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

circulation process in their unity. The gist is to conceive capital as a process which spans a

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.).

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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 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

3 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.

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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 (the circuit of money capital) and (the circuit of productive 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

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)

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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 numerical

example of the calculation of the average turnover rather than providing his own case. We

briefly reproduce it here with numbers changed.10 5 Marx 1978, p.2356 Marx 1978, p.2357 Marx 1978, p.8 Marx 1978, p.2369 Marx 1978, p.26210 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.

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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

____________________________

.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

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

11 See footnote 6 as for the difference.5

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

capital advanced. That is,

(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

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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 ( ), which is consisted of constant part of circulating capital ( ) and variable

capital ( ), is known,12 the ratio by which circulating capital ( ) is consisted of and

would be identical to the ratio of the annual expenditure on constant part of circulation capital

( ) to that on variable capital ( ), both of which are also known data. Thus,

(2).

Combining equations (1) and (2) we finally get the annual number of turnover as:

(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

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

12 The circulating capital would be the total capital advanced less the fixed capital.13 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)

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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:

(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:

, (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

follows:

(6)

Where c: constant capital advanced, v: variable capital advanced.16 Now in order to grasp the 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)

15 This chapter is written by Engels.16 To avoid a confusion in notation, notice that total capital value advanced can be think of two ways;

consisting of fixed capital ( ) and circulating capital ( ), or of constant capital ( ) and variable 8

influence the turnover has on the rate of profit, combine (4) and (6) and we have

, (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 counter-

tendencies of the rate of profit to fall.

In Chapter 13 of Volume III a rise in the organic composition of capital ( ) associated

with a technological development is discussed as major determinant of the tendential fall of

the rate of profit; whereas in Chapter 14, Volume III the rate of surplus value ( ) comes at

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

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

capital ( ). Thus it holds + = + . 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) cheapening of the elements of constant capital, iv) the relative surplus population, v) foreign trade, and vi) the increase in share of capital.

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another important issue of fixed capital. Notice that when fixed capital is taken into

consideration the rate of profit is constructed as follows:

(8)

where 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. 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, and

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;

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equation (1) for the number of turnover i.e. .19 And the way they measure variable

capital advanced, which is not readily known as we have mentioned, is also the same with

that of Marx & Engels, i.e. equation (2) . Note that as a proxy for the

circulating capital , 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 ( ) and circulating part of constant capital

advanced ( ) 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 ( ) and that on circulating part of

constant capital ( ). 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

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

annual rate of surplus value ( ) and the real rate of surplus value or exploitation rate ( ) –

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

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.

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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 , for Webby & Rigby and Engels is known and the unknown

could be calculated from the other available data and thus finally can be measured. On the

other hand Fichtenbaum, who does not accept that can be calculated with other known

variables, attempts first to calculate using other data, and then measures from and .

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

version is , namely the ratio between annual expenditure on the constant and

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

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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

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 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).

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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 pre-

1987 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.

Figure 2. The two versions of turnover rate in US manufacturing for 1948-2008

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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

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

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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

case study on the US food industry.

VI. Case study: The role of turnover in restructuring food industry16

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 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 17

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

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 18

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

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. 19

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 neo-

liberalism 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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