Wednesday, 16 March 2016

Profit of Enterprise

Profit of enterprise is the portion of profit that is left over after rent, interest and taxes have been deducted. Its consideration is clouded, as Marx describes, because a number of these revenues, which are economically distinct, become combined in the actual payments to entrepreneurs, and owners of capital. That is particularly the case in respect of private capital, where the owner of capital, still undertakes the function of entrepreneur, as well as the labour of superintendence. In those cases, it is further complicated, where the private owner of the productive-capital also provides the money-capital, and/or where they own the land used by the enterprise. In such cases, the business owner obtains revenues in the form of wages, rent, interest and profit of enterprise, but all of these may assume the form of a single revenue for the owner.

If we take a capitalist farmer, for example, who owns the land they farm, the rent they would have paid for that land as a productive-capitalist, comes back to them as a landlord. As Marx demonstrates in his analysis of rent, rent does not constitute a cost of production, but a deduction from surplus value. The capitalist farmer does not make a saving in rent, but pays it to themselves as their own landlord. But, with the development of capitalist agriculture, especially as capitalists become farmers, rather than just farmers becoming capitalists, the capital advanced for the purchase of land, becomes viewed as with any other advance of money-capital, i.e. one on which an average rate of interest is expected. As Marx describes, this also becomes co-mingled with the actual interest on the money-capital advanced for capital improvements on the land, such as the provision of barns, cattle sheds and so on.

To the extent that the capitalist farmer acts as an active worker themselves, engaged in the organisation of work, and the supervision of the labour process, they also earn wages. For the capitalist farmer, all of these different revenues appear as simply a return on the capital advanced.

The same is true where a private capitalist loans money-capital to their business. Again to the extent that they are engaged in the labour process, as a manager, they earn wages. As the provider of money-capital, they earn interest on the money loaned. The profit of enterprise is the profit left over after this interest has been paid, along with any rent and taxes, but as the private owner of the productive-capital, the capitalist obtains this profit of enterprise along with the interest on the money-capital, they have loaned to the business, along with the wages they pay themselves as functioning capitalist. But, all of these revenues tend to be consolidated into one, particularly for the small business owner. 

Even within private capitalist enterprises, as they expanded beyond a certain size, the role of functioning capitalist became assigned to professional managers, with the owner of the business, becoming the provider of money-capital. The professional manager, thereby was paid wages, whilst the owner of the business, received interest on their loaned money-capital, plus the profit of enterprise.

“Transformation of the actually functioning capitalist into a mere manager, administrator of other people's capital, and of the owner of capital into a mere owner, a mere money-capitalist. Even if the dividends which they receive include the interest and the profit of enterprise, i.e., the total profit (for the salary of the manager is, or should be, simply the wage of a specific type of skilled labour, whose price is regulated in the labour-market like that of any other labour), this total profit is henceforth received only in the form of interest, i.e., as mere compensation for owning capital that now is entirely divorced from the function in the actual process of reproduction, just as this function in the person of the manager is divorced from ownership of capital.” (p 436-7)

But, as Marx describes, these different revenues tend to be more distinguishable for socialised capital. The labour of superintendence, required in every labour-process, becomes the role of professional managers, who become the “functioning-capitalists”. They are paid wages, determined in the same way as the wages of any other worker. Indeed, as public education is extended, so that members of the working-class are able to take on these higher skilled tasks, the supply of such labour-power tends to rise faster than the demand for it, causing the wages for these managers to fall, even below that of other skilled workers.

The managers, exercise control over the productive-capital on a day to day basis. They are the personification of that socialised productive-capital, and their function is, thereby, to organise production on the most efficient basis, so as to maximise the production of surplus value, and rate of profit. As wage workers, the same in that respect as all the other workers in the company, they seek to maximise the production of surplus value and rate of profit, not in their own immediate interest, as did the private capitalist, but in the interest of the socialised capital itself, and its need to compete with other capitals, and to accumulate in order to do so.

This is true, whether the socialised capital takes the form of a joint stock company, a nationalised industry, or a worker-owned co-operative, because all of these forms, remain forms of capital. Indeed, for so long as capital and commodity production exists, such a function to maximise the production of surplus value, and rate of profit will continue, even in the context of a Workers State. Indeed, the requirements of the first stage of communism, as Marx sets out, in the Critique of the Gotha Programme, to expand production even more rapidly, so as to raise living standards across the board, will require that the rate of surplus value, and rate of profit be increased much more than currently exists under capitalist production. Given the need to do that in a workers state, for example, across Europe, but still in competition with powerful capitalist forces on a global scale, it becomes even more important. That is why Lenin, and Gramsci, and others saw an important role for the use of techniques of scientific management such as Taylorism.

The real division of these different revenues – interest, rent, wages, and profit of enterprise - is most visible within the worker-owned co-operative, as Marx points out. In the joint stock company, shareholders appoint their own tiers of management above the “functioning capitalists”, whose sole function is to monitor their activities, and to exercise longer-term, strategic control over the capital, not in the interest of the business, but in the interest of the shareholders. These higher tiers of management obtain “wages” that have no relation to any labour undertaken, but are generally in inverse proportion to it. They also obtain share options, that provide them with revenue in the form of dividends and capital gains on those shares, and because the shareholders exercise this control over the company, they are also able to make payments from the company to shareholders, way in excess of what is economically justified, including as payments to the executives who represent the shareholders interests.

In the worker-owned co-operatives, however, the workers themselves appoint the managers, and the workers as a whole, including those managers, undertake the function of the long-term strategic control over the capital. The effect is quite apparent in relation to the much lower wages obtained by these managers within the co-operative, or joint stock company, compared to within the private capitalist company.

“In a case known to me, following the crisis of 1868, a bankrupt manufacturer became the paid wage-labourer of his own former labourers. The factory was operated after the bankruptcy of its owner by a labourers' co-operative, and its former owner was employed as manager.” (Engels, Capital III, Note 5, Chapter 23) 

The division of revenues is even clearer in the case of such a co-operative, where it operates solely on the basis of borrowed capital. In that case, a portion of its profit is deducted to cover the interest paid to the bank, or bondholders. The functioning capitalists, i.e. the professional managers are paid wages, as with any other worker within the firm, and so the co-operatives profit, after the deduction of the interest, along with any payment of rent, and taxes, forms the profit of enterprise, and is the return to the productive-capital itself.

A similar situation exists with the functioning-capitalists within the joint stock company, as they too are paid wages, as with any other worker.

“The wages of management both for the commercial and industrial manager are completely isolated from the profits of enterprise in the co-operative factories of labourers, as well as in capitalist stock companies. The separation of wages of management from profits of enterprise, purely accidental at other times, is here constant. In a co-operative factory the antagonistic nature of the labour of supervision disappears, because the manager is paid by the labourers instead of representing capital counterposed to them. Stock companies in general — developed with the credit system — have an increasing tendency to separate this work of management as a function from the ownership of capital, be it self-owned or borrowed.” (Capital III, Chapter 23)

Within the privately owned company, the wages of management and profit of enterprise were confused whether the role was undertaken by the private owner himself, or by a professional manager acting on their behalf. Marx sets out that on the one hand the function of management is to undertake the labour of superintendence. All production in whatever mode of production requires labour to organise the means of production, and to supervise the labour process. Marx describes it as being like the function of a conductor in an orchestra. Such labour is necessary and productive.

“On the one hand, all labour in which many individuals co-operate necessarily requires a commanding will to co-ordinate and unify the process, and functions which apply not to partial operations but to the total activity of the workshop, much as that of an orchestra conductor. This is a productive job, which must be performed in every combined mode of production.” (Capital III, Chapter 23)

On the other hand, the other aspect of management arises not from this necessary and productive function, but purely from the antagonistic relation between the owners of the means of production, and the labourers. This function is not productive. As Marx states above, it is this function of management, based upon antagonistic relations between capital and labour, which the worker-owned co-operative does away with, because the workers themselves have a direct interest in ensuring the most efficient, accumulation of the capital. But, that antagonistic function remains both in the private capitalist firm, and within the joint stock company. In both cases one function of management then becomes ensuring that the wage slaves produce as much surplus value as possible.

But, this takes on again a different aspect in relation to the private capitalist company, and the joint stock company, or state capitalist enterprise. The situation that Marx and Engels are describing where private companies are controlled by professional managers, is where these former managers borrow money-capital to establish their own business, and a similar thing has been seen in more recent years with the leveraged management buy out. In other words, the manager/s do not own their own capital, which is employed in the business, but utilise the money-capital of others, be it individual money-capitalists, who buy, shares and bonds, or deposit it in bank accounts, or the money-capital that has itself become socialised, as the banks and financial institutions accumulate the mass of small savings of the rest of society.

Engels describes this situation in his appendix to Capital III, on the stock market, where he describes the situation of people, indeed like himself, who became rentiers. When Engels retired from business, he had a personal fortune that is estimated to be around £3 million at today's value. He invested this so as to provide himself with a generous income. As he states,

“But with this accumulation the number of rentiers, people who were fed up with the regular tension in business and therefore wanted merely to amuse themselves or to follow a mild pursuit as directors or governors of companies, also rose.” 

In these cases, the business deducted the interest paid to the money-lender from the profit, leaving the profit of enterprise. But, as with the private company, where the owner also provided the firm's capital, the functioning capitalists in these businesses, now also combined their wages of superintendence with a portion of this profit of enterprise, which in economic terms was the return to the productive-capital, and destined for its accumulation.

In the joint stock company, the professional managers, or functioning-capitalists, by contrast, were wage workers like all the others, and simply paid the wage for their labour of superintendence, in orchestrating production. And so, as in the worker-owned co-operative, the contradiction between these managers and the other workers does not exist. Rather the contradiction of interest is between these managers and workers, and the owners and representatives of the interest-bearing capital, i.e. the shareholders and their appointed executives. As Marx puts it,

“These two forms, interest and profit of enterprise, exist only as opposites. Hence, they are not related to surplus-value, of which they are but parts placed under different categories, heads or names, but rather to one another. It is because one portion of profit turns into interest, that the other appears as profit of enterprise.” (Capital III, Chapter 23)


“On the other hand, profit of enterprise is not related as an opposite to wage-labour, but only to interest.” (ibid)

Its for this reason that the owners of interest-bearing capital, the shareholders, establish their own representatives above the “functioning-capitalists”, not to further the interests of the business, but to protect their own personal interests. As Marx puts it,

“On the basis of capitalist production a new swindle develops in stock enterprises with respect to wages of management, in that boards of numerous managers or directors are placed above the actual director, for whom supervision and management serve only as a pretext to plunder the stockholders and amass wealth.” (ibid)

Marx goes on to illustrate the way these board members obtained remuneration in inverse proportion to the work done. So, as the wages of the actually functioning capitalists declined, as the supply of that type of labour increased, so these higher tiers of management arise in opposition to them, a large part of their income deriving, in reality, not from wages, but from appropriation of a part of the profit of enterprise, which should have been used for further capital accumulation. Its on that basis that the grotesque disparity between the incomes of these higher executives and the workers and managers in the enterprise has developed.

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