## The Rate of Profit (2)

### National Income Does Not Equal National Output

The second reason that many estimates of the rate of profit are wrong is that they are not estimates of the rate of profit at all, but only the rate of surplus value, or as with the case of the rate of profit calculated by Doug Henwood, I have used several times, they only measure surplus value against variable capital plus fixed capital. In calculating the rate of profit, Marx (though it should be emphasised also Engels who, with the assistance of Cambridge mathematician Samuel Moore, worked over the numbers, and put together much of the data, in editing Volume III of Capital) built on the analysis conducted in Volume II of Capital, in relation to the rate of surplus value.

 The production of some commodities like ships require large capital amounts of capital to be advanced for long periods, before it is returned with the sale of the commodity.  Other commodities are produced and sold within a few days.  The total capital laid out in both cases may actually be the same, but the capital actually advanced very different.  The higher the rate of turnover, of the capital, the less  capital need be advanced, and so the rate of profit is higher.
As a consequence, the rate of profit, calculated by Marx, does not just relate the surplus value to the capital-value laid out to produce it, but also takes into account the consequence of the rate of turnover on the value of the capital advanced rather than laid out. The capital laid out – in short the total paid for wages, materials etc., during the year - is always a multiple of the capital actually advanced, for the simple reason that the capital advanced is turned over several times during the year. The higher the rate of turnover, the lower the capital advanced need be, and so the higher the real rate of profit calculated against it.

 Where commodities are produced and sold quickly the same capital advanced keeps returning to be laid out once more to produce surplus value.
The rate of surplus value, as Marx first set out, in Volume I of Capital, is the relation of surplus value to the variable capital, which is the same proportion as the surplus product to the necessary product, the surplus labour to the necessary labour. But, in Volume II, Marx sets out the role of the Rate of Turnover of Capital on determining this rate. In summary, Marx describes the way in which the more times the capital turns over in a year, the higher the annual rate of surplus value. If the particular capital keeps having the capital they have laid out, to buy labour-power, returned to them quickly, because its commodities are produced and sold rapidly, the less capital has to be advanced to set in motion any given amount of capital during the year. I will be dealing with this reason as to why the estimates of the rate of profit are wrong in a later part.

But, also in this analysis in Volume II, of Capital, Marx deals at length with another aspect that impacts on the way the rate of profit is currently calculated. Many estimates of the Rate of Profit, use the National Income data provided in the US by the BEA, or else use National Expenditure data, which amounts to the same thing. Where, National Income data is used, one practice, is to deduct wages and salaries from the total in order to obtain a figure for profits, rents, taxes and interest, or what has also been called “property income”, by some, as a proxy for surplus value. Then, this latter figure is divided by the figure for wages and salaries to obtain a “Rate of Profit.”

 Fixed capital such as machines has to form part of the advanced capital-value against which the rate of profit is calculated, but fixed capital comprises only a small part of the constant capital whose value is transferred to the value of social production.  A major element is all of the raw materials, auxiliary materials, semi-finished materials, manufactured components and so on.
But, of course, this is not a rate of profit in Marx's terms s/c+v, but only an estimate of the rate of surplus value s/v. Where the surplus value is measured against the variable capital, and the fixed capital, as Henwood does, this is still not a rate of profit of the kind that Marx calculates. Fixed capital comprises only those elements of constant capital that are not fully consumed in the production process – buildings, machines, vehicles and so on – but a part of whose value is transferred to the end product in their wear and tear. Marx sometimes refers to this portion of the capital as K, and to obtain an accurate measurement of the rate of profit the surplus value certainly does have to be measured against it, as well as the variable capital, because as Marx points out, although this capital does not transfer all of its value to the commodity, it has to be present in its entirety for production to occur. Capital has to lay this capital out in order to generate the surplus value. But, the constant capital comprises far more than just this fixed capital. A much larger proportion of the value of commodities is comprised of the circulating constant capital – the raw materials, semi-finished materials, manufactured commodities that comprise components, the auxiliary materials and so on.

 Adam Smith was confused about the social product. He resolved total national output into national incomes, i.e. v+s.  That approach has been adopted by later economists  like Keynes.  But, the value of national output, like the  value of any commodity is made up of c+v+s.  National Output  is not the same as National Income or National Expenditure.
But, none of the estimates of national income or national expenditure take account of this element. In other words, the value of national income (v+s) is not equal to the value of national output (c+v+s). This reality is missed by most economists, because they have accepted the false view propounded by Adam Smith that these two amounts are identical. But, Marx is scathing of Smith, and those who followed him, calling this proposition absurd. The idea is contained in what Marx calls Smith's “Trinity, Formula”, whereby the value of commodities is comprised of the factor inputs – wages, profits, interest, rent. In response to the argument that this omits the constant capital – though Smith never himself uses the term constant capital and confuses it with “fixed capital” - Smith argues that the constant capital, being itself a commodity is also comprised of these same elements, so that everything ultimately resolves itself into the value created by labour, which is then divided between the workers, capitalists and landlords.

But, Marx points out that this argument is ridiculous, because not only can each of these components of capital be divided into these categories listed by Smith, they also comprise constant capital themselves! Smith has only succeeded in transferring us “from Pontius to Pilate” as Marx puts it. The idea that the total value of output is resolvable just into these various incomes/revenues is only true if what is measured is the “Consumption Fund” of the economy for the year. In other words, if we precisely limit it to the value of the new product of the year, which is equal to v+s. But, the actual value of the year's product is not just the newly created value. It also includes the value of the constant capital used in its production!

As Marx puts it,

“Now Adam Smith’s first mistake consists in equating the value of the annual product to the newly produced annual value. The latter is only the product of labour of the past year, the former includes besides all elements of value consumed in the making of the annual product, but which were produced in the preceding and partly even earlier years: means of production whose value merely re-appears — which, as far as their value is concerned, have been neither produced nor reproduced by the labour expended in the past year. By this confusion Adam Smith spirits away the constant portion of the value of the annual product.”

Its for that reason, that Marx begins his analysis of the exchange of the national social product, by referring to the Tableau Economique of the Physiocrats, which begins not with this year's production, but with last year's harvest. That is because it is precisely last year's harvest that provides the basis for the constant capital used up in, and whose value is transferred to, this year's value of output! Only on the basis of the value of the total output, and not just this year's newly added value (v+s) can you obtain the value of c+v+s, and thereby be able to calculate s/c+v in order to obtain the actual rate of profit!

In reality, the constant capital never appears in the data for incomes, because it never comprises an income for anyone in this year – neither wages, interest, profit nor rent. It has already done so in previous year's when it was itself produced. It merely transfers its value to this year's product, and rather than forming any part of the mass social exchange of capital and revenue between Department 1 (means of production) and Department 2 (means of consumption), it is simply an exchange of capital with capital that occurs within Department 1 itself.

Later in Volume II, Marx illustrates this. He sets out the situation in relation to the two Departments showing the value of output in both, and the relation between the two.

“Recapitulation: Total annual commodity-product:

I. 4,000c + 1,000v + 1,000s = 6,000 means of production
II. 2,000c + 500v + 500s = 3,000 articles of consumption.”

So, it can be seen here that Department 1 employs £4000 of constant capital (materials etc.) to produce the means of production it requires for its own production, and to produce the means of production required by Department 2. This is, of course, as stated earlier, material that was produced in the previous years, and which provided incomes for workers, capitalists, etc. during that period. Out of this year's total production of means of production, £4,000 worth is not available for exchange, for the simple reason that it is already destined to replace this £4,000 of constant capital used in its production.

If we think of Department 1 and Department 2 here as 2 huge firms, then this £4,000 is just like a coal mine that uses some of the coal it produces just to power steam engines used in its mines, or like a farmer that uses some of the seed from the wheat he grows as the constant capital used to grow wheat next year. It is not sold, or exchanged with anyone, forms no consumption, no revenue for anyone, and so appears in no National Income or Expenditure data.

It is only, the £1,000 of variable capital and the £1,000 of surplus value in Department 1 that forms a revenue for anyone. The equivalent amount of that value, represented by the means of production, sold to Department 2 capitalists, then appears as the constant capital of Department 2. In other words, assuming simple reproduction Department 1 (v+s) = Department 2 (c). Department 1 workers spend their £1,000 of wages, and Department 1 capitalists spend their £1,000 of surplus value buying £2,000 of consumer goods from Department 2. The only other revenue, is the revenue received by Department 2 workers and capitalists. That amounts to a further £1,000, and is spent on buying the remaining £1,000 of consumer goods produced by Department 2.

So, if we look at the value of total incomes it is in Department 1 £1,000 (v) and £1,000 (s). In Department 2 it is £500 (v) and £500 (s). In the National Income data it is this figure that would appear. It is the same figure that appears as expenditure, as these workers and capitalists spend their incomes to buy £3,000 of consumer goods, i.e. the end product.

Yet, if we look at the value of this economy's output it is, in fact, not £3,000 but £9,000. £6,000 of the value of its output comprised constant capital that was produced not in this year, but last year, and in year's before that.

 Even in very high end production such as surgery productivity of labour is being revolutionised by the introduction of robots, and other forms of new technology.
By basing themselves on these National Income or National Expenditure figures most estimates of the rate of profit miss the value of constant capital in the value of total output. On the one hand that means that they overestimate the rate of profit, because they miss out a huge amount of the capital actually laid out for the production of that profit. However, more importantly, in trying to understand movements in the rate of profit, and consequently understanding its effect on the rate of growth and accumulation, and on interest rates, they significantly understate the increase in the rate of profit over the last 30 years arising from changes in the value of that constant constant.

At best, as in the case of Doug Henwood's estimate, they take account of changes in the value of the fixed capital employed to produce that profit. Those changes are themselves significant because of the effect of what Marx calls “Moral Depreciation”, i.e. the reduction in the value of existing equipment arising from the introduction of new far more effective equipment, and from the reduction in the replacement cost of that capital arising from the huge rise in productivity that has occurred.

I will resume the analysis of this aspect in Part 4.