Friday, 31 January 2020

Friday Night Disco - Gimme Some Lovin' - Spencer Davis Davis Group

Theories of Surplus Value, Part III, Addenda - Part 52

As the analysis provided by classical political economy is developed, it is compared with a reality which itself is developing. The analysis is critiqued both in terms of its internal consistency and in terms of its coherence with the real world. Only when the analysis itself is sufficiently developed does a body of criticism of it arise, and it is on the foundations of that that vulgar economy can develop. 

“Thus Say separates the vulgar notions occurring in Adam Smith’s work and puts them forward in a distinct crystallised form. Ricardo and the further advance of political economy caused by him provide new nourishment for the vulgar economist (who does not produce anything himself): the more economic theory is perfected, that is, the deeper it penetrates its subject-matter and the more it develops as a contradictory system, the more is it confronted by its own, increasingly independent, vulgar element, enriched with material which it dresses up in its own way until finally it finds its most apt expression in academically syncretic and unprincipled eclectic compilations.” (p 501) 

Classical political economy, as its analysis develops, seeks to address its own internal contradictions, as well as those that reflect the actual contradictions in society that it seeks to represent. This is the way that all theoretical analysis develops, until such time as the contradictions reach such a level that a new theoretical framework arises to replace the old. But vulgar economy, instead, seeks to explain away the contradictions, and is, thereby led increasingly into apologism. 

“Because he finds the contradictions in Smith relatively undeveloped, Say’s attitude still seems to be critical and impartial compared, for example, with that of Bastiat, the professional conciliator and apologist, who, however, found the contradictions existing in the economic life worked out in Ricardian economics and in the process of being worked out in socialism and in the struggles of the time. Moreover, vulgar economy in its early stages does not find the material fully elaborated and therefore assists to a certain extent in solving economic problems from the standpoint of political economy, as, for example, Say, whereas a Bastiat needs merely to busy himself with plagiarism and attempts to argue away the unpleasant side of classical political economy.” (p 501-2) 

But, Bastiat himself does not represent the final form of this vulgar economy. That rests with academic economics, which simply seeks to collate the “best” theories and to present them normatively. 

“All systems are thus made insipid, their edge is taken off and they are peacefully gathered together in a miscellany. The heat of apologetics is moderated here by erudition, which looks down benignly on the exaggerations of economic thinkers, and merely allows them to float as oddities in its mediocre pap. Since such works only appear when political economy has reached the end of its scope as a science, they are at the same time the graveyard of this science.” (p 502) 

Interest-bearing capital appears to create value without the expenditure of labour. It obtains the fruits of others labour by entering into the labour process. It does not represent congealed labour in the way that productive-capital or commodity-capital does; nor does it perform any labour in the production process. Yet it obtains the product of others labour simply on the basis of being inserted into the labour process. The owner of interest-bearing capital does not just get back the value of the capital they advance, but an additional value – interest

The interest, along with profit, rent and wages appears as a component part of the value of the commodity. The interest is payable because the value of the commodity is enhanced by the advance of interest-bearing capital by an amount equal to the interest. In other words, the interest-bearing capital is creator of value, and this additional value is then the source of the revenue – interest – paid to the owner of the capital. 

“But it can do this only because, in this form, it indeed enters by itself, without labour, into the labour process, as an element which in itself creates value, i.e., is a source of value. While it appropriates part of the value of the product without labour, it has also created it without labour, ex proprio sinu, out of itself.” (p 502) 

Thursday, 30 January 2020

Theories of Surplus Value, Part III, Addenda - Part 51

The fact that the rate of interest, rent or profit may move up or down does not invalidate this theory, any more than that the price of any commodity can move up or down, from its equilibrium price. It only signifies fluctuations in supply and demand. In this way, all explanation of prices, be it of commodities, or as revenues, is removed from the realm of production into the realm of distribution and competition

“Thus land, capital and labour on the one hand—insofar as they are the sources of rent, interest and wages and these are the constituent elements of commodity prices—appear as the elements which create value, and on the other hand, insofar as they accrue to the owner of each of these means for the production of value, i.e., insofar as he derives the portion of the value created by them, they appear as sources of revenue, and rent, interest and wages appear as forms of distribution. (As we shall see later, it is the result of stupidity that the vulgarians, as opposed to critical economy, in fact regard forms of distribution simply as different aspects of forms of production whereas the critical economists separate them and fail to recognise their identity.)” (p 499) 

Interest-bearing capital plays no part in production, and so contributes no additional value in production. Yet, the owner of interest-bearing capital does obtain a revenue – interest – and so the capital itself must be a source of value. 

“In interest-bearing capital, capital appears to be the independent source of value or surplus-value it possesses as money or as commodities. And it is indeed this source in itself, in its material aspect. It must of course enter into the production process in order to realise this faculty; but so must land and labour.” (p 499) 

But, for the owner of interest-bearing capital, it does not appear that this capital must enter into the production process, and this appearance is facilitated by the previous existence of this form of capital as usurer's capital. Indeed, under capitalism, the owner of interest-bearing capital obtains interest, whether they lend money to a spendthrift aristocrat, to an individual capitalist, or, as a payday lender, to a worker to sustain their consumption. Indeed, its that which leads Adam Smith, to view interest as a secondary revenue derivative from the revenues of rent and profit. 

“One can therefore understand why the vulgar economists prefer [the formula]: land—rent; capital—interest; labour—wages, to that used by Smith and others for the elements of price (or rather for the parts into which it can be broken down) and where [the relation] capital—profit figures, just as on the whole the capital relation as such is expressed in this form by all the classical economists. The concept of profit still contains the inconvenient connection with the [production] process, and the real nature of surplus-value and of capitalist production, in contra-distinction to their appearance, is still more or less recognisable. This connection is severed when interest is presented as the intrinsic product of capital and the other part of surplus-value, industrial profit, consequently disappears entirely and is relegated to the category of wages.” (p 499-500) 

Classical economics looks past the outward appearance of the different forms of revenue, and seeks to discover their inner unity. It identifies labour as the creator of value, and, thereby, identifies the source of rent, profit and interest as surplus value. Vulgar economy starts from the superficial appearance of the different revenues, and the apparent source of each revenue in the respective factors of production. It fails to address the question of how each of these factors of production actually produces new value, which is the basis of the revenue paid to its owner. 

Classical economy, 

“... therefore reduces rent to surplus profit, so that it ceases to be a specific, separate form and is divorced from its apparent source, the land. It likewise divests interest of its independent form and shows that it is a part of profit. In this way it reduces all types of revenue and all independent forms and titles under cover of which the non-workers receive a portion of the value of commodities, to the single form of profit.” (p 500) 

It often finds itself in contradictions, because it skips intermediate stages of analysis, reducing all of these revenues to a single source. It sometimes associates surplus value with profit, and so on. 

“This is however a necessary consequence of its analytical method, with which criticism and understanding must begin.” (p 500) 

But, the greatest weakness is its failure to identify capitalism a merely an historical, rather than natural, form of social production. 

“the analysis carried out by the classical economists themselves nevertheless paves the way for the refutation of this conception.” (p 501) 

Scrap HS2

Boris Johnson's government is, today, likely to confirm that they will waste over £100 billion building the HS2, white elephant rail line. Its likely not to be the only big noticeable infrastructure project they promote, as with the proposal to build 40 new hospitals, and so on. Whether any of them actually do get built is another matter. At the same time, Chancellor of the Exchequer, Sajid Javid, is already writing to government departments asking them to look for “savings”, i.e. cuts in their current, revenue expenditure. As the UK economy goes into recession, as a result of Brexit, its capacity to finance existing expenditures will come under pressure, let alone the need to find the funding for hundreds of billions of capital expenditure, to fund the Tories plans to cut taxes for their rich friends, and, at a time when global bond yields only have one way to go from their current near zero levels, which will rapidly increase UK borrowing costs. The only way the Chancellor can square this circle of increased spending on capital projects, with tax giveaways to the rich, higher borrowing costs, and lower revenues due to a Brexit recession, is by viciously squeezing current spending. He's likely to come to be known as Savij Javid. 

The reason Johnson's government wants to promote HS2, and other such infrastructure projects, is not hard to discern. All politicians like to be associated with such large, sexy projects. Money spent on building a new hospital, a new road, or rail line can be seen by voters. Money spent as revenue, to employ the actual doctors and nurses and ancillary workers in those hospitals, or to finance the expenditure on primary care that would help prevent people becoming ill in the first place, and so not need hospital treatment, is not. The NHS bureaucrats also like such large projects too, because it builds their own personal empires, justifying their own higher salaries etc. For politicians these large projects have the added advantage that, because they take years to complete, they are the gift that keeps on giving. Gordon Brown was renowned for standing up and re-announcing capital projects that had been announced several times over previous years, so as to look as though the government was committed to additional new spending. Johnson's ridiculous claims about building 40 new hospitals, when in fact only 6 are actually funded, is another example. Moreover, because of the fact that these projects extend over several years, governments can save money, in any year, by simply delaying construction. 

HS2 is being sold as a means of regenerating the economies of the North and Midlands, but it does the exact opposite. All experience, not just of the last two hundred years, but back to the time of the Romans, shows that, where new roads or rail lines are introduced, into an existing large conurbation, the effect is to further develop that conurbation's economy, and to drain that of the areas connected to it. It is in the conurbations that the first markets develop, and into which traders and producers converge. It is there that such trading encourages further economic activity and development. In the last two hundred years that has been even more pronounced. The development of better road and rail links, for example, meant that workers could work in the conurbations, but live in the suburbs, where housing costs, at least initially, were cheaper, and where the environment was more pleasant. HS2 simply extends that principle. 

For employers in London, and its environs, labour has become expensive, because the degree of economic activity centred on the capital has driven up housing costs to an even more ridiculous extent than in the rest of the country. The huge asset price inflation that has blown up property prices, in the UK, since 1980, to around four times their long term average level, has blown up London prices to around 4 times the level elsewhere in the country. It means that many workers, even on double or treble the average wage, living in London, cannot afford to buy a house. It means that many cannot even afford to rent without the assistance of Housing Benefit. This effect on housing has a knock on effect into other living costs in London. In order to grow, London needs additional labour, but it needs that Labour to come from further and further outside London, where living costs are lower, and where, therefore, the value of labour-power is lower, so that London employers can pay lower wages. That is what HS2 is designed to achieve. 

Already, London draws in large numbers of higher paid workers from up to 200 miles away. Their travel to London, despite them being higher paid workers, is massively subsidised by the taxpayer, via subsidies to rail fares provided by the government. If London didn't already have a massive economic advantage it is provided with massive further advantages by the state. Much of the £22 billion a year in Housing Benefit goes to subsidise landlords in London. By far the greatest proportion of subsidies for rail travel goes to commuters travelling into London, whilst London gets, again, by far the largest proportion of infrastructure spending on new projects. 

Yet, the truth is that the proportion of people travelling to London from elsewhere in the country is extremely small. Its only if you are one of the minority in a higher paying job that you can afford to commute every day from any great distance. As rail fares on HS2 are likely to be substantially higher than existing fares that will be even more true, unless the state provides even greater levels of subsidy to those fares. And, to be clear what that means, it means that the state collects taxes from workers and businesses elsewhere in the country, and then uses those taxes to subsidise the rail fares of the tiny minority who commute into London, and so, thereby subsidies the profits of companies based in London, who can get away with paying lower wages. It means that higher skilled labour is drained away from the regions to work in London, and that London gets to concentrate even more economic activity, and particularly high value economic activity within its environs. 

But, most of us rarely make that journey. The last time I went to London was 2003, on the Iraq War demonstration, and that journey was conducted by coach. If the government really wanted to rebalance the economy, and promote economic development in the North and Midlands, let alone Scotland and Wales, it would scrap HS2, and use the money elsewhere. The economy of the regions will not be enhanced by providing an additional faster connection to London. All that means is seeing the connection of the rest of the country to the outside world as necessarily having to go via London. That is crazy. If you want to develop the regions, then it involves connecting regional centres of the country directly to the outside world. Of course, Brexit achieves the exact opposite of that. 

In a globalised world, the way to develop Manchester, is to develop Manchester Airport and its links to airports in Europe, North America and the Pacific, and the same applies to Liverpool, Newcastle, Glasgow, Cardiff, Derby and so on, as well as developing new large airports in other areas such as in North Staffordshire. Of course, that is one kind of infrastructure project that politicians are loathe to advocate, because pressure from the environmentalist lobby means that promoting additional airports and air travel is a no-no. Yet, for an island like Britain, it is the only sensible solution. If you are in mainland Europe, the development of existing high speed rail travel, and the possibility, in the next couple of decades, of developing hyperloops is feasible, but in Britain its not. Indeed, with Brexit, even the single rail link between the isolated British island and the mainland, via the Channel Tunnel, becomes diminished. 

If you want to develop the regions, then instead of another route channelling people and resources into London, then, in addition to developing these new regional airport hubs, to connect to the rest of the world, its necessary to build East-West road and rail links in these areas too. In truth the proposals for HS3, and other East-West rail links are also probably a waste of money. So, too are the proposals to put additional money into bus services, other than in the very short-term. Rail services are way too rigid to be of much use to modern day local travel. Even if all the lines closed by Beeching were reopened, it would not be possible to have stations close to where people live and work. Even bus services fail to achieve that, because the huge number of varied routes that people require cannot be easily met by services designed to go from A-E, via B, C, and D, because commuters need to go from A1, A2, A3 …, and to go to C1, C2 and so on. That is one reason that people began to use cars for their personal travel to begin with. The real solution to this problem is a rapid development of electric cars, and particularly of self-driving electric cars that can be called up when you need them, and disposed of when you have completed your journey. If the government wants a real infrastructure project then it should focus its attention on establishing a comprehensive network of fast, free car charging points. 

But, also, in the 21st century, the question is why do many people need to travel anyway? Large amounts of physical work is increasingly being undertaken by robots, and that will increase further with the development of AI. For any kind of administrative work it can more easily be conducted at home using a computer. But that requires those computers to be networked, and that requires a truly fast broadband backbone, of at least 1Gbps, and preferably 2 GBps. That is what Labour's proposal to provide a free, fast broadband network began to offer. Even that was not up to the standard that currently exists in places like Singapore. If Britain wants to compete in the 21st century, it has to forget about 19th century communications solutions, such as railways, and embrace 21st century communications technology. 

Wednesday, 29 January 2020

Theories of Surplus Value, Part III, Addenda - Part 50

The critical economists, and neoclassical economy, essentially starts from Adam Smith's cost of production theory of value, but it takes the marginal production analysis, undertaken by Ricardo and Marx, to explain rent, on the basis of surplus profit, derived from variations in the marginal product, arising from additions of land or capital, and turns this into a theory by which each of these factors is thereby an independent source of value, proportionate to its marginal product. 

The marginal analysis undertaken by Ricardo, Marx and Engels, is an analysis of productivity. In other words, it is an analysis of how the output of use values rises as a consequence of additions of land, labour and capital in varying proportions. But use value is not value. Productivity is a measure of the output of use values, not of value. If 1,000 units of use value A are produced by 100 hours of labour, there is no increase in value if, as a result of a rise in productivity 2,000 units of A are now produced by the same 100 hours of labour. It simply means the unit value of A has halved from 0.10 labour hours to 0.05 labour hours. 

Marx and Ricardo's marginal analysis, in analysing rent, illustrates that, if we take these two situations above as being, say, for the production of corn, on two different types of land, the individual value of the output on both lands is 100 hours of labour. If we give an hour's labour the name of £1, each produce £100 of value. But, the latter land produces 2,000 kilos, whereas the former produces only 1,000 kilos. The individual value of the more fertile land is £0.05 per kilo, as opposed to £0.10 per kilo on the less fertile land. Marx and Ricardo assume that the less fertile land is only cultivated if the price of corn is high enough to ensure that the capital employed on it obtains the average profit, and so that determines the market value. In that case, the capital employed on the more fertile land will sell its output of 2,000 kilos at this market value of £0.10 per kilo = £200, and will thereby also produce a surplus profit of 2,000 x £0.05 = £100, which is appropriated by the owner of the more fertile land as rent. 

Critical economy and neoclassical economy eradicate this distinction between use value and value. For neoclassical economy, the fact that the more fertile land produces twice as much corn is equivalent to producing twice as much value. The additional value is then attributed to the land, and the owner of the land is thereby entitled to a revenue equal to the added value their land has created, i.e. £100 of rent. 

The value created by each factor of production is thereby reduced to its marginal physical product, multiplied by the price of the product, i.e. marginal revenue product. The value of commodities is then comprised of the marginal revenue product of each factor of production, whilst, at the same time, the marginal revenue product is determined itself by the price of the product. This is a circular argument that appears to be a contradiction, but is within the constraints of this particular theoretical system, one that flows from the reality itself. 

“Capital—as an entity—appears here as an independent source of value; as something which creates value in the same way as land [produces] rent, and labour wages (partly wages in the proper sense, and partly industrial profit). Although it is still the price of the commodity which has to pay for wages, interest and rent, it pays for them because the land which enters into the commodity produces the rent, the capital which enters into it produces the interest, and the labour which enters into it produces the wages, [in other words these elements] produce the portions of value which accrue to their respective owners or representatives— the landowner, the capitalist, and the worker (wage-worker and industrialist). From this standpoint therefore, the fact that, on the one hand, the price of commodities determines wages, rent and interest and, on the other hand, the price of interest, rent and wages determines the price of commodities, is by no means a contradiction contained in the theory, or if it is, it is a contradiction, a vicious circle, which exists in the real movement.” (p 498-9) 

This is essentially the same argument that took place a century later between Cambridge, England and Cambridge, Massachusetts. In other words, if we accept the theoretical assumptions underpinning both systems of thought, then neoclassical theory as described in the General Equilibrium model (as opposed to the partial equilibrium model) is internally consistent. The problem is, as the Cambridge, England economists showed, that the assumptions required for the General Equilibrium model bear no resemblance to real world conditions, as Sue Himmelweit describes. 

“General equilibrium theory is internally consistent and complete for where Cambridge, England claimed a theory of class struggle was needed, Cambridge Massachusetts and their many followers throughout the world already had a theory. This was the determination of factor prices (within a general equilibrium framework) by individual preferences for leisure rather for labour and consumption now rather than later. Thus, precisely by returning to the consistency of an individualistic basis, general equilibrium theory was defended. But, it was a weak defence, and showed up the weakness of the whole theory. For the orthodox answer, which explained the current distribution of income on the basis of initial endowments and individual preferences, left unanswered the question of where these preferences and endowments came from. It simply removed the question of distribution a stage further back. 

Orthodox theory came out of this fray logically intact but clearly shown up for its inability to provide a fundamental explanation for such an immediate characteristic of society as the distribution of income and wealth. Still less can it explain the deeper processes that bring about such observable phenomena. The logical inadequacy of the easier versions of orthodox theory which are taught to undergraduates and used by ordinary economists in place of general equilibrium theory heighten the latter's irrelevancy.” 


Tuesday, 28 January 2020

Theories of Surplus Value, Part III, Addenda - Part 49

[5. Essential Difference Between Classical and Vulgar Economy. Interest and Rent as Constituent Elements of the Market Price of Commodities. Vulgar Economists Attempt to Give the Irrational Forms of Interest and Rent a Semblance of Rationality] 


Classical economy identifies value with labour. The value of a commodity is equal to the quantity of labour-time required for its reproduction. For classical economy, therefore, all revenues, whatever their outward appearance, as wages, profits, rent, interest and taxes, are reducible to one single source – labour. This is in contrast to the later critical economic analysis, represented by neoclassical economists who see each factor of production – land, labour and capital – as all equally being sources of value, which, combined, produces the value of the commodity, and, likewise, from the value of the commodity is divided up accordingly in proportion to these contributions, to provide the revenues received by the owners of these respective factors, i.e. capital – interest, land – rent, labour – wages. 

For the classical economist, most clearly expressed by Adam Smith, labour is the source of all value; the value of a commodity is determined by the quantity of labour required for its production. The surplus value is then nothing more than surplus labour, i.e. labour in excess of the labour required for the reproduction of the labourer. Smith's problem, here, arising from his analysis, is why does this surplus labour accrue to the capitalist, as profit, rather than the worker as wages. If The Law of Value requires that commodities exchange at their values, why is it that the worker sells 10 hours of labour to the capitalist, but is paid for only 6, for example? After all, the same labourer, as an independent labourer, if they expended 10 hours of labour, producing a commodity, would get back this 10 hours of value, when they sold the commodity. 

The answer to this riddle, provided by Marx, is that the wage worker does not sell their labour, or the product of their labour, to capital, in the way that an independent labourer sells their products or a labour service to a buyer, but rather sells their labour-power, their ability to perform labour. Smith, like the other classical economists does not make this distinction between labour and labour-power. Consequently, Smith resolves this contradiction, arising from his theory, by concluding that, as soon as landed property and capital arises, The Law of Value ceases to operate. He concludes that, although the value of commodities is determined by the quantity of labour required for their production, capital is able to appropriate the surplus value, because labour is abundant whilst capital is scarce. The price of labour, thereby, falls below its value, whilst the price of capital rises above its value. 

Similarly, classical economy sees rent and interest as similarly deriving from surplus labour, and so, merely, as divisions of the profit. It analyses rent as surplus profit, and for Smith, in particular, interest is only a secondary revenue, derived from profits and rent, as the price paid for borrowing money. For Smith, therefore, he arrives at his cost of production theory of value, which he slips into, whereby the value of commodities is determined by the prices of the factors of production. Each of these factors has a “natural price”, which must be paid to ensure its owner brings it to market. If any factor, such as labour, is in excess supply, then its market price will fall below its natural price. Its on this basis that Smith believed that the supply of capital would rise faster than the supply of labour, so that, eventually, wages would rise and profits would disappear. 

But, the basis can be seen here, in Smith's cost of production theory, for the later conclusions of critical economy, and formulated by neoclassical economy, that each factor of production is itself an independent source of value. Smith never gets away from his initial labour theory of value, that the value of commodities is determined by the quantity of labour required for their production, and his concept of natural price for these factors is really reduced to the question of how this value is distributed amongst them. Ricardo, himself, never followed Smith in abandoning The Labour Theory of Value, and deals with the contradiction Smith faced, in relation to the question of surplus value, by simply ignoring it, assuming that surplus value exists, in the form of the average rate of profit, but never bothering to enquire into its source. Ricardo, instead, focuses on the way an average profit implies also surplus profit, and, thereby, the potential for rent. 

Monday, 27 January 2020

Theories of Surplus Value, Part III, Addenda - Part 48

Marx has demonstrated, from Capital I onwards, that the basis of profit is surplus value, and the source of surplus value is production. The worker produces more new value than is required for the reproduction of their labour-power, and the capitalist then appropriates this surplus value as profit. But, now, examining the phenomenal form of profit, Marx notes, 

“The capitalist’s real profit is largely profit upon expropriation and the “individual labour” of the capitalist has an especially wide scope in this field, where it is not a question of the creation of surplus-value but of the distribution of the aggregate profit of the whole class of capitalists among the individual members in the field of commerce.” (p 498) 

In other words, the explanation for profit, as a category, remains the production of surplus value, but having acknowledged the existence of surplus value, and its manifestation as profit, we are still left with explaining why the profit of firm A is greater than that of firm B, when, for all intents and purposes, the two are identical. Differences in profit, within the same sphere, can be attributed to one firm being larger than another, and so obtaining economies of scale; it may be the result of one firm introducing some new, cheaper or more effective technology; it may be that one firm enjoys natural benefits from location, either in terms of fertility of the land or access to markets, or for labour supplies, raw materials etc., or surrounding infrastructure. 

But, even allowing for all these differences one firm may obtain a greater share of profits than another, simply on the basis of the guile of its management, or even good fortune. A firm that sees a new market opening, for example, obtains first mover advantage; a firm able to effectively promote its brand may be able to charge higher prices for its commodities, and so on. 

“Certain kinds of profit, those based on speculation for example, are restricted merely to this field. It is therefore quite impossible to examine them here. It is an indication of the bovine stupidity of vulgar economy that (particularly in order to represent profit as “wages”) it confuses this with profit insofar as it originates in surplus-value. See the worthy Roscher, for example. It is thus quite natural that, when dealing with the division of the aggregate profit of the whole capitalist class, such asses should mix up the items in the accounts and grounds for compensation of capitalists in different spheres of production with the grounds for the exploitation of the workers by the capitalists, with the grounds, so to speak, for the origin of profit as such.” (p 498) 

And the same confusion results in capital gain being described as profit. A firm that speculates that prices for its raw materials may rise, might buy a large amount of those materials, now, at the current low price, so as to obtain an advantage over its competitors. But, it is “bovine stupidity” to conflate this capital gain, resulting from the change in the current value, i.e. current reproduction cost, of those materials compared to their historic price, with profit. This confusion and conflation of capital gain with profits is most notable in the realm of financial markets. When A buys shares or bonds or property for £100,000 and later sells them for £150,000, this is frequently described as having made a profit of £50,000, whereas, in fact, its not profit that has been made, but only capital gain. Profit only arises as a consequence of the production of surplus value. It means that additional new value has been produced, in excess of the value consumed in production. But, no such production of new value arises with capital gain. It involves only a transfer of wealth from one set of hands to another. It means that one person's capital gain is another's capital loss. The capital gain of the firm that buys twice as much cotton as it would ordinarily have done from its supplier is the capital loss of the cotton supplier who misses out on selling the additional cotton at the higher price. The capital gain of the buyer of share A, which doubles in price, is the capital loss not only of the previous seller of share A, but also of the owners of money-capital who can now only buy half the quantity of A shares that they could previously have done. The capital gain of the buyer of a house that doubles in price is the capital loss of the next buyer of the house whose money has been halved in value, relative to the house. 

But, as Marx described in Chapter 22, discussing Ramsay, these capital gains are themselves ephemeral and illusory, when it comes to capitalist production. The illusory profit represents only a release of capital.  The buyer of cotton, to remain in business, must replace the cotton they have consumed, and must now do so at the higher price. Their “profit”, from the difference between the historic price and the current value, is swallowed up in replacing the consumed cotton, and now, because they must advance more constant capital, because of the higher price of cotton, whilst they produce no more surplus value/profit, their rate of profit falls. 

The person whose house price rises from £100,000 to £150,000 makes a paper capital gain, but this paper capital gain evaporates when they come to buy an equivalent house, which, now, likewise, costs them £150,000. And, if they move up the housing ladder, the same 50% rise in prices means the house they could have bought previously for £200,000, now costs them £300,000, so that their £50,000 capital gain is wiped out by the £100,000 capital loss they suffer, leaving them with a net capital loss of £50,000 from the rise in prices. 

Sunday, 26 January 2020

Theories of Surplus Value, Part III, Addenda - Part 47

This separation of the owners of loanable money-capital from production, and the performance of their former social function, in production, by the professional managers, means that the profit of enterprise appears as wages for the labour of superintendence. But, as Marx points out, the argument put forward by the capitalists and their representatives backfired on them, because the workers and their advocates, with the evidence in front of them, of what the managers in the cooperative factories were paid, simply turned to the capitalists and demanded then that their “wages” be reduced to these same levels. As Marx says, by this time, the extension of education had also meant that workers could see many such managers and potential managers, from within their own ranks, walking the streets in search of employment. 

“Incidentally, these apologetics aimed at reducing profit to wages, i.e., the wages of superintendence, boomerang on the apologists themselves, for English socialists have rightly declared: Well, in future, you shall only draw the wages usually paid to managers. Your industrial profit should not be reduced to wages of superintendence or direction of labour merely in words, but in practice.” (p 496) 

“And they add: the function of the manager, the labour of superintendence, can now be bought on the market in the same way as any other kind of labour-power, and is relatively just as cheap to produce and therefore to buy. Capitalist production itself has brought about that the labour of superintendence walks the streets, separated completely from the ownership of capital, whether one’s own or other people’s. It has become quite unnecessary for capitalists to perform this labour of superintendence. It is actually available, separate from capital, not in the sham separation which exists between the industrial capitalist and the moneyed capitalist, but that between industrial managers, etc., and capitalists of every sort. The best demonstration of this are the co-operative factories built by the workers themselves. They are proof that the capitalist as functionary of production has become just as superfluous to the workers as the landlord appears to the capitalist with regard to bourgeois production.” (p 497) 

There is a requirement for labour of superintendence. The labour of a conductor is required in relation to an orchestra. The more labour is characterised by a division of labour, and, thereby, cooperative labour, the greater is the requirement for labour involved in such functions of supervising, coordinating and managing. Such labour is not specific to any mode of production. Indeed, under socialism, because it is premised on a much greater scale of production, much greater division of labour, including the separation of scientific labour from manual labour, the much greater use of cooperative labour, the need for such labour of superintendence becomes even greater. 

But there are other functions included in the heading of labour of superintendence that are specific to each mode of production. There is only a requirement for slave masters under systems of slavery. There is only a requirement for foremen and other such workers, under capitalism, where the function is not about the supervision and coordination of the labour process, but about ensuring that surplus value is maximised from each worker. In just the same way that slaves were overseen by other slaves, so the task of overseeing the exploitation of wage workers is given to other wage workers. This labour is only necessary in so far s these exploitative relations determine the mode of production. 

“If man attributes an independent existence, clothed in a religious form, to his relationship to his own nature, to external nature and to other men so that he is dominated by these notions, then he requires priests and their labour. With the disappearance of the religious form of consciousness and of these relationships, the labour of the priests will likewise cease to enter into the social process of production. The labour of priests will end with the existence of the priests themselves and, in the same way, the labour which the capitalist performs qua capitalist, or causes to be performed by someone else, will end together with the existence of the capitalists.” (p 496) 

Saturday, 25 January 2020

Theories of Surplus Value, Part III, Addenda - Part 46

After 1999, the new long wave cycle uptrend saw powerful global growth and capital accumulation. It was that which created the conditions for rising interest rates, which crashed asset prices in 2008. After the 2008 crisis had been stabilised, and particularly after 2010, a huge amount of additional currency was pumped into financial and property markets to reflate those asset prices, and, thereby, restore the paper wealth of the top 0.01%, which had been shredded by the 2008 crisis. At the same time, by reinflating those assets, it again created the conditions for profits once more to be used for the purchase of financial and property assets, rather than capital accumulation. 

Even at the level of the ordinary citizen, inflating property prices created a powerful speculative motive to get on the housing ladder, to become a buy to let landlord, and so on. It created conditions for money to flow out of commodity circulation, thereby having a deflationary and depressive impact on commodities, and into finance and property markets. Yet, whilst all of this activity, by the state and central banks, to hold back economic growth, to thereby limit the upward pressure on interest rates, so as to inflate asset prices, has had the effect of suppressing economic recovery, and resumption of the growth, prior to 2008, it has not changed the underlying economic laws and conditions. 

Global economic growth, driven by the laws of the long wave has continued. It has been suppressed, but, thereby, only increased in duration. The US has now experienced the longest period of uninterrupted growth in its history, for example. The interests of the top 0.01% have affected the path of the economy, particularly since 2010, but they have not changed the laws of economics. They have restored their paper wealth that was decimated in 2008, but only at the cost of preparing an even bigger financial crash from which the central banks will not be able to save them. They have suppressed the economic recovery, after 2010, so as to suppress interest rates, and keep asset prices inflated, but, in so doing, they have merely lengthened the period of the long wave uptrend. The same economic laws continue to drive capital to accumulate. 

The process of capital accumulation, even having been artificially suppressed, has continued. One consequence has been the ability of capital in China and elsewhere to accumulate at an even more rapid pace. The capital accumulation has continued to see increased numbers of workers employed and thereby increased demand for wage goods. As this causes the market to expand, so competition drives capital to accumulate so as not to lose market share. In 2018, we saw, therefore, this feeding through into rising interest rates and a 20% fall in US stock markets. Trump's global trade war, along with the similar effect of Brexit, has further curtailed trade and growth, but this can only be a temporary phenomenon. Trade is already being diverted into alternative channels, and when the trade disputes are resolved, there is likely to be an even greater rebound in trade and economic growth, with a consequent rise in interest rates, and fall in asset prices. 

Ultimately, the fictitious capital is subordinated to real capital. 

“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) 

Northern Soul Classics - Any Other Way - Chuck Jackson

Friday, 24 January 2020

Friday Night Disco - The First Cut Is The Deepest - P.P. Arnold

A bit more Torch, mod nostalgia.


Theories of Surplus Value, Part III, Addenda - Part 45

The replacement of private capital by socialised capital, as a transitional form of property is a necessary stage in he transcendence from capitalism to socialism, but it is by no means sufficient. As Marx says, in Capital III, Chapter 27, the worker cooperative resolves the contradiction between capital and labour positively, because it turns the workers into their own capitalist. The joint stock company resolves it negatively, because, although the capital belongs to no one, but to the company itself, which can only logically mean the associated producers themselves, those associated producers do not exercise control. Control is exercised by shareholders, and their appointed representatives. 

For so long as commodity production predominates, each capital, be it a privately owned capital, a socialised capital, in the form of a worker owned cooperative, or a state owned capital, or a corporation, is led to compete in the market. In order to compete, it must reduce the individual value of its output below the market value, and to do that it must accumulate capital. In order to accumulate capital, it must produce profit, and to increase its mass of profit, it must exploit more labour, and exploit labour more effectively. 

The worker owned cooperative resolves the contradiction positively by turning the workers into their own capitalist, but, as capitalists, they must still accumulate capital, and, thereby, exploit their own labour by the most effective means of scientific management, the use of the most effective technology, etc. Their advantage is that they now do this to their own account, and under their own control. 

For the workers in other forms of socialised capital, such a condition requires that the workers gain the same control. That requires that the same kind of political revolution that brought political democracy, in the 19th and early 20th century, at the level of the state, now be undertaken to bring industrial democracy at the level of the enterprise. But, the former private capitalists (and their descendants) who removed themselves from the social function in production, now have no part in this relation between capital and labour. On the contrary, as the owners of fictitious capital, as money lenders, they stand in a contradictory and antagonistic relation, not to labour but to the productive-capital itself, and, thereby, to the functioning capitalists, whether those functioning capitalists be managers appointed by workers in a cooperative, employed by the state, or by a large company. 

Interest presents capital not in opposition to labour, but, on the contrary, as having no relation to labour, and merely as a relation of one capitalist to another; consequently, as a category which is quite extrinsic to, and independent of, the relation of capital to labour. The division of the profit amongst the capitalists does not affect the worker. Thus interest, the form of profit which is the special expression of the contradictory character of capital, is an expression in which this contradiction is completely obliterated and explicitly left out of account. Apart from expressing the capacity of money, commodities, etc., to expand their own value, interest, insofar as it presents surplus-value as something deriving from money, commodities, etc., as their natural fruit, is therefore merely a manifestation of the mystification of capital in its most extreme form; insofar as it at all represents a social relation as such, it expresses merely relations between capitalists, and by no means relations between capital and labour.” (p 494) 

The industrial capital is still compelled by the laws of capitalism to accumulate. Competition drives this accumulation. As the economy expands, each capital is compelled to accumulate so as to obtain its share of the increased market. Each capital is compelled to accumulate so as to reduce its costs of production, to remain competitive. Ultimately, these laws of capital dominate, but, in the short-term, the contradictory interests of fictitious capital, of interest-bearing capital can dominate. The recipients of interest/dividends are, here and now, interested not in maximising company profits, or accumulation, but of maximising the interests/dividends they obtain. The more that goes into interest/dividends the less there is for capital accumulation. 

As seen in the last thirty years, this concern to promote “shareholder value” above the interests of the company, and capital accumulation can take varied forms. At one point, it assumes the form not only of a restriction of accumulation, but outright destruction of capital, in the form of asset stripping. It takes the form of pushing up dividends to compensate for falling yields, as asset prices are inflated. As Haldane has noted, dividends in the 1970's accounted for 10% of profits, and today account for around 70%. As yields fell, even as dividends were raised, because asset prices were continually inflated, so the owners of fictitious capital, which now forms the vast majority of their private wealth, became more concerned with capital gains than with yields/revenues from those assets. 

The representatives of shareholders on company boards used profits not to accumulate capital, but to increase dividends and provide direct transfers of capital to shareholders; they used profits to buy back shares and to buy the shares of other companies, thereby pushing up those share prices (and, in the process, increasing the value of their own share options); they even borrowed money on bond markets, not for capital accumulation, but to buy back stock, and, thereby, inflate share prices. When the inevitable happened, and the relative diminution of the real capital base, and its ability to produce surplus value/profits came into conflict with the continued inflation of asset prices, causing a series of financial crashes – the last so far being that of 2008 – the representatives of the owners of this fictitious capital, in the state apparatus, were on hand to again bail them out.

The central banks cut their official interest rates, so that commercial banks could borrow from them at less cost, and they used various means to direct this additional borrowing and currency into the purchase of financial and property assets. Conservative governments implemented policies of austerity, so as to hold back economic growth, which would have ensured that the increased capital accumulation raised interest rates, thereby again causing asset prices to crash. But, each time they have adopted such methods, they have been less and less effective in raising asset prices, requiring even more and more money printing, and lower and lower yields, and official interest rates, even to the extent of producing negative official interest rates, and negative bond yields, now amounting to $15 trillion globally. At the same time, availability of loans for actual capital investment has dried up for small and medium sized firms, and the actual market rates of interest they face has correspondingly risen. At the same time, nominal profits have been inflated as money wages fell, by workers relying increasingly on credit, in the form of personal loans and credit and store card debt to finance their consumption. But, these forms of credit are extremely expensive, with interest rates of around 30% p.a. For some, reliant on payday lenders, the rates are as high as 4,000% p.a. Consequently, the effect has been to simply make the contradiction even more acute, and make the inevitability of even bigger financial crash that much greater. 

Thursday, 23 January 2020

Theories of Surplus Value, Part III, Addenda - Part 44

The private capitalist took a portion of profit and classified it as wages of superintendence. As Marx sets out, in Capital III, the extent to which these wages bore no relation to the labour they provided was was shown by the drop in those wages, when the same owners were reduced to the status of managers, employed by their former workers, when those workers took over the businesses, and ran them as cooperatives. Today, the large shareholders in firms, similarly, pay out astronomical sums to directors that are in inverse proportion to any labour or value they contribute to the company, and are simply a drain on profits. The shareholders bestow this largess upon them, in order to ensure, as best they can, that these directors protect the interests of shareholders as against the interests of the company itself. 

Profit essentially disappears. On the one hand, capital itself becomes identified with interest-bearing capital, and the return to it is interest/dividends, not profit. Even the relation that profit had to surplus value is thereby obscured. Interest appears as the fruit of capital, just as pears are the fruit of the pear tree. But, industrial profit, or profit of enterprise, also, thereby, disappears and becomes nothing more than wages of superintendence

“Apart from the reasons mentioned earlier, this assumption of an independent existence is established all the more easily since interest-bearing capital appears on the scene as a historic form before industrial capital and continues to exist alongside it in its old form and it is only in the course of the development of industrial capital that the latter subordinates it to capitalist production by turning it into a special form of industrial capital.” (p 493) 

Capital, as interest-bearing capital, assumes its fully fetishised form. It appears as self-expanding value, completely alienated from production, let alone from surplus value. 

“Thus the nature of surplus-value, the essence of capital and the character of capitalist production are not only completely obliterated in these two forms of surplus-value, they are turned into their opposites. But even insofar as the character and form of capital are complete [it is] nonsensical [if] presented without any intermediate links and expressed as the subjectification of objects, the objectification of subjects, as the reversal of cause and effect, the religious quid pro quo, the pure form of capital expressed in the formula M—M'. The ossification of relations, their presentation as the relation of men to things having a definite social character is here likewise brought out in quite a different manner from that of the simple mystification of commodities and the more complicated mystification of money. The transubstantiation, the fetishism, is complete.” (p 494) 

Interest, in this its capitalist form, as opposed to its previous form as usury, itself presupposes the existence of capital, as a social relation. It is only because capital exists as self-expanding value, arising from the appropriation of surplus value created in production, that this surplus value assumes the form of profit. It is only because competition between capitals, to maximise their annual rate of profit, leads to the formation of an average rate of profit, and prices of production, that all capital, thereby, acquires the same use value of being able to produce this average rate of profit, and so capital itself can be sold as a commodity, whose price is the rate of interest. But, once this situation arises, and capital is sold as a commodity, this causal link between production, surplus value, and interest is severed. The owners of capital, and, in reality, its most fetishised form, money-capital, appear to obtain profit/interest entirely independently from production, superficially, in the same way that the usurer obtained interest from debtors. The money-lending capitalist, thereby, stands in no relation to the labourer. The productive-capitalist stands in a contradictory relation to the labourer, based on the appropriation of surplus value. The smaller the proportion of the labourer's output that must go to reproducing labour-power, the larger the proportion that goes to surplus value. Now, as the private capitalist steps aside from that role, that contradiction exists between the functioning capitalist and the labourer. Even when, as socialised capital comes to dominate, and those functioning capitalists are themselves workers, most clearly manifest in the worker cooperative, this contradictory relation continues to exist, as Marx describes in Capital III, Chapter 27. So long as commodity production predominates, even an economy comprised 100% of worker owned cooperatives would continue to reproduce this capital-labour relation, with the only difference being that the labourers would have made themselves into their own capitalist. 

The same is true where the socialised capital took the form of nationalised, statised property, with the further disadvantage for the workers, here, that they would have replaced their exploitation by private capitalists for the far more effective exploitation by the state, as Kautsky noted. 

“If the modern state nationalises certain industries, it does not do so for the purpose of restricting capitalist exploitation, but for the purpose of protecting the capitalist system and establishing it upon a firmer basis, or for the purpose of itself taking a hand in the exploitation of labour, increasing its own revenues, and thereby reducing the contributions for its own support which it would otherwise have to impose upon the capitalist class. As an exploiter of labour, the state is superior to any private capitalist. Besides the economic power of the capitalists, it can also bring to bear upon the exploited classes the political power which it already wields. 

The state has never carried on the nationalising of industries further than the interests of the ruling classes demanded, nor will it ever go further than that. So long as the property-holding classes are the ruling ones, the nationalisation of industries and capitalist functions will never be carried so far as to injure the capitalists and landlords or to restrict their opportunities for exploiting the proletariat.” 


Wednesday, 22 January 2020

Theories of Surplus Value, Part III, Addenda - Part 43

Where all capitalists use their own capital, the category of interest does not arise. Where some capitalists borrow money-capital, and pay interest, the category of profit separates into two – interest and industrial profit – which appears to reflect two different types of capital – interest-bearing capital and industrial capital. This appears, initially, as just a quantitative division of the profit, no different than where, say, a firm belongs to four partners, and its profit is divided between them, proportionately to the capital each has contributed. 

But, in the case of interest-bearing capital this quantitative division becomes transformed into a qualitative division. If profit is the natural fruit of capital, and capital sold as a commodity bears interest, then profit and interest form two distinct categories. The industrial capitalist who uses their own capital now sees their profit itself as divided into these two distinct forms of property. They see the capital value they advance as producing interest, and the remainder of the profit as being a revenue deriving from the production process itself, and their role within it as a functioning capitalist

This latter source of revenue, is, thereby, completely separated from their ownership of capital. It is attributable not to ownership of capital but their function in the production process. Then “industrial profit is happily converted into wages and is equated with ordinary wages, differing from them only quantitatively and in the special form in which they are paid, i.e., that the capitalist pays wages to himself instead of someone else paying them to him.” (p 492) 

When the monopoly of private capital is itself replaced by the dominance of socialised capital, this overlap between the capitalist as owner of capital and as functioning capitalist disappears, or assumes a different form. The private capitalist steps away from their role as functioning capitalist. At first, that function is taken on by individual professional managers, but, as the scale of production increases, so that function has to be taken on by an increasing army of professional managers, technicians and bureaucrats in production, sales, marketing, purchasing, accounting, administration, personnel and so on. And, increasingly, as these functioning capitalists are drawn from the ranks of the working-class, and indeed, like other workers, form themselves into trades unions alongside the other workers, so the owners of the interest-bearing capital are led to protect their own interests against them, by appointing their own representative on to Boards of Directors that sit on top of, and exercise control over the actual functioning capitalists, and the industrial capital. 

Tuesday, 21 January 2020

Theories of Surplus Value, Part III, Addenda - Part 42

To the extent all capitalists utilise their own capital, all of the surplus value they produce takes the form of profit. A direct producer produces commodities only in order to exchange them for other commodities required for their own consumption – in other words, it is really an exchange of products/use values, driven by a social division of labour. They produce only to consume, even if what they produce they exchange for the actual use values they consume. They do not produce to create obtain exchange-value, or profit, or to accumulate capital. Thy are only concerned to ensure that they sell the commodities they produce at their value, as Marx describes in Capital III, Chapter 10, i.e. at a price that reproduces the value of their consumed means of production, plus the value added by their labour in production. Their direct production is characterised precisely by this fact that it is production geared to their own consumption needs, not for profit. 

But, the capitalist does not produce to meet their own consumption needs, either directly or indirectly, in the way the individual direct producer does. The capitalist produces only in order to produce profit, and their aim is to produce as much profit as their capital allows. In other words, to maximise their annual rate of profit. As Marx describes in Capital III, the individual direct producer of cloth might spend £10 on materials, and create £10 of new value by their own labour, with £5 of that required to reproduce the value of their own labour-power. They produce cloth with an exchange-value of £20. The surplus value of £5 they produce represents the “rate of profit” of 33.33%. An equivalent producer of furniture might spend £20 on means of production, and similarly create £10 of new value, and the same £5 of surplus value. But, this represents a 20% rate of profit. The furniture producer does not become a cloth producer, because they do not engage in production to produce profit, but only to be able to consume. 

That is not the case with the capitalist. The capitalist, confronted with the possibility of making 20% profit from furniture production, or 33.33% from cloth production, chooses the latter. As a result, cloth production rises, relative to demand, the market price of cloth falls below its exchange value, and the rate of profit in that sphere falls along with it. By this process, an average rate of profit is established, and, under capitalism, commodities no longer sell at their exchange values, but at their price of production. The profit any capital obtains is then no longer determined by the surplus value it produces, but by the average rate of profit. 

Already, therefore, the source of profit in surplus value, as well as the source of surplus value, is obscured. It now appears that profit is simply a product of capital, and the amount of profit is thereby a function of the amount of capital. Commodity fetishism arises, because what is actually a relation between human beings becomes seen as a relation between things – commodities. It is a relation between equal amounts of labour. 

Capital is also a social relation, but, unlike commodity fetishism, which is based on an exchange of equals, this social relation is based on exploitation. It is commodity fetishism raised to a higher power. As an exchange of commodities – wages for labour-power – it is still an exchange of equals, but, in terms of the exchange of labour with capital it is unequal. The worker obtains wages of £10 equal to the value of their labour-power, but is only paid these wages if they provide capital with labour itself to a greater value than £10. In other words, if £10 is equal to 5 hours of labour, which is the value of labour-power, the value required to reproduce labour-power for a day, the worker is employed, only on condition that they provide, say, 10 hours of labour. The surplus value of £10 does not arise, because of an unequal exchange of commodities – wages for labour-power – but because, having exchanged commodities, the capitalist utilises the labour-power they have bought for 10 hours, creating, thereby £20 of new value. It is this exploitation of labour in the labour process that creates the surplus value, not an unequal exchange of wages for labour-power. 

In the same way that commodity fetishism means that it is the commodity that appears to be the source of value (rather than the labour required to produce it), so this fetishism raised to a higher power now means that it appears that it is capital that is the source of profit, and not the surplus value produced by labour. If profit is then the natural fruit of capital, then, if profit is the motive for capitalist production, it becomes possible for capital itself to be sold as a commodity, and for it to be bought by anyone wishing to engage in capitalist production. 

“On this basis, money, for example, is, as such, capital because the conditions of production in themselves confront labour in an alienated form, they confront it as someone else’s property and thus dominate it. Then capital can also be sold as a commodity which has this attribute, that is, it can be sold as capital, as is the case when capital is loaned at interest.” (p 492) 

Monday, 20 January 2020

Theories of Surplus Value, Part III, Addenda - Part 41

Similarly, merchant capitalists already owned capital, as money and commodity-capital. They bought cloth from peasant producers, below its value, but at a price that was greater than the peasant could have obtained, after covering their own selling costs. When, for a variety of reasons, some peasant producers fell into debt, and could not buy the materials they needed to produce cloth, the merchants began instead to supply the materials, paying the peasants then only a wage for producing the cloth. 

“The formation process of capital—when capital, i.e., not any particular capital, but capital in general, only evolves—is the dissolution process, the parting product of the social mode of production preceding it. It is thus a historical process, a process which belongs to a definite historical period. This is the period of its historical genesis. (In the same way the existence of the human race is the result of an earlier process which organic life passed through. Man comes into existence only when a certain point is reached. But once man has emerged, he becomes the permanent pre-condition of human history, likewise its permanent product and result, and he is pre-condition only as his own product and result.)” (p 491) 

The peasant farmer with a larger farm, or more fertile land, or more and better instruments of labour has an immediate advantage. They benefit from the economies of scale. Even where they buy labour rather than labour-power this advantage exists. If we discount other costs, suppose a small peasant producer produces 100 kilos of output per hour. Say this output, equal to the value produced by an hour's labour, has an exchange-value of £100. Now the same peasant works for a larger peasant, for an hour, who pays them £100. However, as they use the better instruments of labour of the larger peasant, they produce 200 kilos of output. So, if the market value of output is determined by the small peasant, as the least efficient producer, it sells at £1 per kilo. The small peasant recovers the value of their labour in selling their output. However, the large peasant producer, even though they have paid the full value of the labour they have bought, i.e. £100, sells their output of 200 kilos for £200, thereby obtaining a profit of £100. 

The reason, as Marx explained in his analysis of rent and surplus profits, is that the more efficient producer, produces at a lower individual value per unit of output than the market value. They sell each unit at the market value, and thereby obtain a surplus profit equal to the differential value, i.e. the difference between the market value and their individual value. 

In reality, as the larger producers began to dominate production, the market value begins to be determined by them. As capitalism farming develops, the market value is determined by the least efficient capitalist producers, but a large number of small peasant farmers continue to cling to a subsistence existence. Something similar could be seen with the prolonged misery of the British hand-loom weavers, who could not compete with capitalist power loom production, as discussed by Marx in Capital I. The subsistence farmers are led to eke out an existence from their own production, often giving a standard of living lower than a wage worker. They sell their output at market values below the individual value of their production. Increasingly, they must sell their farms and become wage labourers. 

“It is here that labour must separate itself from the conditions of labour in their previous form, in which it was identical with them. It becomes free labour only in this way and only thus are its conditions converted into capital and confront it as such. The process of capital becoming capital or its development before the capitalist production process exists, and its realisation in the capitalist process of production itself belong to two historically different periods. In the second, capital is taken for granted, and its existence and automatic functioning is presupposed. In the first period, capital is the sediment resulting from the process of dissolution of a different social formation. It is the product of a different [formation], not the product of its own reproduction, as is the case later. The existing basis on which capitalist production works is wage-labour, which is however at the same time reproduced continuously by it. It is therefore based also on capital, the form assumed by the conditions of labour, as its given prerequisite, a prerequisite however which, like wage-labour, is its continuous presupposition and its continuous product.” (p 491-2)