Conversion of Profit into Average 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.)
Herein lies theoretical ideas that have been hotly debated for well over a century now. Up until now we have assumed that price equals value and that profit is directly related to the amount of surplus value produced. But now, 140 pages into the 3rd volume of Kapital Marx explains that in conditions of capitalist competition prices don’t equal values and that profit is not determined by the surplus value produced by a firm. This has raised all manner of criticism and even ridicule from some corners. Bohm Bawerk made much of this in his criticism of Marx.
On the other hand Marx has told us that as we add more and more relations to our analysis of capitalist social relations our picture will become less and less like the rigid model we began with. Those basic relational features will become increasingly blurred as the picture becomes more complex, more varied, and embraces more complications and exceptions. Still those basic features will continue to have a strong influence in the model. In fact they will have some ultimate determining influence. Of course if the addition of more and more relations (capitalist competition, credit system, state regulation, etc.) eventually changes the dynamics of the system so much that our original starting point no longer has any relevance then we must ask whether we were ever justified in choosing that starting point in the first place.
Our starting point is that in the exchange between two free individuals in the market a social relation is expressed. Though it appears to be a fleeting, isolated act of exchange it actually links the two parties in a vast chain of exchanges happening all over the globe. This apparent realm of freedom is actually profoundly limited by this network of relations. We are not free to sell or buy at any price we choose. We must sell at the market price. We are not free to buy as much as we want. We can only buy as much as we can afford given the amount of money we’ve been paid for our labor or the amount of profit we have made from production. What are these forces that constrain our choices in the market? How much choice do we really have?
For the Austrians value is purely subjective. Price appears through competitive valuations between free persons in the market. Surely the act of exchange entails a subjective valuation. But also, clearly, we are not free to reach any compromise in any exchange. The conditions of the market press down upon us at every moment. Once supply and demand balance out how are these prices reached? Why are relative prices so consistent (pencils always worth less than cars, bread always less than football stadiums)? Perhaps there is something very objective about this subjective valuation. Isn’t it true that in a system of market exchange we all have the same motivation: to maximize our gain for minimal effort? If everyone has the same motivation, this seeming realm of subjective freedom seems a little more like a realm objectively predictable behavior within the constraints of an objectively observable system within its own laws of motion. If we are trying to maximize gain for minimal output then we are essentially valuing our labor time when we enter the market.
All these products of labor, these commodities being exchanged, derive their ultimate value from their place in a social labor process. This process is indirectly regulated by the market. We don’t know the value of things before we sell them. We can only guess. The market tells us if we are right. In a model of a world of simple commodity exchange private autonomous consumers meet in the market to exchange the products of their labor. In exchange their private labor takes on a social dimension. Its value is weighed against the value of all other labors. If its production time took more than the socially necessary labor time it doesn’t allow the producer to sell it for more than the average price. The socially necessary labor time acts as a regulator of price, pulling all private labors into accordance with the social average. Of course this average is never reached by all. All private labors will not ever reach the same level of productivity at the same time. That is because socially necessary labor time is an equilibrium point about which prices fluctuate, deviations always being sucked back towards it.
Many uninformed critics of the labor theory of value mistake these deviations for a flaw in the theory. Bohm-Bawerk argued that if deviations kept price from equalling value most of the time then the theory that labor time creates value is worthless. But this ignores the idea of value as a regulator. It ignores the indirect way in which private labor becomes social in a market. We can’t know the market price of our commodity while we are making it. We only discover this in the process of exchange. We throw our labor, embodied in commodities, into the market and we see what price it fetches. Socially necessary labor time isn’t very visible in the immediate act of exchange. But over time we can see it work its power as a regulator of price, as day to day prices fluctuate around average prices. If a product is being sold for prices far above its value this attracts other producers who start producing this commodity. Eventually prices fall. But they can’t fall too far because we must be able to reproduce the commodity the next day- we have to make at least enough to pay for our costs of production, compensation for our labor and money to put food on the table. Thus objective values are indirectly established through the subjective act of exchange.
Many things interfere with this process. Producers hold monopolies and thus can charge monopoly prices. Scarcity can keep prices above their values. Since we have some sort of basic, intuitive concept of value we complain about monopoly prices and scarcity rents. We say, “Damn the oil company is ripping me off!” and “These pharmaceutical companies are robbing me blind with these prescription drugs!” We say this because when prices deviate far from their values we sense that there is an inequality in exchange and all of our basic, ideological assumptions about markets tell us that exchange should always be fair- that this is the fundamental freedom/right of all people.
Should these interferences with the law of value cause us to reject the working of the law? No. All laws have interfering forces. Gravity and barometric pressure follow objective laws yet the weather is impossible to predict with 100% accuracy. It is through the averages that we can see them at work over time. So too with value. Monopolies don’t last forever. Most scarcity doesn’t either once production eventually adjusts to demand. This relation of deviation to the law is appropriate since we are dealing here with indirect regulation of value and labor through the process of market exchange. Maybe if we were dealing with a planned economy we would need a different standard of the relation between deviations and laws. But in market exchange this is most appropriate.
Why does Marx choose this relation- the buying and selling of commodities in the market- as the primary relation of his model? Why not start with the credit system, the money system, capitalist competition or even the labor-capital relation? Marx is following the law of presupposition: he always asks what relation presupposed what other relation? The credit system presupposes a money system. Money presupposes commodity exchange. Capitalist competition presupposes capital which is a capital-labor relation (which is, dialectically, also a relation of capital to itself.) What form does the labor-capital relation take? The exchange of labor-power for wages between formally free individuals in the market. Thus market exchange is the fundamental presupposition and thus value as regulator of labor and price is our key concept.
As we add relations to the model, labor-capital, capital-capital, etc. We see alterations in the way the law of value operates. But at each level the regulating force of the law of value continues to exert influence. In conditions of simple commodity exchange value exerts itself as socially necessary labor time bringing private production in line, creating average prices, and overtime breaking down monopoly and scarcity.
When we add the capital-labor relation we observe the way value creates a fundamental antagonism between these two classes, one owning the means of production, the other nothing. The capitalist can use this monopoly on ownership to appropriate value from the working class, not in the sphere of exchange where a trade is usually fair and equal, but in the sphere of production where a worker’s time literally belongs to the capitalist. We see more ways in which prices can deviate from values through relative surplus value and the rising of wages above or below values. But ultimately it is the value relation which governs this labor-capital relation. It is the quest to expand value, to turn money into more money, which drives the capitalist class to exploit the workforce. But in this process capital itself takes on objective properties. It too has tendencies and laws which govern its motion through a fluctuating process of averages. Capital must always grow. It must do so at the expense of the working class. As we later will learn, this growth has its own internal limits set by the antagonism of the wage relation which is an antagonism of capitalism with itself. This is the theory of crisis. Because this theory of crisis requires an understanding of the capital-capital relation we don’t learn about it until after the later relation is addressed in part two of this video. This is why Marx gives the incomplete version of crisis in Volume One of Kapital. In Volume 1 we merely get a picture of crisis caused by fluctuations in the attraction and repelling of the labor force. This version of crisis solely depends on the labor-capital relation. The falling rate of profit presupposes the capital-capital relation.
When we introduce the other internal relation of capital, the capital-capital relation we see even more dynamic changes in our model. Most importantly individual prices diverge from values. The magnitude of profit a capital makes diverges from the amount of surplus value it creates. This is topic of Part 2 of Volume 3. If this is so, how does value continue to operate as a law of any relevance? Marx holds three aggregate equalities: 1. total, aggregate value created in society= total, aggregate prices, 2. Total profit=total surplus value, and 3. average rate of profit in value terms equals average rate or profit in money terms. Though individual prices and profits my vary from their values, these aggregates remain.
On the other hand, saying that total-price equals total surplus value isn’t enough to make the law of value still relevant. After all, value comes about from the exchange of specific commodities in the market and from the network of social relations that this chain of exchanges represent. The total social product doesn’t get exchanged with anything. Bohm-Bawerk develops this line of criticism. He further argues that putting two aggregates side-by-side doesn’t tell us anything. I could say total prices are equal to the total weight of all commodities, but that individual weights differ from individual prices. This wouldn’t be much of a theory of price. (More on Bohm-Bawerk’s criticism later.) This is why Marx takes great pains to explain how changes in the productivity of labor always mean changes in prices and the rate of profit. Ricardo had argued the same thing. In fact Ricardo abandoned the idea of tying price to direct amounts of labor, instead stressing how changes in labor effected prices. Marx agrees that, at this level of abstraction, we see the law of value operating not in the simple manner of prices=value, but in this more general sense that changes in value create proportional changes in price. Yet Marx goes further than Ricardo in actually showing the mechanism by which labor-time is transformed into these prices with his theory of “prices of production”.
Though “prices of production” don’t have the same exactitude and simplicity of “prices=value”, the quantitative nature of the theory is still real and clearly visible. When workers are paid less profits rise. When productivity rises profits rise, at least in the short run. Commodities that require more labor time (cars, stadiums) are priced higher than products that take little labor time (pencils, staples). And when labor is completely eliminated from a task (like duplicating information which is now done with the click of a button instead of by scribes and copyists) that tasks looses all exchange value. The exact quantitative proportions are altered but the basic movements are all there.
The qualitative dimension is also there. Social labor is still regulated through market exchange. Profit is still made by buying labor-power and exploiting it. Capitalist are still capitalists. Workers are still workers. The social relations which the labor theory of value is meant to explain are still the same. And these social relations are our goal and our starting point. To return to Bohm-Bawerk’s criticism, we are not interested in a weight-theory of value because we know that prices are not meant to apportion weight. Prices apportion labor time. This is an observable phenomenon and it lies at the heart of what is distinctive about a capitalist economy. When we keep this theoretical starting point in mind objections like Bohm-Bawerk’s melt away.
We should keep all of this in mind when reading Part 2 and when considering the various criticisms that have been leveled at Marx for his theory of the Prices of Production.
The other famous controversy over Volume 3, Part 2 is the matter of the transformation problem. I have talked about this more extensively in my video “What Transformation Problem?” and the “Math Supplement” that goes with it so I will merely refer readers to those pages rather than repeat myself here.
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My notes for part two here: http://readingmarx.wordpress.com/category/capital-volume-3/capital-volume-3-part-2-the-transformation-of-profit-into-average-profit/