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Finally, Marx also devoted a few pages in this section to a discussion of the relation between interest-bearing capital, mercantile (or commercial) capital, and industrial capital. Marx argued that interest-bearing capital and mercantile capital are derived from or secondary to the basic form of industrial capital. In other words, the analysis of interest-bearing capital and merchant capital follow that of industrial capital, and the incomes received by interest-bearing capital and merchant capital are parts of the total surplus-value produced by industrial capital (or, more precisely, by the labor employed by industrial capital). Marx returned in the next section, to be discussed below, to a more extended discussion of mercantile capital and mercantile profit, yet another form of distribution of the total amount of surplus-value.


d. Mercantile capital

We come now to an important part of the 1861-63 manuscript which has only recently been published in English in Volume 33 of the Marx-Engels Collected Works. As a direct continuation of the section on "Revenue and its Sources,” in which mercantile capital was briefly discussed, two of the next three sections present a more extended discussion of mercantile capital and the mercantile profit derived from it.

Mercantile capital is capital which functions solely in the sphere of circulation, i.e. performs only the pure circulation functions of buying and selling, and activities related to buying and selling (accounting, advertising, credit, etc.). Since according to Marx's theory, these functions by themselves are "unproductive", i.e. produce no value or surplus-value (see Moseley 1992, Chapter 2, for a further discussion of Marx's concept of unproductive labor), the question arises of how this mercantile capital receives a profit, since of course it must, just like any other capital.

Marx's brief answer to this question in this manuscript is that mercantile capital receives its profit as a deduction from the surplus-value produced by industrial capital. As with the other forms of the distribution of surplus-value already discussed, the total amount of surplus-value is determined prior to the deduction of mercantile profit and is taken as given in the analysis of mercantile profit. Marx briefly sketched the general mechanism through which this deduction of mercantile capital from the total surplus-value occurs - through the difference between mercantile capital's buying price and its selling price. This difference enables mercantile capital to recover its cost and to collect the average rate of profit. (Further details of this pricing mechanism are presented Part 4 of Volume 3 of Capital, which will be discussed below).


e. Capital and Profit

In between the two sections on mercantile capital just discussed is a section entitled "Third Chapter. Capital and Profit". According to Marx's plan since the Grundrisse, the part of his book on Capital in General would consist of three chapters: (1) The Production Process of Capital; (2) The Circulation Process of Capital; and (3) Capital and Profit. (MECW.29. 511-16; MECW. 40. 287). At this point in his year-long detour from his draft of Chapter 1 and into the "Theories of Surplus-Value" and the various aspects of the distribution of surplus-value discussed above, Marx decided to write a draft of Chapter 3. (Marx began a separate notebook with the draft of this chapter and wrote "Ultimum" on the front of this notebook, suggesting that this was more of a final draft than the exploratory work of the previous and succeeding notebooks; see MECW.33. 506, note 4). As we shall see, this draft remained primarily at the level of abstraction of capital in general, although the determination of the average rate of profit was touched upon because it related directly to the subject matter of this chapter. A likely explanation of this decision to write a draft of "Chapter 3" was to explore the relation between this chapter and the various aspects of the distribution of surplus-value that Marx had been working on.

The subject that receives the most attention in this draft of "Chapter 3" on "Capital and Profit" is the tendency of the rate of profit to decline (MECW.33. 104-45), which Marx calls "the most important question in this section" (MECW.33. 91). The chapter also includes an important discussion of the "two transformations of surplus-value into profit,” which is more relevant to our subject of the distribution of surplus-value.

In the first transformation, surplus-value is transformed into profit, i.e. is related to the total capital invested, and not just to variable capital which, according to Marx's theory, is the source of surplus-value. As a result of this transformation, the source of surplus-value is obliterated and therefore not recognized by the agents of capitalist production. In this first transformation, the magnitude of surplus-value does not change; it is simply related to the total capital, rather than just to variable capital. This first transformation eventually became the subject of Part 1 of Volume 3 ("The Transformation of Surplus-Value into Profit and of the Rate of Surplus-Value into the Rate of Profit").

Profit - as first transformation of surplus-value - and the rate of profit in this first transformation - expresses surplus-value in proportion to the individual overall capital of which it is the product - treating all parts of this overall capital as uniform, and relating to the whole of it as a homogeneous sum of value, without regard to the organic relation in which the different components of this capital stand towards the creating of its surplus-value. (MECW.33. 100)

Profit, as we are originally faced with it, is thus the same thing as surplus-value, save in a mystified form, though one that necessarily arises from the capitalist mode of production. Because no distinction between constant capital and variable capital can be recognized in the apparent formation of the cost price, the origin of the change in value that occurs in the course of the production process is shifted from the variable capital to the capital as a whole. (C.III. 127)

In the second transformation, profit is transformed into average profit and the average rate of profit is established. In this second transformation, the total profit is distributed among individual capitals in such a way that the profit appropriated by each individual capital is proportional to the magnitude of the individual capital, rather than equal to the amount of surplus-value actually produced by that capital (or rather by the labor employed by that capital). This redistribution of surplus-value is accomplished by means of the formation of a general or average rate of profit, which is equal to the total profit divided by the total capital, and prices of production based on this average rate of profit. In this second transformation, the amount of profit appropriated by each capital changes, which further obscures the origin of surplus-value. This second transformation eventually became the subject of Part 2 of Volume 3 ("The Transformation of Profit into Average Profit").

On the basis of the first transformation, therefore, a second takes place, which no longer affects the form alone, but also the substance itself, in that it alters the absolute magnitude of profit... This absolute magnitude of profit was untouched by the first transformation. (MECW.33. 97)

In this second transformation to average profit, Marx again emphasized clearly that this average rate of profit is determined as the ratio of the total surplus-value to the total capital.

The empirical, or average, profit can therefore be nothing other than the distribution of that total profit (and the total surplus-value represented by it or the representation of the total surplus labor) among the individual capitals in each particular sphere of production, in equal proportions ... It therefore represents the result of the particular mode of calculation in which the different capitals divide among themselves aliquot parts of the total profit. What is available for them to divide among themselves in only determined by the absolute quantity of the total profit or the total surplus-value. (MECW.33. 99; emphasis added)

Empirical or average profit ... relates the total amount of surplus-value, hence the surplus-value realized by the whole capitalist class, to the total capital, or the capital employed by the whole capitalist class, in exactly this way - it relates the total surplus-value as profit to that total capital of society, without regard to the organic relation in which the individual components of that total capital have participated directly in the production of that total surplus-value ... (MECW.33. 100)

The average rate of profit is nothing other than the total surplus-value related to and calculated on this total capital. (MECW.33. 104)

Marx also commented that a closer investigation of the determination of the average rate of profit and the consequent distribution of surplus-value "belongs to the chapter on competition". (MECW.33. 94 and 101). Therefore, Marx was still thinking at this time that this third chapter on capital and profit would be concerned only with capital in general. However, the close relation between the "two transformations" of surplus-value into profit required at least some discussion of the average rate of profit in this chapter.
f. Outlines of Volume 3 of Capital

As mentioned above, after completing the draft of "Capital and Profit", Marx returned to a further discussion of merchant capital, which has already been discussed in section (2.d) above. Marx then returned to the "Theories of Surplus-Value" and wrote three concluding sections on Ramsay, Cherbuliez, and Jones. Marx's main emphasis in these sections was the glimpses by these authors of the crucial distinction between constant capital and variable capital and the falling rate of profit that followed from this distinction. For our purposes, the most important parts of these sections are two draft outlines of what later became Volume 3 of Capital, which are contained as digressions in the sections on Cherbuliez and Jones.v These draft outlines will be discussed in the reverse order in which they appear (about 50 printed pages apart) because the second outline is more general than the first and is clearly presupposed in the latter.

The second outline is for what Marx calls the third "section" (instead of the third "chapter") on "Capital and Profit". This outline is as follows:

1. Conversion of surplus-value into profit. Rate of profit as distinguished from

the rate of surplus-value.

2. Conversion of profit into average profit. Formation of the general rate of profit. Transformation of values into prices of production.

3. Adam Smith's and Ricardo's theories of profit and prices of production.

4. Rent. (Illustration of the difference between value and price of production.)

5. History of the so-called Ricardian theory of rent.

6. Law of the fall of the rate of profit. Adam Smith, Ricardo, Carey.

7. Theories of profit...

8. Division of profit into industrial profit and interest. Mercantile capital.

Money capital.

9. Revenue and its sources. The questions of the relation between production and distribution also to be included here.

10. Reflux movements of money in the process of capitalist production as a whole.

11. Vulgar economy.

12. Conclusion. "Capital and wage labor". (MECW.33. 346-47; TSV.I. 415-16)

The most striking feature of this outline is that the contents of "Capital and Profit" is now radically expanded compared to the draft of just a few months before. It no longer includes just aspects of capital in general (the first transformation of surplus-value into profit and the falling rate of profit), but also includes all the aspects of competition or the distribution of surplus-value which Marx had been working on for the previous year: the general or average rate of profit and prices of production, rent, interest, merchant profit, and revenue and its sources. Evidently, Marx's work on these subjects over the previous year convinced him that they should be included in the third "section" on "Capital and Profit", rather than waiting for a subsequent volume on competition. (Oakley 1983, pp. 82-110, also emphasizes Marx's expansion of the content of "Capital and Profit" to include these aspects of competition and the distribution of surplus-value, besides capital in general.) We can see that this outline is very close to the final version of Volume 3 of Capital, which Marx wrote in the following two years (1864-65).vi

The other outline is a more detailed outline of "the second chapter of Part 3, on 'Capital and Profit, where the formation of the general rate of profit is dealt with" (MECW.33. 299). (Note that this title presumes the more general outline just discussed of the entire "Part" 3 on "Capital and Profit".) Excerpts from this outline are:

1. Different organic composition of capitals ...

2. Differences in the relative value of the parts of different capitals which do not arise from their organic composition...

3. The result of those differences is diversity of the rates of profit in different spheres of capitalist production.

4. For the total capital, however, what has been explained in Chapter 1 holds good. In capitalist production each capital is assumed to be a unit, an aliquot part of the

total capital. Formation of the general rate of profit. (Competition).

5. Transformation of values into prices of production...

6. To take up the Ricardian point: the influence of general variations in wages on the general rate of profit and hence on prices of production. (MECW.33. 299; TSV.I. 415-16; emphasis added)

Again, this outline is very close to the final version of Part 2 of Volume 3, with (1)-(3) the subjects of Chapter 8, (4)-(5) the subjects of Chapter 9, and (6) the subject of Chapter 11. (Chapters 10 and 12 are not included in this outline). Note especially (4), which is a very important methodological comment and which clearly supports the main point of this paper that the total amount of surplus-value is determined prior to its distribution and is not affected by this distribution. Note also the second sentence of (4), which clarifies the important point that the individual capitals which Marx often used as illustrations in Volume 1 of Capital (i.e. in "capitalist production") is not an actual individual capital per se, but instead is an ideal representative of the total capital ("is assumed to be a unit, an aliquot part of the total capital"), and thus that the real subject of Volume 1 is this total capital or capital in general. Finally, note also that the "competition" in parentheses clearly indicates that the theory of the equal rates of profit and prices of production belongs at the level of abstraction of competition.

Thus we can see that Marx's year-long study of various aspects of the distribution of surplus-value clarified Marx's thinking on these issues, and led Marx to include them in "Capital and Profit,” along with the aspects of capital in general already included. The next major manuscript written by Marx in 1864-65 was the first and only full draft of Volume 3 of Capital, as we know it today. Evidently, Marx's work on the 1861-63 manuscript clarified Marx's thinking to such an extent that he was now ready to write this volume. The fact that this first draft, although certainly not polished for publication, is as clear and complete as it is, is further evidence of the clarity Marx achieved while working on the 1861-63 manuscript. To this 1864-65 manuscript of Volume 3 we now turn.
3. Volume 3 of Capital

As indicated by Marx's outline just discussed, Volume 3 of Capital is primarily concerned with an analysis of the distribution of surplus-value into its component parts - first the equalization of profit rates across branches of production and then the further division of surplus-value into merchant profit, interest, and rent at the level of abstraction of competition. A full discussion of Volume 3 is obviously beyond the scope of this paper. Instead, a brief survey will be presented of each of the specific aspects of the distribution of surplus-value which are discussed in Volume 3 with two main objectives: (1) to provide further support for the main point of this paper - that the total amount of surplus-value is taken as a predetermined magnitude in this analysis of the distribution of surplus-value in Volume 3; and (2) to examine in greater detail Marx's specific theories of the determination of the particular forms of surplus-value. The versions of these specific theories presented in this draft of Volume 3 are Marx's final and most complete versions of these theories.


a. Equal rates of profit and prices of production. (Part 2)vii

Marx's theory of the equal rates of profit and prices of production presented in Volume 3 may be briefly summarized as follows (see Moseley 1993 for a more thorough discussion): First, the general rate of profit is determined as the ratio of the total amount of surplus-value produced (S) to the total capital invested © in the capitalist economy as a whole. Algebraically:

(1) R = S / C

As discussed many times above, the total amount of surplus-value (S) is determined at the prior level of analysis of capital in general and is taken as given in the analysis of the distribution of surplus-value. The total amount of capital invested © is also taken as given, as the initial sum of money (M) in Marx's "general formula for capital", M - C - M'.

The prerequisite [of prices of production] is the existence of a general rate of profit ... (C.III. 257)

The general rate of profit is determined in fact (1) by the surplus-value that the total capital produces, (2) by the ratio of this surplus-value to the value of the total capital, (3) and by competition, but only is no far as this is the movement through which the capitals invested in particular spheres of production seek to draw equal dividends from this surplus-value in proportion to their relative size. (C.III. 489)

Next, the price of production for each commodity (Pi) is then determined according to the following equation:

(2) Pi = Ki + R Ci

where Ki is the costs of production of the commodity (the sum of variable capital and constant capital consumed) (a flow variable) and Ci is the total stock of capital invested in the given industry. In this determination of prices of production, the general rate of profit (R) is taken as given, as determined in the prior analysis of capital in general. The magnitudes of individual capitals invested and consumed in each industry (Ci and Ki) are also taken as given, as the sums of money which initiate the circulation of capital in each industry, as is the total capital in the analysis of capital in general. Therefore, prices of production are determined by adding the average profit to the given costs of production for each commodity, with the average profit determined as the product of the general rate of profit and the given capital invested in each industry, and the general rate of profit determined by the prior analysis of capital in general. In this way, the total amount of surplus-value is distributed in such a way that all industries receive the same rate of profit.

The formula that the price of production of a commodity = k + p, cost price plus profit, can now be stated more exactly; since p = kp' (where p' is the general rate of profit), the price of production = k + kp'. (C.III. 265) [Marx is here ignoring the difference between the stock and flow of capital; FM]

The prices of production arise from an adjustment of commodity values under which, after the reimbursement of the respective capital values consumed in the various spheres of production, the total surplus-value is distributed, not in the proportion in which it is produced in the individual spheres of production, ... but rather in proportion to the size of the capitals advanced... It is the constant tendency of capitals to bring about, by competition, this adjustment of the total surplus-value which the total capital produces ... (C.III. 895)

The average profit included in the price of each commodity (= R Ci) will in general not be equal to the amount of surplus-value actually contained in that commodity, and hence the price of production of each commodity will in general not be equal to its value or proportional to the labor-time required to produce it. However, the total amount of surplus-value is not altered by this redistribution of surplus-value among the individual industries according to the total amount of capital invested. Taken all together, the divergences of individual profits from individual surplus-values balance out so that the sum of individual profits is equal to the total amount of surplus-value (S), as determined in the Volume 1 analysis of capital in general. (See Moseley 1993a for an algebraic derivation of this result.)

We have thus an absolute limit for the value component that forms surplus-value ... ; this is determined by the excess of the unpaid portion of the working day over its paid portion, i.e. by the value component of the total product in which this surplus labor is realized. If we call this surplus-value whose limits are thus determined profit, when it is calculated on the total capital advanced, as we have already done, then this profit, considered in its absolute amount, is equal to the surplus-value, i.e. it is just as regularly determined in its limits as this is. It is the ratio between the total surplus-value and the total social capital advanced in production. If this capital is 500 ... and the surplus-value is 100, the absolute limit to the rate of profit is 20 percent. The division of the social profit as measured by this rate among the capitals applied in the various different spheres of production produces prices of production which diverge from commodity values and which are the actual averages governing market prices. But this divergence from values abolishes neither the determination of prices by values nor the limits imposed on profit by our laws... This surcharge of 20 per cent ... is itself determined by the surplus-value created by the total social capital, and its proportion to the value of this capital; and this is why it is 20 percent and not 10 percent or 100 percent. The transformation of values into prices of production does not abolish the limits to profit, but simply affects its distribution among the various particular capitals of which the social capital is composed ... (C.III. 999-1000; emphasis added)

In my previous paper (Moseley 1993a), I have responded to the widely-accepted neo-Ricardian criticism of Marx's theory of prices of production, that this theory is logically incomplete and contradictory. One of the two main points in my response is that the neo-Ricardian interpretation of Marx's theory does not recognize the distinction between capital in general and competition and the prior determination of the general rate of profit in the analysis of prices of production.viii If Marx's logical method is followed, including this key premise of the prior determination of the general rate of profit, then there is no logical error in Marx's theory of prices of production.


b. Commercial profit (Part 4)ix

Commercial capital is what Marx called mercantile capital in the 1861-63 manuscript, i.e. capital engaged in the functions of buying and selling (and related activities). As discussed above, the unique feature of commercial capital is that the circulation functions which it performs do not produce value or surplus-value. Therefore, the question arises of how commercial capital receives a profit if it produces no surplus-value. We have already seen above that Marx's general answer to this question is that commercial capital receives its profit as a deduction from the surplus-value produced by industrial capital and that the mechanism through which this deduction of surplus-value takes place is the difference between the "wholesale" price at which commercial capital purchases commodities from industrial capital and the "retail" price at which commercial capital sells commodities to consumers. The total amount of surplus-value is taken as given and remains the same, but it must now be shared (at equal rates of profit) with commercial capital:




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