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.

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