A Note on the “Echo Effect”

H. A Note on the “Echo Effect”

Marx’s discussion in Capital 2 of the periodic character of crises based on the aver- age life of fixed capital has attracted considerable attention from early days (see for example Bernstein 1961 [1899]: 76–7). As for the life cycle or “turnover period” of fixed capital itself, that was dependent upon physical depreciation reflecting wear and tear and “moral” depreciation reflecting the availability of cheaper replace- ments in consequence of new technology: “In any investment of capital the sep- arate elements of the fixed capital have different lifetimes, and therefore different turnover times” dependent on rate of usage (and natural forces), supplemented in “modern industry” by the phenomenon of “moral depreciation” as in the railways, whereby (citing Lardner 1850: 120) “[a]fter the lapse of ten years, one can generally buy the same number of cars and locomotives for £30,000 that would previously have cost £40,000. Depreciation in the rolling stock must be set at 25 per cent of the market price even when there is no depreciation whatever in its use value” (MECW 36: 172–3). The average life cycle reflects a balance between industrial pressures tending to lengthen the potential physical life span of equipment and the availability of new technology tending in the opposite direction. Two important passages convey this notion each of which links crises to fixed-capital replacement as determined by the average life of equipment, and the second specifying that “in the essential branches of large-scale industry this life cycle now averages ten years”:

The instruments of labour are largely modified all the time by the progress of industry. Hence they are not replaced in their original but in their modified form. On the one hand the mass of the fixed capital invested in a certain bodily form and endowed in that form with a certain average life constitutes one reason for the only gradual pace of the introduction of new machinery, etc., and therefore an obstacle to the rapid general introduction of improved instruments of labour. On the other hand competition com- pels the replacement of the old instruments of labour by new ones before the expiration of their natural life, especially when decisive changes occur. Such premature renewals of factory equipment on a rather large social scale are mainly enforced by catastrophes or crises (173; emphasis added).

The Cyclical Dimension

As the magnitude of the value and the durability of the applied fixed capital develop with the development of the capitalist mode of production, the lifetime of industry and of industrial capital lengthens in each particular field of investment to a period of many years, say of ten years on an average. Whereas the development of fixed capital extends this life on the one hand it is shortened on the other by the continuous revolution in the means of production, which likewise incessantly gains momentum with the development of the capitalist mode of production. This involves a change in the means of production and the necessity of their constant replacement, on account of moral depreciation, long before they expire physically. One may assume that in the essential branches of large-scale industry this cycle now averages ten years. However we are not concerned here with the exact figure. This much is evident: the cycle of interconnected turnovers embracing a number of years, in which capital is held fast by its fixed constituent part, furnishes a material basis for the periodic crises. During this cycle business undergoes successive periods of depression, medium activity, precipitancy, crisis. True, periods in which capital is invested differ greatly and far from coincide in time. But a crisis always forms the starting-point of large new investments. Therefore, from the point of view of society as a whole, more or less, a new material basis for the next turnover cycle (187–8; emphasis added).

It may be allowed with Matthews that we have in these passages an intimation of the so-called “echo effect” relating fluctuations in national income to fluctuations in the proportion of the capital stock falling due for replacement, reflecting the uneven age-composition of the capital stock (Matthews 1959: 67). 31