Profit, Rent, Interest and Asset Prices - Part 1 of 19

The Physiocrats correctly identified that surplus value
is created in production.

Prior to Marx, there was no objective basis for determining the mass and rate of profit. The Physiocrats correctly identified that the source of surplus value was in production, representing a step forward from the Mercantilists who believed that it resided in exchange. Adam Smith advanced on the position of the Physiocrats by identifying value as labour rather than use value. But, Smith's views were confused and contradictory. He failed to distinguish between the substance and measure of value – labour – and labour-power, as a commodity, and so ended in an irreconcilable contradiction of determining the value of commodities by wages, and at the same time the value of wages, by the value of the commodities required to reproduce that labour.

Moreover, Smith, like Ricardo after him, never actually analyses surplus value as such, but only the component parts of surplus value, rent and profits, and also interest, which, for Smith, is a secondary revenue derivative from the recipients of rent and profits. Smith does, along the way, identify the real nature of surplus value as being the difference between the value required to reproduce labour-power, and the new value created by that labour-power, but he fails to recognise what he has uncovered, and it is left to Marx to elaborate that discovery, and to explain its significance.

Ricardo follows on from Smith, and resolves some of the contradictions residing in Smith's theory, where Smith lapses into Physiocracy. However, Ricardo also never analyses surplus value separate from his analysis of its specific forms as profit, rent and interest. Consequently, Ricardo simply assumes the existence of surplus value as a starting point for his analysis, rather than explaining it, and he then proceeds from an assumption of an average rate of profit, as the basis for his theories.

Ricardo's assumption of this average rate of profit is wholly subjective. He recognised its existence, much as Engels explains in his Supplement to Capital Volume III, that, prior to the dominance of industrial capitalism, there existed an average rate of commercial profit, enforced by the various merchant guilds, and this initially acts to set a basis for a rate of profit, which those merchants seek to obtain, when they turn themselves to industrial production. But, there is no objective basis for determining what this rate of profit should be. Ricardo assumes that there is some average rate of profit that exists a priori, arising from custom, and he correctly identifies that each capital will seek to obtain this average rate, and so move from low profit areas to higher profit areas.

It is only Marx, who identifies that Smith had essentially solved the problem, in recognising that surplus value is created in production, and its objective basis is the value of commodities. Once, it is recognised that what the worker sells to the capitalist is a commodity – labour-power – whose value is determined, as with any other commodity, by the labour-time currently required for its reproduction, and that what the worker produces are similarly commodities, whose value is determined by the labour-time required for their reproduction, Smith's confusion is resolved. The worker sells a commodity – labour-power – with a value of X to the capitalist. The capitalist consumes this commodity, labour-power, in the production process, and this labour-power produces a quantity of new value equal to X + n. In that case, the surplus value is simply the quantity of new value created by this labour power, in production, in excess of the value required for its own reproduction.

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