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.

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8 Responses to Where does Profit come from?

  1. Wizz says:

    Your concept of Capitalist Greed and Immorality applies to anything Human. Including Labor. That’s just the nastiness of Human Nature.
    But what you do not take into account is that Labour is worthless unless it has something to which it can be applied.
    An exaggerated example goes like this. Let’s say that there are just the two of us on Earth. And I have, by whatever means, whether my size, age strength, whatever, have fenced off all the arable land and fresh water.
    Now you come to me and say, “I will work (ie apply my labour) for you in exchange for water and food” ANd I say’ Nah, I’ll do the work myself”
    So what worth does your labour have? NONE.
    Unless you have something that someone else desires of Labour, it by itself has no intrinsic worth.
    The only original source of worth (capital) is Land and Fresh Water.
    After that everything else works by way of main base characteristics of Human Nature- One you describe, Greed. The Others I say are Laziness, Egotism, Haughtiness, Self agrindisement, One Upmanship.
    After those develop the system of barter and trade, Labour for Food and Water, then you can develop a system of Morality to try to organize the Barter. And keep the serfs down on the Farm.

  2. hb says:

    “Labour is worthless unless it has something to which it can be applied.”

    Resources are worthless without the application of labor. One has to expend labor just to drink from a stream.

    My labor would be of great value in punching you out when you tried to assert claim to all the world’s resources. You’d be *begging* for my labor, idiot, were there only two people in the world.

    • arharris says:

      “One has to expend labor just to drink from a stream.” True enough, but in that case your own labor belongs to you, no one else. Now imagine someone put a chain around your neck and ordered you to go get him some water. If you failed he would whip you into a bleeding mess of flesh. Then he would sell your wife and children to another slave owner. Then your labor would not belong to you. All the value of your labor would belong to your master. From the value of your labor the slave owner makes his profit. That is how slavery works, and also how serfdom and capitalism work, although in different forms.

      You say you would punch out the slave owner. Well, that’s not how the real world works. The slave owner has hundreds of overseers armed with guns and riding horses to run you and your family down. He uses torture limited only by him imagination to coerce you.

      This system worked quite well for thousands of years; in fact it worked in the U.S. for about 300 yrs.

  3. Nikita says:

    Labor like all things is also a commodity. Worker sells his labor to a capitalist. Capitalism allowed greatest amount of people to come out of poverty. By seeking profit a capitalist makes sure he pleases everyone. You can not make a profit without that altruistic component.

    • Labor is not a commodity. Labor power (the ability to work) is. You can’t sell a definite amount of work. You can only sell a definite amount of labor time (what the worker sells) or the product of a definite amount of work (what the capitalist sells). A worker sells their labor power (their working time) to a capitalist. But the amount of labor they provide, the amount of value they create, depends on various contingent factors. This difference between labor and labor power is what makes profit and exploitation possible. How does a profit please everyone? It only pleases those who make the profit. It definitely can’t please someone who has been exploited to make that profit. If capitalism brings everyone out of poverty then why is most of the world poor? “Altruism”? Altruism is by definition a voluntary act of charity, external to production, and is not contained in any definition of the wage-relation or the profit motif.

  4. Nilma says:

    Kapitalism101, Sorry for my belated comment. I appreciate your lesson & most of your viewpoint, thank you.

    However, isn’t labor seeking employment also greed? Labor, Land & Capital each in it’s own self-interest, equally compete for employment. We can call seeking this employment; exploitation, greed, self-interest, or survival but we ought do so equally.

    Some labor wisely invests it’s own capital into itself(education, self-employment, etc.), in order to become more competitively employed. Is this not also greed? Or are you saying that labor is also compelled towards greed by Capitalists?

    Stay well, -Nilma

    • arharris says:

      The problem, I think, is that when a worker seeks employment he or she is seeking to exchange his or her own labor for a wage. You might say he invests in his own life, his children’s lives, etc. He wants to exchange his own labor for an equal amount of wages. Thus he cannot profit off his own labor.

      The capitalist, however, must make a profit in order to stay in business. He or she wants to exchange somebody else’s (the worker’s) labor, in the form of a product, for money. The capitalist invests in greed, the worker in his own life.

      Marx’s theory, I think, is that a capitalist can only make this profit by paying the worker less than hsr real value and pocketing the difference. Thus, the worker pays for his or her kids’ education with hsr own labor; the capitalist pays for hsr mansion with the unpaid labor of hsr (my invention) workers.

      It is not that “… that labor is also compelled towards greed by Capitalists?” but that capitalists are compelled toward labor by greed.”

  5. arharris says:

    I know I am late on this comment, but I wanted to respond to the point raised by Nilma.
    You say, “But the amount of labor they provide, the amount of value they create, depends on various contingent factors.” The various contingent factors being, I would assume, skill, strength, age, experience, etc. of each worker. However, Marx, Smith, and Ricardo, among others, all held that in the exchange of commodities (on average, in general) equal value is always exchanged for equal value.

    Thus, as a commodity, labor value (whether labor time, labor value, labor power) is exchanged for equal value. The capitalist exchanges $8.00 for an hour’s work or labor; he adds to this, say, $2.00 for all other costs (materials, interest, machine, rent, etc.) Yet the capitalist is able to sell the product for $11.00 (on average) and thus make a profit of $1.00 for a rate of profit of 10%.

    But, and this is the key point, the capitalist can only exchange his commodity for equal value. Thus the true value of his commodity is $11.00, yet he paid only $10.00 for it. Where does this extra $1.00 come from? Obviously from the worker.

    Marx’s explanation was that part of the worker’s wage is unpaid: a worker agrees to work an 8 hr day at an agreed wage or price of labor of $8.00 per hour. Yet this, according to Marx, does not prevent the working for a full day. (Capital, Vol I) This, I think, is where Marx runs into a difficulty which has not been solved to this day. He says that the non-payment of wages happens behind the worker, and, therefore, the worker cannot see it happening. Exactly how it happens Marx does not explain, I think. Marx was able to explain how the exploitation worked for slavery and feudalism, but not for capitalism.

    I believe (and I don’t pretend to be an economist) the problem is with the commodity analysis of labor. It is unquestionably true that labor (power, time) is a commodity, as Marx discovered. However, as a commodity it must obey all the rules of commodity exchange. The fundamental law it must obey is the law of supply and demand. If there is an oversupply relative to demand the price will go down, and vice versa. Imagine if you were a capitalist and you were producing a commodity for which there was a constant oversupply. You would go out of business. Imagine, however, if you had access to a commodity crucial to your production, which commodity was always in excess supply. You would have found the golden goose.

    The worker owns only one commodity: his labor. Labor is the only commodity for which a permanent oversupply can exist, i.e. permanent unemployment, the existence of a reserve mass of the unemployed. This will artificially lower the price of labor more or less permanently. However, the value of labor remains the same. The value of labor, in the above example, $9.00, goes into the production of the commodity, which is added to the non-labor cost, and the result is the true market price of the commodity: $11.00.

    As the use of labor declines relative to the use of machinery, the rate of profit will decline. Permanent unemployment can cause this artificial lowering of value; also the discovery and exploitation of a new undeveloped labor market (e.g. China, Mexico, etc.) can cause the value of labor to be devalued, as it were.

    As to how this happy circumstance arose for capitalists, Marx discovers in primitive accumulation: two of the best known types of primitive accumulation were “enclosure,” which drove millions of peasants from their traditional homes and into factory towns. They became the original source of the oversupply of labor. The second primitive accumulation was the discovery and robbery, by means of rape, torture, and murder, of the gold and silver of the New World.

    High unemployment and easy money (or rather, eviction and murder) were the unnatural parents of the modern day capitalist.

    I really appreciate your blog and your videos; and the opportunity to think out loud about this whole subject is incredibly helpful.

    As I am finding out, someone else usually has written about what I am thinking about. If you know of any books, papers on this could you let me know. Also, I have not checked for spelling, grammar, etc.

    Thank you.

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