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.)

Photo 3Chapter 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

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

  1. Pingback: Kapital Vol. 3 – Engels’ Preface 1894 « Kapitalism101

  2. Advance The Struggle says:

    thanks for this summary. I’m reading volume 3 right now and enjoying the struggle. Just found these summaries and going to look through them all. Do you know of any other guides/companion pieces for vol 3?

    Also, from what I can tell the link to your Opening Remarks is broken.

    Thanks.

    • Thanks for the heads-up. I’ve fixed the link.
      I don’t know of any good guides to Vol. 3. Rumor is that Harvey is planning a video lecture series on vol. 2 and 3. I have no idea when this will be available.

    • Ed,

      Good to see you have made it to vol 3 with your project. I am so behind I don’t know if I’ll ever finish! Best of luck. Feel free to continue to post links to your chapters here. I will attempt to follow along.

  3. A fan of your intellect and your expositions of Marx, Mr. Cooney,

    Volume 3 is the most difficult of Marx’s work as in my estimation it is the most abstract and theoretical. Here, are a few notes on the possible blind-spot in Marx. It seems to me that Marx is overly focused on constraints via the law of value, and fails to realize that the law of value can be enabling/liberating as well, in a sense that in fact it can encourage price, value and wage exaggerations, if one’s network of social-relations is robust, oligarchical and/or a monopolistic. Let me explain and I quote (to reiterate what you said):

    “Cost-price is the real value of the commodity…profit is merely the arbitrary raising of price
    above cost-price. And of course, this is what happens in the short-run…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…In the long-run this free exchange is regulated by the apportioning of social
    labor”.

    First and foremost, it is important to note, that this constraining force/law works both ways it can be both constraining and liberating, that is, the network of social relations created by this web of exchanges, can, it is true constrain, usually the common individual who is poor, not well-connected and immersed in competition, but this so-called constraining force can as well empower and encourage arbitrary price-setting, under the right conditions over an extended period of time.

    (OPEC, for example, can set its own artificial prices and it can sustain these arbitrary prices
    over an extended period of time and space, because it has oligarchical control. Moreover,
    in the long-run, OPEC can normalize its artificially constructed prices to the point where these
    arbitrary prices become normal conditions of everyday living).

    As a result, this constraining force, that supposedly regulates prices and the apportioning of social labor, can in turn enable and empower the artificial construction of prices and the radical skewing of the apportioning of social labor, prompting and encouraging the actions of individuals to set their own arbitrary obscene prices, if they can (think of the epi-pen crisis etc.). The only way they can overcome this constraining force and sustain arbitrary prices over the long-run is through a ruling-enterprising-network, that is able to control entry into the specific branch of production (cost of start-up), circulation, professional standards and brand-formation. If one has excessive market control (think of the medical profession in setting drug prices, medical procedure prices etc. or fees for service etc.), then one can effectively command the inflated prices one arbitrary constructs or dreams up.
    All in all, It is seem to me that Marx is positing a constraining market-force in Volume 3, that may not actually exist. If this law/force can bend to constrain prices, it can also be bent liberate and detach prices from any labor base, thus allowing, encouraging and also safeguarding, the artificial construction of prices at any acceptable level beyond cost of production. Much of the media and advertising industry revolves around normalizing arbitrary unfounded prices that are well-above cost of production. And if this is what occurs, then the existence of this Marxian law, i.e. constraining force, is suspect. It may not actually exist because it does not universally constrain, it functions in certain areas and time-frames, and does not function in other areas and timeframes. In this regard, price may be simply a matter of what a capitalist, or a network of capitalist that have hegemonic authority, can get away with in the market-place. What the public and/or a specific economic-branch, in general, thinks is an acceptable price is fair market-value.

    In any event, Volume 3 is important because it make the reader think about these things because Volume 3 sets up an interesting framework and explanation concerning price and value, and how they are inter-related.

    All the best,

    Michel Luc Bellemare

    • Michel,

      Thanks for the comment. In brief, I think what you have written makes a price/value conflation, one that I could be guilty of not clarifying in the original post. Marx’s theory of prices of production is not a theory of market price formation in the sense that prices of production are conceptually prior to other factors that go into the formation of day to day prices, like the monopoly prices and other effects on price that you mention. But the fact that market prices can deviate in the long run from prices of production does not change the overall constraint that total price=total value. I don’t see how your comments about price formation make anything in Marx “suspect”.

      • I do understand that price and value are two separate structures, that Marx argues do not necessarily coincide in everyday market exchanges, but nonetheless do equate in their universal forms, i.e. [total price = total value] (As you aptly mentioned). But going over Volume 3 once again for a third time, I am struck by the possibility that, total price and total value, may be totally detached from each other, i.e., that our contemporary pricing-condition may no longer function according to a finite total price and a finite total value formula. That just may be, total price, in theory, might be capable of infinite arbitrary augmentations, which in theory permit unlimited artificially constructed price-determinations completely detached from all value-structures, such as Marx’s. (Labor-power and value may no longer be such a central feature in price-determinations)
        However, I agree with you that there is “constraint” within finite [total price = total value], which I should have mentioned in my prior comment, but in my prior comment I was also implying the possibility of an infinite amount total price, in an economic-world of finite or less important total value. Now, I think you would agree that Marx, in Volume 3, readily admits price and value rarely coincide in everyday market interactions, but he nonetheless holds out a belief, or faith, that at the universal level of abstraction, i.e. at the level of pure conceptual totality, that total price and total value are notwithstanding, synonymous, [total price = total value].
        Consequently, it seems to me that “constraint” comes from the finite limits to pricing. And when those limits are removed or moved around, to use David Harvey’s terminology, to the third-world periphery, that is, if there are no limits to pricing, price becomes something that is socially constructed, i.e. whatever price, someone, or a corporate entity, is able to think-up and fetch is the real price (What’s value go to do with it!). In Marxian terms, it may not be the real value, but it is the real price, more so if an artificial arbitrary price can be sustained over long periods of time and space through violence, coercion, the state-disciplinary-apparatus, corporate collusion etc. A CEO dreams up an outlandish wage/price for his or her services, which does not reflect his or her actual labor-power input/contribution, yet is acceptable and valid because it is socially constructed in the sense that his or her average wage/price is held together by a network of capitalist social relations and a capitalist web of exchanges, that buttress his or her conceptual-perception of value, wage and price. (An autonomous law-like mechanism, devoid of human influence, is not necessarily at play in socio-economic affairs).
        The structure of value and the law of value, i.e. the modern Marxian rational labor theory of value, may not be such an autonomous-mechanism as Marx argues (and you so eloquently show in your educational videos). Many socio-economic phenomena break, bend, usurper and/or falsify these autonomous regulative-constructs and law-like mechanisms, that Marx claims to have discovered and scientifically laid-out. Surely you can acknowledge this!
        I guess, what I am trying to see, Brendan, (if I can refer to you by your first name) is to find-out if you have shed the commodity-fetishism that envelops Marx and his work. One, must so to speak, throw away the Marx-ladder after one has climbed up it.
        Now, I love reading Marx (which I think you and I are on the same page), his prose and logical outlays are enchanting, even if his work is tedious and convoluted at times. Volume 3 is a monster of abstraction, requiring lots of mental agility and flexibility, (philosophy doesn’t get more difficult). But I am also aware of Marx’s propensity for manufacturing logical rule-govern structures, and his yearning beneath his writing to be thought-of on the same level as Darwin and Newton’s law of gravity.

        Continued Success,

        Michel Luc Bellemare Ph.d.

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