Letter: Profit's source (1985)

Letter to the Editors from the September 1985 issue of the Socialist Standard

Profit’s source

Dear Editors.

I would like to take you up on the subject of value-in-use and value-in-exchange. Value-in-use is a misnomer. It ought to be called value-in-production. A product is not only a useful object, it is a thing of value. A product has a value of its own apart from its value-in-exchange. If value-in-exchange is so called because its value arises in the process of exchange, then the other value ought to be called value-in-production because its value is created in the process of production.

How do we arrive at the value of the product that is created in the process of production? Like this. Let us suppose the product to be yarn The first thing necessary for the making of yarn was the raw material. 20 lbs of cotton let us say. No elaborate enquiry as to the value of the cotton is needed seeing that the capitalist has bought the cotton in the open market at its value, which we will suppose to be 20 shillings. Let us assume that the wear and tear of the spindle (for the purposes of this argument "spindle" is a comprehensive term for all the instruments of labour used in the process) amounts to 4 shillings. Let us further assume that the workers' wage amounts to 6 shillings.

Let us now consider the total value of the product, the 20 lbs of yarn:

                     20 lbs cotton = 20 shillings

                     Spindle =    4 shillings

                     Workers' wage = 6 shillings 

Value-in-

production     20 lbs yarn =  30 shillings

But as soon as the product, the 20 lbs of yarn. enters into the process of exchange it undergoes a change in its magnitude of value. Why? Because the industrial capitalist cannot sell the 20 lbs of yarn for 30 shillings: there would be no profit.

The industrial capitalist does not sell the 20 lbs of yarn for 30 shillings, he sells it for 30 shillings plus 3 shillings profit. And to whom does the industrial capitalist sell? He sells to the wholesaler. The wholesaler buys the 20 lbs of yarn for 33 shillings and sells it for 33 shillings plus 3 shillings profit (36 shillings). And to whom does the wholesaler sell? He sells to the retailer. The retailer buys the 20 lbs of yarn and sells to the consumer for 36 shillings plus 3 shillings profit (39 shillings).

Underlying the difference between the value-in-production and the value-in-exchange of the 20 lbs of yarn is the fact that the cost of production of the 20 lbs of yarn is only 30 shillings, whereas the market price of the same 20 lbs of yarn is 39 shillings, a difference of 9 shillings There is nothing mysterious about this matter. When the value-in-production of the 20 lbs of yarn is only 30 shillings, there are only three things involved (20 lbs of cotton, spindle, workers' wage). But when the value-in-exchange amounts to 39 shillings, there is something else involved — profits.

It is only in the capitalist economic system, where people are allowed to sell a commodity at a price higher than its cost of production, that a commodity has two different prices. 30 shillings and 39 shillings. In a socialist society, where people are not allowed to sell a commodity in order to make a profit, the cost of production and the market price of a commodity such as 20 lbs of yarn will be the same (30 shillings).

We see plainly that profit does not arise in the process of production. Profit can only be obtained in the process of exchange by selling a commodity at a price higher than its cost of production: the higher the price above the cost of production, the higher the profit. This is the means whereby the capitalist class grow rich.

Of course, that has nothing whatever to do with what Aristotle calls economics: rather, it is what he calls chrematistics, the art of making money. Call it what you will — chrematistics. capitalism. Thatcherism or the profit motive - it is a gigantic swindle.

Alex Martin

Bo'ness, Scotland

Reply:

Our correspondent challenges the usefulness of the distinction we drew in the article on "Commodity Production" in the May Socialist Standard between use-value and exchange-value. According to him, there are indeed two kinds of value, namely, value-in-production (cost of production) and value-in-exchange (market price), and he seems to be suggesting that what we called "use-value" is a misnomer for what he calls "value-in-production". But from his description of this latter this is not at all the case. Even if we accepted his definitions, the concept of use-value — to refer to the usefulness of a good, to its ability to satisfy some particular human need or desire — would still be needed.

So we now have three kinds of value: use-value, "value-in-production", and exchange-value. As a matter of fact, although we only mentioned two kinds in our article. Marx himself used three since for him exchange-value was not entirely identical with value. For him. the exchange value (or price, once money had evolved) of a commodity was the expression in exchange of a value possessed by the commodity even when it was not actually being exchanged. This pre-existing value was determined, according to Marx who adhered to the labour theory of value, by the amount of socially-necessary labour time spent on producing it from start to finish.

Alex Martin has read Marx, since his example of cotton being spun into yarn is taken from section 2 of chapter VII ("The production of surplus value") of volume I of Capital — hence its somewhat out-of-date character. He has, however, forgotten one thing: that although Marx used shillings and pence his analysis is really in terms of labour time. In fact Marx assumes that "twenty-four hours' labour, or two working-days, are required to produce the quantity of gold represented by 12 shillings" — and that the cotton spinners work a 12-hour day (as was the case in the 1860s). This was a purely arbitrary assumption, as Marx himself noted, and Alex Martin can adopt another one if he wants to. But if we are to make sense of our correspondent's example, he must at least tell us how long it takes his workers to transform the 20 lbs of cotton into 20 lbs of yarn. As he omits to do so we will assume (but only so as to be able to compare his example with Marx's) that this takes 12 hours. So we get (since, on our assumption. 1 shilling = 2 hours labour):

Amount                  Price         Value

20lbs cotton           20s.           40 hrs labour

Spindle                     4s.             8 hrs labour

Wages                      6s.           12 hrs labour 

20 lbs of yarn        30s.            60 hrs labour

The first point to notice is that, with this example. it would indeed be the case that if the capitalist sold the 20 lbs of yarn for 30 shillings he would make no profit. But if we look more closely at the example we can see why: the workers have worked 12 hours and have been paid as wages the equivalent of 12 hours' labour. So what Alex Martin's example, when converted into labour-time. shows is that if workers were paid the full value of what they produced then there would be no profits for the capitalists. We are now well on the way to identifying the real source of the capitalists' profits.

As Marx pointed out, wages are the price of a commodity (mental and physical energies) which the workers sell to the capitalists on the open market, and the value of this commodity is determined in the same way as that of any other, namely, by the amount of labour-time spent on producing it from start to finish. In the event this will be the total of the values of all the goods and services workers consume to recreate their daily, weekly or monthly working energies.

But, Marx went on, this is not necessarily, and in fact is not at all. the same as the amount of labour a worker can add to a product in a day, week or month. Workers are capable of producing considerably more than their upkeep, but in accordance with the laws of the market are only paid as wages the value — the full value — of their labour power, the commodity they have to sell.

In his example, Marx assumes that workers are able to reproduce the value of their daily labour power in 6 hours; they are thus paid 3 shillings (not 6 shillings, as in Alex Martin's example) as wages. Nevertheless, since 3 shillings is the price of a day's worth of labour power, they are required to work for a whole day and produce 12 hours' worth of value. The difference between what they are paid for their labour power (3 shillings) and the total new value they have added to the raw material provided (6 shillings) is pocketed by the capitalist who employs them and owns the finished product, the 20 lbs of yarn. Thus, contrary to what Alex Martin claims, even though the capitalist sells the 20 lbs of yarn at 30 shillings which market conditions will normally oblige him to do. since the selling price of a commodity is not something decided arbitrarily by the seller, as Alex Martin seems to think — he will make a profit, of 3 shillings. And this profit will have arisen from the process of production since its source is the 6 hours of unpaid labour of the workers.

To deal with Alex Martin's introduction of the wholesaler and the retailer — who do indeed share in the unpaid labour of the workers — what, simplifying, happens is this: the industrial capitalist sells the yarn to the wholesaler for. say, 28 shillings, the wholesaler sells it to the retailer at 29 shillings, and the retailer to the public at 30 shillings. In this way the total profit of 3 shillings comes to be shared between the industrial and merchant capitalists without the commodity ever having to be sold above its value.

Even though this does not affect the question as to whether profit arises in the process of production or in the process of exchange, we must point out that in the real capitalist world, due to the averaging of the rate of profit between the different branches of industry individual commodities do not. except accidentally, sell at their labour-time values but at what Marx called their "price of production" (cost of production plus average profit). In a developed capitalist economy the equation value price is only valid at the level of the whole economy, not at that of each individual productive unit.

Quite apart from the argument derived from the labour theory of value, the suggestion that profit arises in the process of exchange is logically absurd because it overlooks the fact that every capitalist is a buyer as well as a seller. This means that what he gained from selling his products above their value he would lose by having to buy his raw and other materials above their value. It would just be as if. to take Alex Martin's example of selling a commodity at 30 per cent above its value (at 39 shillings instead of 30 shillings), the standard of price and the amount of labour-time represented by a shilling were to be changed by being correspondingly devalued. Which would still leave us with the mystery of the origin of profit.

There is a way out for Alex Martin: to argue that all sellers except workers sell their commodities above their value. But, once the resulting devaluation of the standard of price had been taken into account, this would lead us back to Marx's conclusion that the source of profit is the workers being paid less than the value of what they produce. That, in other words, profit arises in the process of production, not in that of exchange.

Finally, we cannot accept Alex Martin's view that in socialism commodities will sell at their "cost of production" (in Marx's terms, at their value minus profit). Socialism will be a society in which commodity-production will have been completely abolished. In other words, goods will not only no longer be produced for profit, but they will not be produced for sale either, they will be produced for use, solely to satisfy human needs. They will thus have neither a value nor a price (exchange-value) but will simply be things capable of satisfying some human need or desire — simple use-values, if you like.

Editors.