Prof E's Blog

~300 words, ~2 min reading time

Summary

This short chapter summarizes some of what came before, and also makes clearer the main purpose: Marx was trying to show that the rate of profit is typically not independent of the size of the capital involved. This view (which Marx attributes to the German socialist Rodbertus) claims that capital and profit levels move in lock-step – so a 20% increase in capital and 20% increase in profit would go together, so that the rate of profit would be unaffected. Marx claims that this is true in only two cases: First, if there’s a change in the value of the monetary commodity. In that case, it’s not really that capital and profit are both increasing by 20%, it’s that gold (or the dollar or whatever) is decreasing in value by 20%. So, here, there is actually no “real” (inflation adjusted) change in either capital or profit – only in its nominal (money) value. Second, if variable and constant capital move in lock-step, so that the ratio between the two does not change. (In modern terms, economists would say that the enterprise is changing by “replication”, a simple repeating of the same process an extra time, half a time or whatever.)

Why It Matters

Marx’s view of distribution and cycles are closely tied with the fact that there is a connection between capital accumulation and the rate of profit, I suspect. So, this is going to play a bigger role when we reach that point.

Where Marx Goes Wrong

Here, Marx’s comments are few enough, and mostly in the form of a recap and application against Rodbertus that I don’t have any specific objections that wouldn’t show up elsewhere.

~420 words, ~3 min reading time

Summary

In this chapter, Marx considers the effects of variations in various prices on the rate of profit. First, raw materials. As one might expect, there is an inverse relationship between raw material prices and the rate of profit. Thus, low material prices are important to capitalists maintaining profit levels. Marx explains that this is true, even though changes in the prices of raw materials tend to be reflected in the price of the product. Because of competition, the change in cost is typically not fully reflected in the price of the final good. In the case of wages, higher wages tend to decrease both the rate of surplus value (which decreases the rate of profit), and also tend to decrease the capitalist’s scope of production – further decreasing profit. One of the more interesting observations Marx makes in this chapter is that there is a tendency in capitalism for the growth of the stock of machinery to run ahead of the ability of nature to produce nature-given factors (like agricultural goods, for example), and this creates imbalances that lead to cyclical fluctuations. Marx specifically considers cotton markets, showing how there was a repeated boom and bust in that industry in England through the mid-1800s.

Why It Matters

In this chapter, Marx hints that a good part of the instability of the capitalist system that he will explain later rests on the relationship between the prices of the factors of production and the rate of profit.

Where Marx Goes Wrong

From a modern mainstream or Austrian perspective, Marx’s analysis here isn’t “wrong” in one sense – but is wrong in another. On the one hand, from an individual firm’s perspective, Marx’s analysis of the effect of prices of factors on the rate of profit is fairly sound. But, from the perspective of the economy as a whole, we have the problem that the prices of factors of production are not exogenous. They depend on the (expected) price of the product. Value is then imputed back from the product to the factors that produce it. In mainstream terms, the demand for the factors of production is “derived” from the demand for the product. So, the causal analysis, if we’re trying to analyze the system as a whole, is backwards – UNLESS we’re considering cases where the price is changing because of a change in availability of the goods under consideration, but Marx isn’t very clear about that (though there are certainly places where he considers these cases).

~700 words, ~ 4 min reading time

Summary

Since workers create surplus value, it makes sense for capitalists to minimize how much they spend, relatively, on non-labor. (That is “constant capital” in Marx’s terminology.) In general, they can do this by increasing working hours. Since the same building can operate for 8 hours or 24 hours, a greater profit margin will be attained if work happens for more hours. In addition, capitalists look for ways to use the “excretions of production” – that is, by-products or “waste”.

Marx goes a bit deeper on a couple of examples. He discusses savings on labor conditions – pointing out that capitalists can decrease their expenses by tolerating unsafe or uncomfortable working conditions, and presents data showing that disease and mortality are more common among workers in industries where conditions are particularly bad. Marx also observes that large-scale production is encouraged, in part, by the way that power works in industrial machinery. It is often more economical to operate one large plant than multiple smaller ones. These economies of scale (to use the modern phrase) allow capitalists to economize on constant capital. Marx goes a bit deeper into the “excretions of production”. Strangely, he criticizes capitalism for not putting human feces on fields to use as manure. Finally, Marx observes that new inventions are often not economical – so that the first to buy a new product end up paying far more than when the product gets more developed.

Why It Matters

Here we’re getting much more to the practical criticism of the capitalist system that Marx provides. The most important part here is the criticism regarding requiring long working hours and the one about unsafe and unhealthy working conditions. These are the two activities that look the most like “exploitation”, and, I would suggest, are often at the heart of criticisms of a market system.

Where Marx Goes Wrong

Here, Marx’s wage theory is what creates the biggest problems. Since Marx buys into the classicals’ iron law of wages – that is that wages will stay at the level of subsistence – Marx misses the actual dynamics of what is happening. For example, people will trade off wages against other features of a job. So, for example, people may be willing to accept worse conditions – but they only do so if they are compensated for it financially. Conversely, it can sometimes be cost-saving for a company to offer more benefits but pay less – in fact, Marx himself points out a case where a business ended up saving money by installing safety equipment. Marx’s argument then, in this section, relies on the existence of two “irrationalities” – one of which Marx is explicit about, the other of which is missing from the explicit argument, as it is ruled out by Marx’s wage theory. The first irrationality: that capitalists habitually seek to avoid certain kinds of costs – specifically for safety devices. Marx reported one case where a group of manufacturers spent more paying lawyers to fight the imposition of safety regulations than it would have cost to simply implement the regulations themselves. A second is that workers care only about wages and pay no attention to the conditions of production. But these are unlikely to be true. There are systematic differences in certain wages which are explained by differences in job characteristics – sometimes explicitly. This makes perfect sense – people would be willing to be paid less for safe, comfortable jobs, other things equal – but doesn’t fit the iron law of wages which suggests that wages will fall to subsistence levels. In addition, employers take this fact into account when making decisions about safety procedures and the like. Do they get things wrong sometimes? Of course. But, it hardly seems accurate to suggest that employers regularly, irrationally avoid measures that are actually cost-saving – in a competitive world, such decisions put you at a disadvantage compared to your competitors. Which brings us back to a central issue with Marx – for Marx, competition between competitors seems to exist sometimes, but is not worked into the logic consistently. So, competition keeps prices of products in check – but doesn’t let wages rise above subsistence. Competition leads to capitalists being cost-minimizers – but they do so very poorly.

~300 words, ~2 min reading time

Summary

The previous chapters were considering the rate of profit for a single “turnover” of capital – effectively a single productive period. In this chapter, Marx broadens the analysis to examine the annual rate of profit if there are multiple turnovers of capital in one year. For example, if I advance $100 in wages at the beginning of the year for wages, and workers make a product I can sell for $110 at the end of the week, then I can “turnover” the $100 from my revenue to pay for wages in the next week. As a result, the same $100 can be spent on wages 52 times over the course of the year, resulting in a profit of $520, while I only had to advance $100 – a 520% return. Marx shows that the annual rate of profit is simply the rate of profit for a single turnover multiplied by the number of turnovers in a year.

Why It Matters

If you’ve read his previous volumes, you’ll know that Marx is a bit obsessed with the idea of “turnover” with capital. The reason is simple: it is what makes capital self-replicating in the Marxian system. So, it makes sense that, as Marx is turning to questions of profit, that he would consider how profit is affected by turnover.

Where Marx Goes Wrong

Marx’s devotion to the labor theory of value muddies his analysis because his price theory is a bit goofy. Sensibly, if a particular set of labor and materials allows for twice as high a turnover, and therefore twice the rate of profit, it seems obvious that entrepreneurs would bid up the wages and material prices, which, in turn, lowers the per-turnover rate of profit. Marx’s system doesn’t seem to allow for this, because it is bound by the labor theory of value.

~ 800 words, ~ 4 min reading time

Summary

If we define the rate of profit as the profit divided by the expenditure (not too far from profit margin by standard accounting, though also not quite the same), and the rate of surplus value as the amount of surplus value (that is, profit) divided by the wage bill (that is, the amount of variable capital), then we’ll find this relationship:

Rate of profit = rate of surplus value x (variable capital/total capital)

“Capital” here being the term that Marx uses for “costs” – including wages (that is variable capital), depreciation, materials, etc.

This chapter mostly focuses on different ways in which the rate of profit can change/differ. He considers a number of cases, but comes to this conclusion in the end:

(1) The rate of profit moves in the same proportion as the rate of surplus value if the share of variable capital stays constant.

(2) The rate of profit moves more than the rate of surplus value, but in the same direction, if the share of variable capital moves in the same direction as everything else.

(3) The rate of profit moves less than the rate of surplus value, but in the same direction, if the share of variable capital moves in the opposite direction, but less than, the rate of surplus value.

(4) The rate of profit moves opposite the rate of surplus value if the share of variable capital moves in the opposite direction and more than the rate of surplus value.

(5) The rate of profit stays constant if changes in the rate of surplus value are offset exactly by changes in the variable capital share.

Marx feels a need to explain #5. So, let’s look at Marx’s example (but I’ll use $ instead of pounds). Let’s say that, originally, the capital is divided as: $80 constant capital + $20 variable capital + $20 surplus value. In this case, the rate of profit is 20% ($20/$100), while the rate of surplus value is 100% ($20/$20). Then, let’s say that wages fall, so that you can produce the same stuff with just $16 paid in wages. Then, we’d have $80 constant + $16 variable + $24 surplus value. The problem is that this would mean that the rate of profit has increased 25%. For that not to happen, the constant capital has to have increased, for example, like so: $104 constant + $16 variable + $24 surplus value. Now, the rate of profit is $24/$120 = 20%. The change from $80 to $104 constant capital means that either labor productivity has dropped – that is, that workers need more materials to produce the same quantity of product, or that the cost of materials has increased.

Why It Matters

Marx’s big point from this chapter was to establish that it is possible for two capitalists to have the same rate of profit, but different rates of surplus value. The above examples shows how that can happen. Similarly, it is trivial now to show that two capitalists can have the same rate of surplus value, but different rates of profit. I’m still not 100% sure where Marx is going with this – but I suspect part of the point is to show that, since there is a tendency toward rates of profit to equalize, we’ll have capital-intensive firms (for whom the wage share is low) with relatively higher rates of surplus value. That is: an increase in capital intensity across the economy leads to greater labor exploitation. But, I’m just speculating about that at this point.

Where Marx Goes Wrong

This chapter was mostly mathematical identities. But, I do want to point out two oddities in Marx in this regard:

(1) Marx’s use of the rate of surplus value is really strange. Why “profit divided by wage bill” is meaningful at all is unclear to me. Even if we accept that constant capital should basically be discounted, and only consider a “value added basis”, it seems that the rate of surplus value should be “profit divided by value added by labor (that is profit + wage bill)”. No idea why Marx does what he does on this.

(2) Marx’s use of “labor productivity” is also a bit non-standard to the modern reader. Where we typically think of labor productivity as the ability of labor to make a product in a period of time, Marx is thinking in terms of relative value added (compared to the value already “embodied” in the means of production) – so a lack of productivity is seen more as a worker needing more tools/materials to produce the same thing, as opposed to the modern notion where a lack of productivity is seen more as a worker needing more TIME to produce the same thing.

As is always the case, a definition can’t be “wrong” per se. It’s just more or less useful. These are similar – but could cause confusion because of the difference between modern usage and Marxian usage.

~300 words, ~2 min reading time

Chapter summary

In this chapter, Marx distinguishes between the rate of profit and the rate of surplus value. In money terms, surplus value and profit are the same. But, they are different as rates. The rate of profit in Marx is the profit divided by the capital expended (including both constant and variable capital, that is non-wage expenses and wages). The rate of surplus value is the profit divided by the variable capital (the wage bill). Marx says that capitalists really only care about the rate of profit, as they don’t care what their expenditures are, exactly – they just care about the total expended. As a result, changes in the degree of exploitation (the rate of surplus value) are difficult to discern.

Why It Matters

I’m not quite sure where Marx is going with this at this point, but a point he emphasizes is that the same rate of profit may obscure significant differences in the rate of surplus value. So, for example, a firm that is capital-intensive may the same rate of profit as a labor-intensive firm. However, the rate of surplus value is higher for the capital intensive firm since it generated the same profit with a lower wage bill – so, more “surplus labor”.

Where Marx Goes Wrong

This chapter lacked theoretical substance, for the most part, so there wasn’t much wrong with it. The key problem of the labor theory of value runs through Marx, and that is no different here. If we start from the assumption of derived demand/value imputation, however, then everything turns on its head. What Marx calls “profit” is what Bohm-Bawerk identifies as “interest”. “Profit” then, is the result of capitalists delaying consumption for the money that they’ve tied up in the capitalist production process. It has nothing to do with the exploitation of labor.

~600 words, ~3 min reading time

Summary

In this chapter, Marx lays out the idea of the “cost-price” of a good. Suppose, for example, that a firm pays $400 for means of production (including some wear and tear on capital), $100 in wages, and sells the good for $600. By Marx’s terms, there were $400 in “constant” capital, $100 in “variable” capital (that is, labor), and $100 in “surplus value”.

Marx also considers how changes in the components above change the value (and therefore sales price) of the good. A change in the cost of the means of production would change the value – and therefore sale price – of the good. However, a change in the wage simply changes the division in how much of labor creates “surplus value”. This follows from two of Marx’s premises: (1) the price of a good reflects the value. (2) the value reflects the total labor content embedded in the good. So, if the cost of the means of production increases, then that is a sign that the value of the means of production increases – this value is then passed through to the final product. However, if wages change, that, in itself, doesn’t change the quantity of labor in a good. So, it doesn’t change the value of the good.

This chapter focuses on distinguishing cost-price from other ways of accounting. For example: we wouldn’t use the entirety of durable goods in calculating the cost – on the wear-and-tear portion transfers value to the finished goods. Also, Marx emphasizes that the sale price – NOT the cost-price indicates the real “value” of the good. Eliminating profit then would not eliminate the exploitation of labor. Rather than the surplus value accumulating to the capitalist, it would accumulate to the consumer.

Why It Matters

One of the most significant points that Marx makes in this chapter is that changes in wages do not change the value of the good (as stated above). So, for example, if wages get cut in half, then the value of the good will still be $600 (as above), but the money will be divided $400 for constant capital, $50 for variable capital (that is, wages), and $150 for surplus labor.

This has profound implications for things like minimum wages and labor union negotiations. Because, in the Marxian framework, wages do not affect prices, wages and surplus value are effectively just dividing up a fixed pie. So, imposing a minimum wage, or having powerful unions, would simply result in workers getting more money.

Where Marx Goes Wrong

The fundamental problem: this chapter is infused with the labor theory of value. This is the opposite of the more correct view – which is reflected both in Austrian economics and in mainstream microeconomics, though using slightly different language. Austrians discuss the idea of “imputation” – that is, that value starts in the mind of the consumer, and then is imputed to consumer goods and up the chain of production to the various producer goods and labor. In mainstream lingo, the demand for labor is a “derived demand” – specifically, it is derived from the demand for the goods being produced. Both of these show value coming from the final good to the goods being used to produce that. This is the exact opposite of Marx – where value starts in the labor that goes into the good – whether raw labor or labor embodied in the means of production.

To outsiders, this might feel like a very philosophical disagreement – but it has profound scientific implications. If Marx is right about the labor theory of value, then it DOES follow that the only effect of minimum wages would be a decrease in profit. If modern economics is correct, then minimum wages can create negative employment effects and price effects as well.