## Which Rate of Profit?

Michael begins his post by saying,

"Official data are now available in order to update the measurement of the US rate of profit a la Marx for 2017."

But, he fails to say exactly a la, which one of Marx's measurements of the rate of profit, he is talking about.

Marx's initial definition of the rate of profit is s/(c + v), i.e. the profit margin. It is the most generic definition of the rate of profit, which assumes that all of the capital advanced is consumed in production, during the year, so that the whole capital turns over just once during the year. In that case the cost of production is equal to the capital advanced. That is not realistic, because the fixed capital is rarely all consumed during the year. What is consumed alongside the circulating capital, i.e. the capital laid out for raw materials, and labour-power, is the value of wear and tear of fixed capital. So, Marx's definition for the rate of profit/profit margin is actually s/(d + c + v), where s is surplus value, d is wear and tear of fixed capital, c is raw and auxiliary materials (including intermediate goods, which Marx terms raw material, because at each stage of production they are the raw material to be processed into something else) and v is the variable-capital laid out as wages

So, this rate of profit is a rate of profit calculated as the profit as a proportion of the cost of production. It also assumes that all of the produced surplus value is realised as profits, which, of course it isn't, and Marx also later, in Capital III, Chapter 17 examines the role of Commercial Capital (including money-dealing capital), in raising the general annual rate of profit, even though, it does not contribute any new value, or surplus value itself. As Engels also describes this rate of profit, later in Capital III, where profits take the form of actual realised profit, based on an amount of average profit, as commodities sell at prices of production, rather than at their exchange value, if the cost of production is represented as k, and the realised profit as p, it is then equal to p/k

But, if that is the rate of profit that Michael means, in that case, it's impossible, from official data, to calculate it, as Marx showed in criticising Smith and Ricardo, who believed that the value of commodities, and so of national output resolves entirely into revenues - wages, rents, profits, interest and taxes - and whereby National Income is made equal to National Output, because that calculation omits the value of the constant capital consumed in production of the means of production. GDP is a measure of value added, not total value of production. In Capital II, Chapter 20, Marx explains this. If we take his schema for simple reproduction, the value of intermediate goods, often wrongly seen as the value of constant capital, in the calculation of national output, is, in fact, Marx shows, only the value of (v + s) in relation to those intermediate goods, it omits the value of c, the constant capital consumed in their own production. In other words, the value of Department II c, is only equal to the value of Department I (v + s), and omits Department I c, which is a growing proportion of social production, and the basis, thereby, of Marx's law of the tendency for the rate of profit to fall

If we ignore wear and tear of the fixed capital, the cost of production is the value of the consumed materials, plus wages, and the value of production is the cost of production plus surplus value. Adam Smith argued that the value of commodities is resolvable solely into revenues, i.e. into just the wages plus the profits (subsequently divided into rents, interest and taxes), thereby omitting the value of materials. His justification for doing so was that, he argued, the materials themselves are commodities, and as such they are produced by labour, so that this value of the materials itself divides into wages and profits. But, Marx points out that the value of these commodities themselves also does not divide solely into revenues, because those commodities also comprise the value of the materials used in their production and so on. Smith's argument amounts, Marx says, to a never ending process of trying to find some production, where no constant capital is used in its production, which doesn't exist.

Marx demonstrates this in Capital II, Chapter 20, in examining the process of social reproduction, and the relation between Department I, which produces means of production, and Department II, which produces consumption goods. Take a farmer who produces grain. They use 10 kilos of grain as seed, they use 40 kilos of grain, to pay as wages to their workers, and those workers produce, in total, 100 kilos of grain. Of this 100 kilos, 40 kilos is again handed back to the workers as wages, and 10 kilos must be taken out of production to replace, in kind, the seed consumed in production. That leaves a surplus product of 50 kilos appropriated by the farmer, which they can use for their own consumption. The revenues, here are the 40 kilos paid to the workers as wages, and the 50 kilos of surplus product appropriated by the farmer, i.e. 90 kilos. The other 10 kilos of output represents a revenue for no one. It is not bought by anyone out of revenue, but is itself bought out of capital, it represents not revenue but capital. Yet, it is nevertheless, an undoubted part of the value of output.  We could  assume that the farmer also consumes this 10 kilos grain as revenue, but that would mean that he consumes his own seed corn, literally.  It assumes that we are not analysing capitalism, as a continuous and ongoing system of production.  The output of the farmer here, in the form of the 10 kilos of grain, is simultaneously his own input of seed, indeed the 40 kilos of grain set aside, as wages, out of his output is simultaneously his input of 40 kilos as variable-capital.

Now it can be objected that the producers of means of production, do not, produce all of their own means of production, as the farmer does here. True, and this is what causes confusion in examining the figures for national output in respect of intermediate production, i.e. the production of those means of production, used in the production of other commodities, for example, the production of steel or plastics used in the production of cars etc. The figures for GDP, are figures for value added, so that, for example, if we take the value of car production, it takes the value of all the cars produced, but deducts from that value, the value of all of the material inputs that go into the production of the car, on the basis that the value of these inputs are themselves calculated as output separately, and so unless they are deducted, they would be double counted. So, the value added, at each stage of production, is the value added by labour, and this added value, is divided into wages and profits, the latter then being divided into rents, interest (dividends) and taxes.

But, it can then be seen how this takes us right back to Adam Smith's “absurd dogma”, as Marx calls it, that the value of commodities, and so of national output resolves entirely into revenues. The basis of the GDP calculation is precisely that, by taking the value of each stage of production out of the value of the one that follows it, the value of output as a whole can be calculated simply on the basis of the value added at each stage of production, i.e. by totalling the revenues created in each sphere, and at each stage of production, but as Marx demonstrated, against Smith, it clearly cannot. Yet, every economist following Smith, down to today, accepts this absurd dogma, and modern orthodox economics textbooks continue to teach this nonsense that the value of output resolves into the factors of production and their revenues of wages, profit, interest and rent.

So, by taking into account the value of intermediate production, economists have come to believe that they are taking into account the value of c – the raw materials, and other constant capital consumed in production – when, in fact, they are doing no such thing. The value of those intermediate goods, as with any of the other commodities included in the national output is measured only in terms of the value added in their own production, in other words, the value added by labour, which resolves only into wages and profits, i.e. revenues

If we take the example of the farmer producing grain. We can see this if we examine how their output might be treated, along with that of the miller, and the baker. Suppose, we assume that 1 hour of labour equals £1, and that 1 kilo of grain has a value of £1. The farmer keeps 10 kilos of grain to use as seed, and sells all of their remaining 90 kilos of output to the miller, for £90. They pay £40 of this in wages to their workers, and keep £50 as profit for themselves. For the miller, the grain appears as intermediate goods, that constitute his constant capital. His workers add, £90 of new value, £40 being paid to his workers, and £50, retained by him as profit. The miller sells the resultant flour to the baker for £180. The grain constitutes intermediate production for him, or his constant capital. His workers add a further £90 of new value, £40 paid as wages, and £50 as profit.

The total value of the end product available for consumption is then £270. If we add up all of the revenues, it is also equal to £270 (£90 in farming, £90 in milling, £90 in baking). So all of this revenue can be used to buy the end product. The baker, cannot consume the whole of the £270 they take in sales, because they must spend, £180, replacing the consumed flour. Moreover, if they want to continue as a capitalist, they cannot consume the £40, of revenue, that must be used to reproduce the wages for their workers. As I will demonstrate, later, this is another important point in Marx's analysis of social reproduction, and calculation of the rate of profit, compared to the use of historic prices, as favoured by Michael. Marx's assumption is that capitalist production is continuous and ongoing, so that with each turnover of capital, the consumed capital must be physically replaced, “on a like for like basis” (Capital III, Chapter 49), which necessitates a view of this continuous reproduction as involving, simultaneity, by which outputs are simultaneously inputs. The use of historic pricing, implies a view of capitalism as one in which, in place of this assumption of ongoing production, and continuity, at the end of each year, the whole capital is liquidated, converted into revenue, only then to be converted into capital once more. It is an exercise in comparative statics, that is syllogistic rather than dialectical. It sees simultaneity as necessarily contradicting the syllogism's insistence that a thing cannot be two things simultaneously, and so rejects it. Marx demonstrates that this contradiction is a real contradiction, existing in the material world, and its representation in theory, is not only thereby valid, but central to the understanding of the process of reproduction

Returning to the baker, this £180, does not constitute a revenue for the baker, but must be used as capital. Similarly, the miller cannot consume all of the £180 they obtain from the baker. They must use £90 of it to buy grain from the farmer. This £90 does not constitute revenue for the miller. It is capital. Finally, the farmer can consume all of the £90 they obtain from the miller. All of it constitutes revenue. However, this £90, did not constitute the total value of the farmer's production. That was £100. £10 of that value was never sold, instead it was directly thrown back into production, by the farmer, as seed, to replace, on a like for like basis, the seed that was consumed in production. Again, this portion of the farmer's output does not constitute revenue, but is capital, and is directly reproduced out of current production. If, instead of the farmer saving seed, they sold all of the 100 kilos of seeds, for £100, they would be in the same position as all the other producers. They could still only use £90 of that £100 as revenue, because they would now have to spend the other £10 as capital, to buy seeds from a seed specialist.

So, we arrive here then at the position of the producers of means of production, who do not produce all of their own means of production, and must buy them from other producers of means of production. But, as Marx demonstrates, nothing fundamentally changes. If we take a coal producer, like the farmer, they use some of the coal they produce, to directly replace some of their own means of production consumed in production. They use some of the coal they produce, to replace the coal consumed in running steam engines, used to pump water from the mine, and to drive the winding gear. Now, its true that the coal producer does not replace, in kind, all of their means of production. They do not, by this means, replace the steel used in machinery or pit props etc. They have to buy these from machine makers, and so on, who buy their materials from a steel producer, and so on.

Suppose we assume that the coal producer could get all of their other inputs from a steel producer. In turn, the steel producer does not get all of their own inputs from their own output. They need coal, from the coal producer, for example, to burn in their furnaces. The matter is easily resolved, if we simply assume that the coal producer, takes over the steel producer, or vice versa, which was, in fact, quite common. Now, if we take the total output of coal and steel, the coal and steel required to replace the coal and steel consumed as means of production, can now, again, simply be taken from the total output, and directly replaced, so that, again, it is no longer sold, and again forms a revenue for no one, but is simply reproduced, on a like for like basis, out of capital. All of these means of production (assuming they were suitable for consumption), or their money equivalent, can only be consumed, or converted into revenue, if we assume that production is not capitalist production, i.e. that it is not continuous and ongoing, but rather that it comes to an end at the end of each year, with all of the capital being turned into revenue, and then back into capital again, at the start of a new year. But, as soon as we return to the reality of capitalist production, whereby all of this capital is not liquidated, but continues to act as capital, and where we see that the capital which is reproduced, on a like for like basis, we see that this replacement occurs not on the basis of the historic price of that capital, but on the basis of its current reproduction cost. This fact, which confused Ramsey, also confuses the proponents of historic pricing, as the basis of calculating the rate of profit.

That is the case with the data for output. If we take the economy as a whole, these interrelationships are merely obfuscated by the fact that sales of these intermediate products take place between firms in Department I, and Department II, as well as between firms within Department I itself. As Marx sets out in Capital II, if we have these two departments,

Department I

c 4000 + v 1000 + s 1000 = 6000

Department II

c 2000 + v 500 + s 500 = 3000

the value of output will appear as GDP, as the 3,000 value of output of final production in Department II. It comprises, 1,000 of value added, represented by the 500 v and 500 s. The other 2,000 of its output value comes from the value of intermediate goods that Department II firms buy from Department I. Again, this 2000 of value appears in the national accounts as the value of output of Department I, because that is the value that appears in the books of Department I firms from their sales of means of production to Department II firms. In the same way that although the farmer's output value was £100, only £90 appeared as revenue, in the form of his sales to the miller. But, of course, it too is only a value for the value added, by labour in Department I. The value of inputs used by Department I firms, bought from other Department I firms, are deducted from the value of their output.  It resolves into the 1000 of wages paid to Department I workers, and 1,000 of profits paid to Department I capitalists. But, as Marx points out, clearly the value of output of Department I is not 2000, but 6000! The other 4000, the bulk of the value of its output, and more than half the value of total output for Department I and II combined, does not appear, because it is not sold. It is taken directly from its output, and used to simply replace in kind its own consumed means of production.

If Department I were simply one huge single firm producing all means of production that would be obvious. It is simply obscured, because Department I firms also sell means of production to each other, as in the example above, of the coal and steel producer. But, the fact remains that even on the basis of these sales between Department I firms, nothing is changed. As two separate firms, the coal producer and steel producer, might sell their products to the other, rather than taking them directly out of their joint production to replace directly, in kind, their consumed means of production, but because the output data is collected on the basis of the value added, nothing changes. The coal producer, for example, might require £100 of steel from the steel producer, and the steel producer £100 of coal from the coal producer. In calculating the value of coal output, the value of the £100 of steel is deducted, and in calculating the value of steel, the £100 of coal is deducted, so that they cancel out, as far as the national output figure is concerned. Yet, it's quite clear that £100 of coal, and £100 of steel was actually produced, and represents a value of £200 of output that never enters into the actual national output figure

In Part 3, which will appear on Sunday, I will look at Marx's Law of the Tendency for The Rate of Profit to Fall, which he makes clear is based upon rising productivity, which causes the rate and mass of surplus value to rise, but the rate of profit to fall, as more raw material is processed, as the consequence of this rising productivity, so that the proportion of raw material value in total output rises proportionately.  This is in contrast to the theories to explain the tendency for the rate of profit to fall, that had been given by Marx's predecessors, such as Smith and Ricardo, which was premised upon a concept of the rate of profit, which is essentially only a rate of surplus value.  Their explanation, contrary to that of Marx sought to explain the tendency for the rate of profit to fall, as a fall in the rate of surplus value, which ultimately results in a fall in the mass of surplus value.  For Smith, this arises because capital accumulates faster than the labour supply, so competition for labour pushes up wages, and pushes down profits; for Ricardo, it is the growth of the labour supply, to meet the needs of a growth of capital, which causes the value of agricultural products and rents to rise, as, in order to meet the rising demand for these products, to feed the additional workers, less fertile land has to be cultivated.  That causes the value of labour-power to rise, leading to higher money wages, which results in a squeeze on profits.

These are two very different, and opposite conditions that arise, at different stages of the economic cycle, as Marx describes.  Just pointing to a fall in the rate of profit without distinguishing between these two opposing conditions, and causes, is like confusing a parasol for an umbrella, and wondering why, therefore, people are carrying umbrellas when the sun is shining brightly.