Profit-Rate Equalization and the Transformation

B. Profit-Rate Equalization and the Transformation

The Grundrisse, we found, emphasizes capital flows between industries to assure uniform profit rates – an aspect of the process of “competition” – as in the reference

1861–1863 I: Surplus Value – Profit, Rent, and Interest

to the “withdrawal of capital” from a particular branch of industry and “the result- ing favourable relationship between demand and supply” (MECW 28: 364; cited Chapter 8, p. 255). In the correspondence with Engels of August 1862, “competition between capitals” is indeed defined as “transfer of capital or withdrawal of capital from one trade to the other” (MECW 41: 396). This notion of competition is true also of the Economic Manuscripts as is clear from Marx’s answer to the query, why “must the price be so high that it = the cost price, advances [plus] average profit? Because of the competition of capitals in the different trades and the transfer of cap- ital from one trade to another. That is, as the result of the action of capital upon capi- tal” (MECW 31: 542). The following passage expresses the output adjustments with splendid clarity: “A rate of profit . . . above or below the average . . . will be forced down or raised up by competition to the general level, through the entry of outside capitals into the privileged branch, or in the opposite case the exit of local capitals – capitals which are settled in that branch – out of the latter. The level of the rate of profit thereby falls in the first case, and rises in the second” (MECW 33: 94–5). 1

Of particular importance is the criticism of Rodbertus 1851 for maintaining that “competition” between sectors generates money prices proportionate to labor values: “Rodbertus seems to think that competition brings about a normal profit or average profit or general rate of profit by reducing the commodities to their real value; i.e., that it regulates their price relationships in such a manner that the correlative quantities of labour time realised in the various commodities are expressed in money or whatever else happens to be the measure of value” (MECW

31: 260). Precisely the same objection is directed against Ricardo: What competition within the same sphere of production brings about, is the deter-

mination of the value of the commodity in a given sphere by the average labour time required in it, i.e., the creation of the market value. What competition between the different spheres of production brings about, is the creation of the same general rate of profit in the different spheres through the levelling out of the different market values into market prices, which are cost prices that are different from the actual market val- ues. Competition in this 2nd instance by no means tends to assimilate the prices of the commodities to their values, but on the contrary, to reduce their values to cost prices that differ from these values, to abolish the differences between their values and cost prices.

It is only this latter process which Ricardo considers in [his] Chapter IV and, oddly enough, he regards it as the reduction of the prices of commodities – through com- petition – to their values, the reduction of the market price (a price which is different from value) to the natural price (the value expressed in terms of money). This blunder,

1 Marx specifies that his concern is with the industry not the individual capitalist: “The surplus profit, or the short-fall of profit, an individual capitalist encounters in a particular branch

(district) of capital investment, does not belong to this discussion at all. What is involved here is rather the profit of capital in all the particular branches of production, or in every particular sphere of capital investment conditioned by the social division of labour – for every capital placed in average or normal conditions” (MECW 33: 95). Elsewhere Marx refers to “the special advantages which individual capitalists in the same sphere of production may enjoy” (MECW

B. Profit-Rate Equalization and the Transformation 295 however, arises from the error he committed already in Chapter 1 “On Value,” where

he identified cost price and value, this in turn was due to the fact that at a point where as yet he was only concerned with explaining “value,” where he, therefore, as yet, only had to deal with “commodity,” he plunged in with the general rate of profit and all the conditions arising from the more developed capitalist relations of production. (432)

The opening proposition has been dealt with in some detail in Chapter 1.F. The 1861–63 documents provide impressive accounts of the “tendency” towards

a uniform profit rate in terms of the demand-supply mechanism involving not only redistributions of resources, with corresponding output changes, but also – in fact to a greater extent – the allocation of net investment between industries. They immediately bring to mind the corresponding analyses by Walras (1954 [1874]: 225, 276, 305, 308) and by Marshall (1920: 592–3, 411–12, 418–19, 533). The complexities of the process, which Marx highlighted rather than played down, involve requisite knowledge of going rates which allow comparisons to be made of relative profitability; and the length of time particularly “high” returns must rule before responses to them occur:

The difference in the rates of profit in the various spheres can only be discerned by comparison of the market prices in the different spheres, that is, the market prices of the different commodities, with the cost prices of these different commodities. A decline in the rate of profit below the ideal average in any particular sphere, if prolonged, suffices to bring about a withdrawal of capital from this sphere, or to prevent the entry of the average amount of new capital into it. For it is the inflow of new, additional capital, even more than the redistribution of capital already invested, that equalises the distribution of capital in the different spheres. . . . Apart from the fact that this act of equalisation requires time, the average profit in each sphere becomes evident only in the average profit rates obtained, for example, over a cycle of 7 years, etc., according to the nature of the capital. Mere fluctuations – below and above – if they do not exceed the average extent and do not assume extraordinary forms, are therefore not sufficient to bring about a transfer of capital, and in addition the transfer of fixed capital presents certain difficulties. Momentary booms can only have a limited effect, and are more likely to attract or repel additional capital than to bring about a redistribution of the capital invested in the different spheres. (MECW 32: 460)

There are further mobility problems peculiar both to supply and demand con- ditions: “in addition, the speed of the equalisation process, whether it is quicker or slower, depends on the particular organic composition of the different capitals (more fixed or circulating capital, for example) and on the particular nature of their commodities, that is, whether their nature as use values facilitates rapid withdrawal from the market and the diminution or increase of supply, in accordance with the level of the market prices” (460–1).

There remains to note the central role accorded credit in the adjustment of values to cost price, terms which are understood as in the Grundrisse: 2 “The equalisation

2 “Production costs can be defined as prices determined by the average profit – that is, the price of the capital advanced + the average profit – since this profit is the condition for reproduction,

1861–1863 I: Surplus Value – Profit, Rent, and Interest

of values to cost prices occurs only because the individual capital functions as an aliquot part of the total capital of the whole class and, on the other hand, because the total capital of the whole class is distributed amongst the various individual spheres according to the needs of production [sic]. This is brought about by means of credit. Credit . . . makes this equalisation possible and facilitates it . . . ” (518; also 31: 434– 5). Marx cites the famous accounts by Ricardo relating to the role of bankers and others in the discount business (1951–73 1: 88–90), passages that happen to play down the obstacles in the way of capital movement between industries, to which Marx himself paid particular attention. And Ricardo’s advance beyond Smith in “his more precise exposition of the migration of capital from one sphere to the other,” is attributed to the fact that “the credit system was more highly developed in his time . . . ” (MECW 31: 434).

So much for the mechanism of adjustment. 3 The character of the profit rate as a sort of statistical average considering the actual deviations that exist at any time contrasts with the interest rate that can be taken as a known price:

The real profit deviates from the ideal average level, which is established only by a con- tinuous process, a reaction, and this only takes place during long periods of circulation of capital. The rate of profit is in certain spheres higher for some years, while it is lower in succeeding years. Taking the years together, or taking a series of such evolutions, one will in general obtain the average profit. Thus it never appears as something directly given, but only as the average result of contradictory oscillations. It is different with the rate of interest. In its generality, it is a fact which is established daily, a fact which the industrial capitalist even regards as a precondition and an item of calculation in his operations (MECW 32: 459). 4

Now it emerges that the profit-rate uniformity principle – based squarely on appropriate capital movements between industries and allocations of net invest- ment – does not extend to the entire surplus value but only to the excess over the contractual “advance” of interest (and rent): “That surplus labour, unpaid labour, constitutes just as essential an element of the capitalist production process as paid labour, is expressed here by the fact that factors of production – land and capital – distinct from labour have to be paid for. . . . Parts of surplus value – interest and

spheres [of production]” (MECW 32: 513). As for value: “Finally, the real amount of labour (objectified and immediate labour) it costs to produce a commodity, is its value. It constitutes the real production cost of the commodity itself. The price which corresponds to it is simply the value expressed in money.” 3 Marx pays tribute to Corbet 1841 for an appreciation of the equalization-of-profits process as

a long-run tendency (MECW 33: 240). 4 The average or general rate is said to exist in reality “only as the determining tendency in the

movement of equalisation of the real different rates of profit, whether of individual capitals in the same sphere or of different capitals in the different spheres of production” (MECW 32: 459). But the inclusive reference to “individual capitals” conflicts with the position described in note 1.

C. The Transformation Aborted 297 rent – appear here as costs, as advances made by the exploiting capitalist” (512).

The contrast with profit proper is then outlined: [A]verage profit, like the production price itself, acts rather as a determining ideal and

at the same time appears as surplus over and above the advances made and as a price which is different from the cost price properly speaking. Whether or not [average profit is obtained] . . . determines whether more or less of the capital existing in this or that sphere [of production] is withdrawn or invested; it also determines the ratio in which newly accumulated capitals flow into these particular spheres, and finally, to what extent these particular spheres act as buyers in the money market. On the other hand, as interest and rent, the separate portions of surplus value in a quite definite form become preconditions for the individual production prices and are anticipated in the form of advances (512–13).

The narrow version of “profit” in the analysis of profit-rate uniformity contrasts with the broad version – inclusive of rent and interest – in the analysis of the falling profit rate (see Section D).

The principle at hand is confirmed in the remark that “[e]ach component of the price of a commodity, in so far as it appears as an advance . . . ” – as do rent and interest – “ceases to represent surplus value as far as the industrial capitalist is concerned” (509; emphasis added), whereas it is precisely the industrial capitalist who determines the allocation of capital between sectors. Again, it is “average profit” net of rent and interest advances that is said to constitute “a condition of supply, of the very creation of the commodity” (478), and of this profit element Marx writes further that: “ . . . the industrial capitalist rightly regards this surplus, this part of surplus value – although it constitutes an element of production – as a surplus over his costs; he does not regard it as belonging to his advances in the same way as interest and rent. In critical moments, profit too confronts the capitalist in fact as a condition of production, since he curtails or stops production when profit disappears or is reduced to a marked degree as a result of a fall in prices.” Without specifying the culprits – conceivably J. S. Mill is intended – he rejects “the nonsensical pronouncements of those who consider the different forms of surplus value to be merely forms of distribution; they are just as much forms of production.”