Basics of Marxism Part 3— Value, Price, and Profit

In part three of our lessons on value, we take the basic concepts which have been elaborated and put them to the test by explaining the core of Value, Price, and Profit.

Is value the same as price? According to marginal utility theory, it is. Value and price, it says, are subjective. They are determined according to the evaluation of individual buyers and sellers.

In this framework, every transaction is a bargaining operation where the buyer has a maximum price that they value the commodity at and the seller a minimum price. They are negotiating for a price between the two as individuals.

This theory is used to “decisively” prove Marx wrong. This model, which conflates value and price, claims that Marx thinks that something’s price is determined by the cost of the worker’s wages in the time it took to produce it. Or, if the critic is being generous, by the general cost of production. This is not so, as Marx distinguished between value and price.

Price is the incidental cost at which something is sold, which can be above, below, or even equivalent to its total value. These fluctuations are influenced by the following:

1. Competition among sellers, which drives prices down
2. Competition among buyers, which drives prices up, and
3. Monopolies, which enables sellers to hike up prices to ridiculous amounts

Price is not randomly selected by two isolated individuals, as marginal utility assumes. It has tendencies determined by said competition.

Marx engages in depth with the relation between price and value in an 1865 series of lectures to members of the First International called Value, Price, and Profit. We will focus on his explanation of the connection between price and value, and how that relates to profit, particularly in the case of surplus-value.

Supply and demand, as we explained in our Wage Labour and Capital article, do not necessarily determine prices alone, but merely influence their fluctuations. Prices are influenced by competition. But their axis lies in the value of a commodity. Their fluctuations above and below this value tend to average out into something close to its equivalent.

Value is essentially the necessary labor-time embodied in something, or the potentiality for labor-power to realize value from something.

To understand capitalist exploitation, we must understand the components of capital. Capital has 4 value components:

1. circulating capital
2. constant capital
3. variable capital, and
4. surplus-value

Circulating capital is the raw materials used in production, with its value being set by the necessary labor-time already embodied in the previous production of the materials. Circulating capital is the object of the production process, what value is being added to. Constant capital is essentially technology used in production, the means of production. It transfers its value created by its production to the commodity in proportion to its wear-and-tear in producing it. Its value can be restored when it’s fixed.

To understand this value transfer, think of a stamp transferring ink. If more effort is put into stamping, more ink is transferred, using up a greater amount of the total ink on the stamp. Eventually, the ink needs to be replenished for more to be transferred. Constant capital’s value transferred to the circulating capital operates under the same logic as the stamp.

Variable capital is the labor-power of the workers, which is the only thing which can put the process of production into motion. Variable capital transfers its value in proportion to the necessary labor-time, accounting for intensity, which is put into production to the commodity. Variable capital only corresponds to necessary labor-time, which is the cost of the workers’ labor-power. It does not include the total value added by their labor-power. Variable capital, essentially the mass of labor-power, has its minimum price set by the reproduction of the labor force.

Under normal conditions, the one component of capital which capitalists do not have to pay for is surplus-value, the unpaid labor-time of the proletariat. Only workers can produce surplus-value, as you can’t exactly underpay a machine or a commodity, nor can they produce new value like the labor which creates them does. But you can perhaps buy them below their value.

The rate of profit, which is the surplus over the cost of variable capital, increases with the component of variable capital relative to other capital components, and decreases with the opposite.

Surplus-value corresponds to surplus-labor-time, which is labor-time that creates value beyond the value of the variable capital, or the cost of the workers’ wages. This is the source of profit. But not all surplus-value goes into the category of profit. It is first split into funds for insurance, costs of maintaining constant capital, for buying raw materials, a fund for the personal consumption of the capitalist, a fund for paying rent, a fund for paying interest, and a fund for management of the workers. What remains can truly be called profit.

Profit is split into investment into new constant and variable capital, generally expanding the production process. This expansion, as compared to operating on the same scale, is called expanded reproduction. When surplus-value is realized by expanded reproduction, it enables capital to accumulate, as it grows in an ever outward spiral.

Now that we’ve outlined the components of capital, let us investigate the value and price of commodities. Commodities’ prices fluctuate around their value. Their value is the total socially necessary labor-time embodied in them, represented by the 4 value components of capital we investigated. Their value and price are not set by their cost of production nor by the cost of workers’ wages, as some accuse Marx of saying.

A commodity can be sold at its value and still be profitable to the capitalist. Why? Because there is surplus-value — which is unpaid labor time — embodied in it. The cost of a commodity’s production is the cost of circulating, constant, and variable capital which went into producing it. But its value is all those and surplus-value.

If a commodity is sold at a price anywhere between its cost of production and its total value, then it is profitable to the capitalist. So part of its surplus-value is being realized. The capitalist does not need to sell it at a price equivalent to its full value to profit.

A commodity’s price cannot sustainably be sold above its value, as competition among sellers brings it back down. Only when there are monopolies can such a practice be relatively sustainable. In that context, the capitalist is appropriating value from the consumers rather than altering the real value of commodities.

A commodity’s price also cannot sustainably be sold below its cost of production, which would lead to the ruin of businesses. It can, however, be sold below its total value. Sometimes, large capitalists use the practice to undercut smaller capitalists, as Standard Oil famously did.

Price is also something influenced by the value of currency, which is a universal standard for commodity exchange. Fluctuations in real price due to increases or decreases are a result of expressions of the relations between supply and demand of the currency, not due to fluctuations in the value of commodities themselves.

Profit can be expressed in a mass as the literal monetary or value quantity of profit, or in a rate as the mass of profit divided by the total cost of production. The rate of profit is more important because it directly sets the possible rate of growth for the capitalist.

The rate of profit is increased by economizing on the cost of production. Capitalists seek to increase the rate of surplus-value relative to variable capital, necessary labor, as much as possible.

They can do this by two general strategies. The first is reaping absolute surplus-value. This means that the capitalist increases the literal length of the working day, which increases the mass of surplus-value and the cost of variable capital. It does not meaningfully change the rate of profit. The second and more successful means is the reaping of relative surplus-value. This is done by altering rates rather than masses. It can be done by increasing the intensity of labor so that the value equivalent of wages can be made quicker. So labor-time spent on surplus-value is increased.

This is achieved by:

1. Slashing wages
2. Reducing the workforce while increasing labor intensity
3. Seeking lower prices for circulating capital and constant capital through various means
4. Increasing efficiency of constant capital in production, which increases the fraction of constant capital relative to the other components.

This last part will be important in a moment.

These economizing measures tend to intensify class struggles, as the workers seek to keep their wages the same or increase them, and the capitalist seeks to increase surplus-value. When the capitalist cuts down their labor-force in the midst of these struggles, they decrease variable capital and surplus-value, since only variable capital can create surplus-value.

When constant capital increases as a component, which is made essentially inevitable by technological development, production becomes more efficient. The capitalist can have the same quantity of commodities produced in a shorter amount of time with fewer workers. So they begin to get rid of workers, casting them into the unemployed masses of what we call the industrial reserve army. This process is particularly evident in contemporary automation in major industries. The casting of workers into the industrial reserve army increases competition with hired workers, leading to a reduction in wages, and thus a lower cost of production for the capitalist.

However, with a workforce decreasing in size relative to the technological component of investment, the rate of surplus-value also decreases. This leads to a decrease in the rate of profit. The capitalists respond to this by further economizing measures, especially cutting wages and increasing intensity of labor, thus fanning the flames of class struggle. In the midst of these class struggles, the workers tend to organize labor unions to resist cuts to wages, poor conditions corresponding to money-saving techniques sacrificing health and safety, and so on.

The fall in the rate of profit becomes a tendency, meaning that it is not always falling, and in fact fluctuates. But it is, in the long term, on a decreasing trend. This trend occurs in part due to the constant capital component increasing relative to variable capital. Overproduction results owing to a lack of social planning and a lower population of consumers for commodities than the commodities themselves. Decreases in the consumer population occur with increases in the unemployed. Technological development leads to production that is so efficient that it overshoots actual demand.

All of this leads to regular crises. And they become more common as the tendency of the rate of profit to fall becomes more severe, and as the world market extends itself into every corner and reinforces its connections. The mass of profit may be increasing with the scale of production. But its rate compared to the cost of production becomes smaller and smaller, thus influencing the rate of growth and the sustainability of the large-scale production.

Even bourgeois economists recognize the tendency of the rate of profit to fall, although they offer poor explanations for it. Marx understood it, and his analyses of it as inherent to capitalist production have proven correct, seeing how no capitalist reforms have succeeded in preventing crises.

The tendency spells the inherent limits of capitalism, of it as a mere finite epoch of history. It makes it clear that capitalism, sooner or later, will end. Capital’s tendency to reduce wages and worsen conditions as an economizing measure leads to a spontaneous resistance among the workers, which eventually develops into labor union organizations to struggle for a defense of pre-reduction prices for labor-power, or higher prices, and for improvements in conditions.

Union struggles must be supported by socialists, as they are the everyday struggles of workers as a class. They build their consciousness of their relation to the capitalists and the reality that collective class action alone reaps material benefits. However, labor union struggles are limited, as they tend to work within the capitalist system rather than challenge it.

Working toward improvement in wages and conditions is something which is in the workers’ interests, and widens their base for revolting against capitalist society. But it is not itself revolt against the capitalist system. Demanding improved conditions of wage labor is not demanding the abolition of the wage system. But it is difficult to demand the latter when one’s demands are limited to immediate material gains within the system.

It is this limitation of them to struggle within rather than against the system that necessitates a party leadership. Such a leadership can operate on the political and economic level, and synthesize labor struggles across wide regions under a programme which reaches beyond everyday struggles into revolutionary struggle. The communists are the most advanced section of the proletariat. They stand not in antagonism to other proletarian organizations, but as their vanguard.