William J. Blake: An American Looks at Karl Marx
Surplus-value is the foundation of profits. It might be better said that profit is a name for a relation of surplus-value to total capital invested, instead of only to variable capital. As Marx puts it, the capitalist cost of a commodity is measured by the expenditure of capital, whereas the economic cost of a commodity is measured by the expenditure of labor. Capitalist cost-price of a commodity then is a quantity different from its value or its actual cost-price. It is less than the value of a commodity.
Capitalist Viewpoint Differs from Economic Analysis
Now we know that commodities, although they include surplus-value, do not exchange for more than value but only for their value. For exchange-value, expressed as price, is merely the outward manifestation of value and, as such, cannot manifest more than it is. Labor-power gives a new value to every commodity and that new value is divided into the value of variable capital and surplus-value. But the capitalist does not think that he sells commodities at their value. He counts his costs, he sees his selling price and any difference between them is profit, a true surplus as far as he is concerned, a supplement to the value of the goods, which, in his nomenclature, is its cost to him. He makes his profit, he thinks, not in the factory, for that is all costs to him, but in the market. The factory is expense, the market, profit. We have seen that this is nothing like the facts, but for all that the capitalist way of looking at his operations is a reality we must now dissect.
For the capitalist, if goods sell below their cost, then the value of his advanced capital that has been consumed is not recovered and if this keeps on he will lose his capital. The cost of the commodity was what he, the capitalist, paid for it. It is for that reason that the capitalist is forced to think that the surplus-value he realizes when he sells commodities is the excess of sale price over value instead of an excess within its value over cost. For him the sale is the profit, and he will argue “no sale, no profit.”
Fixed and Circulating Capital
Apart from this first distinction, the capitalist has no conception of the distinction between constant capital and variable capital. He would say, “My capital is divided into two sections, long-term investments that stay there through many jobs, years in fact, and short-term purchases that are used up in the production of the goods I am going to sell.” The first group he calls fixed capital and the second, which includes both raw materials and wages, he calls circulating capital. Marx’s distinction of constant and variable capitals was made so as to fathom the real source of capitalist profits.
But the capitalist, too, has a motive for his own accounting language. He measures the speed of turnover. The capital that turns over quickly can be isolated and as that is a large factor in his calculations he must know it, and know it in that way. He is really classifying capital by a question, “How soon will I put up fresh money for X? In a few weeks? That’s circulating capital. In a few years? That’s fixed capital.”
The Accounting View of Profit
The capitalist lumps wages and raw materials together for that reason. And for that reason he has a wholly different conception of the rate of surplus-value from the Marxist who takes it as a ratio to wages alone. For by this means too his bookkeeping takes no notice of unpaid labor. He says: “What unpaid labor? I reckon $5,000 for wages, $3,000 for raw materials, $2,000 for wear and tear of machinery and depreciation of plant, $200 for insurance, $200 for freight, $300 for commission to my salesman, $100 for trade advertising, and $200 for allocated office expenses, such as books, pen, ink and what-not, $150 for reserve for emergencies, and, the deuce with the government that gives me nothing, $400 reserve for taxes. Add it up. Expenses $11,550. What do I get for my goods? $12,000, and Robinson, my customer, takes off 2 per cent for cash, that makes $11,760 net. And another thing, I borrowed money from the bank, $10,000, and it took 30 days to pay it off, that’s one-twelfth of 6 per cent a year, or $100.
“So my profit is a measly $110 for all my headaches. What unpaid labor? I paid those lazy workers more than they’ll ever give me. Don’t look and they’ll cheat on you. They should hang the bankers, and get rid of the racketeering trades unions and kick the politicians out of the government and save taxes, and then maybe there’d be a chance for a businessman to make out. Look into my ledgers and show me unpaid labor! But look into my kidneys and you’ll find an occupational disease that comes from all my worries.”
It would not be easy to impress this small businessman with the long analysis of unpaid labor in the Marxian examination of surplus-value. For his business purposes, then, his economic division is fixed and circulating capital. He makes surplus-value a product of his entire capital, both constant and variable. That he calls the rate of profit. Owing to the money-form of buying labor-power, that can appear only on the books as paid for in full, and the difference between cost and sales is entered to profit and not to unpaid labor.
Rate of Profit Less than Rate of Surplus-Value
The rate of profit must always be smaller than the rate of surplus-value, for it is calculated against a larger basis, a basis that includes constant capital. If constant capital is $100,000 and variable capital is $20,000, then a profit of $20,000 is 100 per cent on variable capital, but 16⅔ per cent on total capital.
Profit Possibilities at Sales Less Than Value
It is clear that from a Marxist viewpoint the value of a commodity must include the profit, since it includes the surplus-value. But a capitalist may sell a commodity to a profit even if he sells it below its value. For he need not recover the whole of the surplus-value. So long as he recovers a difference above his cost he has got some of the surplus-value, that is, he has a profit. Very well then, he takes three hours’ unpaid labor in place of four. But he still makes money. That accounts for the constantly met underselling, dumping, bargains, and this is done continuously by solid merchants who get richer and richer. They are men willing to shave prices below value but not below cost. The bigger the surplus-value the greater their play. We shall see later what a brisk turnover does for these merchants.
It is interesting to note that the idea that it is cost-price that constitutes value, instead of labor-time, is at the basis of so many schemes to eliminate profits by a currency that represents cost-price only (the Douglas scheme).
Causes of Rate of Profit
The rate of profit is determined by two factors that are primary and intensified by a third. These two basic elements are the rate of surplus-value and the composition of the value of capital.
Given the same organic composition, the rate of profit is in proportion to the surplus-value. A capital of $100,000 consists of $75,000 constant and $25,000 variable. The rate of surplus-value is 50 per cent, or half of the variable capital, that is, $12,500. The rate of profit is the ratio that $12,500 bears to the total capital of $100,000, or 12½ per cent, a rate one-fourth that of surplus-value. But the surplus-value may not always be realized in sales. Let us say that only $10,000 is realized as profit. Then the realized rate of surplus-value is 40 per cent, the rate of profit realized 10 per cent. But the mass of surplus-value and of profit are always identical.
The second factor of the organic composition of capital can be seen best by comparing two different capitals. In one case the constant capital is $100,000, and the variable is $25,000; in the second the variable is $100,000 and the constant $25,000. If the rate of surplus-value is 100 per cent in the first case, that is, $25,000, the profit rate on the total capital will be 20 per cent. But if the rate of surplus-value is 100 per cent in the second case, then the rate of profit will be 80 per cent, since it will be the ratio of $100,000 to the total capital of $125,000. Hence the lower the organic composition, that is, the larger the ratio of variable capital to constant capital, the higher the rate of profit; the higher the rate of organic composition, that is, the higher the ratio of constant capital to variable capital, the lower the rate of profit.
Rate versus Mass of Profit
We have seen that in order to obtain relative surplus-value the proportion of constant capital to variable is constantly being increased and that this pace becomes accelerated with the accumulation and centralization of capital. How does it come about that the capitalist is so zealous to increase the rate of surplus-value and thereby diminish the rate of profit? Are not profits what he is after, that is, differences between investment and return, however they are composed or analyzed?
But what interests the capitalist is not the rate of profit but the amount of profit. If a greater investment of constant capital in proportion to variable is the only way to increase the ratio of surplus-value to variable capital, and that yields a higher sum of profits, it does not matter that the rate of profit on the total capital is diminished. For the capitalist is making more money, and that is the way to make it. Marxists argue that this alone vindicates their analysis for, on the assumptions of capitalist economics, how else is the contradiction reconciled?
Rate of Turnover
But we are only at the beginning of dilemmas. Before going on to the greatest of all we must notice a new variable in profits, and that is the rate of turnover. If a capital of $25,000 is divided into two sections, $20,000 constant and $5,000 variable and this variable capital is turned over twice a year, then the rate of surplus-value per annum is twice that of one turnover. The results have been incredible in some industries.
Engels cites a case known to him in Manchester, where he was engaged in business, in which a capital was 97½ per cent constant and 2½ per cent variable. The rate of surplus-value on the variable capital was as 3 to 2, or 150 per cent per turnover. The turnover took place eight times per annum, the surplus-value rate thus being 1200 per cent per annum. If the total capital was $100,000, of which only $2,500 was reserved for wages per turnover, the profit of the enterprise was twelve times $2,500, or $30,000, or 30 per cent per annum.
That such amazing rates of surplus-value are brought about by turnover is not to be discredited merely because of the Arabian Nights appearance of the figures. For after all, Carnegies, Rockefellers, and Fords do start with a few thousands and run them into billions, and conservative rates of profit will not account for anything like that rate of increase. For the highly successful enterprise, in fact, almost unimaginable rates of profit are not exceptional. They must be the rule, else these companies would not so far have outstripped the others.
Three factors of profit complete the story. First, that profit is another name for surplus-value, in essence, and follows its laws; secondly, that it falls as a rate with the rise in the organic composition; and lastly, that it is increased by the speed of turnover.
Differing Rates of Profit Are Short-Lived
But everyone can see that this theory of differing rates of profit, though possibly true for certain short runs, or certain “bulges” in one trade, or for a temporary advantage due to monopoly or inventions, cannot be true of straight competitive enterprise in the long run. For if the profits of the Woolworth type of store with a high variable capital, that is, a large wages expenditure compared to fixed capital, were permanently high, and that of the steel business, which has an immense investment per labor used, were permanently low, capital would desert the steel business and go into the novelties business, and would so saturate the novelties business that profits would be slashed to the bone, and soon there would be no more money in that formerly prosperous trade than there would be in steel.
We shall later deal with another of the celebrated theories of Marx on this very tendency to slash the rate of profit (not the mass of profit), but for the moment let us ask of what use the Marxist theory is at all, if so glaring a contradiction can exist? Is the contradiction in the capitalist system or in Marx?
If the profits of capital are due to surplus-value, and if surplus-value is due only to labor-time devoted gratis to the capitalist, and if the theory of surplus-value is dependent on the theory of value itself—that value is the embodiment in commodities of socially necessary labor-time—and if the upshot of the whole business is that the rates of profit do not vary according to the foregoing formulas, but are equalized by competition, then for what did we need the preceding Marxian theories?
Before studying the question to determine if there is a contradiction, let us first summarize the theory of Marx concerning this crucial point. For it is certain that there are two fundamental facts known to businessmen and economists alike—that in no two industries can the ratio of constant capital and wages capital possibly be similar, or even very comparable, and that the flow of money from one trade to another tends to equalize the rate of profit.
Marx presents his reply and synthesis of both factors. To anticipate one objection—that first he must have thought of his value theory and then was surprised by its unexpected results—we know, however, that the profit theory was worked out in 1865, the value theory, its basis, published complete in 1867. It is a matter of total theory, not of a later contradiction.
The Average Rate of Profit
The problem given: How can the rate of profit vary, rise or fall while the surplus-value rate remains the same? To isolate the question, we use one assumption: intensity of exploitation, that is, rate of surplus value and length of working day, are to be the same in several trades. We must examine the only variables in question: (a) their differing organic compositions; (b) their differing rates of turnover.
Comparison of Differing Capital Compositions
We take three industries with the same capitals, $100,000 each. One is in steel, the other leather, the third light jewelry work. The constant capitals are: for steel, $80,000; for leather, $70,000; jewelry $60,000. The variable or wages capital is: for steel $20,000; leather $30,000; jewelry $40,000. The three capitals as totals are identical, their organic compositions vary. All three have the same rates of surplus-value, say, 100 per cent. That means that their surplus-values are equal to their wages capital, hence for steel it is $20,000; leather $30,000; jewelry $40,000. These result in differing amounts of surplus-values for equal capitals.
But according to Marx’s labor-time theory, the use-value of constant capital is transferred into new products, although the value is not increased thereby. But their values are preserved, carried over. Therefore the total value of the products must be equal to the transferred constant capital and the new value added by variable capital and surplus-value. For steel, the product is worth $100,000 in capital plus $20,000 surplus-value, or $120,000; for leather $130,000; for jewelry $140,000. What happens now? Inequality still persists. For steel the rate of profit is on its $100,000 capital, 20 per cent; for leather 30 per cent; for jewelry 40 per cent.
The Effect of Divergence of Prices from Value
So far we have been speaking of the values of their products. Will their values equal their prices? If competition becomes the keenest where profits are largest how does that competition express itself? By cutting down prices. And so the industry that has the largest rate of profit, jewelry, will attract the most competition; leather will be untouched; and capital will desert steel and so lessen competition. By these means the selling prices of jewelry will be cut to reduce the rate of profit to the average rate of 30 per cent, that of leather will remain unchanged, and the steel industry, free of this transferred competition, can raise its prices 10 per cent and get the difference due to the fewness of offerings. Hence all profits will be equalized at 30 per cent. That is the average rate of profit.
Not that this equivalence takes place like the movements of mercury in two compensating thermometers. It takes place slowly, haltingly, and allows for the variations of business acumen in judging trends of price. But this is the social tendency, and that establishes the law of profits. The average rate of profit is independent of organic composition of capitals, the surplus-value rate is dependent on these organic compositions.
This equalization of the rate of profit takes place in production, not in the market, though its price differences are seen only in the market. For it is by the flow from one industry to another of capital used in production that the capitals finally equalize their profit rates. The exploitation of labor remains the same, for its mass is unaltered, as is the mass of total profit. It is the allocation of rates of profit between industries that is altered. In the industries with a high ratio of constant to variable capital the mass of profit exceeds the mass of surplus-value, and where the variable capital is the larger proportion the mass of profit thus becomes lower than the mass of surplus-value.
The Price of Production
That is, in some industries prices are above value and in others below. The price of commodities (not their value) is thus determined by the cost of production plus the average profit, and this sum total we term the price of production.1 Hence price is the expression not of exchange-value as merely the outward manifestation of value, but differs from that manifestation by the extent of surplus or deficit from value brought about by the varying costs of production plus average profits.
What does the law of value function as, under these conditions? The total sum of prices so realized, though, must equalize each other, and so the total value of commodities is their labor-value, neither more nor less. No matter how much capitalist competition equalizes, or monopoly prices distort profits, they must add up to the values embodied in the social total of production by the sum-total of labor-time expended in their production.
Quantity of Profit and Surplus-Value Socially Equal
We have seen that there was a difference between the rate of surplus-value and the rate of profit, but none between their quantities. The qualitative difference was due to the proportion of variable capital to total capital, but notwithstanding, there was no quantitative difference. Now we have seen that the total value of commodities is transformed into the varying prices of production.
Is there a similar disguise of quality, while retaining an economic identity? For price of production includes as one element cost of production, and this cost of production includes either the value of dead labor in the shape of means of production, or living labor and the new value it adds. Thus value and surplus-value are concealed in the idea of prices of production.
Masses of Profit Differ in Industries
But there is a difference and it consists in this: that as soon as an average rate of profit is established corresponding only to total capital invested, the profit and the surplus-value produced in any industry are no longer necessarily identical with the profits obtained by selling the products. Not only the rates of surplus-value and profits are different, but also their masses, or absolute quantities.
It is the quantity of surplus-value produced by the workers for the capitalists that is far more significant than that for any capitalist. For the capitalist in any given industry, the importance of the surplus-value produced therein plays a decisive part in regulating the average profit (and this part in turn depends on the proportion which his investment bears to the total industry with which it is compared).
But the deviation of the masses of profit and surplus-value, as well as their rates, from each other, now completely obscures from the capitalist the social origin of his profit, that is its basis in class relationships. By values being transfigured commercially into prices of production, there is no basis for a direct perception of the value basis of commodities, labor-time. It is for that reason that its exposition appears so intricate, and that Marxist economy seems to bear no resemblance to everyday existence.
The Marxians contend that it is only on the basis of value and surplus-value as labor contributions that any conversion into prices of production can be understood. But the anti-Marxians have concentrated all their fire on what they term the “great contradiction.” We are advancing things a little in discussing this controversy, but some primary phases of it must be given right here. It was considered a “theoretical suicide” by the Italian economist, Loria,2 and the doughtiest enemy of Marx’s theories, the Austrian Finance Minister, Dr. Böhm-Bawerk, entitled his critique of it Karl Marx and the End of His System.
The “Great Contradiction”?
Marx has said in one place that exchange-value is the representative of labor-time, at the other, that it disregards labor-time, due to competition equalizing rates of profit, and that commodities sell at the price of production. You cannot have both: the theory is finished. Scores of economics manuals do not even re-examine the question; for them it is decided. As the French say, in this matter Marx decidedly has a bad press.
Marxist Concordance
Marx distinguishes value from price at the outset of his initial study of value. He states that while value determines the general level of magnitude of prices—that is, if more labor-time is incorporated into a commodity its price will tend to reflect that value—nevertheless the blindness of production is also a feature of capitalist economy, that it has to explore the market to discover the relationships of values.
That the laws of the market tend to conform to the labor-time of production is an absolute, but the oscillations both above and below value are considerable, and prices are always tending towards values but are rarely (almost never, in fact), at values. So the first horn of the dilemma is blunted.
Marx holds that value is the governing influence, establishes a reference for prices, limits the time in which extreme fluctuations from value can possibly persist, and thus is always operative.
But it is also to be noted that Marx used the expression socially necessary labor-time. He left out of consideration wasted time, so that time itself was not his only referent. Also, he spoke of social labor-time, meaning the total labor-time conceived of as an abstract mass, of which each section of labor-time is an equally divisible part.
Commodities sell exactly at the equivalence of social labor-time; a commodity need not, though it tends to move in the orbit of average social labor-time.
Under capitalism value is revealed only through the fluctuations of the market. In a village, in the Middle Ages, though, the then mode of value was directly reflected in exchange. There was nothing to disturb its manifestation. These capitalist disturbances do not annul the law of value; they illustrate its working in a society torn by class divisions, producing for profit, and using an unplanned market to probe unmeasured demand.
Marxian Method Ignored by Critics
Then again, the critics have neglected Marx’s convention. He states that he assumes that goods exchange for their value in order that the laws of value may be ascertained free from disturbance. He also states that he is criticizing a real society in which, in fact, disturbances exist. He promises to leave the study of capitalist production as a motionless model for a study of it in all its rich complexity, after the first volume.3
But that his deductions were carried out by a series of abstractions is insisted upon by him. Nowhere does he state that their appearance in society is the same as their essence as made known by economic study. Thus Marx points out that were it true that goods sell at value, they must contain surplus-value, they must yield a profit.
He does not say they do, he says even if they do. The reason back of his assumption was the uncovering of the relations that are hidden. What confirms it is that even when prices are converted from social-value into prices of production this is not true of labor-power.
Labor-Power Confirms the Marxian Analysis
That commodity cannot be so obscured in the market, for it is basic to all commodity values whatever. It is a Marxian exhibit without trimmings. The reason for labor-power’s being autonomous in its action is that it is not produced by capitalists, but out of the means of subsistence of the workers. This is the Marxist Rock of Gibraltar.
Let us follow the enemies gathered against that fortress. The Marxians say, “We have equalized rates of profit. But how? By equalizing rates of surplus-value. We got these ultimately from the theory of value. As a totality of social production you have a sum of values and these equal the sum of your prices of production. The prices of production explain the price of specific parts of the social total, but not of the total itself. They are a mode of division of value created by capitalist competition but they are only comprehensible as parts of Marxian value itself.”
Law of Value the Referent
You have an average profit. But average of what? If it has no referent why is it $50,000,000 and not a trillion, why 10 per cent and not 50,000 per cent? The average is an average of something that limits it. What limits it? If you say it is an average of total surplus-value you have something, for then you are ultimately back to something outside of exchange, a measurable physical thing, total labor-time.4
It is true (to illustrate this total analysis), say, that price of production deviates from the proper fraction of total value that a commodity has. Good. Now let the labor-time required to produce that commodity go down by nine-tenths. Will your price of production still maintain its level? It can be produced in a tenth of the time. Will it not be altered in all its relationships to other commodities? What sought the level, the prices of production? Yes. What determined the level? Socially necessary labor-time to reproduce the goods.
Marx sums up: The social total value of commodities regulates total surplus-value and the level of average profit and rate of profit (as a general law), and so it follows that the law of value regulates prices of production. In order to counter Marx, the critics bring up the theory that prices are determined by costs of production, not price of production, which is cost plus profit. So according to them profit plays no part in prices at all. Then what determines profits?
Cost Theories an Endless Regression
The theory that costs are final cannot be sustained, for one must ask what determines costs of production? Costs of what enters into goods? Where do we stop? The Marxian holds that one must stop with labor, for labor is the living element of production.
We shall later go on to the bourgeois economists’ philosophy of subjective utilities as a psychological or inward way of replying to the Marxist physical or outward way of projecting the question of value. For the Marxian there is no contradiction between the law of value and the average rate of profit.
There is a contradiction, says Marx, between the manifestation of value and value itself, but that is of the essence of a system whose class divisions make contradictions its normal form of action. The economic critics of Marxist theory, say its defenders, blame the doctor for the disease.
1. The student should master this category, for it will recur more than any other in the critical section.
2. In 1895 in the Italian literary magazine Nuova Antologia.
3. The theory of profit is formulated in the third volume of Capital.
4. What especially distinguishes Marx in his understanding that no science of political economy can exist by itself, it must be referred back to the physical world of which it is a social segment.