Profit into Average Profit

Part Two: The Transformation of Profit into Average Profit

Chapter 8 – Different Compositions of Capital in Different Branches of Production and the Resulting Variation in Rates of Profit

Marx now applies a simplifying assumption that the rate of exploitation is the same in all departments.

(This is not unrealistic as it depends upon an approximate equalisation of wage levels, intensity of labour and length of the working day between industries).

Given this assumption, the rate of profit on a particular capital, so long as everything exchanges at its value, will depend on the organic composition of capital and the turnover time of that capital.

The higher the organic composition, or the longer the turnover time, the lower will be the rate of profit because the less will be the portion of the capital (i.e. variable capital in the productive phase) that is actually producing SV.

However, “there is no doubt that…differences in the rate of profit in the various branches of industry do not exist in reality, and could not exist without abolishing the entire system of capitalist production. It would seem therefore, that here the theory of value is incompatible with the real phenomena of production and that for this reason any attempt to understand these phenomena should be given up.” (p. 151)

If commodities exchange at their values, then the rate of profit in different industries must be different.

If the rate of profit is to be equalised, as it is in practice in capitalist society, then commodities cannot exchange at their values.

It seems that the labour theory of value, that underlies Marx’s whole account, has come unstuck at last.

To try and reconcile theory with reality Marx returns to the concept of cost price, and argues that we have to understand the equalisation of the rate of profit in terms of the competition between capitals on the basis of cost price.


Chapter 9 – Formation of a General Rate of Profit (Average Rate of Profit) and Transformation of Commodity Values into Prices of Production

The rate of profit on a particular capital depends on the organic composition of that capital, so long as commodities exchange at their values (assuming constant rate of exploitation and turnover time of capital).

If we take all the capitals together we can work out an average rate of profit…

P = S/(C+V)

If each individual capital is to earn the average rate of profit, then prices must diverge from values.

In those branches with an above average organic composition the price will be higher than the value, so raising the rate of profit; in branches with a below organic composition the price will be lower than value, so depressing the rate of profit.

Thus the price of the commodity will be equal to the cost price (C + V) plus an amount of profit calculated on the initial capital at the average rate.

If the constant capital is all used up in one period, then the initial capital is the cost price and the final price, the price of production, is equal to (C+V).(1+r), where r is the rate of profit.

It is the competition between capitals that ensures an equalisation of the rate of profit: capitals will move out of industries with a low rate of profit into industries with a high rate of profit until prices diverge sufficiently from values to equalise the rate of profit.

Marx insists that, although prices diverge from values, the prices can only be calculated on the basis of values. They cannot be directly calculated as cost price plus average profit, so by-passing the labour theory of value, because to perform this calculation it is necessary to know what the average rate of profit is, and this can only be calculated in value terms, as the total SV divided by the total capital.

Thus although prices of production diverge from values, Marx argues that they are transformed forms of value.

All that happens is that the process of competition redistributes SV amongst the capitals.

Capitalists still seek to increase the SV they can produce by all the means at their disposal, even though they will ultimately have to share the increase with others.

Marx assumed that the transformation of values into prices of production did not affect the magnitude of SV, but only its distribution amongst the various capitals.

This is to assume that the transformation does not affect the rate of exploitation.

If, however, the industries producing workers’ means of consumption have a below average organic composition of capital, the price of those means of consumption falls.

This will only leave the rate of exploitation unchanged if wages fall to compensate for this.

Thus the transformation of values into prices also involves the transformation of the wage.

The transformation of values into prices affects not only prices that individual capitalists receive for their commodities, but also the prices they pay for labour power and for the MP.

Thus the total effect of the transformation is very complex.

Working out the precise effect is the so-called “transformation problem”.

Marx did not do this.

However, it can be shown that it is possible to derive a set of prices of production consistent with an equal rate of profit from a set of values.

Marx argues that the effect of the transformation is that a capitalist no longer receives an amount of profit corresponding to the amount of SV he produces.

Thus the capitalist is producing SV not directly for himself, but for all the capitalists.

Thus “the mass of SV produced in a particular sphere of production is then more important for the average profit of social capital, and thus for the capitalist class in general, than for the individual capitalist in any specific branch of production. It is of importance for the latter only in so far as the quantity of SV produced in his branch helps to regulate the average profit. But this is a process which occurs behind his back, one he does not see, nor understand, and indeed which does not interest him. The actual difference of magnitude between profit and SV…now completely conceals the true nature and origin of profit not only from the capitalist…but also from the labourer. (p. 165)

Thus profit appears to derive not from the labour of the worker, but from capital itself.

But value continues to regulate the capitalist mode of production in two senses:

  1. it continues to apply at the level of capital in general: the laws of the general rate of profit
  2. it continues to apply to the individual capitalist to the extent that he is able to retain the advantages he gains by increasing the rate of exploitation (thus in the short-term he can increase his rate of profit by lengthening the working day, increasing productivity, increasing the intensity of labour, economising on the MP and subsistence and reducing the turnover time of his capital), but in the longer term competition will erode his extra profits and so distribute the gains amongst the capitalist class.

Thus the transformation of values into prices affects the distribution of SV among the individual capitalists, but it does not affect the underlying dynamic of capitalist production.


Chapter 10 – The Equalisation of the General Rate of Profit through Competition. Market Prices and Market Values. Surplus Profit

Marx points out that there is a tendency for all capitals to achieve the average rate of profit.

What is at issue is how this comes about.

It must be something that takes place in exchange.

“The whole difficulty arises from the fact that commodities are not exchanged simply as commodities, but as products of capital” (p. 172)

Thus it involves a modification of the laws of commodity exchange discussed in Volume I, chapter 1, which were only appropriate to simple commodity production.

In simple commodity production, market prices could diverge from the value of the commodity, but the divergences even out.

Competition between capitalists in the same branch of production produces a single social value as a result of the equalisation of the various individual values (i.e. the value is registered by the socially necessary labour time, and not the individual labour time).

The overall effect of competition is to press market prices towards the market value.

But in the capitalist market, we are no longer dealing with the simple purchase and sale of commodities.

It is not simple commodity producers, but capitalists, who meet in the market.

The capitalist is seeking to realise his SV in selling his commodity capital, and it is to realise SV that the capitalist enters the market.

He is not interested in the specific use-values of the product, or the branch of production in which he is engaged, thus he is not concerned with realising the value of a particular commodity, but seeks the max. rate of profit on his capital advanced.

Capital is mobile.

It can move to branches with above average rates of profit.

Thus the social division of labour is regulated in a capitalist society not by the exchange of commodities according to their values, but by the exchange of commodities according their prices of production, i.e. by their exchange at prices corresponding to a uniform rate of profit.

Thus the law of capitalist exchange is a modified form of the law of exchange of simple commodity production.

The effect of exchange according to prices of production is that SV is redistributed among capitals according to the size of the original capital.

Hence capitalists are interdependent in their exploitation of the working class: an increase in SV achieved by one capitalist is shared among all capitalists, and capitalists therefore have a common class interest in the exploitation of labour, i.e. to maximise the amount of SV.

They engage in competition for the division of this SV.


Chapter 11 – The Effects of General Fluctuations in Wages on the Prices of Production

In value terms an increase in wages has no effect on value, it simply reduces the SV accruing to the capitalist.

However, if different branches have different organic compositions of capital (V/C), the rate of profit will be affected differently since the wage increase will alter the organic composition differently.

Thus prices will have to readjust to equalise the rate of profit again.

High organic composition, price of production of commodities falls (low oc prices rise).


Chapter 12 – Supplementary Remarks

The conception that profit derives not from SV but, pro rata, from capital, gives rise to the capitalist expectation that he will earn such profits and so to capitalist forms of calculation.

In these forms of calculation it seems that profit derives from capital itself (from its size and its turnover).

The phenomena revealed by competition “seem to contradict the determination of value by labour-time as much as the nature of SV consisting of unpaid surplus-labour. Thus everything appears reversed in competition. The final pattern of economic relations as seen on the surface, in their real existence and consequently in the conceptions by which the bearers and agents of these relations seek to understand them, is very much different from, and indeed quite the reverse of, their inner but concealed essential pattern and the conception corresponding to it.” (p. 205)

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