Sunday, 1 May 2016

Commercial Profit

Commercial or Merchant Profit, as the name suggests, is the profit obtained by merchant's capital, including money-dealing capital. As with other forms of revenue such as interest, rent and profit of enterprise, its nature varies according to the mode of production.

As Engels, in particular, describes, in his Supplement to Capital Volume III, in pre-capitalist modes of production, the rate of merchant's profit is often determined by guilds and other forms of monopoly.

“Here, for the first time, we meet with a profit and a rate of profit. The merchant's efforts are deliberately and consciously aimed at making this rate of profit equal for all participants. The Venetians in the Levant, and the Hanseatics in the North, each paid the same prices for his commodities as his neighbour; his transport charges were the same, he got the same prices as every other merchant of his "nation". Thus, the rate of profit was equal for all.”

These rates of profit were high, and in some cases this high rate of profit even undermined the ability of producers to reproduce their own labour-power let alone produce a profit. As Marx describes, it leads in pre-capitalist societies to a reduction of producers to slavery. As trade expands internationally, an average commercial profit is established as a consequence of competition between these different monopolies.

“Equalization of these different company profit rates took place in the opposite way, through competition. First, the profit rates of the different markets for one and the same nation. If Alexandria offered more profit for Venetian goods than Cyprus, Constantinople, or Trebizond, the Venetians would start more capital moving towards Alexandria, withdrawing it from trade with other markets. Then, the gradual equalization of profit rates among the different nations, exporting the same or similar goods to the same markets, had to follow, and some of these nations were very often squeezed to the wall and disappeared from the scene.”

(Engels Supplement to Capital III)

As merchants became industrial capitalists, this established commercial rate of profit formed a basis for the profit they expected to obtain from industrial production, a margin over and above their cost of production.

“Merchant capital's rate of profit was at hand to start with. Likewise, it had already been equalized to an approximate average rate, at least for the locality in question. Now, what could induce the merchant to take on the extra business of a contractor? Only one thing: the prospect of greater profit at the same selling price as the others. And he had this prospect. By taking the little master into his service, he broke through the traditional bonds of production within which the producer sold his finished product and nothing else. The merchant capitalist bought the labour-power, which still owned its production instruments but no longer the raw material. By thus guaranteeing the weaver regular employment, he could depress the weaver's wage to such a degree that a part of the labour-time furnished remained unpaid for. The contractor thus became an appropriator of surplus-value over and above his commercial profit.”


In pre-capitalist societies, just as rent is the form of surplus value, and acts as the constraint on profit, so too commercial profit and interest act as a constraint on profit from production. But, as Marx and Engels describe, as soon as industrial capital becomes dominant, it becomes determinant, and acts as the constraint on rent, interest and commercial profit. As Marx describes, both interest-bearing capital and commercial capital are inimical to capitalism, and both are subordinated to industrial capital as it becomes dominant. That subordination initially takes the form of a formal subordination, with laws against usury and so on, but then takes the form of a real subordination of these forms, which can no longer exist other than as adjuncts to the circuit of reproduction of productive-capital.

In pre-capitalist societies, the rate of commercial profit is fixed, but arbitrary. Its only objective limit is the requirement for the producers to be able to reproduce their labour-power, without which, production itself collapses, and so the basis of the commercial capital itself collapses. Within international trade, competition brings about an equalisation of these rates of profit, but it is an equalisation of arbitrarily determined rates of profit, separated from any objective basis for its determination.

That changes with the development of capitalist production. With capitalist production, labour-power is bought as a commodity. As with any other commodity it has an objectively determinable value, equal to the labour-time required for its production, which in this case is the labour-time required to produce all of those wage goods required for the reproduction of the worker's labour-power. At the same time, the workers who sell this labour-power, produce an objectively determinable amount of new value, equal to the quantity of abstract labour they perform. An objectively determinable normal working-day is also established, above which the value of labour-power rises, due to the effect of increasing the needs of the worker for the reproduction of their labour-power, and on potentially shortening the working life of the worker.

The difference between between these two objectively determinable magnitudes – the value of labour-power, and the new value created by that labour-power – is the amount of surplus value produced, and for the first time, this means that the amount of surplus value and profit can be objectively determined. Moreover, the value of the means of production used in production is itself objectively determinable, because it is also comprised of commodities. Consequently, the relation of the profit to the capital consumed in its production (constant capital plus variable capital) is itself an objectively determined amount. This rate of profit, or profit margin, (s/c+v), is for the first time, an objective amount, and no longer simply arbitrarily determined.

In addition, the relation of this surplus value to the capital advanced for its production, is also an objectively determined figure, and this produces the general annual rate of profit, (s/C), which determines the amount of profit that each capital adds to its cost of production. It is that figure, which produces the price of production, (k+p).

For example, suppose a capital is comprised as follows:

Fixed capital £10,000, depreciating at £1,000 p.a.

Materials £10,000

Labour-power £5,000

The general annual rate of profit in the economy is 10%.

The capital advanced here is £25,000, and so this capital would expect to obtain £2,500 of profit on its advanced capital.

Its cost of production is £1,000 wear and tear, £10,000 materials, £5,000 wages = £16,000. Adding the £2,500 of profit to this figure gives a price of production of £18,500, which gives a rate of profit/profit margin of 15.625%, compared to the general annual rate of profit of 10%.

If we take a capital of equal size but different relation between fixed and circulating constant capital we might have:

Fixed capital £5,000, depreciating at £500 p.a.

Materials £15,000

Labour-power £5,000

The advanced capital is again £25,000, and so the average profit obtained is again £2,500. But, the cost of production is now, £20,500. Adding the £2,500 of profit gives a price of production of £23,000, and a rate of profit/profit margin of 12.20%.

As productivity rises, so that more material is processed relative to the value of fixed capital, so the general annual rate of profit will tend to rise, whilst the rate of profit/profit margin will tend to fall. At the same time, as Marx describes this same process results in a rise in the mass of profit produced.

As soon as industrial capitalism creates these conditions whereby an objectively determinable general annual rate of profit is established, even if this average rate is never actually obtained by each and ever capital, it becomes the determining factor, for the existence of rent, interest and commercial profit.

Rent – both absolute rent and differential rent – is only surplus profits, i.e. profit above this general annual rate of profit. If no such surplus profits exist, no rent is economically possible. If the mass of surplus profits rises, rents rise and vice versa. Similarly, commercial capital, as capital, is entitled to its share of the total surplus value, pro rata, but no more. If commercial profits rise above the average, capital will migrate into that sphere, and away from industrial production, causing the rate of profit to fall in the former and rise in the latter. Similarly, if the rate of interest rises whilst the rate of the profit of enterprise is thereby reduced, the accumulation of productive-capital will slow down, and profits will go into the money-markets as loanable-money capital, which will then depress the rate of interest.

The commercial capital, be it the merchant capital that takes on the task of selling the commodities that comprise the commodity-capital of the manufacturer, or the money-dealing capital that takes on the task of keeping the books for the productive-capitalists, and the function of making payments and taking in receipts on behalf of the productive-capitalists, simply represents the separation of those aspects of the circuit of industrial capital, i.e. the distribution phase, into independent capitals. It means that the commodity-capital is bought from the producer by the merchant capital, who then sells it, and who also takes on the function of buying all those commodities, which they then sell to the producer as new means of production; it means that money-dealing capitalists take on the task of storing the producers' money-capital in their vaults, and of making payments on behalf of each producer for their purchases of materials etc.

The productive-capitalists farm out this activity to the commercial capitalists, because it means that the capital they would otherwise have had tied up in the circulation phase of the circuit of capital, can now be utilised in production. It thereby acts to increase the rate of turnover of the productive-capital, and so raises the general annual rate of profit. In addition, the commercial capitalists by specialising in this function, are able to obtain cost savings, and to enjoy economies of scale. That means that the total social capital advanced in the production and realisation of the total social product is reduced, which means both that the mass of realised surplus value is increased, and that the rate of profit is thereby also raised.

This leaves the question of how this commercial profit is then derived under capitalism. As stated above its foundation is the recognition that the capital employed in the sphere of circulation is capital required for the realisation of value and surplus value. Suppose, that the total capital employed in production is equal to 800, and that the total surplus value is equal to 200. In that case, the total value of output is equal to 1,000. Put another way the total cost of production, k, is 800, p is 200, so the rate of profit/profit margin, p/k, is equal to 25%. If the assumption is that the capital only turns over once during the year, then this will also be the general annual rate of profit.

But, this output must be sold, and capital must be employed in circulation to achieve that. The productive-capitalists farm this function out to the commercial capitalists for the following reason. Suppose that the productive-capitalists would need to advance 300 in capital to perform this function, then if commercial capitalists can achieve the same result by the expenditure of just 200, less social capital is used in total, and this means that a higher rate of profit can be achieved.

On this basis, the total capital advanced is 1000 (800 + 200), whilst the amount of surplus value remains 200, because the commercial capital adds no new value. In that case, the general annual rate of profit is 20%, and this is the rate of profit that each capital will expect to obtain. So, industrial capitalists whose advanced capital is 800 add 20% to this value as profit, and so sell their output to merchants for 960. The merchant capitalists who advanced 200 of capital then add 20% profit, i.e. 40, to the cost of the commodities they have bought from the industrial capitalists.

The value of total social output was 1,000 (800 c + v + 200 s), and this is the price at which it is sold by merchants. Both the industrial capitalists and the commercial capitalists thereby obtain the average rate of profit on the capital they have advanced.

Industrial capitalists subcontract this function of circulation to the commercial capitalists, because as set out above, by specialising in these functions, they reduce costs, and thereby raise the general annual rate of profit. Had productive capitalists undertaken the function themselves, and had to advance 300 of capital, then the total capital advanced would rise to 1100, and the general annual rate of profit would fall to 18.18%.

But, the commercial capital benefits the industrial capital, and so capital in general by other means. Firstly, by taking on the role of circulation, it means that productive-capital is able to keep all of its capital actively engaged in production, and consequently the production of surplus value. 

Secondly, besides its greater efficiency, commercial capital is able to turn over more quickly. Suppose there are four productive capitals, each producing output with a value of 250. Assume that the working period for each is equal to 5 weeks. If each of these capitals sold their own output, they would have to wait 5 weeks, plus the circulation time, before their capital was turned over. If the circulation time was a week, that would mean that each capital would need to be 300, equals 1200 of capital in total.

But, a single commercial capital could buy the commodity-capital of producer 1, and sell it, so as to obtain the capital required to buy the commodity-capital of producer 2. After 1 week, the commercial capitalist has sold those commodities and obtained the capital to buy the output of producer 2. A week later, the commercial capitalist has sold those commodities, and obtains the money to buy the output of producer 3, and so on. In other words, this single commercial capital now acts to turn over the productive-capital of four separate productive-capitals. It thereby both reduces the total social capital that must be advanced for the production and circulation of commodities, and also raises the rate of turnover of the total social capital, thereby raising the general annual rate of profit.

The general annual rate of profit is different to, and moves in the opposite direction to the rate of profit or profit margin, and this is particularly clear in relation to commercial profit. The general annual rate of profit is calculated on the capital advanced for one turnover period, whereas the rate of profit, or profit margin is calculated on the capital laid out for a specific period, usually a year. 

If the rate of turnover of capital rises, then the general annual rate of profit will rise, but because such a condition means that productivity will have risen, and so the amount and value of materials processed will have risen relative to the variable capital, and surplus value, the rate of profit/profit margin will fall.

The general annual rate of profit obtained by commercial capital is the same as that for industrial capital, and is calculated on the same basis, i.e. on the capital advanced. So, in the example above, the commercial capital advances 200, and obtains 40 in profit, equal to a rate of profit of 20%, the same as for the productive-capital. This assumes that the commercial capital is turned over just once during the year. But, Marx describes the situation where this is not the case.

Suppose that the commercial capital turns over 5 times during the year. So, it advances 200 for the purchase of commodities equal to that value from manufacturers. If it sold these commodities at 240, then during the year it would make in total 200 in profits. However, whilst it would have laid out 1000 in capital during the year, giving it a rate of profit/profit margin of 20%, it would have made an annual rate of profit of 100%, compared to the 20% for productive-capital.

On that basis, capital would leave production and turn itself into commercial capital, to obtain this higher annual rate of profit. The increased competition amongst commercial capitalists would then cause them to reduce their selling prices, until this annual rate of profit fell back to the level of the general annual rate. In short, if the commercial capital turns over 5 times during the year, the profit margin must fall from 20% to just 4%. The merchant capitalist having laid out 200 of capital would add 8 of profit, selling the output for 208. Over the year, they would pocket 40 in profit, giving them an annual rate of profit of 20%, the same as for the productive-capitals.

Marx points out a difference here, which is that however high the rate of turnover of productive-capital, it does not change the value of its output, because that is determined by the value of the constant capital consumed in production, plus the new value created by labour in the production process. What a higher rate of turnover of capital achieves here is a rise in the annual rate of profit. A rise in the rate of turnover of commercial capital only affects the annual rate of profit in so far as it raises the rate of turnover of the total social capital. But, in contrast to the rise in the rate of turnover of the productive-capital, a rise in the rate of turnover of the merchant capital, does affect the selling prices of commodities, because it reduces the profit margin levied on each individual commodity.

So, if £1,000 of merchant capital is advanced just once during the year, and buys 1,000 units, it will sell these units for £1.20 per unit, if the general annual rate of profit is 20%. However, if this capital turns over ten times during the year, it will sell 10,000 units at a price of £1.02 per unit, producing a total profit of £200 during the year, once again giving an annual rate of profit of 20% on its £1,000 of advanced capital.

No comments: