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:
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:
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.