The Economic Doctrines of Karl Marx

4. Surplus-Value and Profit Surplus-Value

The same distinction that exists between value and price also obtains between surplus-value and profit. What interests the practical man, the seller and buyer of commodities, is their price. Consequently, he is only interested in the laws of price, because a knowledge of them may be useful to him in his business calculations and speculations. On the other hand, the laws of value which underlie price interest merely the theorist, who is not concerned with buying as cheaply and selling as dearly as possible, but in investigating the social ramifications which arise from commodity production.

Thus it is not surplus-value but profit that interests the practical capitalist. His desire is not to investigate the relation between capital and labour, but to make as large a profit as possible. With what expenditure of labour this profit is created is primarily a matter of supreme indifference to him. It is not his labour that creates it, although it is his money with which it is created. He does not therefore compare the surplus-value that has been gained with the quantity of labour that has been expended in its production, but with the amount of money that he has been obliged to advance. If the movement of the creation of surplus-value is represented by the formula M – C – (M + m), the capitalist measures his profit by the relation of m to M. But this relation is by no means the same as that between v and s, between variable capital and surplus-value. The sum of money which the capitalist is obliged to advance for production must suffice not merely to pay for the wage-labour, but also for factory buildings, machines, raw and auxiliary materials, in short, for all that Marx comprises in the term “constant capital.” As a result of this, the rate of profit may be quite different from the rate of surplus-value even in cases where surplus-value and profit are identical. If the rate of surplus-value is expressed by the formula v : s, the rate of profit may be expressed by the formula (c + v) : s.

It is to be observed, however, that as regards many branches of production, especially agriculture, the year forms a natural term for production, which begins anew at its close. The custom has therefore grown up of calculating the rate of profit by the relation of the amount of money yielded in one year to the amount of capital advanced for production during the same year.

It is clear from the start that the rate of profit must differ from the rate of surplus-value.

In the preceding chapter we chose the example of a capital of £250, of which £205 was constant capital, £45 variable capital, and £45 surplus-value. The rate of surplus-value was therefore £45 : £45 = 100 per cent On the other hand, the rate of profit in this case is £250 : £45 = 18 per cent

But between the rate of surplus-value and that of profit a distinction other than this purely formal one is soon revealed, another method of calculation.

It is obvious that the same rate of surplus-value must yield different rates of profit if the composition of capital is a varying one, if differing amounts of constant capital accompany the same amount of wages. This composition is necessarily different in every branch of production, according to its technical character and the level of the technical development.

“The value-composition of capital, in so far as it is determined by its technical composition and reflects the latter, we call the organic composition of capital ... Consequently we call that capital which contains a higher percentage of constant and therefore a lower percentage of variable capital than the average social capital: capital of a higher composition. Contrariwise, such capital as contains a relatively smaller percentage of constant and a higher percentage of variable capital we call capital of a lower composition. Finally, we call capital of an average composition that capital whose composition coincides with that of the social average capital.” (Capital, III., pp.124, 142.)

Let us now see how the rate of profit develops under the influence of the various compositions. Let us take three undertakings from three different branches of production. The first is technically backward, and in relation to the number of workers, employs few machines, uses no large factory buildings, etc. The second is an average one, but the third is so highly developed that for every worker a large amount of value in machines and buildings is employed. The organic composition of its capital is a high one.

Making the example as simple as possible, we will assume that in all three branches of production the rate of surplus-value is the same, and the whole of the capital advanced is turned over once a year, that is, it is entirely used up in production during that time, and the product is not sold until the end of the year, when all of it is disposed of. These are assumptions which scarcely transpire in reality, but we are obliged to make them if the example is not to be too complicated and obscure.

In each of the three undertakings 100 workers are employed at a yearly wage of £50 each. The rate of surplus-value amounts everywhere to 100 per cent; the wage bill is therefore £5,000 and the amount of surplus-value is also £5,000. But the constant capital amounts in undertaking A to £5,000, in undertaking B to £15,000, and in the third undertaking C to £25,000. Thus we have:

With equal rates of surplus-value, the rates of profit will therefore differ considerably, if the commodities are sold at their exact value.

This variation in the rate of profit, however, is a condition which cannot continue under the capitalist mode of production. The capitalist produces only for the sake of profit; not in order to satisfy some need. What he produces is all the same to him, whether it be knitting needles or locomotives, boot polish or eau de cologne. The chief thing is that he pockets the largest possible profit in return for his money. What, therefore, would the consequence be if an undertaking in one branch of business yielded 50 per cent, and in another branch only 17 per cent? Capital would avoid the latter so far as it could, and turn with all its strength to the former. Undertaking A would be exposed to strong competition, the production of commodities in this branch would rapidly increase, while it would decline in C.

This brings us to the sphere of competition, of supply and demand. We have already seen that value and price are two different things, although the latter is determined by the former. Among the causes which produce a deviation of prices from values the most important is a change in the demand of buyers and the supply of sellers.

Under free competition, supply and demand are the regulators of the prevailing mode of production, which otherwise would lapse into utter anarchy, inasmuch as it is not systematically regulated, but carried on by private undertakings, each of which produces according to the estimates of its owner or manager. Supply and demand ensure that the existing quantities of labour-power are distributed among the various branches of production in such wise that each produces on the whole as much as society requites under existing conditions. Of course, this only applies generally, and not to every individual case. The truth is rather that, with the planlessness of the prevailing mode of production, either too much or too little of one or another commodity is being constantly produced, and it is only afterwards, through the operation of supply and demand, which produces a fall or rise in prices, that production is restricted or expanded in accordance with social requirements.

If more of a commodity is produced than the purchasing members of society can or will buy at a certain price level, which in the last resort is determined by its value, then its price falls, as a result of which the circle of those members of society who are able or willing to buy extends. But a fall in profit accompanies a fall in price; if the profit sinks below the average, it frightens away capital from the branch of production in question; production there is diminished, with the result that the price rises again until it reaches the level which corresponds to the average profit.

Contrariwise, if the price rises above this level, because fewer commodities are being produced than would meet the demand of the buyers, then the profit rises also. Capital is attracted to this branch of production and streams into it, extending production, whereupon prices again fall to the level which yields the average profit. Prices continually fluctuate about this level, sometimes rising above it, sometimes sinking beneath it. It is only through this wave movement that the level is established; it exists only as a tendency, an aspiration, and not as a permanent condition.

This effect of supply and demand would also counteract those inequalities in the rate of profit which arise from the inequality in the organic composition of capital.

In Branch C, production declines, and prices, and consequently profits, rise. In Branch A, production increases and prices fall. Both the one and the other will continue until profits have been equalised and have reached the average level of the totality of the rates of profit. We have assumed that B represents the average organic composition of capital, and its rate of profit is therefore the average rate of profit. The profit in the three undertakings will then work out in the following way:–

This equalisation of the rate of profit, however, is only possible by virtue of the fact that commodity prices deviate from commodity values. As we assume that the total capital advanced is turned over in one year and appears in the value of the year’s product, we shall now establish the following relation between the value and the price of the annual product of each undertaking:

If we assume that the annual product of each undertaking comprises 10,000 commodities, this gives us the following figures for each single commodity:-

In reality the process does not operate in such a manner that each capital immediately secures the full surplus-value, and the capitalists in one branch make a profit of 50 per cent and those in the other only 17 per cent

Such distinctions as these only obtain in the beginnings of the capitalist mode of production, or in countries and branches of business which have recently come under the influence of this mode of production. Under conditions of developed capitalist production, a traditional average principle of profit is assume as a matter of course formed, which capitalists in their price calculations, but which, of course, does not prevent them from utilizing very opportunity to exceed this price, although they regard it as a loss if they secure a lower price, and therefore a smaller rate of profit. This price, which is formed from the costs of production (the variable and constant capital expended), to which is added the “current” profit, appears to the capitalist as the “natural” price. Marx calls it the production price. It consists of the cost price (amount of the variable and constant capital) and the average profit.

It is not the value, but the production price which, under a developed capitalist mode of production, forms the level about which the market prices, under the influence of supply and demand, oscillate. The pride of production itself, however, does not oscillate in vacuo, but is based upon value.

The opponents of the Marxian theory of value are fond of asserting that Marx himself threw overboard his own theory, which he developed in the first volume of Capital, in the third volume, in which he demonstrates that, in consequence of the tendency towards an equalisation of profits under developed capitalist commodity production, the prices of most commodities permanently deviate from their values, inasmuch as the prices of one-half of these commodities are permanently as much below their values as those of the other half are above them: But Marx would have thrown overboard his theory of value only if he had contended that prices are independent of their values. Far from doing this, the third volume of Capital proves rather that production prices, about which market prices oscillate, remain in complete dependence upon the law of value, without which they cannot be explained. It is precisely the factor of the average profit, which causes the deviations of production prices from values, that can only be explained by the laws of surplus-value, which in their turn arise from those of value.

If we do not assume that the entire mass of the surplus-value existing in society is synonymous with the entire mass of profit with its sub-divisions (interest, ground rent, etc., which we shall not discuss further at this place), we abandon every method of explaining why the average rate of profit is a definite magnitude under given conditions.

The law of commodity-value is not invalidated by the emergence, under developed capitalist production, of a new intermediate factor, in the shape of the average rate of profit and the production price dependent therefrom, between value and price. If this fact should invalidate the law, then the law of gravitation would be invalidated because falling bodies encounter more resistance in water than in air.

The Marxian theory of production price is inseparable from its theories of value and surplus-value. Far from reducing the latter to absurdity, it forms their complement. The theory of production price furnishes us with the clue to a series of phenomena upon which is based the relationships of the ruling classes to each other, the antagonism between capital (profit) and landlordism (ground rent), between industrial capital (industrial profit) and money capital (interest), etc. Moreover, it supplies us with the clue to a number of theories of value, and also provides the means for their refutation, for many of these theories are at bottom only theories of production price, which they regard as the ultimate determining factor in market prices.

This may be the proper place to glance at those theories of value which deny the determination of value by labour. It may be said of all these theories that they are not theories of value at all, that they understand by value something which is not value at all: use-value, production price, average price.

It can of course be said that every theorist has the right to define value as he likes. We have merely to inquire whether his explanation of that which he understands by value is correct or not. It does not matter to us if it is a theory of use-value or of price, or whatever else.

But in every other science a conception of such unscientific simplicity would not be taken seriously. Take, for instance, the atomic theory. What would be said of the notion that every investigator was at liberty to understand by atom what he liked, perhaps a molecule or a cell; that, provided he formulated a correct cellular theory, it was a matter of indifference whether he called it an atomic theory or not? He would at once be told that the question of the atom was not that of a name which could be applied capriciously now to this and now to that thing, but that it was a question of perfectly definite processes, whose explanation has to serve the theory of atoms, processes which, among other things, also underlie the formation of molecules or cells. The atomic theory may be accepted or rejected, that is, the processes in question may be explained by it or otherwise; but it would be a crude scientific blunder to call an atom a product of those processes which, according to the theory, are determined by the pervasion of atoms. The fundamental ought never to be confused with the derivative.

About this no doubt is possible in natural science. The processes of political economy are more complicated; nevertheless what applies to natural science must apply to them. The social relations and processes which are to be explained by the law of value are of a quite definite character, and it will not do to describe and deal with as the law of value the laws of other relations and processes which are determined by value.

The process which every theory of value must aim at explaining is the exchange of two commodities; the social relation which it must aim at explaining is that between two commodity-owners, who mutually exchange their commodities. The process of commodity-exchange, from which buying and selling develops, is the fundamental process, which maintains the whole activity of present-day society. Consequently, any explanation of this activity must proceed from the investigation of the law which regulates the exchange of commodities, and this in fact is the law of value. If by the law of value is to be understood the explanation of another process, then a particular name must be given to the law which underlies the exchange of commodities. This, however, none of the theories of value does. Each theory therefore aims at explaining the same process.

If, however, the process which the law of value has to explain be kept steadily in view, it will be obvious that above all use-value and exchange-value must be sharply distinguished, and the investigator must not allow himself to be led astray by the little word value which occurs in both designations, so as to regard them as synonymous. Many theories of value explain value from the utility of an article. The more useful, the more valuable. This is correct if by more valuable is understood a greater use-value, but false, if a greater exchange-value is meant.

The use-value, the utility of a thing, describes a relation between the individual, the consumer, and this thing; but not a social relation, a relation between two people, such as the exchange relation is. Perhaps it may be contended that equally useful articles are exchanged with each other in the same quantities. But the exchange or the sale usually consists in the fact that every seller parts with things which have no use-value, no utility, for him.

If the baker and his assistants are fed, the bread which they have baked and sell has no longer any use-value for them. If the baker cannot find any customers for it, he does not know what to do with it. On the other hand this bread may have the greatest use-value for a worker passing by the baker’s shop who has not yet broken his fast. The exchange-value of the bread, however, is the same for both parties.

Suppose the workman passing by is a basket-maker, calling from house to house with his baskets. The baker needs a basket, which has great use-value for him, but none whatever for the workman. The latter has a quantity of baskets lying at home, and no use to put them to. He gladly parts with a basket for some loaves of bread. But in what ratio would basket and bread be exchanged if their owners took their stand on utility? How many loaves of bread are as useful to the workman as the basket is to the baker? It is obvious that the utility of two different use-values cannot be compared at all; they do not admit of a quantitative comparison. If the basket-maker received five loaves of bread for his basket, it would be absurd to say that a basket was five times more useful or (in this sense) more valuable than a loaf of bread. The utilities of different commodities are not commensurable with each other.

In the case of various specimens of the same type of commodity, it is certainly possible to fix a higher or lower degree of their use-value. A durable pair of boots has a greater use-value than a shoddy pair, and I would gladly pay more for them – provided I had the necessary money. A bottle of Johannisberg wine has a greater use-value and exchange-value than a bottle of Spandau or Grueneberg wine. It would therefore seem that use-value is an element in exchange-value.

But it only seems so. If the greater use-value creates the greater exchange-value, the question arises, why does not every producer only produce the best qualities? Why does not every shoemaker manufacture only superior shoes? Why does not every vintner bottle only the best brands? The answer is simple. In the case of shoes the better quality is either the result of better raw materials, etc., which cost more labour and money, or the result of better work, which means a greater expenditure of labour, assuming an average degree of skill on the part of the worker. For this reason, and not because of the greater use-value, the more solid shoes are dearer. It is a well-known saying that the dearest commodities are the cheapest, that is, their use-value surpasses that of the inferior qualities to a much greater extent than their commodity-value surpasses that of the latter. A pair of boots costing 12s. lasts perhaps twice as long as a pair at 10s.

The higher price of certain kinds of wines, however, is based on the fact that they can only be bottled at particular places. Here the law of value loses its validity, because we are concerned with a monopoly. The law of value, however, presupposes free competition.

Where differences in price are determined by differences in quality among the same kind of commodities, the latter may always be traced either to differences in the expenditure of labour or to monopoly conditions.

Again, other theories of value confuse value with price. They purpose to explain value from the relation of supply and demand. But they only explain why the prices of a certain commodity continuously oscillate about its value (its production price); they do not, however, explain why the average price of one commodity continuously remains so much higher than that of others; why, for instance, a pound of gold was for centuries thirteen times as dear as silver.

If the explanation of value through supply and demand is to make this permanent difference in the prices of different commodities intelligible, there is no alternative but to have recourse to the labour theory of value. To the question as to why one commodity is constantly so much dearer than another, it answers that this is due to its greater scarcity, which causes the supply of it to be permanently less than that of the other.

In order, however, to place on the market as much of a commodity that is scarce as of one that is plentiful, more labour is required. If I say that a pound of gold was thirteen times as dear as a pound of silver, because it was found thirteen times more seldom, or because it cost thirteen times as much labour to produce a pound of gold as a pound of silver, it comes to the same thing. As soon as the theorist steps down from the standpoint of the business man, who is merely interested in the price of commodities in the market, and not in the manner in which they are obtained; as soon as he investigates matters more closely and considers how commodities are produced, then he always finds that the value of commodities is determined by the process of production, and is created in the work-place and not in the market. Of course, the bourgeois theorists are generally fonder of the market than of the factory, and as a rule they entirely fail to comprehend the labour theory of value.

In the market value is merely transformed into money, into price; first of all into imaginary money, the price demand, and then into real money, when the commodity is sold. The more capitalist economy develops, the more intermediate factors are interposed between the workplace and the market, between the producers and the sellers to the consumers, the greater may be the deviations thereby brought about of the actually realised price from the theoretically determined value. But all the same, in the last resort it is always the conditions of production which determine the value of commodities, and from which their prices remain dependent, however contingent the nature of this dependence may be.

The practical capitalists themselves determine the value of commodities by reference to their conditions of production. They do not, of course, understand by these conditions the labour-time socially necessary for the production of the commodities in question, but the production costs (wages, outlay for machines, raw materials, etc.) plus the average profit.

Accordingly, a whole school of theorists attempt to explain that value is determined by costs of production.

But what is correct from the standpoint of the practical capitalists is absurd from the standpoint of theory, which does not have to calculate the normal price at a given time, but has to trace the social processes of the capitalist mode of production to their final causes.

Above all: what are the costs of production? A definite sum of money. Consequently they pre-suppose the existence of money. The determination of value by production means, therefore, that value is to be explained by money, and not vice versa. The cart is being put before the horse.

The costs of production are a definite sum of values – the value of the labour-power (wages), the value of the means of production; the value of the profit. Value is explained from this sum of values. It is obvious that this determination of value revolves in a circle.

Let us now take a commodity producer, some peasant weaver, who we will assume produces everything himself. He raises his food, as well as the raw material, the flax, which his daughter spins, and he makes the loom himself from his own wood; in what consist this man’s costs of production? He has laid out no money; his product merely costs him labour, nothing but labour.

Now let us proceed a step farther to a higher level of production, to an artisan weaver. The latter has to make a pecuniary outlay; he has costs of production. He must buy the loom, the yarn, and also his food. These are his costs of production. But will he calculate on this basis the value of the linen which he weaves? In that case his handiwork will hardly be lucrative; it will yield him no surplus which he could save. And a portion of his costs of production-his outlay for food and the loom-will remain the same whether he works 4 or 12 hours per day. Will he not therefore reckon the product of 12 hours higher than that of 4 hours, apart from raw material? It is plain that he will reckon his labour as a value-forming element in the cost of material.

Matters turn out differently as far as the capitalist is concerned. The product costs him no labour at all, but only money. He pays with money not merely for the means of production, but also for the labour, and therefore so far as he is concerned all the conditions of production resolve into an expenditure of money, and the latter seems to him to be the value-forming factor. But he would make a grimace if he were assured that the value of his product was equal to the amount which be expended for its production. He does not embark on production merely to recoup his expenditure of money upon production. He also wants to make a profit. This is the reason why he has parted with his money for productive purposes, instead of consuming it. He therefore adds the “current” profit to the costs of production. The price fixed in this manner is the minimum price, which he is at least obliged to realise, if, according to his notions, he is not to work at a loss.

According to capitalist ideas, profit is part of the costs of production which determine the value of a product. This “value” now turns out to be nothing more than the production price of the Marxian theory, which again can only be understood in the light of the law of value.

Use-value, market-price, production-price – these are the categories which are put before us by the theories of value which differ from the labour theory of value. They are either categories which, as in the case of use-value, are only concerned with exchange-value in so far as they form its pre-requisite, but not one of its determining factors; or such as are derived from exchange-value, like production price or market price, which do not explain the exchange relation but depend for their own explanation upon the elucidation of this relation.

These theorists content themselves with regarding the ideas which the buyers and sellers or the capitalists have of their business operations as the real bases of these operations. They believe that a phenomenon is scientifically explained if they collate and reproduce the ideas of the men practically engaged therein. But to do this no science is requisite. Science should reveal the ultimate causes of social processes and relations, of which the participants are often only incompletely aware, when they have not formed erroneous ideas about them.

Among the theories of value here mentioned, that comes nearest to the truth which seeks the determining cause of value in the costs of production. But it breaks down on the point of the average profit. Apart from the labour theory of value, none can explain what determines the magnitude of the average profit, and why, under certain conditions, it amounts to about 10 per cent, and not 100 or 1,000. The other theories content themselves with either justifying or explaining psychologically the appropriation of profit. But the profoundest jurisprudence and the subtlest psychology cannot explain whence profit is derived, and how it is created.

The theory of profit is extremely important for the comprehension of social ramifications. Nevertheless, we will not pursue it farther at this juncture, but return to the theory of surplus-value. The theory of profit is the theory of the distribution of the spoil – of the surplus-value – among the various sections of the ruling classes. Although the industrial or agricultural capitalist is the prime mover in the creation of surplus value, he is not able to retain it all. If he employs his capital in a branch of production, in which it must assume a lower organic composition, he is obliged to cede a portion of the surplus-value to other capitalists who have invested their capital in branches of production representing a higher organic composition; as he does not notice this process of equalisation, it does not cause him any qualms. He must also – and this he notices very plainly – pay a portion of his profit as interest to the money capitalist from whom he borrowed money, leave a portion to the merchant as trading profit, and finally, if he be a tenant farmer, cede a portion as ground rent to the landowner or – if he is his own landlord – set it aside to pay off the capital which he had been obliged to employ for the purchase of his property.

But, important as all these relationships are, what chiefly interests us here is the relation between the capitalist and the worker, not indeed that between the individual worker and the individual capitalist, but that between the capitalist class and the working class. The theory of profit does not serve to explain this relationship, but rather to obscure it, because it makes the magnitude of profit dependent upon a series of circumstances which have nothing at all to do with the relation between capital and labour.

Whatever form the profit of the individual capitalist may take, its magnitude depends in the last resort upon the magnitude of the surplus-value, and therefore upon the degree of the exploitation of the wage worker. This applies above all to the whole of the capitalists, as the total sum of profits is equivalent to the total amount of the surplus-value.

It is not from the laws of profit, but from those of surplus-value that we shall best be able to understand the class antagonism and the class struggle between capital and labour and the peculiarity of the capitalist mode of production.

We shall therefore deal again with value and surplus-value in the following pages, starting from the assumption that price is equal to value and profit to surplus-value. In this case we must leave out of account the average rate of profit and the production prices, just as the resistance of the air is left out of account in calculating the law of gravitation.

Of course, the factors which are here ignored must be taken into consideration in the practical application of the theory.