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.
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