published the term in 1867, in Capital Volume I, in the chapter on the general law of capitalist accumulation (German text: MEW 23, p. 640). Its fuller elaboration is Chapter 8 of the third volume, completed from Marx's manuscripts and edited and published by Engels in 1894, after Marx's death. Marx held that capital accumulation and competition in the sphere of production make a rising organic composition a necessary effect at least in the long term. Henryk Grossman in 1929 was the first Marxist to systematically explore the tendency of the organic composition to rise, and hence of the rate of profit to fall, as a fundamental feature of Marx's explanation of economic crises; that crisis-theory dimension became widely known only with the 1894 publication of Volume III.

Examples

By any of the measures, the plant- and machinery-intensive oil industry has a high organic composition, while labour-intensive businesses such as catering tend to have a low one. The OCC varies with production technology, between sectors of an economy, and over time with changes in production technology. Empirically, fixed equipment and materials per worker or per hours worked approximate the technical composition, while summing fixed capital and intermediate expenditures and dividing by the value of labour costs approximates the value composition. The most accurate quantitative estimates refer to outlays in specific sectors, such as manufacturing.

The OCC can fall as well as rise. In severe slumps physical capital assets are devalued, lie idle or are destroyed while workers become unemployed, reducing the OCC; non-profitable war production can also lower the average, and a technological revolution reducing the cost of constant capital lowers it further. Some claim that the dominance of services and knowledge industries reduces the organic composition, but since the labour process always produces a material outcome, Marx's observation may retain validity for the social process of production taken as a whole.

Relations

The magnitude of the OCC matters for Marxian crisis theory through its impact on the average rate of profit. Since the rate of profit p' = s/(v+c) = e/(1+OCC), a rising OCC implies a declining rate of profit cet. par.; for every new increase in surplus value realised, an even larger increase in constant capital investment becomes necessary. Marx maintains the fall is only a tendency, offset by counteracting influences. In his draft, edited by Engels, he cited six: more intense exploitation of labour; reduction of wages below the value of labour-power; cheapening of the elements of constant capital; growth of a relative surplus population (the reserve army); foreign trade reducing input and consumer-goods costs; and increased use of share capital by joint-stock companies. He thought these could not ultimately prevent the average rate of profit from falling.

The OCC is tied to the law of the tendency of the rate of profit to fall and to Marx's crisis theory, which he considered his most substantial theoretical achievement; Roman Rosdolsky notes Marx called the law "in every respect the most important law of modern political economy". A rising OCC is linked to the same development of the social productivity of labour that produces both a falling rate and a rising mass of profit. Differing organic compositions across branches of industry raised a problem for Ricardo's schema, since they imply different profit rates in different industries; Marx addressed it with his theory of prices of production and the levelling of profitability differentials through competition, and whether he succeeded is contested in the debate over the transformation problem.

Whether the OCC must rise historically is disputed. One line of criticism, Okishio's theorem (1961), argues that a cost-reducing technical change with constant real wages would raise, not lower, the equilibrium rate of profit; Roemer's extension with fixed capital concluded that "there is no hope for producing a falling rate of profit theory in a competitive, equilibrium environment with a constant real wage." Bortkiewicz, Habermas, Heinrich and Steve Keen also contest Marx's proof. These should be presented as open scholarly disputes, not settled fact. Statistical and historical evidence on the Kondratiev waves from the 1830s onwards has been described as favourable to the theory of a rising OCC, since industries with a rising wage share are hard to find, but critics note the value of physical capital is hard to measure accurately and long time-series are error-prone; empirical studies remain mixed.

Distinctions

The OCC must be distinguished from the technical composition and from the value composition generally. The technical composition refers to the proportions of concrete labour, use-values, rather than the value composition of capital, and involves no valuation. The value composition is also affected by movements in the prices of means of production and by wage changes independent of technical change. Marx calls only the value composition determined by, and mirroring, the technical composition the organic composition.

Several ratios are used. The concept is usually expressed as c/v, but the Marxian literature also uses c/(s+v), the ratio of constant capital to newly produced value, close to a capital/output ratio, and less commonly Paul M. Sweezy's c/(c+v), constant capital to total capital. In contemporary Marxian economics the OCC is sometimes used as a theoretical alternative to the neoclassical concept of capital deepening, the most similar neoclassical notion. Unlike the neoclassical capital/output ratio, however, the OCC does not apply to all capital assets, only to those invested in production, excluding assets in the sphere of consumption such as homes; and the total capital tied up by an enterprise includes liquid funds, reserves and other financial assets beyond fixed assets, materials and wages.