Capitalism’s road to riches (1985)

From the December 1985 issue of the Socialist Standard

Question: How do capitalists go about the business of making all that money — the legitimate' capitalists, that is? One answer takes into account the fact that they invest their capital, either in direct ownership of production plants or merchandise emporiums; or indirectly through building portfolios in the stock exchanges. In either case the process revolves around commodity ownership. Anything that can be extracted or captured from land, waters, or skies that is potentially saleable at a profit is processed and manufactured with that in mind — commodity production and distribution.

In other words, the only way potential profits and riches can be created is by manufacturing or processing items of wealth through the application of human labour power to natural raw materials. But how is that profit finally obtained? After all, what capitalists have immediately on conclusion of the manufacturing process are warehouses bulging with merchandise — products for which they have no personal need. How do they convert those wares into money and profits?

If we go to conventional wisdom we learn that the costs of production are totalled, to which a percentage is added which will constitute their profit. The merchandise will then be shipped to wholesalers, dealers, jobbers, retailers, or whoever, and each individual entrepreneur involved with the sale of the commodities will, in turn, add a percentage of hoped-for profit, thus raising the cost of the commodity to the ultimate consumer in a purely arbitrary way.

There is, too, an added emphasis that clever merchandising talent helps to separate the men from the boys, to enable those with the good business heads get the better of the rest through wheeling-and-dealing. Also, it must be admitted, is the acknowledgement of an element of luck — being in the right venture and the right place at the right time. But the bottom line on how one is supposed to earn profits is: add a percentage to one's costs.

To be sure, capital invested in production is involved in the business of increasing commodity value through the manufacturing process. And such capitalists, in fixing their selling prices, must add to the costs of the commodities that they need to purchase from other production capitalists. They add those expenditures to the other costs in their production process, and then tack on a figure representing the average profit in their industry to arrive at what Marx termed their ' price of production".

But the merchandising capitalists, who are concerned only with the marketing of finished commodities, would have no reason to jack up the cost of the item since marketing adds nothing to its value. True, they do appear to be doing just this and that is exactly how it shows up in standard bookkeeping. But it is all mere semblance of reality; the merchandisers get their profit by sharing in the surplus value that has been added during the manufacturing process.

To whom do they sell?

The population of industrial and trading nations are made up, generally, of two major elements: capitalists, or employers of labour; and the working class. While there are members of the population that seemingly fit neither category professionals who work on their own for fees, artists, insignificantly tiny business people who hire no help — but their totals are minuscule as against those of the main segments and their income aggregates would be more in the category of working-class levels than capitalist.

Looking at the working class as customers for commodities, the maximum they can afford to consume would have to amount to the total of their wage/salary income. They can hardly spend more without getting into deep trouble which, to be sure, a noticeable percentage of them manage to do from time to time, egged on by the flood of huckstering in the press and over the broadcast media. But there is one outstanding flaw in the argument that profits arise from sales to the wage and salaried section of the population. If that were so, would it not seem practical for the employers of labour to force frequent pay raises in order that the workers might have more to spend on profit-generating merchandise? It should be apparent that the driving rationale of capitalist production is to produce more cheaply in order that commodities can be sold for less with similar, or greater, profit. So the working class, whose labour power applied to raw materials is the source of all wealth, is forever being forced to modify their wage increases while increasing productivity — which is equivalent to accepting a wage cut, even if indirectly. That is the bottom line for the employer.

Profiting from one another?

Now what about that capitalist market? It goes without saying that the capitalist class is the consuming class, although not because of the total values of the necessaries and the luxuries that they buy for themselves whether for simple, personal use or for purposes of conspicuous consumption. The bulk of capitalist purchasing is in production goods needed to operate the industries that turn out and distribute commodities. There are tons of ore and metals of all sorts extracted from ore; there are forests and timber and lumber, crude and refined oil. coal and gas. So individual capitalists indeed seem to get rich from selling to one another.

But we run into another problem when we dig below the surface of what is happening in all that commercial activity. Certainly capitalists do get richer when marketing is enjoying boom times but do those riches arise directly from the sales? The trouble with that theory is simply that it is not possible to sell without also buying. Even a manufacturer of men's trousers must buy buttons or zippers and thread and equipment and machinery of all sorts. So what the wily sales staff would gain for the trousers capitalist would be lost when the equally shrewd people from the firms that supply the accessories and equipment go to work.

There is no question about capitalists needing markets in order to make money. But the profits do not emanate from sales. All that is happening in the area of marketing is a re-distribution of profits that have already been produced. That fact was noted a long time ago by the American author and scientist Benjamin Franklin who wrote: 

Trade in general being nothing else but the exchange of labour for labour, the value of all things is . . . most justly measured by labour.

(The Works of B. Franklin &c. edited by Sparks. Boston. 1836. VoI.ll. p.267.) (Quoted in Capital, Vol I. p.59 footnote. Kerr).

In other words Franklin, like others before him, anticipated Marx in observing that value arises from labour not exchange. Marx, like all scientists, took hold of something already known and added to it, in this case, exposing the legalised swindle of surplus value and wage slavery.

The source of the profit

Actually, it should not take too much reflection to understand why it seems to be so difficult to detect the fallacy in the theory that profits arise from the sale of the commodity. In a society based on production for profit it is even perplexing to most that the question need be raised. From the time we are old enough to comprehend, the proposition that profit is made by adding a percentage to cost, at the selling stage, is seen as self-evident and is taught in the institutions of learning from primary grades on up through university level. Even that common assertion, especially by discount merchandisers, that they buy for less and consequently are enabled to sell for less than their competition, does not alter the fact that their profit is supposed to be traced to their mark-up from cost.

And yet, on dose examination, the concept breaks down. Try asking yourself this question, for example: would you be willing to pay £7,000 or more for a shiny new car at a showroom if you were told that a part of that value was added in the dealer's business office simply by putting pencil to paper or fingering the keys of a calculator? The truth is that every penny of value had been added to that car when it had been inspected at the factory for shipment to the dealer.

Every penny of profit that is garnered by the various entrepreneurs involved with the sale of the car comes from the surplus value that had been extracted from the workers engaged in its production. The production capitalists cannot gobble up all the profit that is left after the expenses associated with plant operation have been subtracted.

To leave nothing for commercial capitalists they would be compelled to market the commodity themselves, thus tying up capital that would be better earmarked for production. It makes more economic sense for industrial capitalists to share the loot with merchant capitalists. This they do by selling their commodities to the merchandising capitalists below their full "price of production"; the merchant's mark-up brings the final selling price which the consumer pays up to a level representing costs plus the average rate of profit in full. But this profit has been created in the manufacturing process as surplus value. When the commodity in which it is embodied is sold this surplus value already created by the labour of the working class is converted into a monetary form: profit. Profits are made in the process of production and only realised on the market.

Harry Morrison

(World Socialist Party of the United States)