Humpty Dumpty.

The division of production into separate departments is an idea as old as economic theory. Criticising the founding fathers (Smith, Say, Sismondi and Ricardo), Marx tried to systemise it (Capital II). He proposed one department making means of production and one department making consumer goods.

I. constant capital + variable capital + surplus value = means of production

II. c + v + s = articles of consumption

Then, in an incomplete and unsuccessful explanation of how capital accumulates, he divided the second department into consumption for everyone and luxury consumption for the rich. The model was taken up by Rosa Luxemburg in “The Accumulation of Capital”. Neglecting the monetary aspect of credit, she concluded that accumulation could not occur in a closed circuit. The growth of capital needed new markets and resources that depended on the spread of its creed, by force when necessary, and on the expanding dominion of commodity exchange and of private property of the means of production, starting with land. However, the general problem with the concept of departments is the difficulty in defining them. Now it is fairly obvious that no one would buy a steel oven or a container ship for their private use and consumption. But what of vans, chain-saws, computers, or a bunch of flowers, they can just as well be invested in a production process as they can be consumed. And the supply of energy lights up living rooms and drives cars, as well as factories, trains and power plants. This means that some of the goods (and services) made by department II go back into the production process and add their value to it.

A more specific problem concerning a model with two departments is that there are two distinct kinds of investments. There are those that acquire more value by being transformed, and those that lose value by passing it on during the transformation process, raw materials on the one hand and machines and buildings on the other. Land is unmade, as are the oceans and the wind, but its owners demand rent, which is taken from the value added by labour (rent, interest, taxes, profits and wages). Having made these precisions, a different departmental model presents itself.

Department1 produces raw materials, animal, vegetable and mineral (R). It uses up machines and buildings (M1), employs labour to add value (V1), and digs up the planet.

Department2 makes machines and buildings (M). It uses up M2, adds V2 and transforms raw materials (R2).

Department3 makes goods for consumption (C). It uses up M3, adds V3 and transforms R3.

Department1. M1 + V1 = R

Department2. M2 + V2 + R2 = M

Department3. M3 + V3 + R3 = C

If M1 + M2 + M3 = M and R2 + R3 = R, then V1 + V2 + V3 = C. This is not quite true (see above) because some of C joins M as means of production, which results in V1, V2, V3 being proportionally smaller and M1, M2, M3 being bigger. Albeit, the model works for simple reproduction – department1 gets M1 in exchange for R2 and a part of C in exchange for R3(=V1), department2 gets its share of C in exchange for M3(=V2), whereas M2 and the remaining share of C(=V3) are the result of exchanges within their respective departments – and it also shows the disruptions provoked by growth and expansion.

To produce more of everything, more raw materials are needed. But department1 can only increase R if it has more M1 and V1 (it is supposed that the labour pool is plethoric and can be hired or fired at will). To increase M, department2 needs more M2, V2 and R2. If R2 increases R3 must decrease, as R is still unchanged (1). And a reduction in R3 reduces automatically V3 and M3, so that department3 makes less C. The first step, therefore, is reduced consumption and fewer jobs for department3, while department2 reduces production of M3 and increases M1. This may demand more M2, V2 and R2. If it does not, there is simply a transfer of M3 to M1 without a change of M, so that labour and raw materials are in excess. Supposing that M does increase to meet the demand of M1 and M2, there is still a reduction in M3 and C. The second phase is an increase in department1’s production of R. Here again department2 is first served, as it must increase its own means of production(M2) before making more M3 and allowing department3 to grow, transform more R3 and increase C. Department2 grows to supply growing departments 1 and 3, but it competes with department3 for raw materials, not with department1.

Department1. M1 + V1 = R

Department2. M2 + V2 + R2 = M

Department3. M3 + V3 + R3 = C

Either growth brings back the situation of R = R2 + R3, bigger but in the same proportions, and the whole disruptive process has to start again. Or R2 grows faster than R3 and M1 + M2 grows faster than M3. For R to continue growing, M1, M2 and R2 must grow, whereas growth in M3 and R3 is a hindrance. In practice, apart from civil and military security, growth in C depends on vigorous and vociferous demands from the labour force in V1, V2 and V3. And, for the stop-and-start cyclical progression to be replaced by a linear one, these demands must be repressed. In the closed uniform world of the Communist Blocks this was done by force and censure, with a fatal effect on creation and innovation. In the open transnational West, force and out-sourcing did the trick for a while.

Depatrment1 operates where geology and climate make the extraction and production of raw materials possible. Depatrment2 operates where science and technology are the most developed. Depatrment3 can operate anywhere. This being said, one can imagine three separate regions of the world X, Y and Z. Region Y is very industrialised with innumerable factories making M and C. Regions X and Z have far less industry. However, X is rich in potential raw materials, and Y’s departments 2 and 3 are outgrowing the region’s reserves of R (or the imports may be cheaper and “lighter”). To maintain (or increase) growth, region Y out-sources its department1. This happens progressively and is never complete, as long as Y still produces raw materials.

Region X. M1 + V1 = R

Region Y. M2 + V2 + R2 = M

Region Y. M3 + V3 + R3 = C

Region Y ships out machines (M1) and expatriated labour (V1), and gives the natives a few gold coins for rent and royalties. With time production increases and the global balance of power changes, and region X demands more and more gold. And, after a particularly sharp rise in price, region Y has to revert to paper money and abandon its gold standard. The whole situation is most unsatisfactory. R2 is exchanged for M1 in a growing but stable relationship. The problem is the exchange of R3 for a part of C equal to V1, which includes rent and royalties. If V1 takes a larger share of C, V3 and ultimately V2 receive a smaller one. This increases labour inequality in region Y, opposes V2 and V3 and brings down margins.

At this point region Y tries a different approach. Instead of exchanging a growing share of C for R3, it begins out-sourcing M3 in exchange for C. First with region X, but infrastructure and education are insufficient and political instability is rampant. So, after a global power change, region Y turns to region Z, where infrastructure and political stability exist and where a very large docile, young and literate labour force is conveniently on hand.

Region X. M1 + V1 = R

Region Y. M2 + V2 + R2 = M

Region Z. M3 + V3 + R3 = C

The departments of production have become geographical regions and exchanges cross monetary and tariff barriers. Region Y has out-sourced M1 to region X and gets it back as R2. And it has out-sourced M3 to region Z and gets it back as a part of C equal to V2. Region Y has passed on the problem of royalties and R3 to region Z, but it has not expatriated V3. However, M is growing and so is V2, which is the most productive sector of labour. So redundant V3 is employed to supply “services” to V2 and receives a beggar’s share of C. Region X is doing the messy business of supplying raw materials. Region Z is the workshop with its millions of agile hands. And region Y is making the high added value technological stuff. All seems well and the future looks bright for region Y, until a few grains of sand disrupt the mechanism.

Region Y makes, controls and owns the means of production. The rest of the world has only its work force and natural resources to offer in the struggle of all against all. Region Y is the Capitalist, exploiting the world’s proletariat and paying rent to potentates. But the blind spot of hubris hides the loss of control that results from out-sourcing M3. For cultural reasons that might be linked to writing, region Z is less inventive than region Y, but it is very good at copying. And so it starts to make M3 and the corresponding M2, and reduces its demand of M3 from region Y. But region Y depends on the exchange of M3 for a share of C. And reducing the production of M3 has a knock down effect on M2, V2 and R2. Region Y, the world’s super power and master of currency, cannot lose face and decides to maintain appearances by borrowing. Borrowing for C and, when region Z starts to make M1, borrowing For R2. Unfortunately, borrowing is unsustainable, especially for consumption (2). So region Y’s debt reaches a tipping point, and all the king’s horses and all the king’s men can’t put Humpty together again.

1. R2 and R3 share certain materials e.g. steel. For the rest department1 has to modify its production.

2. For the difference between borrowing for investment and borrowing for consumption see:

http://lelezard.blogspot.fr/2010/08/binary-production-of-wealth.html