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)
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