Value-Price- a draft script

This is a draft of the script for my next video “Value and Price”. Any feedback is helpful. The footnotes have yet to be numerically linked to the main text.

Intro

There is a lot of confusion over Marx’s theory of value and price. Let’s take care of that. [Obviously I'm just skimming the surface here, but I suspect that what my audience wants is a broad concept of the main points.]

When people get their panties in a bunch about price/value it’s over this issue of price and value not being the same all the time. At noon today a hot dog that took 20 minutes to make might sell for the same price as a bowel of soup that took an hour to make. Ack! Is this non-identity of value and price the end of Marx and the end of all radical politics?

I hope not. The reason we have two concepts, value and price, is because they are not the same. It is the relation between them that explains the inner mechanisms of capitalist production and exchange. If value and price were the same we would automatically know how much labor went into a commodity and what level of output we needed to meet societies demand. But if we knew all of these things then there would be no need to have value or price or a market for that matter. We could just plan everything on a computer.

But we don’t have a planned economy. What division of labor and what level of productivity are necessary for the division of labor to reproduce itself each day? Nobody knows.  When capitalist hire workers and buy inputs they don’t know what sort of profit they will make. And when we go to the store we don’t know how much labor has gone into the things we buy. These decisions all must happen through the fluctuation of price signals. These fluctuations reflect back upon production to discipline and apportion labor.

Discipline and Apportion

When we say that labor is ‘disciplined’ we meant that individual workers must strive to work at the average level of productivity. This is Socially Necessary Labor Time (see my video ‘Socially Necessary Labor Time’). When we say that labor is ‘apportioned’ we are talking about the division of labor, that is, deciding how much labor should be apportioned to what tasks. The division of labor and the SNLT determine what is produced, how much is produced and what the values between these commodities are.

But the unique thing about capitalism is that these decisions about disciplining and apportioning labor only happen after the labor has been performed. Price signals are judgements on past labor which then influence future labor. As the products of labor leave production, enter circulation and then become inputs into future production we have a continual feedback loop of information.

Production and Exchange

This feedback loop could be confusing unless we remember this important principle:

‘value cannot be created in exchange’

Once you understand that almost everything else falls into place. Value is created in production by human labor. It takes the form of commodities with definite values that enter the market place where they acquire prices. Sometimes these prices are above their values. Sometimes below. These signals act back upon production to discipline and apportion labor. Thus the enormous, complex division of labor in a capitalist society is coordinated through the value relations between the commodities.

Because value cannot be created in exchange this means that the exchange of commodities is a zero-sum game. If some commodities sell above values then others must sell below. There can be no aggregate increase in value merely through the process of commodities changing owners. To have new value there must be new labor.

Unlike neoclassical theory where prices arise merely from the collision of subjective motivations of individuals bartering, totally abstracting away from the production process, the Marxist theory of of value and price directly links these phenomenon to the need for society to reproduce itself through a capitalist division of labor.

Value- Price

If value is created in production then the value of a commodity is the socially necessary labor time that goes into it. But we can’t see this labor time when we look at the commodity. All we see are the exchange values that occur when this commodity trades with other commodities. We can only see the social relations between producers through these exchange values. When the commodity exchanges for money then we see a special form of its exchange-value: price. Price is the form of appearance of value. It is the way we see value at work in the real world.

If value can’t be created in exchange this means that the total amount of value produced is always equal to the total prices of these commodities. But individual values and prices can and must diverge in order for the price mechanism to discipline and apportion labor.

Money

When we say that price is the ‘form of appearance’ of value we mean that the value of a commodity is not stamped on its side for the world to see. We only see the relations between laborers through the exchange ratios of commodities. Money is the god of all commodities. It is the one commodity that all other commodities measure their value in. As such money represents value in the abstract. It is a measure of abstract labor (See my video on Abstract Labor).

Thus when the price of a jellybean rises above its value this means that the jellybean, commands more money than its value, that it commands more abstract labor in exchange than it required in production.

Demand and Supply

One of the main reasons that prices deviate from values is the constant fluctuations of demand and supply. As capital revolutionizes the productivity of labor, values change, output and prices change, and demand and supply fluctuate. If demand for jellybeans is higher than demand then the prices of jellybeans rise above their values, they command more abstract labor in exchange, and this triggers a reapportioning of labor to bring supply in line with demand.

If supply and demand were in balance then price would equal value. This is why it is meaningless to try to form a theory of price just by relying on demand and supply. If demand and supply were to actually balance for all commodities we would need some external factor to explain the exchange ratios between commodities. For this reason Marx often abstracts away from demand and supply imbalances when making his analysis of value.

Side Note on Marx’s Method

In fact Marx often asks us to assume, for the purpose of illustration, that value=price. This is not because he thinks that, on the average, or in the long run, value always equals price. It’s because the divergence of value from price has no bearing on any of his main conclusions about the qualitative aspects of value: that the origin of profit is the exploitation of labor, that capitalism is unstable and prone to crisis, etc. By isolating the fluctuations of price and value he can put our attention on the class relation between capital and labor in the workplace, instead of letting us get distracted by the distribution of value through market fluctuations.

Review:

Before we move on we should review the main points thus far: Value can’t be created in exchange, only moved around. Money is the measure of value. If a commodity sells above its value this is the same as saying that it commands more labor in exchange than the labor that went into it.

3 components of value

The value of a commodity is divided into 3 components:
constant capital (c)- is the value of the past labor that went into the production of any inputs.
The other two components of value are new value created by the worker.
variable capital (v)- is the wage paid to the worker
surplus value (s)- is the surplus labor the worker performs for the capitalist above the value of their wage.

The line between V and S is the site of class struggle as capitalists try to get as much surplus labor out of workers at a given wage. That’s why it’s called ‘variable capital’. The value of non-labor inputs are called constant because they can’t create any more value once they are bought. They pass their value directly into the value of the final commodity.

C+V represent the cost of production to the capitalist. Marx calls this the ‘cost-price’. Capitalists must at least recoup the value of their cost-price if they are to continue production each period. If they didn’t at least recoup their cost price they would not have money to pay workers or buy inputs.

But capitalists also must have an incentive to invest. They also require profit. But the profit they get from selling their commodities is not always equal to the surplus value they produce. Previously we said that value is created in production but that the seller can gain more or less value depending on the fluctuation of price. Now we can also say that surplus value is created in production but the capitalist can gain more or less profit than depending on the price of the commodity. If a capitalist’s profit is higher than the surplus value they create in production we call this “super-profit”. As we discussed in the video on SNLT, super-profits are the prime motivating force of a capitalist economy. They drive innovation and attract investment. The deviation of individual capitalists’ profit and surplus value is thus a necessary part of capitalist competition. However the total amount of surplus value produced is always equal to the total amount of profit received. As with price and value, surplus value can only be created in production even though it is redistributed in exchange.

Prices of Production

The most notable case of surplus value being redistributed in exchange is Marx’s theory of Prices of Production. Before explaining that we first have to take a brief detour to talk about average profit rates. If capital is free to invest in any industry, free to move in search of the highest profits, this causes a tendency for profit rates to equalize. As money flows into a high-profit sector, the supply of these commodities rise and their prices fall. Those high-profits start to erode. The opposite happens with low-profit sectors. Of course this doesn’t mean that all sectors of the economy always have the same average profit rate. This is only a tendency, one hindered by barriers to entry, monopoly, etc.

If surplus value can only be created by human labor we would expect the highest profits to come from capitalists who hire the highest ratio of workers to machines. We would expect the lowest profits from capitalists who spend lots of money on machines and very little on workers. (This is the concept of the ‘organic composition of capital’: the higher the ratio of machines over workers the higher the organic composition of capital.) If capitalist A spends $75 on wages and only $25 on constant capital we would expect her to make more profit that Capitalist B who spends $25 on wages and $75 on constant capital. The more workers relative to machines the more surplus value is produced per dollar invested. Both capitalists invest $100 but one has a much higher profit rate than the other.

Assuming no barriers to the flow of capital we should see a tendency for profit rates to equalize, for capitalists to make the same return on investment for every $100 invested. How can this happen? If we keep in mind the fact that value and surplus value can only be created in production but can be redistributed via prices and money then the solution is already in front of us. Surplus value is redistributed between capitalists to form an average rate of profit.

How do capitalist’s redistribute surplus value? Do they send it to each other in the mail? No. Prices do this work of redistribution. The prices for some commodities fall, others raise, and thus capitalists gain and lose surplus value in exchange in a way that equalizes profit rates. In this way surplus value becomes less of the property of the individual capitalist and more the property of the capitalist class as whole, uniting the class in their common interest in the exploitation of labor.  These new prices, the prices which redistribute surplus value to form an average rate of profit, Marx calls “Prices of Production”. They are formed like this:

c+v+p

where p is the total surplus value created by the working class divided evenly between capitalists, or the average profit.

Criticisms

There are some common critiques of Marx’s concept of value and price. There is room here only to sketch out a few and give some brief rejoinders.

1. Q: If price is just cost price (c+v) plus average profit what is the point of talking about value at all? Why not just have a theory of price that says prices are the cost of production plus an average mark-up?

A: Such a strategy would not explain the relation of price to the disciplining and apportioning of labor by capital, the social relations which are coordinated by the price system. After all, cost-price represents a definite quantity of current and past labor. And the average profit is completely dependent on the amount of surplus labor extracted by the working class.
If we eliminate value as a category then we have no way of explaining money. Money, as the commodity which all other commodities measure their value in, is the embodiment of labor in the abstract. Without this real abstraction we have no way of comparing the relative worth of one commodity from the next. This is why neoclassical theory doesn’t really have a theory of money, but rather bases its system upon the notion of barter. Marx, by contrast, shows how the intrinsic value of the commodity can only find its expression in the money prices.

2, Q: If value rarely ever equals price, what is the point of value analysis? How can you prove that they aren’t two sets of numbers, labor times and prices, coexisting with no relation?

A: Attempts to prove or disprove Marx’s theory of value by finding instances of price-value divergence or identity will always fail. This is because the theory only makes sense if individual values and prices deviate. Value is a process, always in motion, and always in fluctuation. By analyzing value we can understand the violent social contradictions that create this dynamism and fluctuation.
Some Marxists like to think of values like long-run equilibrium prices. If demand and supply were in balance, technology didn’t change, and there was no equalization of the profit rate then yes, values would be long-run equilibrium prices. But these conditions never occur and so I don’t know how useful this concept is.

3. Q: The transformation problem
A: There is a long standing claim that Marx’s concept of the Production Price is mathematically incoherent. This charge is called “The Transformation Problem”. But the TP is actually not a problem for Marx at all. It only arises when his value-price theory is forced into a bull-shit Walrasian General Equilibrium framework where input and output prices always equal each other and prices never change or fluctuate. As we’ve seen change and fluctuation are the whole point for Marx so this so-called problem is not really a problem at all. For more on this see my video “What Transformation Problem?”

Conclusion

We can only conclude that Marx gives a a quite robust and practical explanation of the way that commodity exchange regulates the reproduction of a capitalist division of labor and class relations. This in stark contrast with the neoclassical tradition which tells us nothing about the social relations of capitalism. Neoclassical economics’ main ideological purpose is to prove that markets lead to the optimum allocation of scarce resources. In order to meet this aim it must abstract away from capitalist productive relations, basing itself on a theory of barter. This means that money must be artificially injected into the model down the road since there is no role for value in the abstract. And when we get to Walrasian General Equilibrium price even loses its role. This is clearly not a science at all, but a sham set of elegant equations

Footnotes:

Value: Marx’s terms have an elastic quality. In different places they stretch or constrict to contain more or less content.  This is because Marx understands things (and processes) only relationally. Things only have meaning in how they relate to other things. Value is a particularly elastic term because it sits at the very center of capitalist social relations. Sometimes when Marx says “value” he is talking about the exchange value of commodities, sometimes he is talking about the labor that goes into a commodity, sometimes he is talking about the form of social relations unique to a capitalist society. Understanding value theory requires that we are aware of what particular aspect of value is being referred to in a specific context. See Bertell Ollman’s “Dance of the Dialectic” for more on the elasticity of Marx’s terms.

Quality-Quantity: Value theory has both qualitative and quantitative dimensions. It’s a theory of social relations. In contrast to predecessors who treated categories like capital and labor only at the level of content, Marx was concerned with the form of these things took in a market society. In such a society they take the form of value relations and these involve certain laws, imply certain social relations, fetishism, etc…. These are all the qualitative aspects of value theory, in many ways the most crucial aspects of his theory to understand for formulating an understanding of the radical challenges of anti-capitalist politics.
But value theory also has a quantitative dimension, which comes to the foreground when we look at the value-price dimension. At times in the 20th century, due to the persistent myth that there was something internally inconsistent with the quantitative side of Marx’s value theory, Marxists have attempted to distance themselves from the quantitative aspects of value theory, instead developing approaches which attempted to side-step these quantitative aspects by focussing only on the qualitative aspects of the theory. This is no longer necessary, see my vid on TRansformation Problem.

Indirectly Social: Marx calls this unique way of organizing labor “indirectly social”. Rather than operating on some sort of plan where we decide how much labor should go into the production of various things our labor is distributed indirectly through the price signals of the market. We perform private labor. This labor is not social labor when we are performing it. It only becomes social after we finish working when the products of our labor meet in the market. Here in the market we find out if our labor has been socially useful and if it has been performed at the average level of efficiency.

appropriation of value: Bourgeois theory often confuses the appropriation of value with the creation of value in its idea of returns to factors of production.

Money: Marx sees money as the embodiment of labor time in the abstract. He builds this theory directly from his theory of the commodity. Commodities have both a use-value and an exchange-value. The use-value is a specific dimension of the commodity particular to each object and their various uses. Exchange-value is a universal, abstract dimension of the commodity. It is the empty quantitative relations between a commodity and all other commodities. It is numbers, not qualities. This leads to the separation of use and exchange value. Use-value stays in the bodily form of the commodity while exchange-value separates itself from the commodity in the form of money. Money becomes the commodity that all other commodities measure themselves against. As such it is the universal measure of value and the universal measure of abstract labor.

Equalities: Marx famously held three equalities to be true for the economy as a whole: 1. total value equals total price; 2. total surplus value equals total profit; 3. total value rate of profit equals total money rate of profit

Prices of Production: If capitalists receive an average rate of profit regardless of the ratio of constant to variable capital, how do prices of production still regulate the division of labor? Prices of Production still allocate labor because wages and surplus value are still involved in the prices of commodities. But, yes this allocation doesn’t happen as smoothly as it would in a world with no average rate of profit. In fact we already know that there is a systematic tendency in capitalism for capitalists to replace workers with machines. This increases the productivity of the remaining workers, allowing capitalists to produce below the SNLT and thus gain super-profits in exchange. Prices of production allow capitalists to continue to automate production without being punished for producing at a lower individual rate of profit. But if firms are replacing more and more workers with machines then less and less surplus value is being produced relative to the cost of all those machines. This leads to a Falling Rate of Profit in the economy as a whole. This is why in vol. 3 of Kapital Marx immediately moves from the discussion of Prices of Production to the theory of the Falling Rate of Profit. The tendency of the rate of profit to fall can lead to crisis, like the one we are in now. The rate of profit is only restored once enough capital value (ie the costs of production: workers, inputs) has been destroyed or devalued. See my video on the Falling Rate of Profit or any of my coverage of Kliman.

Organic Composition: the ratio of constant to variable capital is called the organic composition of capital and is drawn as c/v. The higher the organic composition in society as a whole, the lower the rate of profit.

Das Kapital vol.3 Part 1 Chapter 2: The Rate of Profit

Kapital Volume 3
Part 1, Chapter 2 The Rate of Profit.

(This post is part of an ongoing project: a close reading of volume 3 of Kapital, one post per chapter. I hope that others who are tackling this book for the first time might find my summaries and thoughts useful. I also hope that others might leave their own thoughts, criticisms, help, etc. here so that this blog might become a good collective resource for those brave souls who take on Vol. 3.)

The summary which begins Chapter Two serves not only to remind us of some important details about the way in which value is produced but also ties together several details that will be essential for understanding our analysis of the law of value in the context of competing capitals. We are reminded first that surplus value is created in production but only realized in circulation. This is a crucial point as it really helps delineate the essential contours of Marx’s argument. The world of appearance is dominated by fetishism. We think that the coercive and tantalizing power of the market, that value, is manifest in commodities themselves as a result of their specific properties. We think that capital itself creates value. And we think that the process of exchange itself can create a profit. The modern neo-classical idea that both sides of an exchange profit because of differences in subjective utility would be the most pathetic form of fetishism to Marx. Of course value must be realized in exchange. Of course we couldn’t have profit without entering the marketplace to sell a commodity. But without engaging in productive activity we would have nothing of value to sell in the first place. Marx reminds us a few sentences later that the capitalist only engages in production in the first place in order to make a profit in the market and that this is only possible if there exists a commodity which can create more value than it costs: the worker.

The fact that value is produced by the worker but realized in circulation is important for our understanding of the theory of prices of production (see Part II). If surplus value is realized in the market then there is no guarantee that all of that value will be realized. A capitalist could realize more or less than the actual value of their commodity. This is precisely how average profits are realized.

The capitalist can’t employ workers without also employing means of production. After all, this is what makes him a capitalist- his ability to dominate the means of production and thus exploit wage labor. The capitalist must always purchase additional means of production whenever (s)he invests in workers. Thus every investment in variable capital is also an investment in constant capital. It becomes impossible to distinguish between the purchase of the worker and the purchase of the tools by which the capitalist dominates the worker. If the capitalist doesn’t suffer from the fetish that his profit comes from the market then he is likely to suffer from the fetish that surplus value comes from capital itself. That is, profit seems to come from investment in total capital and not merely from the variable portion. The mystery of profit is obscured. The indirect mechanism of the market once again draws a veil over the social relation behind it.

Profit, as Marx explains in Volume 1, comes from the excess of surplus value over the wages paid to workers (variable capital). Thus we represent the rate of exploitation:
s/v
where v is variable capital, money spent on wages, and s is the surplus value created by workers above the value of their wages. But if profit is really a measure of surplus value over the entire expenditure on capital, constant and variable, we will need a different equation:
s/(v+c)
where c is constant capital.

This formula for the rate of profit, surplus value over the total capital invested, will become the focal point of the next several hundred pages. Marx will attempt to show how variations of the elements of this equation will produce different results- different worlds of appearance. In fact the rest of Part 1 will be devoted to showing how variations in surplus, variable and constant capital, produce different real world phenomenon. In the course of this painstaking exploration he will describe every single variation possible in the equation and how each results in a different world of appearance. We are expanding on the more general descriptions of class struggle painted by the equation for the rate of exploitation (s/v) in Volume 1. Now we see a more graded, varied world of outcomes as we begin to examine the new dimension of capitalist competition which we are slowly adding to our map of capitalist social relations.

Though much of Part 1 is quite tedious in its example after example of different variations in the equation for the rate of profit, one of the things I do admire about it is that it is a great example of how misinformed those critics of Marx are who label him a determinist. From a superficial glance at the equation for surplus value we would assume that Marx assumed a world of constantly polarizing class struggle, of constant immiseration of the working class at the expense of the capitalist class. And indeed, this is the basic theoretical crux of the theory of exploitation. To the extent that capital reigns supreme, unrestricted, unchallenged, it will extract as much value from the working class as possible. But some see in this some sort of weather forecast, some sort of absolute prediction that is not borne out by the current plurality of working class experiences. But here in Part 1 of Volume 3 we get a long description of the plurality of forms of appearance that capital may take just by adding another variable to the equation, constant capital. Marx is saying that capital has certain essential characteristics, characteristics rooted in the antagonism of the wage relation, but he isn’t saying that there is only one possible world of appearance that this relation may take. He’s just pointing to the essential, abstract relations inherent in all of these possible world’s of appearance.

The formula for exploitation, also called the rate of surplus value, s/v, tells us that the capitalist gets something for nothing, that surplus value costs the capitalist nothing at all. This is essential to the basic contours of Marx’s argument. He assumes equal and fair exchange. He assumes a world of free and equal exchange in which nobody is ripped off and nobody charges monopoly prices. That is, he assumes the existence of bourgeois equality, market equality. The only way capital can exist in the context of bourgeois equality is for there to be a commodity which produces more value than it costs. An equality in exchange can only create profit through an inequality in production. While buyers and sellers are free and independent in the market, the social relation of capital is an unequal one which allows domination in production. This is the basic social relation capitalism.

But as capitalists employ their monopoly on means of production they employ the products of past labor as well as present labor into production. Constant capital enters their calculations. The equation for the rate of profit, s/(v+c) describes the relation of past labor to present labor, of capital to labor, and of cost-price to profit. This is why Marx says, on page 43, that the rate of profit must be deduced from the rate of exploitation and not vice versa. The social relation of dead to living labor, of total capital to profit, etc, can’t be understood without the prior relation of capital and labor.

But then he goes further and says that “it was the rate of profit that was the historical point of departure.” (p 43) I’m not sure how to read this. There is much debate about whether we should interpret Marx’s model of simple reproduction as an historical phenomenon or a theoretical level of abstraction. Many accuse Engels of imposing the historical interpretation on Marx’s writing. Some even challenge the whole idea of simple production (See Chris Arthur’s piece: http://marxmyths.org/chris-arthur/article2.htm). It is true that Marx’s comments on the historical nature of simple commodity production seem scattered and unformed, at least in the 3 volumes of Capital. There are also some important questions to raise about the historical argument: How does primitive exchange become regular enough for the law of value to really operate without the power of capital to break down these barriers to exchange? If primitive exchange contains unequal profit rates based on varying organic compositions (something we talk about in future chapters) why do people invest in high composition industries in the first place? Here are some of the thinkers on either side of this debate: Engels, Ernest Mandel (see intro to Vol. 1), and Rudolf Hilferding (Reply to Bohm-Bawerk) all argued for some historical interpretation. I.I. Rubin (Essays on Marx’s Theory of Value) and David Harvey (Limits to Capital) are the two that I have read who criticize this interpretation. I would be curious to hear other folks’ take on this and other suggested readings.

On with the chapter…

S/V tells us about the basic relations of the production of surplus value. It is assumed that once a surplus is produced that it is realized. But we know that the market contains all sorts of pitfalls and challenges to the actual realization of the value created in production. In this chapter Marx begins to outline some of the basic ways in which “production and circulation intertwine and intermingle”. “Capital passes through the circuit of its metamorphoses. Finally stepping beyond its inner organic life, so to say, it enters into relationships with outer life, into relations in which it is not capital and labor which confront one another, but capital and capital in one case, and individuals, again simply as buyers and sellers, in the other.” As our model of the labor-capital relation is expanded by adding competition between capitals we get a more fleshed-out picture of what capitalism actually looks like.

One of the most important things we notice when examining the process of circulation of surplus value is that circulation time can effect that rate of profit. If a capitalist can turnover a given amount of capital twice as fast as another he can make twice as much profit in the same amount of time. This gives the appearance that turnover time is as important as labor-time in creating value.

The process of production constantly intermingles with the circulation process. One stage morphs into the next in a continual cycle which makes it difficult to single out just one leg of the circuit as responsible for the production of value. Equally distorting is the idea that increasing the rate of exploitation by paying workers less is similar to cutting cost-price by buying cheaper constant capital. Capitalists treat both variable and constant capital as input costs to be slashed.

Marx says this all is a further development of the inversion of subject and object which happens in capitalist production. In the factory the subjective, creative forces of labor appear as the productive forces of capital alone. On the other hand the past-labor embodied in the forces of production become the subjective power of the capitalist. These “inverted conceptions” create a “transposed consciousness” (p.45), a fetishism which attributes the social power of labor to machines and capitalists while treating the living laborer as an objective commodity.

But this is an illusion. In reality there is no inner relation between the amount of constant capital used in production and the amount of surplus value created. Now, of course there is a technical relation at play. For a given amount of workers to perform a given amount of work a certain amount of constant capital will be needed. But this amount of constant capital has no relation to the amount of surplus created. The amount of constant capital varies with the specific technical requirements of a different production processes but has no bearing on the amount of surplus created. Even within the same production process the value of the constant capital employed can change without effecting the surplus value. So Marx tells us there is no inner relation between c and s. This also means that there is no inner relation between k (cost price, or c+v) and s.

Surplus value can only be created by exploiting wage laborers. But this doesn’t mean that in the course of realizing profits in exchange this surplus can’t be redistributed between capitalists. Though the rate of profit is just another measure of the rate of exploitation, though both are just a measure of the amount of surplus value extracted from workers, the rate of profit appears as merely an excess of selling price over cost-price. It remains a mystery where the profit came from. Did it come directly from the exploitation of workers or did it come from exchange? As we will discover later in our exploration of average profits, though surplus value is created in production it is redistributed among capitalists in exchange. Though profit can only come from exploiting labor the equation for the rate of profit shows us that profit occurs as equal returns on total capital. The only differentiation within the total capital that the capitalist is aware of is the difference between fixed and circulating capital, neither of which create surplus value from Marx’s perspective.

Marx concludes the chapter by evoking Hegel: “If, as Hegel would put it, the surplus therefore re-reflects itself in itself out of the rate of profit, or put differently, the surplus is more closely characterized by the rate of profit, it appears as a surplus produced by capital above its own value….” Surplus appears as an inner relation of capital to itself and not as a social relation between capitalists and workers. And of course, appearances always have a ring of truth when we are dealing with the fetishism of commodities. The body of the laborer is incorporated into the circuit of capital. As we breathe life into the machine we gives up our own life, becoming appendages to the machine, our alienated products becoming the active agents of our domination.

Profit is the form of appearance taken by surplus value. Surplus value immediately reveals a social relation to us. Profit doesn’t. Profit obscures surplus value, and appears as a relation of capital to itself. Marx warns that the further we explore this world of appearance the more surplus value will seem divorced from profit. In Part 2 of the book we will see how, in the case of average profit, this causes prices to diverge from values.

chapter 3

Kapital vol. 3 Part 1 Chapter 1: Cost-Price and Profit

Kapital Vol. 3
Part One: The Conversion of Surplus Value into Profit and of the Rate of Surplus value into the Rate of Profit

(This post is part of an ongoing project: a close reading of volume 3 of Kapital, one post per chapter. I hope that others who are tackling this book for the first time might find my summaries and thoughts useful. I also hope that others might leave their own thoughts, criticisms, help, etc. here so that this blog might become a good resource for those brave souls who take on Vol. 3.)

Chapter one: cost-price and profit

Marx begins by briefly reminding us of the the large-scale structure of his three volumes of Kapital. Each volume analyzes capitalism from different levels of abstraction delineated by different social relations. Volume 1 analyzed capitalist production and was therefore focussed on the labor-capital relation. Volume 2 analyzed the process of circulation and thus focussed on the inner relations of the various components of the circuit of capital. Volume 3, Marx tells us, will focus on the world of appearance capital takes in the world and thus will focus on the last piece of the puzzle: the relation of different capitalists to each other in competition.

With this remark about the “world of appearance” we are immediately reminded of Marx’s discussion of the fetishism of commodities in the very first chapter of Volume 1 in which Marx talks about the world of appearance created by market exchange and the underlying social relations hidden by it. Sometimes readers fail to understand the dialectical subtleties of the fetishism argument. To briefly summarize: If the world were all one big factory the productive relations between people would be direct productive relations. The division of labor, the apportioning of varying amounts of labor to different tasks, and the organization of production would be direct and transparent. This would be true regardless of whether the factory was run hierarchically or democratically. As Marx points out later in Volume 1, the internal workings of the capitalist firm are exactly this type of direct social relation (as are most historical forms of productive activity where people created their own means of subsistence rather than purchasing it in the market). But market relations between producers (whether these producers be capitalist firms or individual producers) are not organized in this direct, transparent way. When the market is used to coordinate the allocation of labor a very unique world of appearance emerges. The allocation of labor takes place through the exchange of objects rather than through direct social relations. Allocation of labor takes place not through a conscious plan but is coordinated through the indirect pressure of market forces. When individuals meet in the market they are not making decisions about the allocation of labor. They are merely exchanging commodities, seeking to fulfill their own needs and desires. While bourgeois economics sees this subjective, utility maximizing behavior as the starting and ending point of economic analysis Marx sees that behind these transitory, fleeting acts of exchange lies a network of social relations, social relations that result in the allocation of labor time in order to meet society’s needs. It is the process of exchanging these things, these commodities, that creates and coordinates these social relations. Yet at the same time these social relations appear not to be social at all. They appear to be relations between individuals and commodities. Commodities seem to have a value all of their own (or as marginal utility theory holds, a value solely the result of the relation of individual desire and an object’s utility.) But Marx says this exchange value only exists because of the role exchange plays in the allocation of social labor. This need to apportion labor time is the ultimate regulating factor in determining the value of things. But this process goes on behind our backs making objects themselves seem to be bearers of social power. The social relations between people become relations between things.

It is common for people, on a quick read through the fetishism section in the first chapter of Volume 1, to think that commodity fetishism – this notion that commodities themselves have social power, detached from their social relations- is all about a world of illusion that obscures the underlying nature of capitalist social relations. Sometimes people think that commodity fetishism is some sort of ideological phenomenon that needs to be torn down to reveal the underlying reality . But Marx is saying something deeper. This world of illusion is a necessary part of the basic form of exchange. Social relations between producers in a market society can ONLY be expressed through the exchange of commodities. It’s not that commodities just appear to take on social power. Commodities really do have social power. The really do have values that act upon people as a social force. Market social relations are “thing-i-fied” and physical objects are “person-i-fied”. When social relations take the form of things Marx calls this reification. So when the process of allocation takes the form of value and when value is expressed in money, money becomes reified. It takes on a social power that is real. It doesn’t matter if one is conscious of the social relation implied in money or not. The illusion is permanent, even if you know it is an illusion.

Throughout much of Volume 1 we hear from Marx about how the purchase and sale of labor power obscures the exploitative social relation between capital and labor. This obfuscation is not some convenient ideological side-effect. It is imperative to the basic notion of exploitation: that labor power is bought and sold in the market place at its value.

But there are other social relations in a capitalist society between buyers and sellers of other things. These market relations also play a part in creating the world of appearance that is our everyday experience of capitalism. Here at the beginning of Volume 3 Marx is telling us that by examining the market interactions between the various parts of the capitalist class we will get closer to seeing how this world of appearances is necessary for coordinating the underlying social relations of capitalism. This means that we are very concerned with how capitalists go about setting prices and making profits in the context of market competition. When capitalists enter into exchange how does the regulating power of value, of socially necessary labor time, determine what prices they set and what profits they make?

This is what Marx is setting out to explain- how this web of market interactions becomes a regulating force that bends the will of market actors to the law of value. So as we are reading through what at times may seem a dry and boring exposition on cost-price and the rate of profit we should always be aware that Marx is constantly trying to explain this inter-relation, or inter-regulation, between a world of appearance and an underlying social relation.

now on to the first chapter…

Marx’s first concern is to explain how the law of value operates upon the capitalist even though the subjective experience of the capitalist seems the opposite of the law of value. In case I have not made it clear before, the “law of value” refers to the idea that socially necessary labor time acts as the ultimate regulating force in exchange and production. The capitalist’s decisions regarding the purchase and sale of commodities are not based upon a conscious obedience to a law of value. The capitalist merely purchases one set of commodities and sells another for a higher price. Yet this law of value acts upon his sale and purchases in ways he is unaware. Like the fetishism of commodities, even if he was aware of the law of value he would still be powerless to act outside of it.

So Marx begins by looking at the way the capitalist perceives his purchase and sale of commodities. He begins by looking at the difference between the cost of production to the capitalist and the cost of the final batch of commodities sold on the market. The difference between these two quantities, of course, is profit. The capitalist purchases all the material elements of production (machines, raw materials, labor, etc.). This is his cost of production which Marx calls “cost-price” and represents with the letter “k”. The two elements of cost price are constant and variable capital represented by “c” and “v” respectively. Thus k=c+v.

(To review, constant capital designates products of past labor: machines, raw materials, partially finished components, etc. Variable capital is the money laid out in wages to purchase the working time of the working class. These two components of cost price make up the cost of production for the capitalist. But they do not make up the total cost, or value, of the finished commodities. This is because of the unique properties of variable capital: while the variable capital laid out in wages goes to purchase a specific bundle of commodities which reproduce the laborer, there is no direct correspondence between the value of those subsistence commodities and the value produced by the worker in production. This surplus value, produced by the worker is what creates profit.)

While cost-price determines how much a capitalist must pay in order to produce a commodity this cost-price does not measure the total amount of labor expended in production. The total labor is what determines the final price of commodities. Here in volume 3 Marx makes the distinction between the cost of production to the capitalist and the cost of production to labor. Surplus value costs the capitalist nothing at all, by definition. Surplus value costs the laborer in unpaid labor. But in selling his labor power to the capitalist the worker’s body enters into the circuit of capital. His labor becomes an element of capital and so it appears as if capital itself, or the capitalist, is the creator of the commodity, and that cost-price is the actual price of the commodity.

[This idea of the cost of surplus value is an interesting one. I wonder if Marx expands on it elsewhere. When he says that the cost of surplus value to the laborer is unpaid labor- that workers pay for surplus value with their working lives- we get some insight into the way Marx conceives of value in the first place. In a system of simple-commodity exchange where each producer owns their own means of production the cost of a commodity is still c+v+s. In the price they charge for their commodity the worker includes the price of the materials, c for constant capital, the price of their own means of subsistence, v for variable capital, plus an extra amount, s for surplus value, to compensate for their additional labor time. Later in chapter 10 Marx will describe this. I've been recently reading some of Kevin Carson's "Studies in Mutualist Political Economy" where he attempts to provide a subjective framework for the labor theory of value. His arguments remind me, in some ways, of what Marx says here- that in addition to cost-price (c+v) the additional surplus value of a commodity, in a system of simple-commodity exchange, comes from the valuation that the worker makes of his/her own surplus labor. But I think where Carson errs is in calling this subjective. He doesn't understand Marx's idea of fetishism- that objective laws are worked out through the subjective valuations of individuals in the market. Perhaps Carson's big synthesis about subjective valuations is actually just an account of the micro-details Marx didn't even consider interesting enough to elaborate on. The interesting thing for Marx is the way these subjective valuations in the market are structured by objective forms, the way the process of exchange creates a world in which we have no choice but to give our working-time a market price. How subjective are these valuations of labor-time really? By not understanding the notion of fetishism Carson falls prey to many of the mistakes Marx warned of. He assigns the "free choices" people make in a market some sort of determining agency without realizing the way the market structures these choices. Thus he treats the "subjective" valuation of labor as an ahistorical concept extending backwards through history. Marx argues the opposite, that the phenomenon of value is unique to markets and that this structure of market relations explains the unique subjectivity of market interactions. Although Carson provides a lot of useful rebuttals of Austrian criticisms of the LTV, in the end he falls prey to the basic false dichotomy of the Austrian position: the subjective-objective dichotomy. Marx's treatment of value goes beyond such a simplistic dichotomy.]

We can see how easy it is then to make the mistake in thinking that profit is just a result of marking up price above the cost of production. It is true that prices are higher than the cost of production. But this doesn’t mean that there aren’t regulating forces in the market that determine how much one can increase price above cost-price.

Cost-price measures the expenditure of capital. But the actual price of commodities measures the expenditure of labor. Marx makes sure to point out that cost-price isn’t just important for understanding capitalists’ subjective understanding of profits. It’s also important for understanding the way capital is reproduced. All of the capital laid out on constant and variable capital is consumed in production, it’s value passed onto the final product. If production is to commence again at the start of the next day that consumed capital value must be replaced. Commodities must be sold and the part of the value of those commodities which represents the cost-price must be reinvested in production.

But while cost-price is essential for reproduction it does not tell us anything about the creation of new value in production. Bourgeois economy has made many attempts to account for the fact that cost-price somehow increases itself and comes out of production as a higher value. But Marx says that these explanations which seem to endow capital with magic powers of self-expansion are illusions. It is the unique property of variable capital which accounts of this self-expansion of value. It was this devastating critique of capitalist production that drove bourgeois economists after Marx to attempt to find all sorts of other explanations for the existence of profit: roundaboutness, subjective utility, etc. And while Marx did not live to address all of these different theories we can guess his response. It would begin with the fetishism argument: ascribing social powers of value expansion to material objects is to deny the role that value has in apportioning social labor. When we apportion social labor to fulfill social needs through autonomous market interactions we don’t need to be conscious of this process. The market regulates this apportioning of labor because labor takes the form of value. All we experience of value is our personal reaction to market prices. But to mistake this personal relation to prices as the source of value, as marginal utility does, is to be guilty of the most egregious fetishism.

In this chapter Marx’s explanation of the way in which capital self-expands through the exploitation of labor is quite similar to the argument in Volume 1, but there does seem to be a different emphasis due to the change in perspective in Volume 3. Constant capital transfers its entire value to the finished product to the extent that it is used up. Variable capital does not transfer its value to the product. The investment in wages that go toward buying means of subsistence is replaced by the body of the laborer. In other words, the groceries and housing bought by wages don’t create value. The living laborer does. When a capitalist spend less on constant capital less value is transfered to the final product. But when less is spent on variable capital this does not necessarily mean that the final product contains less labor time, less value. Thus, while variable capital enters into cost-price just as constant capital does, variable capital does not enter into productive capital. It is replaced in the productive capital by the body of the laborer.

(This may be an important point in the debate over the nature of unpaid domestic work in reproducing the worker. Is the housewife exploited because her unpaid labor is necessary for reproducing the worker? Surely such labor can lower wages but this doesn’t mean that this labor enters into the productive capital of a firm, that it is value creating.)

To the capitalist, constant and variable capital do the same thing. They both enter into cost-price in the same way, as ingredients of production that must be paid for at the beginning of production and whose replacement must come from the selling of the final commodity. The distinction between constant and variable capital is blurred. In fact the capitalist is more likely to focus on the distinction between fixed and circulating capital. Fixed capital is investment in machines, buildings, infrastructure, etc. that lasts for many production periods and transfers its value to the final product a little at a time. Circulating capital is entirely consumed in the production process. Thus constant capital like raw materials and variable capital both fit under the grouping circulating capital. This further mystifies the origins of surplus value.

Surplus value is an excess of value above cost price that returns to the capitalist by way of circulation. Marx is always adamant that value cannot be created in exchange. Even in the case of an unequal exchange (cheating, monopoly, etc.) there is no creation of value, just a transfer of value. The magic of capitalist exploitation is that more value is created, that the amount of value in society expands. But when at the end of a day full of investment and exploitation, the capitalist owns a quantity of commodities of greater value than their cost-price, this surplus value is not realized until the commodities are sold in the market. It is in this sale in the market place that surplus value flows into the coffers of the capitalist.

This all creates several illusions. It makes it appear as if profit flows from exchange and not from production. Profit also appears as a return on total capital investment regardless of the proportion of constant to variable capital. After all, both variable and constant capital contribute equally to cost-price. This point will become important when we later discuss the phenomenon of average profit. When average profits are established then capitalists really do receive equal portions of surplus value regardless of the proportion of constant to variable capital they invest in. Profit really does seem to come from total capital itself and not from living labor. But here I am getting ahead of Marx…

So surplus value seems to spring equally from all investment in capital, even from investment in fixed capital. After all, all investment goes into cost-price and all cost-price is necessary for production to take place. A factory is just as necessary as a worker. All of the capital enters materially (physically) into the production process, regardless of whether it is used up. If a capitalist didn’t think one part of his capital was as productive as another he would decrease investment in that part until he was receiving the maximum, equal return on each investment.

So as not to be confused as to Marx’s point here we should make the distinction between the material elements required for production and their relation to value production. This is part of the distinction between social relations and the physical objects which embody these social relations. This distinction is at the center of the entire Marxist approach and the failure of bourgeois economy to understand this distinction is the center of Marx’s critique of bourgeois economy. Production has always required an interaction of human labor and the products of past labor. But only under capitalism do these things take the form of value. It’s obvious that machines, factories and other objects must materially enter into the production process. It’s obvious that they also enter into the cost-price of commodities. But just because they are materially required for the production of surplus value doesn’t mean that they create surplus value. It is the hidden nature of variable capital, a nature hidden by the very form of wage-labor itself, that explains the expansion of capital.

Marx says here “Because at one pole the price of labor-power assumes the transmuted form of wages, surplus value appears at the opposite pole in the form of profit.” (p.37). In the same way that the sale of labor power for a wage takes the form of an equal exchange in the market, an exchange which masks the exploitation of labor, the sale of commodities on the market for profit masks the phenomenon of surplus value.

Marx then points out that it is, of course, possible to sell a commodity below or above its value. This may at first seem an obvious point but it is also an important one. First, this makes it seem like the cost-price is the real value of the commodity… that profit is merely the arbitrary raising of price above cost-price. And, of course, this is what happens in the short-run: a capitalist is free to set any price they want. But what prices can be realized in the market? Behind the free, fleeting exchanges of commodities between autonomous individuals lies a network of social relations created by this web of exchanges, one that constrains the actions of these individuals to set arbitrary prices. Marx is trying to show how this seeming freedom of exchange is regulated, in the long-term, by value. Bourgeois economy exists entirely in this fleeting moment of freedom when buyer and seller meet in the market. It treats this moment as eternal. But in the long-run this free exchange is regulated by the apportioning of social labor. The obsession with scarcity and utility come from this ignorance of long-run forces.

The second phenomena made possible from the possible sale of commodities above or below values is the phenomena of average profits. Here, at the end of chapter one, he is not in the right place in the argument to explain this fully. He merely brags that the understanding of this phenomena will allow him to solve problems that no economist in the past had been able to solve, namely how is is possible for labor-time to serve as the basis of exchange value in conditions of average profit. (I have sketched out this problem in my “Opening Thoughts” introduction to this series.)

In closing Marx takes some passing shots as some of his favorite enemies, Malthus and Proudhon, critiquing them both for thinking that profit comes from selling commodities above their values. Both thought that cost-price was the true value of a commodity and that profit came from an arbitrary setting of price above cost-price.

Chapter Two