Where does Profit come from?

Where does profit come from? part one: part two:

Text: Imagine you are a capitalist. Your money works for you. You wake up in the morning with a big chunk of cash. You invest that cash in some productive capital. At the end of the day you have more cash than you started with. All you did was sit around and drink martinis.

The money you invest moves through space to distant lands, far away, where people you will never meet scurry around on shop floors, assembling widgets which your salespeople will sell to make your profit. You don’t know them. You don’t care to. After all people are just factors of production… like machines, like raw materials. The cheaper the better.

Out in the world are other capitalists. Unlike workers, they are worth worrying about. For it is these other capitalists that are competing with you for your profit. They compete to outsell you in the market for your commodities. They compete to command cheaper inputs than you. Whenever you aren’t chasing after more profit, someone else is. When you meet in the marketplace, they will beat you.

Imagine you are money. In the morning you start out as a wad of bills in a capitalist’s wallet (or, more realistically, a bunch of numbers in a bank account.) The capitalist uses you to pay rent for factories, pay wages to workers and to buy raw materials. Now you are no longer money. You are factories, wages and raw materials. You are productive capital. Workers hammer on you, smoke comes out of your smokestacks. Your conveyor belts rattle with the magic of creation and…. abracadabra: you are commodities.

The production process turns that productive capital into commodities. As commodities you sit around on shelves. Eventually workers come along and buy you. They pay for you with money. Now you are money again. But this time you are MORE money!

We call this circle the “circuit of capital”. Have you ever seen the movie “The Blob”? It’s a corny 50’s horror movie about this alien monster that looks mysteriously like a large wad of bread dough. It gets bigger and bigger until it takes over the whole town. This is kind of like capital.

Let’s go back to pretending we are capitalists… Capital expands and expands and expands through this circuit of money-commodities-money. (MCM) Capitalists have two choices: either continually reinvest their profits into this circuit of capital, or be destroyed by other capitalists who do. Let’s say you decided you were tired of constantly competing for more profit, constantly searching out ways to lower production costs. Let’s say you decided just to keep your production at the level it is. What would happen? Pretty soon other capitalists would have found cheaper inputs, and more efficient ways to produce commodities and they would be outselling you in the marketplace. And pretty soon nobody would want to buy your commodities and you would be out of business. So capitalists may be greedy. They may be immoral. They may be scum. But capitalism is not greedy, immoral or scummy because of greedy, immoral scumbags. Capitalism is greedy, immoral and scummy because it compels people to be greedy, immoral and scummy. It compels people to compete against each other in a constant quest for more profit, for cheaper production costs. It compels capitalists to stop at nothing to turn their money into more money. Capitalists will pillage the earth, wage wars, buy off governments, destroy peoples’ lives all in order to change money into commodities and then back into money. (I recently overheard a capitalist talking about the fact that the investment firm Vanguard is getting some heat for the fact that it invests in Sudan at a time in which the Sudanese government is using the money from investors to launch a war of genocide in Darfur. He referred to this negative publicity Vanguard was getting as “taking a political hit in the name of revenue.”) So maybe money isn’t really working for capitalists after all… maybe capitalists are really working for money. One sometimes wonders if there is any limit to what the imperatives of profit will make people do…

But where does this profit come from…? Money goes into the production process and comes out as commodities which exchange for a greater amount of money. Huh? Is it magic? This makes no sense without recourse to the theory of value.

Let’s review that theory for a moment. For all of these different commodities to exchange in the market they must have a common substance. This common substance which allows us to treat all commodities as containing differing portions of the same substance is labor. Labor produces value. All commodities are the products of labor. Their value is determined by how much labor went into them. Labor digs raw materials out of the ground, labor turns raw materials into useful objects (use values), and labor transports commodities all over the world to be consumed. Labor is what makes our economy tick. It is the substance behind everything we consume and all of the objects we interact with. Labor is to the economy what the atom is to chemistry.

Some people think that labor doesn’t create value. They are called bourgeois economists. I deal with this debate elsewhere. But one of the important challenges to this debate runs like this: There are many other things that are common to all commodities, say the bourgeois economists. Use values, for instance…. “What is so special about labor?” demand the bourgeois economists.

The answer is this: Labor is the one thing that can produce more value than it costs. It is therefore the source not only of all value but also of all profit. When a capitalist pays for labor what are they getting exactly? Certainly not a specific amount of labor. Workers can work faster or slower. They can work with varying degrees of efficiency. It all depends on the organization of the work process and the motivation (or cooperation) of the worker. In fact capitalists aren’t really buying labor. They are buying “labor power”, that is, the capacity of the worker to do labor.

But capitalists have a lot of control over how much labor they get out of workers. In fact, capitalists (or the mangers who work for them) devote a great deal of time to streamlining production so that each worker produces as many commodities as possible. They do this by reorganizing production and by employing labor-saving technology. As well as making workers more productive, capitalists also seek to spend as little money on their workers as possible. By spending less on workers capitalists extract more value per dollar invested. This is not true of other productive capital. If a capitalist spends less on coal, he gets less coal. If he spends less on the factory he gets a crappy factory. But when capitalists spend less on labor they don’t necessarily get less work out of their workers.

There are many ways in which capitalists spend less on labor. They pay lower wages, pay less to train workers, pay less for safety, pay less for insurance. It is important to realize that high wages, worker safety regulations, employer-paid health insurance and pensions are all things that run counter to the basic incentives of capitalist accumulation. We have all those things because workers organized and fought for them decades ago. And capitalists are constantly trying to take those gains away from us. You don’t need me to give you examples of this. Pick up the newspaper.

So labor is “variable”- the amount of value it produces is up in the air. The capitalist constantly tries to get more out the labor power it buys even if this means subjecting workers to increasing degradation. If the labor power produces more value than the capitalist spent on it then profit has been created.

We have another word for this process in which workers create more value for capitalists than they are paid for: Exploitation. Exploitation is essential for capitalism. It is the only source of profit. Without profit money cannot be turned into more money and we have no circuit of capital. Without a circuit of capital we have no way of turning raw materials into commodities. Nothing can be produced or exchanged. There is no capitalism without exploitation.

Like most truths in our economy, exploitation lies hidden deep within the inner reality of the movement of capital. Though we all experience exploitation, few of us are conscious of the fact. A worker is paid to do 8 hours of work and they do 8 hours of work. There may be some dim conception that something isn’t fair about the large salary of the CEO compared to the worker’s own paltry salary. There may be grumbling about how hard and miserable the work is. But workers can’t see the exploitation. They don’t see a capitalist taking anything away from them. The wage contract obscures the reality of exploitation from their view. The capitalist is aware that profit depends on worker productivity. The capitalist is aware that paying workers less, organizing production efficiently and using labor-saving technology are all ways of increasing profits and staying competitive.

But the explicit nature of exploitation is obscured to the capitalist as well. To the capitalist (and to bourgeois economy in general) labor is one of many inputs into the production process, all of which need to be economized. Capitalist seek to cut all sorts of costs whether it be for raw materials or workers. So the reality of exploitation as the sole source of profit is obscured from the capitalist as well.

This obfuscation is something we will return to in future postings. It is the starting point for understanding many things about the way people consent to the cruelties of capitalism, the way in which the actions of individual capitalists have disastrous consequences for capitalists collectively, and the relation between value and price.