By stepping away from the determination of value, and price as the monetary expression of value, we arrive at a cost of production theory of value, whereby the value of commodities is determined by a summation of the value of the factors of production used in their production. But, at the same time, the value/price of these factors is determined by the price of commodities. For example, in neoclassical theory, each factor contributes a marginal physical product, and this is converted in to a marginal revenue product by multiplying the physical product by the unit price of the product.
“Thus, the vicious circle of the vulgarian, whether he is a theoretician regarding matters from the capitalist standpoint or is in fact a capitalist—namely, that the prices of commodities determine wages, interest, profit and rent and that, on the other hand, the prices of labour, interest, profit and rent determine the prices of commodities—is merely an expression of the circular movement in which the general laws assert themselves in contradictory fashion in the real movement and in appearance.” (p 510)
Viewed from the perspective of the individual capitalist – and it is this superficial appearance that vulgar economy presents as its description of economic reality – they must borrow money-capital, in order to set up in business. They see the rate of interest as something they must pay. It is the market price of capital, just as wages represent the market price of labour, and rent the market price of land. Even if the capitalist provides their own money-capital, they still associate it with the market rate of interest as a cost of production, just as a landowner who uses their own land sees rent s a cost of production, even though, in both cases, they pay these revenues to themselves. They divide their own persona into the multiple persona of money-lending capitalist, landlord and industrial capitalist, each receiving revenues – interest, rent and profit – specific to those persona, as the revenue accruing to each form of property or function.
But, the same is true with the industrial profit, or profit of enterprise. Suppose a capitalist advances £1 million of productive-capital. For the reasons Marx describes, it does not matter whether this is their own capital or borrowed capital, in this respect. If the average annual rate of profit is 10% they will first look at whether they can obtain this profit, which will amount to £100,000. First, take the case of a capitalist that uses land. If, after paying rent, their profit falls below £100,000 they will not advance this capital. They will only do so if they can produce a surplus profit that is sufficient to cover the payment of rent.
For the reasons set out above, it does not matter, here, whether they are their own landlord or not. Any surplus profit they pocket not as industrial profit, but as rent. However, in the case where they are their own landlord, it may be the case that they will advance their capital even if it does not produce surplus profit. In such cases, the land in question would not produce rent, whoever owned it. Someone who is only a landlord might choose to leave it unused, or use it for some other purpose, but a capitalist owner of the land may use it in order to obtain the average profit, whilst accepting that, in their persona as landlord they receive no rent.
Now take the case where the market rate of interest is 3%. The industrial capitalist, if they have borrowed the £1 million from a bank, or by issuing shares or bonds, knows in advance that they must pay £30,000 of interest, just as, if the rate of rent is 3% they would have to pay £30,000 rent. But, even if the capitalist provides their own capital, they will still see this £30,000 of interest as a cost of production, because it is £30,000 of interest they have foregone had they simply loaned out their capital without undertaking any risk from employing their capital productively.
So, whether the capitalist uses their own capital or borrows it, they will only advance this capital to production if it leaves them with an industrial profit of £10,000 after the deduction of this £30,000 of interest, paid either to themselves or someone else in the role of money-lender. In other words, the capital is only advanced if this average industrial profit can be obtained in the price of the product. This average industrial profit then also becomes seen as a cost of production, the same as the rent that must be paid to the landlord, the interest to the money-lender, and the wages to the labourer.
This average industrial profit itself appears as something given, just as with the market rates of interest, rent and wages, and these prices are now simply determined by market forces, competition and the interplay of demand and supply, for each factor of production.
Of course, that means that at any one time, these prices may be moving higher or lower. Again, in practice, if capital employed in some particular activity does not produce the average industrial profit, the capitalist will not withdraw it, to allocate it elsewhere. The process rather works on the basis that additional capital is not invested in those spheres, but is instead invested in spheres that provide higher than average annual rates of profit. The average industrial rate of profit, therefore, becomes seen as a cost of production, because unless the price of the commodity is sufficient to produce it, no additional capital will be advanced in that line of production.
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