Source of Profit - Article Example

Where do Profits Come From? Karl Marx, the greatest living exponent of the economical theory of Modern Socialism. Surplus value is a concept created by Karl Marx in his critique of political economy, where its ultimate source is claimed to be unpaid surplus labor performed by the worker for the capitalist, serving as a basis for capital accumulation. According to Marx, the gigantic increase in wealth and population from the 19th century onwards was mainly due to the competitive striving to obtain maximum surplus-value from the employment of labor, resulting in an equally gigantic increase of productivity and capital resources. To the extent that increasingly the economic surplus is convertible into money and expressed in money, the amassment of wealth is possible on a larger and larger scale. In Marxs value theory, the extra or surplus-value has a specific meaning, namely the amount of the increase in the value of capital upon investment, i.e. the yield regardless of whether it takes the form of profit, interest or rent (Wikipedia, 2006a). The problem of explaining the source of surplus value is expressed by Frederick Engels as follows: In the analysis which Marx makes of the economic forms within which the process of the circulation of commodities takes place, money appears as the final form. "This final product of the circulation of commodities is the first form in which capital appears. As a matter of history, capital, as opposed to landed property, invariably takes the form at first of money; it appears as moneyed wealth, as the capital of the merchant and of the usurer... Marx then investigates the processes by which money is transformed into capital, and finds, first, that the form in which money circulates as capital is the inversion of the form in which it circulates as the general equivalent of commodities. The simple owner of commodities sells in order to buy; he sells what he does not need, and with the money thus procured he buys what he does need. The incipient capitalist starts by buying what he does not need himself; he buys in order to sell, and to sell at a higher price, in order to get back the value of the money originally thrown into the transaction, augmented by an increment in money; and Marx calls this increment surplus-value. "Whence comes this surplus-value? It cannot come either from the buyer buying the commodities under their value, or from the seller selling them above their value. For in both cases the gains and the losses of each individual cancel each other, as each individual is in turn buyer and seller. Nor can it come from cheating, for though cheating can enrich one person at the expense of another, it cannot increase the total sum possessed by both, and therefore cannot augment the sum of the values in circulation. (...) This problem must be solved, and it must be solved in a purely economic way, excluding all cheating and the intervention of any force — the problem being: how is it possible constantly to sell dearer than one has bought, even on the hypothesis that equal values are always exchanged for equal values?" (Engels, 1877). Total surplus-value in an economy is basically equal to the sum of net distributed and undistributed profit, net interest, net rents, net tax on production and various net receipts associated with royalties, licensing, leasing, certain honorariums etc (Wikipedia, 2006a). The Circuit of Capital The Circuit of Capital shows how capital depends for its operations not just on exploitation in the immediate workplace, but on the continuous integration of a whole series of social sites and activities--sites and activities which, however, may also become scenes of subversion and insurgency. Marxs original account describes only two moments in the circuit of capital. In production, labor power and means of production (machinery and raw materials) are combined to create commodities. In circulation, commodities are bought and sold; capital must both sell the goods it has produced, realizing the surplus value extracted in production, and purchase the labor power and means of production necessary to restart the process over again (Cyber-Mar, 198-288). Karl Marx offers some valuable insights on capital as a circuit. Indeed, he saw capital as ‘expanding value’ throughout production, distribution and exchange. The system converts money into labor power, raw materials, commodities and then back into money for profit and reinvestment. This circuit can be expressed as a general formula. This formula basically shows the basic conversion of money into profit (or a loss). The owner of capital decides to invest money in the production of a particular commodity. This is achieved through investments in commodities (C), otherwise known as raw materials, labor power (LP) and means of production (buildings, land, machinery). These are otherwise known as the ‘factors of production’; and their relative importance varies between sectors. Some circuits are more labor intensive, others more technology intensive. Together, C + LP + MP lead to production (P) and the eventual creation of new commodities (C’) for sale in the marketplace. In theory, these should be sold at a price that is higher than the aggregate costs of production. M’ should therefore be higher than M, enabling a profit to be accumulated and enabling more capital to be reinvested in the circuit (The Dynamics of Capitalist Societies, N.D). Simple commodity production Vs capitalist commodity production Simple commodity production is a term coined by Frederick Engels to describe productive activities under the conditions of what Marx had called the "simple exchange" of commodities, where independent producers trade their own products. The use of the word "simple" does not refer to the nature of the producers or of their production, but to the relatively simple and straightforward exchange processes involved (Wikipedia, 2006b). On the other hand, the capitalist mode of production refers to the socio-economic base of capitalist society which developed in Western Europe at the end of the eighteenth century, and later extended to most of the world. It is characterized by the predominant private ownership of the means of production, distribution and exchange in a mainly market economy. The owners of capital are the dominant capitalist class (bourgeoisie). The working class (proletariat) who do not own capital must live by selling their labor power in exchange for a wage (Wikipedia, 2006c). Absolute Vs Relative Surplus Value According to Marx, absolute surplus value is obtained by increasing the amount of time worked per worker in an accounting period. Marx talks mainly about the length of the working day or week, but in modern times the concern is about the number of hours worked per year. In many parts of the world, as productivity rose, the working classes forced a reduction in the workweek, from 60 hours to 50, 40 or 35 hours; but casualisation and flexibilisation of working hours also permits higher paid workers to work less. Relative surplus value is obtained mainly by reducing wages — this can only go to a certain point, because if wages fall bellow the ability of workers to purchase their means of subsistence, they will be unable to reproduce themselves and the capitalists will not be able to find sufficient labor power. The second way is by reducing the cost of wage-goods by various means, so that wage increases can be curbed. Increasing the productivity and intensity of labor generally, through mechanization and rationalization, yielding a bigger output per hour worked (Wikipedia, 2006a). The attempt to extract more and more surplus-value from labor on the one side, and on the other side the resistance to this exploitation, are according to Marx at the core of the conflict between social classes, which is sometimes muted or hidden, but at other times erupts in open class warfare and class struggle. One will often hear a Marxist talking about class struggle, but in reality there is a big difference between class conflict and class struggle. A class conflict may exist and fester for a long time, without classes being able and willing to organize any mass struggle actively. Employers may provoke a strategic fight in order to demolish workers militancy in a critical area; or, mass revolts of workers are sparked off by moral outrage about some event, or because conditions have become intolerable. No easy generalizations are possible, especially because the moods, feelings and inclination to act of social classes can change very rapidly; bursts of mass action can take most people by surprise (Wikipedia, 2006a). “The wealth of a society, in which a capitalistic mode of production is dominant, appears as a huge complex of commodities, with the single commodity as its elementary form” (Bax, 349-354). Profits are key to understanding the dynamics of capitalist society. Marx noted: “While capital ...must strive to tear down every barrier...to exchange and conquer the whole earth for its markets, it strives on the other side to annihilate this space with time”. In other words, capitalists try to speed up the delivery of raw materials, the actual production process, and in turn the distribution of commodities to global markets. All of which helps keep the circuit of capital running smoothly and profitably. Capitalists use geography to achieve these goals. They will tend to locate and re-locate productive activities where costs are lowest and profit is greatest. Work Cited Bax, E.B. Leaders of Modern Thought: XXIII. Karl Marx, In: Modern Thought, December 1881, Vol.III, No.12, p.349-354. Cyber-Mar, Chapter 5- Circuits In: Cycles and Circuits of Struggle in High Technology Capitalism. (1999) pp 198-288. 30 Nov. 2006 Engels, F. (1877) Capital and Surplus Value In: Anti-Dühring by Frederick Engels 1877 Part II: Political Economy. 30 Nov. 2006 The Dynamics of Capitalist Societies, Lecture 1 – ‘The Geographical Foundations of Capitalism’. 30 Nov. 2006 Wikipedia, (2006a) Surplus value, 24 November 2006. Wikimedia Foundation, Inc. 30 Nov. 2006 Wikipedia, (2006b) Simple commodity production 1 September 2006. Wikimedia Foundation, Inc. 30 Nov. 2006 Wikipedia, (2006c) Capitalist mode of production, 24 November 2006, Wikimedia Foundation, Inc. 30 Nov. 2006 Read More