Marx’s Strategy
K. Marx’s Strategy
In conclusion, and the light of the foregoing results, we must raise the question why Marx chose to present to the public a first volume turning on non-equilibrium exchange rates proportionate to labor inputs and differing profit rates from industry to industry? Why, in particular, did he set up his argument so that the rate of surplus value – in effect the wage rate – appears to be a datum of the analysis?
The answer is that the market analysis of economic process failed to reveal to the unwary the true source of aggregate profits in excess or unpaid labor time exerted over and above the labor time absorbed in the production of wages. Indeed, the observation apparent to everyone that goods do not exchange according to ratios dictated by relative labor input and that the profit rate, as distinct from the profit- wage ratio, is everywhere the same (in equilibrium) mitigates against the Marxian interpretation of the source of profits. For direct validation of this interpretation by empirical reference requires that the higher the labor-capital ratio in the case of a given commodity, the greater will be its value in exchange, to assure the generation of an appropriately high surplus for its producers.
Marx sought to forestall such anticipated criticism. This he did by first laying down a pattern of exchange rates consistent with his interpretation of the source of aggregate profit, fully aware that this pattern did not describe equilibrium relative prices. If then it could be demonstrated that there existed certain constancies between the value structure and the price structure – that set of equilibrium prices satisfying the principle of profit-rate equality – his interpretation of the source of profits might be more effectively defended. The constancies in question (as we know) were that “the sum of the profits in all spheres of production must equal the sum of the surplus values, and the sum of the prices of production of the total social product must equal the sum of its values” (above, p. 20). Marx’s dual task was carried out in Capital 1 and the materials appearing in Capital 3, respectively. The ordering of topics between the volumes was simply a matter of strategy; for Marx did not posit a labor theory of equilibrium prices, since he did not assume a uniform organic composition of capital, and he did not deny standard classical allocation analysis. We shall now let Marx speak for himself. 31
Marx explains his procedure in Capital 1 itself. His starting point is the assump- tion that labor is the source of surplus value: “The labour which is set in motion
theorem is inapplicable considering the second scarce resource recognized in the model, for Marx himself emphatically rejected Adam Smith’s notion that the prices of commodities ultimately resolve themselves entirely into wages, profit, and rent – a position which implies ultimate commodities produced by pure labor (and land, which we have set aside for present purposes). Marx clearly rejected a single scarce-factor model (MECW 37: 826f). 31 For this perspective on Marx’s strategy, see for example Sweezy 1942: 125–6; Meek 1967: 144; Morishima 1973: 85–6; Baumol 1974, 2001; Oakley 1976: 414–16, 1979. For a different interpretation of Marx’s strategy, flowing from a presumption that the initial proportionality of prices and values does reflect an equilibrium condition (above, note 16), see Morishima and Catephores 1975.
49 by the total capital of the society, day in, day out, may be regarded as a single
K. Marx’s Strategy
collective working day. . . . With a given length of this working day . . . the mass of surplus value can only be increased by increasing the number of labourers, i.e., of the labouring population. The growth of population here forms the mathematical limit to the production of surplus value by the total social capital. On the contrary, with a given amount of population, this limit is formed by the possible lengthen- ing of the working day” (MECW 35: 311–12). Given his assumption regarding the generation of surplus by living labor – which (to use the standard Marxian termi- nology) has its source in the difference between the exchange value and the use value of “labor power” – it ought to be the case that commodities exchange in full equilibrium in such proportions as assure the generation of surplus proportionate in each case to the direct labor input; the higher the labor input relative to the constant capital input, the higher should be the price in order to generate a higher surplus value, since “the masses of value and of surplus value produced by different capitals – the value of labor power being given and its degree of exploitation being equal – vary directly as the amounts of the variable constituents of these capitals, i.e., as their constituents transformed into living labour power” (311). But this “clearly contradicts all experience based on appearance . . .” (above, p. 18). All this is repeated in Capital 3. That equal capitals yield differing profit rates followed from the assumption which (Marx pointed out) “has been the basis of all our analyses so far, namely that commodities are sold at their values” (MECW 37: 152); the direct labor input determines the magnitude of the surplus earned on any given capital, and this will vary from product to product (148). On the other hand: “If
a capital, consisting in per cent of 90 c + 10 v , produced as much surplus value, or profit, at the same degree of exploitation as a capital consisting of 10 c + 90 v ” – if profit rates were everywhere uniform – “it would be as plain as day that the surplus value, and thus value in general, must have an entirely different source than labour, and that political economy would then be deprived of every rational basis.” Now profit-rate equality indeed characterized equilibrium in the competi- tive capitalist system: “There is no doubt . . . that aside from unessential, incidental and mutually compensating distinctions, differences in the average rate of profit in the various branches of industry do not exist in reality, and could not exist without abolishing the entire system of capitalist production” (152). The apparent refutation of the theory seemed to be quite disastrous: “It would seem, therefore, that here the theory of value is incompatible with the actual process, incompatible with the real phenomena of production, and that for this reason any attempt to understand these phenomena should be given up.” As Marx declares a little later, all the phenomena related to competition “seem to contradict the determination of value by labour time as much as the nature of surplus value consisting of unpaid surplus labour. Thus everything appears reversed in competition. The final pattern of economic relations as seen on the surface, in their real existence and conse- quently in the conceptions by which the bearers and agents of these relations seek to understand them, is very much different from, and indeed quite the reverse of,
50 Value and Distribution
their inner but concealed essential pattern and the conception corresponding to it” (206–7). 32
Marx, following his general methodological rule whereby “all science would be superfluous if the outward appearance and the essence of things directly coincided” (804; also letter to Engels, 27 June 1867, MECW 42: 390), set himself the task of proving that rejection of his conception of the source of profit by reference to the empirical “fact” of profit-rate equality or the empirical “fact” that equilibrium
prices are not proportional to labor input would be quite illegitimate. 33 He set out to explain why exchange rates disproportionate to values, and surplus in each industry disproportionate to direct labor input, did not constitute proof against his interpretation of the source of profit – namely, that profit “is due to the aggregate exploitation of labour on the part of the total social capital” (MECW 37: 169; emphasis added). We allude again, of course, to the “Transformation” procedure, specifically the proposition that the total sum of profits generated throughout the system, at equilibrium prices diverging from values, constitutes nothing more than aggregate surplus value (generated by the total employed labor force) distributed between industries to assure profit-rate equality. The identification of the two aggregates – both, of course, estimated in money – amounts to a “macro-economic” defense of the Marxian notion of the source of profits in that the surplus generated in a particular sector does not necessarily remain to be enjoyed by that sector’s capitalists; rather the labor-intensive sectors (the bakers) subsidize the capital- intensive sectors (the cotton manufacturers):
Thus, although in selling their commodities the capitalists of the various spheres of production recover the value of the capital consumed in their production, they do not secure the surplus value, and consequently the profit, created in their own sphere by the production of these commodities. What they secure is only as much surplus value, and hence profit, as falls, when uniformly distributed, to the share of every aliquot part of the total social capital from the total surplus value, or total profit, produced in a given time by the social capital in all spheres of production (157). 34
Marx’s defense of his approach towards the source of profits tends to leave a misleading impression. It suggests that distribution is determined by the value analysis and the results then utilized in the derivation (in a causal sense) of prices – specifically that a mass of surplus value exists prior to the formation of prices which is then allocated among the various industries to yield prices assuring profit-rate equality.
32 A further complication arose from the circumstance that the profit rate could not be identified with the rate of surplus value: “The rate of profit is regulated by laws of its own, which permit,
or even require, it to change while the rate of surplus value remains unaltered. All this obscures more and more the true nature of surplus value and thus the actual mechanism of capital” (MECW 37: 815). 33 Marx did not disdain direct reference to empirical evidence for some purposes. For example,
he appealed to the statistics as proof of a narrow range of deviations of market prices from costs of production (MECW 37: 847). 34 See also MECW 37: 156–7 for the same identity expressed in terms of the average profit rate
51 This is a misconception; for prices are not causally derived from values on the
K. Marx’s Strategy
basis of a solution to distribution obtained within the value scheme. This is most clearly seen if we posit a permanent alteration in the pattern of demand involving an expansion of demand for a labor-intensive commodity and a corresponding contraction in demand for a capital-intensive commodity. The effect will be upward pressure on general wages and a fall in total profits. Absolutely nothing need be said about the value scheme, although if we wish, we can undertake an interpretation of the reduced profit in terms of a reduced “degree of exploitation” manifested in
a lower rate of surplus value. Marx himself was not deceived: “if prices actually differ from values,” he wrote, “we must, first of all, reduce the former to the latter, in other words, treat the difference as accidental in order that the phenomena may
be observed in their purity, and our observations not interfered with by disturbing circumstances that have nothing to do with the process in question” (MECW 35: 176n). Clearly, Marx does not allude here to causal analysis, since it is a reduction of prices to values, not the reverse, to which he refers. 35
The second identity upon which Marx insisted between the value and price schemes is that of total value and total price. The argument runs entirely in value terms; we actually find the disconcerting statement that “in order to forestall useless difficulties” we shall work in terms of a commodity produced by capital of average composition “so that its price of production and its value coincide” (840). Attention then focuses upon the constancy of the value of the net output of this commodity in the face of changing distribution: “The entire value component of the commodity representing the newly added labour . . . does not depend upon its division into wages, profit and rent. . . . The specific commodity value . . . thus produced and determined by the quantity of labour objectified in it constitutes the limit . . . for the dividends which the labourer, capitalist and landlord will be able to draw from this value in the form of revenue – wages, profit and rent” (840–1). Again: “In reality, the commodity value is the magnitude which precedes the sum of the total values of wages, profit and rent, regardless of the relative magnitudes of the latter” (849). Marx’s objective here was to counter the view that wages, profit, and rent represent “the constituent elements which, in combination or taken all together, are the source of the regulating price (natural price, prix n´ecessaire) of the commodities themselves,” or alternatively expressed, that “wages, profit and rent are three independent magnitudes of value, whose total magnitude produces, limits and determines the magnitude of the commodity value.”
We can also approach the matter in terms of Marx’s Ricardian analysis of a wage change, namely the inverse wage-profit relation (above, Section G). An increase in the wage rate leaves the price of the commodity produced by capital of average
35 Alternatively expressed: A certain sum of profit is generated at equilibrium prices in each industry, and these individual sums are aggregated. Given this aggregate, it may be (ideally)
possible to work backwards – as it were from a Capital 3 to a Capital 1 scheme – observing the redistribution of profits that emerges at a price structure reflecting labor values, and assuring
52 Value and Distribution
organic composition unaffected at its value (and the lower profit rate thus calculated is applied to all other goods). The constancy of the price of the “average” commodity at its value is taken to imply the identity of total value and total price (MECW 37: 200, cited above, p. 39). But, while total value and total price are identified, Marx’s real concern was the identity of net value (“the labour set in motion by the variable capital”) – constant capital set aside – and net price (wage and profit costs) in his
derivation of the inverse profit-wage relationship. 36 Now to maintain the identity of total (net) value and total net income (or the corresponding magnitudes in the case of the commodity produced by mean factor proportions) is simply to imply the use of a measure of value which assures constancy in the value of the aggregate to be shared in the face of altered distribution. We can easily appreciate why Marx should follow the formal procedure devised by Ricardo rather then rely directly upon a simple description of the competitive reaction to the assumed disturbance to wages – a reaction which yields the lower rate of profit as the outcome of a process of reallocation of capital between industries without reference to the commodity produced by capital of average organic composition. For Marx insisted that competition “does not create the level [of the average profit rate] which is established when equalization has been achieved;” rather “[t]he average rate of profit sets in when there is an equilibrium of forces among the competing capitalists. Competition may establish this equilibrium but not the rate of profit which makes its appearance with this equilibrium” (851–2). But to the na¨ıve and unwary it might appear that competition in some sense “created” or was responsible for profit (and its level) and disprove the alleged source of total profits in surplus labor. For all that,
the actual market process does not turn upon the mental structure; 37 and Marx appreciated that a general wage increase will generate a response by capitalists to profit-rate differentials without reference to the predetermination of the general profit-rate implied by the formal analysis.
Most significantly, the impression left by Marx’s procedure is that given both the wage rate (implied by the rate of surplus value) and the configuration of output it is possible to predict the average profit and the set of equilibrium prices that assures profit-rate equality. It is a false impression, as we have explained, in that both the wage and the output levels are not data but endogenous variables of the Marxian system.
A complexity remains to be noted. Total surplus value includes rent and inter- est as well as profit. Yet, the profit-rate equalization process, so central to the Transformation, entails the industrial capitalists’ allocative decisions and these,
36 It is also a feature of the “new solution” to the Transformation (see notes 12 and 29) that Marx’s identity of the sum of prices and sum of values should be modified to refer to the sum
of the prices of the net product (value added) and the sum of the values of the net product (Howard and King 1992a: 278). 37 Ricardo was aware of this and justified the fundamental theorem notwithstanding an inability to define the necessary properties of the ideal measure in principle, or to discover an appropriate candidate in practice (Hollander 1979: 238–47).
53 one supposes, are based on profit estimates excluding contractual rent and interest.
L. Concluding Comment: The Baumol-Samuelson Exchange
Marx insists upon this latter feature in the Economic Manuscripts and is troubled by it (see Chapter 10.B). There is much of importance on some of the implications of the contractual payment of interest in the discussion in Capital 3 of “profit of enterprise” as we shall see in Chapter 14.H.