Wednesday, 2 November 2016

Functioning Capitalist

Functioning capitalist is the name that Marx gives to those day to day professional managers who take on the social function of the capitalist in production.

Under feudalism, landowners played a part in the process of agricultural production. Not only did they own land, but they organised agricultural production on it, as well as undertaking a wider social role. Over time, as labour rent was replaced by rent in kind, and then money rent, the social function of the landowner in agricultural production disappeared. It was replaced by the role of the capitalist farmer. The landowner became simply a recipient of capitalist rent for no other reason than they owned landed property. Marx, in Capital III, describes the way in which this same kind of process befalls the private capitalist.

The early forms of capitalist production were undertaken on a small scale. In agriculture, a capitalist farmer takes over the social function of the landlord in organising production; in the towns, artisans and workers like Josiah Wedgwood fulfil a similar function starting up capitalist production in which they often continued to take part as workers, as well as the organisers of production; the first manufactories whether in towns, or as often was the case, in the form of odd buildings that sprung up in the countryside, close to water power, simply brought together existing handicraft producers under one roof, with the capitalist – often a merchant who had been involved in the particular trade – acting to organise their production.

But, very quickly, the accumulation of surplus value into additional capital expands the scale of capitalist production. The capitalist can no longer spend time actually working in production, but must devote increasing amounts of their time to simply organising the production process. Capital must be set aside to buy materials most effectively; to investigate and implement new ways of organising production as the division of labour proceeds; to search out new markets, and develop new products; to ensure that cash flow is adequate; to keep accurate sets of books, and so on.

Before long, the capitalist, having withdrawn themselves from production to undertake these activities, can no longer adequately fulfil them either. There is no reason that a potter like Wedgwood should be a good accountant. Increasingly, even whilst the private capitalist continues to perform a social function in relation to these activities within the production process, they have to share this workload with other professional managers, and in the end the size of the operation even under private capitalism becomes so great that the private capitalist effectively becomes separated from the production process, which is then undertaken by a growing band of day to day professional managers, be they production managers, marketing managers, accountants etc. The private capitalist becomes merely a provider of money-capital to the firm, which is then controlled on a day to day basis by these professional managers – the functioning capitalists.

But, especially as the number of these professional managers grows, and as, at the same time, credit and loanable money-capital expands, it also becomes possible for these same professional managers to establish their own businesses. They can simply go to the bank to obtain a loan to start a business, or they can go to the money market to issue a bond to obtain money-capital to start a business, or to expand it. Although joint stock companies had existed since the 13th century, few businesses would have been established on this basis, initially. The biggest growth of this form of financing occurred in the 19th century, particularly after the passing of the Limited Liabilities Act.

As Marx points out, the argument often used by the apologists for capital, that the capitalists were entitled to profit as a reward for their saving and abstention, falls away, because rather than the money-capital used to establish the business being a result of their own abstention and saving, it is provided as a result of the abstention and saving of the rest of society!

These are still private capitalists, just private capitalists who utilise the money-capital of society, rather than their own money-capital to establish the business. But, the firm, and the productive-capital of the firm is the property of these private capitalists. The modern equivalent is a leveraged management buy-out. Their social function, in production, is two-fold, as Marx describes.

On the one hand, as functioning capitalists, they have a productive role to play in organising the productive process itself. Marx describes it as being like the role of a conductor in an orchestra. Moreover, the more the scale of production increases, the more the labour process is characterised by co-operative labour, the greater the need for such a co-ordinating role. As Marx says, this co-ordinating role applies to all modes of production. Under capitalism, the wages paid to the managers who perform this function forms part of the variable capital.

Where the functioning capitalists are themselves the owners of the firm, and its productive-capital, having borrowed the money-capital to set up the business, they will also have a further role, however, that arises from any form of labour process based upon exploitation. In other words, as well as simply organising the production process, they will also have a role in dealing with the conflicts that arise as a result of this exploitation. This labour produces no value, but represents a cost of production. The revenue they receive for undertaking this function comes not from the variable-capital, but from the surplus value.

As Marx points out, when capitalist production expands to such an extent that it breaks beyond the fetters that this form of private capital presents, and becomes socialised capital, in the form of joint stock companies, and co-operatives a further transformation takes place. For a joint stock company or a co-operative, there is no private ownership. Both forms of company are a legal entity in their own right, and both own their own capital. Logically, control over this capital should then be exercised by the firm itself, which can be nothing other than the “associated producers”, as Marx describes them, employed by the firm. These associated labourers comprise everyone working for the firm and paid wages from the managers down to the unskilled labourers.

This indeed is the case with the worker-owned co-operative. The workers in such a business continue to produce surplus-value, and to this extent, their labour is exploited. But, moreover, the role of the functioning capitalist, as an organiser of the production process remains the same; it is to organise production as efficiently as possible, and therefore, to maximise the rate of surplus value. They must do this, because the co-operative, producing commodities within a capitalist economy is still bound by the same objective laws as any other capital. It must accumulate capital, so as to expand market share, to produce more effectively, and thereby survive.

However, the difference here is that these functioning capitalists are themselves employed by the workers to undertake this role, and to do so as effectively as possible, because the resultant profits produced are the profits of the co-operative, and of its workers, whose interests are served by such profit maximisation, and capital accumulation. For that reason, Marx says, the second role of the functioning capitalist of dealing with the conflicts that arise from such exploitation disappears, because the workers are exploiting themselves, for their own long-term interest.

“The co-operative factories of the labourers themselves represent within the old form the first sprouts of the new, although they naturally reproduce, and must reproduce, everywhere in their actual organisation all the shortcomings of the prevailing system. But the antithesis between capital and labour is overcome within them, if at first only by way of making the associated labourers into their own capitalist, i.e., by enabling them to use the means of production for the employment of their own labour. They show how a new mode of production naturally grows out of an old one, when the development of the material forces of production and of the corresponding forms of social production have reached a particular stage.”

(Capital III) 

All of the wages of the functioning capitalist within the worker owned co-operative is then a part of the variable-capital of the firm.

This is not necessarily the case with other forms of co-operative. In a consumer co-operative such as the Co-op in Britain, the funds for the business are provided by its members/consumers, and these members exercise control over the business, via the functioning capitalists, who are their employees. The profits of the business are thereby not under the control of the workers but of these members, and so a division of interest between the members and the workers arises as with any other form of capitalist enterprise. A portion of the wages of the functioning capitalists in such an enterprise, therefore, goes, to cover the activities in dealing which such conflicts of interest.

In this respect, the functioning capitalists in such a consumer co-operative, are no different than those employed in a joint stock company. Increasingly, as education expands under capitalism, the number of people who are able to undertake the social functions of the functioning capitalist expands, and the wages for such tasks are reduced. Those undertaking this function are increasingly drawn from the ranks of the working-class, they live in working-class communities, and frequently they, like other workers form trades unions to further their interests via collective bargaining. In Capital Volume I, Marx wrote that, what appear as relations between people are really just relations between different forms of property. The functioning-capitalist is the personification of industrial capital and its interests.

In the worker-owned co-operative, the contradiction between the interests of labour and capital are resolved by making all the workers in the firm capitalists, whereas in the consumer co-operative, or the joint stock company it is resolved by turning everyone, including the functioning-capitalists into workers.

“The capitalist stock companies, as much as the co-operative factories, should be considered as transitional forms from the capitalist mode of production to the associated one, with the only distinction that the antagonism is resolved negatively in the one and positively in the other.”


In the worker-owned co-operative, control is exercised by the workers, but in the consumer co-operative or the joint stock company, control is exercised by the providers of money-capital. In both the consumer co-operative and the joint stock company, control is exercised by shareholders, the only difference being that in the former every member gets only one vote, whereas in the latter each shareholder gets votes proportional to their shareholding.

But, it is precisely for this reason, that these shareholders then seek to appoint further Boards of Directors above the actual functioning capitalists. The functioning-capitalist, as the personification of the industrial capital, is objectively driven to accumulate capital. Moreover, as a salaried employee, drawn from the working-class, they also have an incentive to ensure such capital accumulation, as the basis of securing their own longer term employment, and income. This interest is antagonistic to the interests of shareholders, who seek to obtain as much interest on the money-capital they have loaned to the business, as possible. They seek to have their dividends rise each year, and for the value of their shares to rise.

“... interest-bearing capital as such has not wage-labour, but productive capital for its opposite. The lending capitalist as such faces the capitalist performing his actual function in the process of reproduction, not the wage-worker, who, precisely under capitalist production, is expropriated of the means of production. Interest-bearing capital is capital as property as distinct from capital as a function. But so long as capital does not perform its function, it does not exploit labourers and does not come into opposition to labour. 

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

Firstly, assuming the average profit to be given, the rate of the profit of enterprise is not determined by wages, but by the rate of interest. It is high or low in inverse proportion to it.”

(Capital III, Chapter 23)

It is the profit of enterprise that the functioning capitalist seeks to expand, because it is from this that additional capital is accumulated. The more is drawn from profits as dividends or other capital transfers to shareholders, the lower the profit of enterprise and potential for capital accumulation.

“This qualitative distinction between the two portions of gross profit that interest is the fruit of capital as such, of the ownership of capital irrespective of the production process, and that profit of enterprise is the fruit of performing capital, of capital functioning in the production process, and hence of the active role played by the employer of the capital in the reproduction process — this qualitative distinction is by no means merely a subjective notion of the money-capitalist, on the one hand, and the industrial capitalist, on the other. It rests upon an objective fact, for interest flows to the money-capitalist, to the lender, who is the mere owner of capital, hence represents only ownership of capital before the production process and outside of it; while the profit of enterprise flows to the functioning capitalist alone, who is non-owner of the capital.”


The role of the Boards of Directors of companies, and of the Chairman and CEO's of companies should not then be confused with the actual functioning capitalists, or day to day managers. These two groups in fact represent two antagonistic forms of property, and opposing interests. The former represent the interests of the money-lending capitalists/shareholders, whereas the latter represent the interests of socialised industrial capital. In the end, it is the latter which must hold sway, because money-capital is subordinated to industrial capital. Unless industrial capital expands, surplus value cannot expand, and so the mass of interest cannot ultimately expand, or fictitious capital prices rise. At the level of the individual capital, if it does not accumulate real capital it loses competitiveness and market share, making it liable to be taken over, or driven out of business.

"It would be still more absurd to presume that capital would yield interest on the basis of capitalist production without performing any productive function, i.e., without creating surplus-value, of which interest is just a part; that the capitalist mode of production would run its course without capitalist production. If an untowardly large section of capitalists were to convert their capital into money-capital, the result would be a frightful depreciation of money-capital and a frightful fall in the rate of interest; many would at once face the impossibility of living on their interest, and would hence be compelled to reconvert into industrial capitalists.” (Capital III, Chapter 23, p 378)

And yet, in the short term, it is quite clearly possible that the interests of fictitious capital can prevail. The owners of this fictitious-capital continue to occupy entrenched positions of power within the productive-process, and with society, despite having lost all social function, whatsoever, just as happened with the landowners before them. They continue to exercise control via Boards of Directors over large swathes of industrial capital. Alongside the landed oligarchy, this financial oligarchy continues to exercise considerable political control via conservative parties and politicians.

“The credit system, which has its focus in the so-called national banks and the big money-lenders and usurers surrounding them, constitutes enormous centralisation, and gives to this class of parasites the fabulous power, not only to periodically despoil industrial capitalists, but also to interfere in actual production in a most dangerous manner — and this gang knows nothing about production and has nothing to do with it. The Acts of 1844 and 1845 are proof of the growing power of these bandits, who are augmented by financiers and stock-jobbers.”

(Capital III, Chapter 33)

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