Capitalism acts to constrain the forces of production. The notion of free and competitive market penalizes inefficiency and redistributes the surplus to the more efficient enterprises. Adam Smith’s idea of invisible hand promotes rivalries. Therefore the majority of petty owners is pushed out of the market and forced to sell labor power. The surplus value is derived from exploiting these workers. The rate of exploitation is surplus value divided by the labor value. Laborers produce a use value but get paid only for their labor value. The left-over surplus value becomes profit for the capitalist. This wealth can be use for investment, mechanization, research development, management and etc.
Industrial enterprises spend money on capital and labor to produce a product. Rate of profit is calculated from surplus value divided by capital and labor cost. Therefore the rate has an inverse relationship with labor and capital cost. As they fall, rate of profit rise. The average cost is total spent divided by output. By mechanizing, it allows companies to produce more resulting in cheaper price per unit
For example, say three companies produce the same amount of goods using identical labor and capital cost structure. When one company mechanizes, it can produce more goods by only increasing capital and not labor cost. It can also produce more merchandise with same amount of capital and labor. These two scenarios are both forms of increase efficiency. They also are forms of labor exploitation.
Say three companies produce two pens each for $12.When cost of capital is $8, labor cost is $2, surplus value is $2, the market cost for each pen is $6; it is calculated by the total value divided by total output.(36/6=6). However when one company mechanizes, it is able to produce two more pens by only increasing its capital. Subsequently the increase in total value is by $8 and not $12. The price then adjusts to the change in supply curve. There is a total value $44 and an output of eight pens. The new price is $5.5(44/8=5.50) The company that mechanizes is able to produce the good for $4.50 instead of $5. That remains a $1 profit margin. However, it is now able to sell more products increasing the total profit. This is a good feature; however, it produces a negative effect on its rival companies. It came at the expense of the other two companies; the profit margin of $1 diminishes to $.50.
Mechanization is the soul of capitalism. It is derived from capital cost divided by the cost of labor and capital. In the above, it was originally 80% mechanize. However when that company mechanize capital is increase and it rose to 89%.
When a company mechanizes, it is more profitable. For the other two companies to survive, they also need to mechanize to stay with competition. This in turn leads to more production. This is an ongoing vicious fate; companies will never be satisfied. They will mechanize until profit rate is too low that they can’t sustain anymore.
This is the leading cause for economic anarchy. As supplies expand, labor wages and capital depresses. When wages fall, demands for goods become lower. This is a trickle effect, and when the business can’t sell, it hires fewer workers. This is the process of realization crisis mentioned by Kautsky. There is trouble at maintaining stable prices. Market dictates lower because of overproduction. When wages rise, costs rises in response to it. Therefore business reacts to it by cutting back workers and producing unemployment. These became hindrance to the wealth that it is capable of. Capitalism itself in trying to maintain efficiency becomes less productive.
The downturn is even more devastating when the multiplier effect is brought into the equation. Recessions can last a couple years halting growth and shrinking economy. The current recession is an example of how scary capitalism can be.
For Kautsky, he believed that the solution lies in socialism. Capitalism produces for a sale value not use value. Company advertizes a product to create need. Commodity trading is not base on use value but on exchange value. If prices fall, they can cut back supply to drive back up the price. Merchants don’t sit together to discuss about demand, they let the invisible hand do the work. There is lack of correspondence between private ownership and private production. The society is then constraining the production of wealth that it is capable of.
Kautsky idea of socialism through revolution is to collectivize property rights and establish control planning. In a regulated markert, he argues people dictate prices rather that commodity. Demand and wealth is produce for need so there is no overproduction. Collectivizing means of production and socialization of mode of production will relive the society of restrictions. In a regulated market, central planning is established, prices are set and resources are intervened for allocation. Socialism will then unleash the forces of production.
Critcis of Kautsky argue that workers wage will rise when there is expansion. Furthermore Berstein argues that mechanize companies will push out the inefficient ones and invest in other markets creating new competition. However old these theoires might be, policy makers seems to merge these classical views into contemporary economic policy.