c) Mill’s Lack of Understanding of the Regulating Role of Industrial Profit
“All other profits … must sink to the level of agricultural profits” ( [Elements,] second ed., London, 1824, p. 78).” (p 99)
This proposition is wrong, for several reasons. Firstly, capitalist production develops in the towns and cities before agriculture. The average rate of profit develops in industry out of the average rate of profit that the merchant guilds established, and enforced via their monopolies. When merchants began to utilise their capital via the Putting Out System, and then manufacture, it was that which gave them their initial starting point for the mark-up to be placed on their production. But, the more important reason that Mill's argument is wrong is that capital employed in industry is free to move to wherever the highest annual rate of profit can be made. It is that fact which means that whenever surplus profits are being produced, competition ensures that they are equalised. This process of equalisation cannot exist with agricultural capital, because of the existence of landed property and rent.
It is the level of industrial profit which acts as the regulator, because, if the rate of profit in agriculture is higher than in industry, industrial capital then seeks to engage in agriculture, but that then causes the demand for land to rise, and, as the land is privately owned, the landowners raise rents accordingly, thereby appropriating the difference between the agricultural and industrial rate of profit. If industrial profits rise, so that the difference between agricultural and industrial profits shrinks, the consequence is a reduction in rent.
“Incidentally, in order to develop the concept of rent, Ricardo himself assumes the opposite.” (p 99)
Marx sets out Ricardo's line of argument, illustrating this. If the price of corn rises, this increases wages. The rise in wages causes industrial profit, and the average industrial rate of profit to fall. With a lower average industrial rate of profit, the difference between this rate and the agricultural rate of profit widens. That means that a rent now becomes possible on some of the inferior land. Capital is then invested on this inferior land. The rate of profit in agriculture does not fall, as it does in industry, because, although it has to pay higher wages, as a result of the higher price of corn, this is offset by that same higher price of corn for agricultural capital.
“Consequently the industrial profit rate falls and capital which yields this lower rate of profit can therefore be employed on inferior lands. This would not be the case if the old profit rate prevailed. Only because the decline of industrial profits thus reacts on the agricultural profit yielded by the worse land, does agricultural profit generally fall, and a part of it is detached in the form of rent from the profit the better land yields. This is the way Ricardo describes the process, according to which, therefore, industrial profit regulates profit in agriculture.” (p 99-100)
The regulating factor is the industrial average rate of profit, and the formation of prices of production, and without that there is no basis for determining rent. Rent is surplus profit, i.e. profit in excess of the average rate of profit. Its only possible to determine whether agricultural commodities are producing surplus profits, if their price of production is first known. In other words, the capital advanced plus the average industrial rate of profit determines the price of production of the output produced by that capital. If agricultural commodities sell at a higher price than this then the surplus profit is absorbed as rent. If industrial profit rises, for example, because improvements in technology and productivity reduce the value of machines and other elements of constant capital, this rise in the industrial rate of profit does not cause the agricultural rate of profit to rise, which would be the case where agricultural capital migrated to industry, because instead, rents fall.
“But in order that this excess of value over cost-price can be measured, the cost-price must be the primary factor; it must therefore be imposed on agriculture as a law by industry.” (p 100)
Marx says this following passage from Mill must be noted, but does not elaborate on why.
““That which is productively consumed is always capital. This is a property of productive consumption which deserves to be particularly marked… Whatever is consumed productively becomes capital” ([James Mill, Elements, p. 217;] Parisot, pp. 241-42).” (p 100)
In the Grundrisse, however, Marx notes that the workers' consumption of wage goods is productive in the sense that it produces the workers' labour-power. But, labour-power is not capital. For a peasant producer, their labour-power is merely a use value, for a wage-worker, it is merely a commodity. This illustrates Marx's definition of capital as a social relation, and its historical specificity. The peasant producer who consumes those products required for their reproduction thereby produces their labour-power. By utilising this labour-power, the peasant performs labour, and thereby is enabled to create a greater quantity of value than was required to reproduce their labour-power. They produce a surplus product, and surplus value. Yet, the products that the peasant consumed to reproduce their labour-power were not capital, and nor is their labour-power capital, even though the consequence of this process is to create a greater quantity of value, at the end of it, than existed at the start of it.
Yet, if the same individual is employed, in the same work, as a wage-worker, and is paid as wages the same products to consume, so as to reproduce their labour-power, these products do, now, take on the form of capital, - variable-capital, because what the owner of this capital obtains, at the end of the process, is a greater sum of value than was contained in the value of those wage goods, but without having to expend any additional labour to bring that about. The value they advanced as variable-capital has self-expanded.
Of course, this self-expansion has not materialised from nowhere. It is not that no one expended additional labour to bring about this expansion of value, only that the owner of capital themselves did not engage in advancing any additional labour. The process is the same. Labour produces more new value than is required for the reproduction of the given labour-power. The peasant produces a surplus value, only in the sense that they undertake more labour than is necessary. The surplus value they appropriate does not come to them for free, but only as a result of themselves undertaking this surplus labour. It is the fact that the worker's labour-power, no longer just as a use value, as with the peasant producer, but as a commodity, sold to the capitalist in exchange for wages, itself becomes productive-capital, in the hands of the capitalist. The worker, just like the peasant producer, performs the additional labour, in the production process, that creates the additional new value, over and above the value of the wages, which is the source of the surplus value, and which is appropriated as unpaid labour, by the capitalist, and which forms their profit.
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