## Sunday, 14 February 2016

### Individual Value

Individual Value is an important concept. It is vital to understanding the concept of social value, and market value, and consequently market prices and prices of production. It is also vital for understanding, therefore, the basis of surplus profits, and so rent.

Individual Value refers to the value of any discrete unit of production. In other words, take a potter who produces ten identical pots during the day. The first pot may take them one hour to produce, the second may require fifty minutes, the next an hour and ten minutes and so on. That may be due to a number of reasons. The second pot may be produced more quickly than the first, because the potter had settled into their task, whilst the third took longer, because the potter found the clay more difficult to work, or else was distracted, and so on.

If we take each pot as a discrete unit of production, each has a different individual value, because each required a different quantity of labour-time to produce. But, if we take the day's production as being the discrete unit of production, then the individual value of the day's output is equal to ten hours if the potter works for ten hours, and their labour is simple labour. The average value of a pot will be one hour, irrespective of how much labour-time was actually embodied within it.

Similarly, if we take a village community, where ten potters are engaged in such activity, it is inevitable that each of these potters will produce pots at different rates. One may produce only eight pots in ten hours, another nine, the majority ten, whilst others may produce eleven or twelve pots in ten hours. The individual value of a day's production by each potter will thereby be different, but if we take the day's production of the village as the discrete unit, it will be equal to one hundred hours of labour, and if one hundred pots are produced in that time, the average value of a pot, will again be equal to one hour of labour, irrespective of how much labour was actually embodied within it.

In other words, the social value of each pot will be determined not by the labour-time actually embodied within it, but by the average socially necessary labour-time required to produce a pot of this type. If we then extend this further, we can compare the individual value of pots made by this community, to the individual value of the same pots made by some other community. It was on this basis that merchants came to undertake such comparisons, and thereby to determine a market value for each type of commodity. Under capitalism, this also provides the basis for the determination of the price of production of each type of commodity.

If we take any industry, therefore, for example, pottery manufacture, different firms will operate at different levels of efficiency, and so the individual value of the production of one firm will be different to that of its competitors. But, the price of production of pots will be determined by the average cost of production of these pots, plus the average profit. Some firms will then produce pots with a lower individual value/price of production than the average, and some with a higher individual value/price of production than the average.

Suppose, in the pottery industry we have a situation where in total £10,000 of constant capital is consumed, along with £2,000 of variable capital. The average rate of profit in the economy is 25%, and so this advanced capital of £12,000 (its assumed that all of this capital turns over once during the year) produces a profit of £3,000. The Price of Production of the output is then £15,000.

If we assume that 15,000 units are produced, the selling price of each unit is £1. Its assumed here that at this price demand and supply are in balance so that the market price of pottery units is equal to their price of production.

But, if we assume that there are three producers of pottery, they each produce at different levels of efficiency. Whilst each may use the same amount of capital, and so have the same cost of production (c + v ), or (k) each may produce different quantities of output, and thereby have different levels of income from their sale. As the actual profit (p) made by each firm is equal to the difference between its income and its cost of production (k), each will have a different mass of profit, and different rate of profit, (p/k) .

 Firm Cost of Production £ Output Price of Production £ Income £ Profit £ Rate of Profit A 4,000 4,000 1.00 4,000 0 0 B 4,000 5,000 1.00 5,000 1,000 25% C 4,000 6,000 1.00 6,000 2,000 50% Total 12,000 15,000 1.00 15,000 3,000 25%

These differences in profits, with firm C obtaining surplus profits, i.e. a rate of profit higher than the average, create the potential for rent. If C's greater efficiency is due to it producing its output on more fertile land, the owner of the land may demand a rent for the advantage it provides, and that rent will then absorb this surplus profit. If it is because C is a retailer, whose shop is in a prime location, that obtains a greater flow of customers, then again the landlord may demand a rent accordingly.

But, equally, it may simply be that C has more adept managers, and/or workers who are able to produce this higher quantity of output for the same amount of capital advanced. If the supply of such managers and workers is restricted, then its possible that the rent may take the form of higher wages paid to them, but on the assumption that labour-power is available for these functions, there is no basis for the existence of rent. Firm C will simply have a greater mass of profit available to it, so as to accumulate capital more rapidly, probably taking over market share from A.

Rent is made possible by the existence of surplus profits, but it is not surplus profits that create rent. Rent is a direct result of the monopoly ownership of the factor of production, which is the basis of the surplus profit. For example, suppose C produces on a piece of land owned by them, which contains a windmill. The windmill provides them with free power, which drives their machines. This enables them to produce more with the same cost of production as their competitors, and so to make a surplus profit. The existence of this surplus profit does not itself constitute rent.

However, suppose each producer operates on land that does not belong to them. It is only C that has the benefit of the windmill, and this enables them to obtain a surplus profit, of £1,000. The landowner, is thereby enabled to charge C up to £1,000 in rent, for the use of the windmill. Up to that amount, C still makes more than average profit. It is the fact, that the windmill is only available on C's land, and that its ownership is monopolised by the landowner, which enables them to charge the rent.

If similar windmills existed on the land used by A and B, so that C's advantage disappeared, and each had the same cost of production, and level of output, C's surplus profits would disappear, and along with it the possibility of paying rent, because the individual value of each producer would be equal to the price of production.