(Law of)Value, (Production) Price(s), and (Average rates of) Profit: Part 1

 Capital, Volume 3, Chapters 8, 9, 10

1. Chapter 8

Marx identifies a truckload of  tendencies in his critique of the capitalist system of production and reproduction.  Some of the eggs in that basket:

  • the tendency of the mass and value of the fixed instruments of production–those elements that transfer their value to commodities  only fractionally over numerous production cycles–to expand at a rate faster than the rate of expansion for living labor
  • the tendency of the rate of profit to decline as that mass and value of the instruments of production expands
  • the tendency of capitalism to propel the overall development of the forces of production in all sectors
  • the tendency of capitalism to concentrate the forces of production in both mass and value into fewer, but larger, hands
  • the tendency of capitalism to create ever more surplus labor
  • the tendency of an universalizing impulse to capitalism, of capital to go everywhere, attempt to seize, integrate, absorb, and fashion its own image the pre and co-existing modes of production.

And Marx identifies for all those tendencies: offsetting factors, counter-tendencies, opposing actions, elements, and moments spun off by the very dynamics of the tendencies themselves. There are:

  • the counter-tendency of the relations of capital to inhibit, deflect, distort, the expansion of the fixed instruments of production
  • the counter-tendency, or offsetting factors, that resist the decline in the rate of profit
  • the counter-tendency of the limits that private ownership of the instruments of production present to the expansion to those instruments
  • the counter-tendency of capital to spawn new, smaller enterprises, with momentarily higher rates of profit, providing new technology serving new needs which, momentarily, are niche sectors for production
  • the counter-tendency to expel living labor from production thus limiting the surplus value which alone sustains capitalist reproduction

The tendencies and counter-tendencies, always uneven, in sequence or combined, form the laws of capitalist production.  All the laws of capitalist production exist in and as conflicts within capital itself.  The “laws” are tendencies, intrinsic and intractable but not immutable tendencies, confirmed not only “positively” in their direct expression, but “negatively” in and by offsetting factors.   Not for nothing did Marx identify capital as “contradiction in motion.”

In Capital, Volume 3  Marx undertakes the analysis of what is considered a fundamental tendency, a material reality of capitalist production: the tendency of capital to generate an average, or general, rate of profit, applying to all sectors of production, and distributing equal profits to capitals of equal size regardless of their make-ups, meaning regardless of the different ratios of the instruments of production c to the living labor v.  This of course runs counter to the “ordinary” belief that “productivity,” the greatest number of commodities produced in the least amount of labor time yields a greater profit.

In Chapter 8, Marx begins from a point opposite this fundamental tendency:

Capitals of the same size, or capitals of different magnitudes reduced to percentages, operating with the same working day and the same degree of exploitation of labour, thus produce very different amounts of surplus value and therefore profit (Capital, Vol 3, Chapter 8, p.248,  Penguin Books, NLR, 1981)

and this is because:

…their variable portions differ according to the differing organic composition of capital in different sphere of production, which means that different quantities of living labour are set in motion, and hence also different quantities of surplus labour, of the substance of surplus-value and therefore profit, are appropriated.  Equal-sized portions of the total capital in different spheres of production include source of surplus-value of unequal size, and the only source of surplus-value is living labour……Since capitals of equal size in different spheres of production, capitals of different size considered by percentage, are unequally divided into constant and a variable element, set in motion unequal amounts of living labour and hence produce unequal amounts of surplus-value or profit, the rate of profit, which consists precisely of the surplus-value calculated as a percentage of the total capital, is different in each case. (p. 248)

Taking us down this anti-garden path, smiling inwardly as we all nod our heads in agreement, Marx continues:

But if capitals of equal size in different spheres of production, and thus capitals of different size, taken by percentage, produce unequal profits as a result of their differing organic compositions, it follows that the profits of unequal capitals in different spheres of production cannot stand in proportion to their respective sizes, and that profits in different spheres of production are not proportionate to the magnitudes of the capitals that are respectively  employed.  For if profits did increase in proportion to the size of the capital applied, this would imply that the percentage of profit was always the same and that capitals of equal size had the same rate of profits in different spheres of production despite their varying organic composition.  It is only within the same sphere of production, where the organic composition is therefore given, or between different spheres of production with the same organic composition of capital, that the mass of profit stands in exact proportion to the mass of capital employed.  If the profits of unequal capitals were in proportion to their size, this would mean that equal capitals yielded equal profits, or that the rate of profit was the same for all capitals irrespective of their magnitude and their organic composition. (p. 249)

And Marx provides the following explanation, which upon review after finishing the chapter reads like a warning  ( Ripley: “Well, I… it looks like a warning. I’m gonna go out after them.” Alien, 1979, Ridley Scott):

The above argument assumes that commodities are sold at their values.  The value of a commodity is equal to the value of the constant capital contained in it, plus value of the variable capital reproduced in it, plus the increment on this variable capital, the surplus-value produced.  (p. 249)

We have shown, therefore, that in different branch of industry unequal profit rates prevail, corresponding to the different organic compositions of capitals, and, within, indicated limits, corresponding also to their different turnover times; so that at a given rate of surplus-value it is only for capitals of the same organic composition–assuming equal turnover times–that the law holds good, as a general tendency, that profits stand in direct proportion to the amount of capital, and that capitals of equal size yield equal profits in the same  period of time.  The above argument is true on the same basis as our whole investigation so far: that commodities are sold at their value. (p. 252)

This is  what we learned, or thought we learned, when we read, or thought we were reading Capital, Volume 1. 

We’re nodding our heads again, and anticipating two weeks vacation time somewhere on this planet that is not yet contaminated by a novel coronavirus, or a fundamentalist religious-national-racial militia/Facebook Group; somewhere that neither prints nor broadcasts any so-called news from a medium belonging to Rupert Murdoch.

Karl raises a hand, drops the hammer and says “Stop. No such place exists, and if it did, you wouldn’t be allowed in.  Besides…..

There is no doubt, however, that in actual fact, ignoring inessential, accidental circumstances that cancel each other out, no such variation in the average rate of profit exists between different branches of industry, and it could not exist without abolishing the entire system of capitalist production.  The theory of value thus appears incompatible with the actual phenomena of production. (p. 252)

Woe is me. The theory of value incompatible with actual capitalist production?  Even worse, no place unsullied by the organs, literally and metaphorically, of Rupert Murdoch?  Where can we go? (“Nowhere to Run { nowhere to hide},” Martha and the Vandellas, Gordy Records, 1965, Holland-Dozier-Holland).

We can continue with Capital, because Marx is making a big move, one that accounts for more than just the average rate of profit.  It’s a move that through the average rate of profit,  uncovers the unrestrained movement of capital among sectors; that identifies the markets as more than arenas of and for exchange and as processes, relations, of allocation and distribution; that truly takes us from the abstract not-quite-capitalist-model of simple reproduction to the concrete capitalist world of expanded reproduction.

Marx concludes Chapter 8 by introducing the basis for generation of the average rate of profit:

It has emerged from Part One [Chapter 1] of this volume that cost prices are the same for the products of different spheres of production of equal portions of capital are advanced in their production, no matter how different the organic composition of these capitals might be.  In the cost price, the distinction between variable and constant capital is abolished, as far as the capitalist is concerned. For him, a commodity which he must lay out  £100 to produce cost the same whether he lays out 90c + 10v or 10c +90v.  In each case it costs him £100, neither more nor less. Cost prices are the same for equal capital investments in different spheres, however much the values and surplus-values produced may differ.  This equality in cost prices forms the basis for the competition between capital investments by means of which an average profit is produced. (p.252, bold added)

2.  Chapter 9

In Chapter 9, Marx introduces prices of production as the solution to the problem he identifies at the end of Chapter 8, that problem being the generation of the general rate of profit and how, regardless of their organic compositions, capitals of the same size claim the same profit.  Problem solved?

Well, look on the bright side.  We’ve lost a vacation, but we’ve gained a transformation problem.  The elements of this transformation problem are:

  1. Prior to this, Marx tells us that the value of the commodity is the socially necessary labor time embedded in its production
  2. Prior to this, Marx tells us that commodities will exchange in proportion to the socially necessary labor time embedded in their production.
  3. Prior to this, Marx tells us that the surplus-labor is unpaid labor obscured by the wage relation, and this unpaid labor is also embedded, measured, and quantified in the value of the commodity.  This surplus value is the only source of the profit realized, but not generated, through commodity exchange.
  4. Under these circumstances, where the law of value dominates production, we should expect different capitals with different compositions yielding greater or less quantities of surplus-value  to express different rates of profit in proportion to relation of the surplus-value to the total capital.  Now Marx tells us all capitals, if not immediately yielding an average rate of profit, converge toward an average rate of profit.
  5.  Moreover, capitals of equal size, regardless of their composition will obtain equal profits.
  6. How can this be?  Is there an “invisible hand” governing, or governed by, the notion that size really does matter?
  7. If it, the creation of the average profit, is done through price, how are values transformed into prices, and how are they transformed into prices of such specificity?

In fact, 1, 2, and 3 remain operative.  Value remains value, determining exchange, and the only source of profit.   Numbers 4 through 7 require a bit more analysis since they appear to contradict 1,2, and 3.

We begin with the cost price of commodities, the value of the components of capital actually consumed in production.  This forms the basis for the capitalist to add an increment thus establishing the production price (or price of production) of the commodities.

(note: In Theories of Surplus Value, Marx, following Ricardo like the wolf follows the elk, uses the term “cost-price” to mean price of production, see TSV, Chapter X, “Ricardo’s and Adam Smith’s Theory of Cost-price (Refutation),” A. 4

And keep  in mind that what became Volume 3 existed in draft form, and what is presented as Volume 3 is an edited, altered draft.   Engels was Marx’s collaborator, and Fred certainly had the credentials for the editing.  He also held his own views, which were not always Marx’s.  Everything that is presented in criticism and defense of this “deviation” from the law of value and introduction of the prices of production might simply be so much misguided effort when the translation of the next examination of the next undiscovered text is released to the public.  Until then however…….)

The production prices of commodities are the sum of the cost price–those amounts spent on components of production, which are the constant capital and the variable capital–  plus the average rate of profit generated in all sectors of the capitalist mode of production.  So we get to the average rate of profit by including that average rate of profit in the exchange prices.   Nice work if you can get it.

This solution, the generation of prices of production seems so transparent, so obvious, even so willful,  so circular, that it can’t possibly be correct.   Can it be that simple?  Does every capitalist know, more or less, what the average rate of profit is in the economy?  Does every capitalist tack that average rate unto the price of the commodities he or she is throwing into the market?  The answer is, “of course not”…… but as a class reproducing itself as a class, and reproducing the impulse to expand at the core of its mode of production, this is truly the capitalists’ method, presuming what must be obtained, and then praying for the market to deliver.

However, in the circuits of capital, in the bringing the commodities to market, this is exactly how the capitalist prices “his” or “her” products: on a “cost plus” basis.

In the analysis of the general rate of profit, Marx finds the abstract conditions of commodity value inadequate to the world of the concrete.  The problem, Marx tells us, is that commodities function not only  as useful articles that are also values; commodities function as representative of different capitals and must reproduce the conditions, the relation of those capitals.

The whole difficulty arises from the fact that commodities are not exchanged simply as commodities, but as products of capitals which claim share in the total mass of surplus-value according to their size, equal shares for equal size. (p.275)

Now the markets  through the continuous adjustment of individual prices toward and away from individual values, reproduce those relations of size-to-(equal)-share in order to distribute the total value (somewhat) in proportion.

In order to make the transformation from value to price, from surplus-value to profit,  we have to grasp the transformation from individual products to bearers of the relations of reproduction.

The appropriation of labor-time from the laborers is a social relation, determined by the conditions of production but circumscribed by and in private exchanges  The commodity of labor-power exists as an exchange value for its “seller,” the laborer(s). “It”-labor-power becomes a commodity when it has no use to its “owner,” its bearer except for the ability to exchange it.  For the buyer, the capitalist, the labor-power is a use-value, purchased for its ability to create commodities.  The labor-power exists then as both value  and useful article.  How is this transaction, this conversion from exchange value to use-value processed, or mediated ?  How are these dual identities confirmed as a single relation? Of course, in the exchange process itself; through price, through an approximation of value by its money form.  Capitalism can come no closer than the approximation of the appropriated value, for value is not and cannot be immediately, directly social.  If it, value, were directly social, private property wouldn’t have a leg to stand on.

Throughout the three volumes of Capital,  price remains the expression of value in terms of money.  Given the determinants of  of capitalist production, price is the expression and the variation in money terms of the value of the commodity in exchange with other commodities from the value of the commodity aggrandized in the labor process.  This is the only way value can be expressed.

Now price can only be validated in the markets through the completion and competition of multiple exchanges of multiple commodities, all or none or some of which correspond exactly to the labor-time privately appropriated by the individual capitalist.

Price can only serve as the  mediator if it can reproduce the general conditions of exchange, the social relations spawning these exchanges everywhere, and every time (approximately).  Price must  serve to reproduce socially the “individual” sellers and  buyers as classes, as laborers and capitalists in general within their particular circumstances.  Price represents the infinite expressions in the multitude of  circumstances of the value relation. Price makes that relation commercial.  Markets set the price, but only because valuation permits, spawns exchange.

Through all those variations, price generates an average, a general, a rate of exchange; a ratio of value appropriated to value realized.  Price is a calculus that yields an approximation of values, and the equivalent of the total value.  Money talks, and  despite the jumbled words, malapropisms, slurred speech, that’s close enough for government work.

The source of value in general and surplus-value in particular is made obscure through this mediation in the calculation of the ratio.  Value becomes a sort of omnipotent, but intangible, invisible force, like god, or the son thereof, made manifest in earthly form only through miracles of transubstantiation called cash.  All components in the value relation appear, to the capitalist, as equal suppliers of value.

We know that the capitalist doesn’t pay for surplus-value, and if it’s not out of pocket for the capitalist, it’s out of mind.  She, he, it, they don’t, can’t find a line item for unpaid labor, by  definition.  It can’t exist if a price can’t be attached to it.  But every capitalist does know, or better learn before the quarter is up, what everything costs.  She, he, it they know, more or less accurately, the price of every element consumed in production.   She he it they know the cost of the raw materials consumed in any production period; the cost of the electricity consumed; what incremental part of the buildings, machines, the means of transport and communicated can assigned to and circulated by each production cycle.  Knowing what things cost provides the relations for the distribution of the totality of value according to the size of capitals.

Using this cost accounting, Marx presents  five (5) different production capitals from different sectors operating annually; all production capital have the same total valuations of 100,  but each has  different technical and value compositions (the organic composition of capital).  The production capital with the highest organic composition consists of  95c + 5v; the capital of the lowest composition is 60c +40v.   Of course, the total annual product for each production capital varies with the amount of variable capital (labor-power) deployed.

All the capitals yield the same rate of surplus value, 100 per cent, producing different values of product and different rates of profit .  Critical to his explanation, and unique to this explanation of production prices, Marx distinguishes between the total capital invested, and the portion of capital consumed in the annual production cycle.  The difference, of course, is derived from the differing organic compositions of the capitals and the different portions of constant capital consumed, including the value transferred by the fixed capital to the final product via depreciation. (p.256)

In considering the values of the commodities produced by each different capital of 100, therefore, we must take into account the fact that they differ according to the different composition of c in terms of its fixed and circulating components, and that the fixed components of different capitals may themselves depreciate either faster or more slowly and thus add unequal quantities of value to the product in the same period. (p.255)

The capital with the highest organic composition consumes annually 5v + 10c;  produces commodities with a cost price of 15, with the value 20  (v+c+s); the capital of the lowest organic composition produces commodities with a cost price of 91 and a value of 131.

The averages of all five capitals valued at 100 are:  c=78, v=22, sv=22, rop=22%.   For the capital of the highest organic composition, the 22 average surplus value is added to its cost price of 15, to provide a  price of production of 37, in contrast to the commodity “static” value, 20.  This gain, and all gains, are of course balanced by the equal but opposite losses of value from capitals of lower organic composition with greater masses of surplus value.  The transfer of value makes the rate of profit for the capital of the lowest and highest organic compositions equal.

To the same extent that one section of commodities is sold above its value, another is sold below it. And it is only because they are sold at these prices that the rates of profit for capitals I-V are equal at 22 per cent, irrespective of their different organic compositions.  The prices that arise when the average of the different rates of profit is drawn from  the different spheres of production are the prices of production.(p.257)

Marx continues:

Thus although the capitalists in the different spheres of production get back on the sale of their commodities the capital value consumed to produce them, they do not secure the surplus-value and hence profit that is produced in their own sphere in connection with the production of these commodities.  What they secure is only the surplus-value and hence profit that falls to the share of each aliquot part of the total social capital, when evenly distributed, from the total social surplus-value or profit produced in a given time by the social capital in all spheres of production. (p. 258)

And with price as factor, and exchange an incident in the creation of both the moment and the average of value, the general rate of profit is established.

This is not Marx’s version of the “efficient market” theory.  All information from all the capitalists is not always known, but in order to claim a portion of the available profits, the information necessary to establishing the prices of production that perform the allocation must equal the total surplus value, so we get the self-reflecting “feedback loop,” where the capitalist looks at “his” or “her” costs and the estimated average profit necessary to sustain expanding reproduction to establish the price of production.

The markets do “this work,” this allocation, this “generalization” of the rate of profit, erratically, messily through the slog and the slough of competition.

The laws, the tendencies and counter-tendencies of capitalist accumulation apply to all capitals.  And because the laws govern any one capital, in the abstract all capitals can be regarded as one.  In the concrete, capital exists for itself only in the recognition of other capitals.  The laws can only be expressed in and through the encounters of capital with capitals; through the interaction of all capitals; through the processes of exchange.  Competition is the sprouted dragon’s teeth of capital; the armored warriors battling for now more than just profit– battling for the surplus for expanding production; for capital itself; for financing and funding; for refinancing  and re-funding.

This competition is between sectors. Thus the average, general rate of profit, is critically dependent upon the “opening up,” the emergence of new sectors of production where a unique technique may yield a unique product, fostering an increment of additional profit that will circulate throughout the economy and finance further expansion.

In the world of capitalist exchange,  it is not the vision or dream of obtaining greater masses of surplus-value that drives capitalist competition.  It’s the reality of cost and cost-reduction that compels the capitalist to introduce greater efficiencies into the production process, in so doing lifting a bit more than the average profit from those in the capitalist’s own sector.  It’s the reality of cost and cost-reduction that compels all the capitalists in each sector to seek greater efficiencies, claiming a greater portion, in accordance with their size which is in reality the capital accumulated in the means of production; which means embedding more capital value in the instruments of production.

Productivity does not increase the mass and the rate of surplus value.  Productivity shifts the general rate of profit, allowing the largest capitals to claim more through the mechanism of the average, while at the same time, depressing the overall profitability of capital as a whole:

What the capitalist sees, and therefore the political economist as well, is that the part of the paid labor that falls to each item of the commodity changes with the productivity of labour, and so too therefore does the value of each individual article.  he does not see that this is also the case with the unpaid labour contained in each article, and the less so, as the average profit is in fact only accidentally determined by the unpaid labour absorbed in his own sphere.  The fact that the value of commodities is determined by the labour they contain now continues to percolate through only in this crudified and naive form. (p.272)

The generation of the general or average rate of profit is coincident, coterminous actually, with the tendency of the rate of profit to decline.

Indeed, there is a transformation “problem” in Marx’s work, but it doesn’t begin with Volume 3. It appears in Volume 3 because  Marx has discarded the notions of simple reproduction.  The  transformation of values into prices isn’t a problem of Marx’s formulation,  and isn’t a repudiation of the law of value.  It, that transformation, is one of the vital processes of capital– inherent, intrinsic, in the expression of labor power as value creating.  It is the truth of the law that  the very mode of production that makes the value relation the regulating  principle of social reproduction,  best expresses the law of that relation  through its deformation; that the enormous gravity of the mode of production bends its own laws to the curvature of its historical limit.  

S.Artesian

July 12, 2020

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