Marx’s Capital, Volume III – Chapter 1 “Cost-Price and Profit”

~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.

2 thoughts on “Marx’s Capital, Volume III – Chapter 1 “Cost-Price and Profit””

  1. Professor Engelhardt,

    I appreciate greatly your thoughts on Marx’s Capital (do you have blog posts for other writings by Marx- I could not find them?)

    However, I thought I should comment on something that is a common mistake that I would not expect to be apparent to you- not out of disrespect of your school of thought but rather out of the fact that basically every living “Marxist” today gets this wrong as well (and therefore, it would appear to be a correct view). Meaning all of the affirmative views also miss this crucial point, that makes reading Kapital very difficult and the more critical reads tend to take the same standpoint.

    The first question one has to ask is – who is the target of Marx’s critique?

    The common answer, that I hear from most “Marxists” is “the capitalists” or “the bourgeois economists.”

    This is incorrect (and this goes for all of Marx’s writings). The most famous of all – the Dictatorship of the Proletariat – is exactly a critique of how the failure of socialist politics.

    You might not believe this but Marx is rather the greatest critic of the socialist movement in history – he was consistently this since his Letter to Arnold Ruge in 1843, where he pointed out that Communism is a “dogmatic abstraction,” and “infected” by its opposite private property. In his notes in 1844, he demonstrates that the achievement of Communism, actually is the universalizing of the Capitalist Relationship – meaning, it is hypercapitalism. Furthermore, he said it was just as much driven by “envy” and “greed” – a demand to level people down to something even unnatural (yes, Karl Marx)! This was an expression of contradiction, not due to inconsistent thought but because the genesis of the modern idea of communism expressed a contradiction in reality (this is the famous “camera obscura” point Marx makes in The German Ideology). This is meaning behind the phrase in the 1844 Manuscripts that Communism was “not the goal” (this section is puzzled over by Murray Rothbard) – that’s because its the contradictory expression of the present. It was the riddle that humanity set itself.

    The Critique of Political economy was aimed at the proletarian socialist movement, in particular the Proudhonian and Left Ricardianism (people like Thomas Hodgskin, but practically, the Chartists).

    Why? Because they repeated the revolutions of the Bourgeois Era (England, America and France) but under changed conditions (post-industrial revolution). In other words, the discontents of the socialist movement are *bourgeois* discontents (bourgeois means the urban classes). The feeling of being “exploited,” of demanding the “value of your labor,” – Marx has a ***critique*** of this. This is not some secret chapter but the whole point of the entire exposition from vol 1 onwards.

    Engels from the Preface to the Poverty of Philosophy:

    “The above application of the Ricardian theory that the entire social product belongs to the workers as their product, because they are the sole real producers, leads directly to communism. But, as Marx indeed indicates in the above-quoted passage, it is incorrect in formal economic terms, for it is simply an application of morality to economics. According to the laws of bourgeois economics, the greatest part of the product does not belong to the workers who have produced it. If we now say: that is unjust, that ought not to be so, then that has nothing immediately to do with economics. We are merely saying that this economic fact is in contradiction to our sense of morality. Marx, therefore, never based his communist demands upon this, but upon the inevitable collapse of the capitalist mode of production which is daily taking place before our eyes to an ever growing degree; he says only that surplus value consists of unpaid labour, which is a simple fact. But what in economic terms may be formally incorrect, may all the same be correct from the point of view of world history. If mass moral consciousness declares an economic fact to be unjust, as it did at one time in the case of slavery and statute labour, that is proof that the fact itself has outlived its day, that other economic facts have made their appearance due to which the former has become unbearable and untenable. Therefore, a very true economic content may be concealed behind the formal economic incorrectness…But the Ricardian definition of value, in spite of its ominous characteristics, has a feature which makes it dear to the heart of the honest bourgeois. It appeals with irresistible force to his sense of justice. Justice and equality of rights are the cornerstones on which the bourgeois of the eighteenth and nineteenth centuries would like to erect his social edifice over the ruins of feudal injustice, inequality and privilege. And the determination of value of commodities by labour and the free exchange of the products of labour, taking place according to this measure of value between commodity owners with equal rights, these are, as Marx has already proved, the real foundations on which the whole political, juridical and philosophical ideology of the modern bourgeoisie has been built. Once it is recognised that labour is the measure of value of a commodity, the better feelings of the honest bourgeois cannot but be deeply wounded by the wickedness of a world which, while recognising the basic law of justice in name, still in fact appears at every moment to set it aside without compunction. And the petty bourgeois especially, whose honest labour – even if it is only that of his workmen and apprentices – is daily more and more depreciated in value by the competition of large-scale production and machinery, this small-scale producer especially must long for a society in which the exchange of products according to their labour value is at last a complete and invariable truth. In other words, he must long for a society in which a single law of commodity production prevails exclusively and in full, but in which the conditions are abolished in which it can prevail at all, viz., the other laws of commodity production and, later, of capitalist production.”

    – In other words, the proletarian socialist movement was *symptomatic* of a change in society that was understood through anarchronistic terms – hence, “bourgeois ideology,” which does not mean some thoughts or propaganda given by wealthy people but rather the fact that the proletariat understands its own SELF-domination through bourgeois discontents (i.e. exploitation, etc).

    In France, in 1789, Abbe Sieyes issued a famous pamphlet, “What is the Third Estate?”
    The revolution was literally for one where people would *relate* based on *work.*
    This gave a ground, literally a condition, for *equality,* not in terms of outcome but in terms of human qua human.

    This was the revolution against traditional society, where those who worked in the “profane” realm paid tribute to the upper estates, those who had heard the word of God and those with honor (knights). Property was basically based on conquering and this was considered righteous.

    Meaning, the castes and orders of traditional society, didn’t really relate (and this is even expressed in the fact that different castes used different money – they didn’t respect each other individuals).

    Bourgeois Property, as famously expressed by John Locke, was founded in labor. It was homesteading. I know there is some debate among the Libertarians as to the limits and universal validity of this but I know many famous libertarians have held the homesteading to be valid.

    The development of this definitely happened behind the backs of people – villains in the towns, merchants who traded with each, etc., built a society based on being **productive.**

    Property was based on how useful you were to society.

    – this was opposed to property on conquest (passed down through customs and tributes), like the countrysides. It had a spontaneous “emergent order” – people in exchange, have to respect each other’s property and therefore, were implicitly treating each other as equals.

    It was voluntary. Co-operative. Non-aggression, etc. It was the germ of modern society and ethics.

    Early political economy,then, did specifically reduce value to labor because Bourgeois Society recognized labor as the first property. Thus, whatever the realization of an exchange, it had to count as the “value” of someone’s labor because that is the only condition for property. Either it is exchanged or produced – Capitalists, when they make a profit, count as workers! Of course – and they are and Marx says so!

    This is what is meant about the exchange of equivalents – it means people relating to each other as people. That’s why I can even describe my inequality with Bill Gates because our commensurability presupposes something homogenous. In nature, animals are different but not unequal, unless you compare them to a third thing.

    There is a third in any exchange – society. This is what Marx means when he says the third in the opening chapter (you mention this in the Mises bootcamp talk) – that it is labor that is the third, is a bourgeois social relation. That’s actually why he “dogmatically” states such – it is the critique!

    Meaning value in exchange, as Smith puts it in his discussion about Diamonds and Water, ***presupposes society.*** It presupposes property rights. That is why he says what is the “purchase” of Dimaonds. This is not something that exists in nature – it is an achievement of Humanity. That they might have different utility on the margin does not describe what property they are being related to i.e. what they are being made equivalent to.

    Individual rights are consequences of the fact that in bourgeois society, we recognize labor in property. It is the “inalienable” right as Jefferson put in the constitution – this did not exist in traditional society because it **could** not – it would be completely undermining to the social ordo (for example, why Marx has a footnote in Vol 1 about Aristotle being unable to recognize labor because he would have to recognize the right of the slave laborer).

    This relation, which was really only emerging, came into contradiction following the industrial revolution (if you are still slogging through Kapital, it is in the chapters Co-Operation, Manufacturing and the Division of Labor and then Industrial Machinery – the last one is where it becomes anachronistic).

    This was expressed in “labor-time” – that is value could be realized by either living or “dead” labor. It is a crisis of time.

    This is very important, because this is why there is in fact a continuity between Marx and the Bourgeois Radicals. It is not Marx vs Locke or Smith or etc., but rather history has rendered them contradictory. “Proletarian labor,” for Marx, is the ***destruction of private property.*** The problem of capitalism for Marx (and this is directly stated in the third section of the Communist manifesto) is the **destruction of private property,** not that there is private property (which directly says is a step forward on numerous occasions). The destruction comes because the property relations have become incapable of capturing the potential in industrial society.

    I would say that the Marginalist Revolution happens when it does for a specific reason – and it is one that Marx understood pretty well.

    Socialism, then for Marx, is actually the return of the bourgeois revolution under a changed condition and it is the repetition of an anachronistic standpoint that leads to the “farce” of 1848 and the return of all the things that Bourgeois Society expected – most notably, the State (and to me, it is no surprise that I can trace one of the founders of the Modern Anarcho-Capitalist movement to the 1848 farce – Gustav Molinari! It makes sense – the State is the **Scandal** of Bourgeois Society, which was supposed to be a **stateless society**)

    So it is not that Marx held the labor theory of value but rather he showed the limits of such a conception. In fact, to actually prove Marx wrong, which is probably the reason you are reading these texts, so to have ammunition for pesky pinkos, you would actually want to show that labor **does adequately** capture society. But then you would be Ricardo (who had doubts and added an appendix to the last edition of his famous text).

    He gave an immanent (within) dialectical (self-reflexive) critique of the labor theory of value because the proletarian socialist movement had politicized society based on the value of labor (so in the Holy Family, Marx notes that a critique of political economy is possible because of Proudhon choosing the “side” of labor). If a political agent had done something else, Marx and Engels would have focused on something else (and they did earlier in their careers – they focused on the crisis in Hegelianism, which reflected the contradictory character of the dialectic – both affirming and negating – following Hegel’s death).

    In other words, Bohm-Bawerk’s criticism at the very best would prove Marx’s point but since the contradiction gets rendered at a purely academic level, rather than with respect to a political agent, it doesn’t have the same effect. He didn’t know what he was supposed to be critiquing but he knew Marx was bad and evil.

    In fact, the limits of labor as value are mentioned in these very chapters you are giving an outline of. The transformation into prices is the expression of the undermining of Bourgeois Relations – they are expressions of the over-production of value but more importantly, the “social property” called Capital i.e. the ability of Capital to make claims on the social product as “labor.”

    In orthodox Marxism, this was simply described as the contradiction between “bourgeois relations” (labor as value) and industrial production (this is capital, which is the undermining of such relation – it is not Capital in the Austrian sense of savings going into the investment into higher-order goods for the production of consumer goods – Capital for Marx is rather a contradiction within bourgeois social relations, literally past labor making claims on present labor and therefore, a very new phenomenon i.e. post-industrial revolution).

    In your recent talk – “Markets and Prices” – you mentioned slogging through Vol 1, so I know that you will either soon come across this passage (in the “Fetishism of Commodities”) or have recently – when discussing

    “When I state that coats or boots stand in a relation to linen, because it is the universal incarnation of abstract human labour, the absurdity of the statement is self-evident. Nevertheless, when the producers of coats and boots compare those articles with linen, or, what is the same thing, with gold or silver, as the universal equivalent, they express the relation between their own private labour and the collective labour of society in the same absurd form.”

    The (in)famous contradiction pointed out between Vol 1 and Vol 3 – that commodities exchange at labor in vol 1 but exchange at capital in vol 3 – **is the point.** As Marx mentions with respect to Cherbuliez in Vol 1, can you get the negation of labor as value on the basis of labor?

    Again, if Marx merely explained the economy, then to the workers movement, the answer would not be socialism actually. It would rather be that the worker is morally wronged – they are exploited and should be given correct, bourgeois justice. For exploitation is a crime in Bourgeois Society.

    But that is not the goal of the text – it is rather to show how labor has become *non-identical* with society and that reflects the anachronistic character of social relations with respect to the potential in society.

    That Kapital comes across as an economic theory today, is because we do not have a proletarian socialist movement and so this critique, falls on deaf ears. And also, doesn’t work then!

    Perhaps, your strongest argument might be “Well, then Marx’s Capital is irrelevant for today.”

    In which case, I would completely agree, because the object of critique for Marx – a proletarian socialist movement – does not exist. Instead, we just have various discontented youths tailing the Democratic Party and other kinds of Statism. The Left has become a Right.

    A more technical aside:
    “Because, in the Marxian framework, wages do not affect prices, wages and surplus value are effectively just dividing up a fixed pie. ”

    – It is not that wages don’t affect prices . Also, this is more aimed at Ricardo’s description of prices.

    In fact, Marx will get into how differences in wages will affect the ordinary rate of profit and that can affect prices.

    Also, you are leaving out the most important part – constant capital. Wages and Surplus value, are the divisions that get passed down from Smith (Smith’s “mistake” as it is unfortunately put in Vol 2., whereas in Smith’s time, there really wasn’t constant capital yet).

    The issue is rather past labor – constant capital – that can make claims on the present and can make claims as “labor.” The reason this gets obscured, is because constant capital is the property of someone, so the “phenomenal” form of the domination of the past on the present takes the form, to the worker, of your boss (but without a boss, it would still be there, obviously – see the Critique of the Gotha Program).

    But most importantly, what does he call wages?

    Variable – ***capital.*** Note bene!

    It follows by the most basic readings of Marx that an increase in the minimum wage is an ***accumulation of capital.*** I don’t know how many Marxists I have to tell this to. But of course it increases unemployment! Karl Marx would tell you so!

    Best

    D. Eisenberg.

  2. For an example of the ideology, note the following statement in Chapter 1

    “The category of cost-price, on the other hand, has nothing to do with the formation of commodity-value, or with the process of self-expansion of capital…The investigation will show, however, that in capitalist economics the cost-price assumes the false appearance of a category of value production itself.”

    Again, all of Marx’s critique of political economy is the immanent (within) dialectical (self-reflexive) critique of the categories of political economy, not because they are wrong in a simple sense or propaganda but rather, that they have become anachronistic. So the price being the “cost-price,” reflects rather a bourgeois ethic of equality (see the Engels quote from above). But this view has become non-identical (does

    This is why history matters.

    Otherwise, if Marx was merely saying “XYZ economist is wrong,” it would actually be an anachronistic critique. It would not account for the qualitative change between not only Smith’s time but even Ricardo’s time (reflected in the additional chapter he added on Machinery at the end of his life). Marx would contradict his own points about the dialectic of history and the negative dialectic post industrial-revolution.

    So Ricardo, in his debates with Say (that a very young Engels write on), takes a “cost-price” view of the value of a commodity, whereas Say takes a more subjective theory of value. Both, as followers of Adam Smith, reflect the breakdown in the (Marx’s focus on Ricardo against Say, more has to do with how Ricardo tries to preserve Adam Smith in a very changed condition. It is not an affirmative in a mere sense and Marx seems to prefer Say’s phenomenal definition of Capital).

    Engels critique of both is that they presuppose property and competition into existence, whereas these accomplishments of humanity (including competition, a kind of co-operation – thank god we have developed the ability for people to voluntarily co-operate and respect each other’s private property).

    This is going to be behind the statement about the tendency for capitals to equalize.

    Tendency is an expression of contradiction – while Vol 3 might be quite dry and dense, there is supposed to be something “scandalous” about this view of the world

    It actually expresses the destruction of property even(!).

    But instead, polemics against Marx tend to accuse him of contradicting his own theory!

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