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Where does profit come from?

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Rabbit's picture
Rabbit
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Jun 23 2011 00:29
Where does profit come from?

In Marx's terms, capitalism is driven by a sum of money being turned into a commodity which is exchanged for a larger sum of money. The capitalist has more money than he started with. The difference is profit. But where does it come from?

Assume a closed economy. Perhaps a very small island. (If you want to argue that economies are not closed, but open to trade, imagine a global economy. Earth cannot trade with any other planet.)

A company hires the people on the island as workers to produce widgets out of thin air. (If the costs of raw materials and tools are considered, making a profit appears even more difficult!) It then sells the widgets back to the workers. (This may sound far-fetched, but in aggregate, the producers of goods must also be the consumers of goods.)

The workers produce 20 widgets and are paid $100 for their labour. That $100 is all the money circulating in the economy. It's all the money that the people have in their pockets.

Now the company has 20 widgets, and it wants to sell the widgets to make a profit. How should the widgets be priced? If the price is more than $5, the people can't afford to buy all of the widgets. If the price is less than $5, the company loses money.

Making a profit appears impossible. Profit means having more money than you started with, but in this model, the money supply is fixed.

OK, so we'll increase the money supply. Imagine a bank, or government body, that prints $50 and distributes. Bills falling out of the sky. Now the people can afford to buy the widgets at a higher price.

The company prices the widgets at $7.50 each and sells all of them. Its costs were $100 and its revenues were $150. So it made a profit, right? But wait, this extra $50 is just inflation. In real terms, the company has not profited at all. If we imagine that the economy is producing something other than widgets, gadgets perhaps, the company cannot buy any more gadgets than it could before.

Is fractional-reserve banking the answer?

bruji76
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Jun 23 2011 02:18

The problem in your example is that you asumme there's only one capitalist. Normally, there's several capitalists, so basically many lose, so a few can have good profits. Also inflation information doesn't move so fast. so capitalists can get profit before inflation is perceived and prices rise. However, in the end, when enterprises become bigger and bigger, and all markets become homogeneous, indeed you are right. In the end, it becomes, harder and harder for capitalists to get profits. Marx explains this when he describes contradiction of capitalism, and its cyclical crisis. So basically, that's why capitalism in the end tends to collapse.

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Jun 23 2011 02:47

So you're saying that profit of X in one part of the economy requires losses of X in the rest of the economy? That makes perfect sense to me. So much so that it seems self-evident. lHas this economic 'law' been mentioned by anyone else?

In this model, inflation exists independent of knowledge of inflation. As soon as that $50 drops from the sky, inflation has occurred, regardless of whether prices have changed or not, because an omnipotent observer would divide real GDP by the money supply and discover that the price index has gone up.

bruji76
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Jun 23 2011 06:01

Well, it is a very simplified model you have there, but indeed, in the end, since resources are finite, for a few to accumulate a lot, others have to lose. Obviously this is is more clear in your model, since you have a closed economy and a perfect information hypothesis, so the transitory that allows profits is not considered in your model. But yes, I think if you look at asymptotic behavior system collapses,. because it ends without customers for its products. If you read Marx's Capital, he discusses this kind of contradictions, where capitalists on one hand are interested to pay the lowest wage possible, but they need others capitalists to pay better wages so they can have customers for their products (so as you see, workers are the first who lose in this chain of profit making, but in the end this becomes a problem because this makes demand to go down), so system has overproduction crisis, and most of the time the solution seems to be to destroy everything and start again, i.e.: war (think 1929 crisis and second world war, for example). Also they have the scapegoat of getting customers from other markets, or get profits via imperialistic exploitation. But in the end, when globalization is complete, and there's only one world market, and very few transnational capitalist, clearly things will tend to look a lot like your model, except for the perfect information bit. But of course, inflation not perceived by the market for a while it is simply yet another way to make workers lose in favor of capitalists profit, so, there you go.

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Jun 23 2011 09:16

Here is a good simplified example of how capitalism works:

http://libcom.org/library/great-money-trick-robert-tressell

your model is incomplete.

To the poster above, in terms of globalisation being "complete", that is something which doesn't have to happen, necessarily, as the market can expand by bringing more and more things into it - i.e. by making more and more things which aren't commodities into commodities (like DNA, carbon quotas, etc).

As for "the answer", we do not posit a different type of banking as the answer - we propose communism: an economic system not based on money or profit but on fulfilling human needs.

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Jun 23 2011 12:20

I think the problem of the 'closed system' example is it's static, whereas capital only exists in motion and goes into crisis whenever it's static. Credit plays a part here, but the temporal dimension is crucial. In other words, this is why capital must constantly expand; capitalists get credit to start an enterprise or expand production, which creates only some of it's demand, but others are doing the same, the market clears, profits are made, loans repaid, surpluses reinvested and the whole thing repeats... Until for whatever reason (systemic shock, financial illiquidity, over-production in a key sector, wages rising too much due to struggles...) the cycle of expansion falters, when a crisis sets in, capital is devalued and working class conditions attacked (austerity) until such a time as accumulation can recommence.

(the orthodox economic objection to the closed system schema would be Say's Law, that firms don't just pay out wages but also buy raw materials, pay dividends etc, which create a consumption fund equal to production: of course the question of where systemic growth comes from persists as profit could only be a zero-sum game under such conditions).

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Jun 23 2011 12:25

Exactly: that aspect (of capital needing to expand) is what is missing model - although the model does demonstrate that if capital doesn't expand it stops working

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Jun 23 2011 13:21

Just to expand on Steven's point above - some people do argue that capitalism needs a permanent outside - whether in terms of non-capitalist markets for its products (e.g. the Opium Wars), or in terms of commodifying more and more things from DNA to the atmosphere and ideas. Some also argue that 'primitive accumulation' (essentially enclosure of property rather than production) is an essential ongoing process rather than just an initial kickstart to capital accumulation. Personally I tend to think while all these things happen, they aren't necessary per se, but I haven't given it a great deal of thought.

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Jun 23 2011 13:25

I always went for the primitive accumulation and commodification gag. Ok there may come an eventual end point as Rabbit suggests there could, but it's pretty far off. If I were the capitalist on that island I would move from widget production to buying up the land around the palm trees then charging people to sit under the shade or something.....

posi
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Jun 23 2011 14:22
Quote:
Where does profit come from?

Profit = revenue - costs

Glad to help.

bruji76
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Jun 23 2011 16:05

If we take the closed system model, I disagree that simply adding new commodities is enough for capitalism to expand. To expand capitalism uses heterogeneity of markets, IMHO, so I think if we reach homogeneous global market, the system very much gets static, and dies. But the very same forces of capitalism are always sending the system towards those kind of static situation, that's the reason of cyclic crisis, after all. The only possible way to expand once global homogeneous market would be to expand to other planets, i.e.: have colonies outside earth exploited by earth people, or something like that. But I doubt this is possible before system collapses, since it can collapse before reaching the homogeneous phase, because of ecological collapse of our planet. That's why if system doesn't change, humanity seems to be doomed as a species.

bruji76
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Jun 23 2011 16:07

Posi: I think the question is WHERE does profit come FROM, not WHAT profit is.

bruji76
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Jun 23 2011 16:15

The problem is where does people get the money to pay for that if all production sources are owned by the same capitalist. Unless there's some kind of commodity they can make on their own and exchange with the capitalist in the island, if most of people in the island is simply payed a wage for their work by the only capitalist in the island, and the guy cannot exchange with markets outside the island, in that case, the capitalist can't get profit, because the money customers have is the same money he payed them in the wages in the first time. He is getting wealth by the production of workers, so he and his family can consume those goods without working, but not getting profit from selling those goods to his own workers.

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Jun 23 2011 16:15

Yes you are right that if we have a closed system things will eventually grind to a static halt, but this doesn't get us very far in understanding capitalism because it is not as closed as one island that only produces one commodity? As you said, ecological crisis is more likely than complete global capital domination to such an extent that the market halts. But I am very doubtful that this would ever happen, so I am doubtful whether its helpful to think in these terms....

bruji76
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Jun 23 2011 16:49

Regarding the island-capitalist, I think it would become some sort of feudal sir, in the end.
Arbeiten: I disagree, I think both ecological collapse and globalization are real tendencies of the capitalist system, so they are relevant. Those are possible asymptotic behaviors of the system.
In the case of globalization, we see markets are becoming more homogeneous, in the sense we have middle class disappearing, wages are getting low in all countries, not just third world, etc. And capital is getting in accumulated in fewer hands, i.e.: transnationals. And what do we have? A huge international capitalism crisis since 2008 that was not able to recover yet. I don't think that's a coincidence.

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Jun 23 2011 16:46

Steven, the model in your link presupposes the ability of the capitalist to sell his goods to persons 'outside' of the model, but in a 'total' model this is impossible. However, it does suggest one answer: the capitalist 'profits' when he consumes a greater share of the commodities than the workers do. Exploitation, in other words. In my model, the company is a monopoly, so it could take any number of widgets for itself and sell the rest for the maximum price, as long as the workers don't die of starvation. Bruji, isn't that what you're saying? The capitalist accumulates wealth in the form of commodities, not profit in the form of money.

Joseph: point taken. The model is missing expansion of markets or technological change. How can they be added in?

bruji76
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Jun 23 2011 16:54

Yes, Rabbit, that's exactly what I am saying. The technological change I think it makes only sense if there is competence between several capitalists. If there isn't competence, what's the point of changing anything for the capilatist?
The technological advances are useful for expanding by getting other capitalist out of the market, so if you are the only capitalist, you can't expand in that way.

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Jun 23 2011 16:58

Bruji, I don't think in that case we are really in any disagreement. I would hold that those are two tendencies also. I think one of them is going at a much faster rate than the other though* (I am the sort of person Jameson is on about when he says we can imagine ecological crisis better than the end of capitalism, probably watched too much Mad Max). What I am questioning is the likelihood of a global stasis any time soon and the utility of analogising global stasis with an island that produces one commodity and only has one capitalist....

*It is also interesting to see how this very process can be commodified, Steven already mentioned Carbon Quota's, and I'm sure we could think of more....

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Jun 23 2011 17:00

On technological development, Marx is pretty clear (at least in my reading, I don't really want to get into who can read Capital better) that it only makes sense in the context of more than one capitalist. Technological change is necessarily uneven. It's motor is the need to produce faster than the competition.

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Jun 23 2011 17:58

Clearly profit comes from the capitalist getting the workers to make more widgets than he pays them for. It isn't a zero sum game because new commodities are being made (unless the production process just suddenly stops at this point, then it is a zero sum game). Profit doesn't have to take a money form, any commodity will do.

bruji76
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Jun 23 2011 18:37

sorry, double post.

bruji76
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Jun 23 2011 18:41

888, you are right, the only "profit" for that island-capitalist would be the produced goods themselves, but then he would be more like a feudal lord, rather than a capitalist. He wouldn't be able to get profits from selling those products, what kind of defeats the reason to produce them in the first place. Basically he would give workers the minimum to survive, and they would work for his needs.

Arbeiten: I agree ecological collapse is pretty likely to happen before total globalization, but we can clearly see signs of both tendencies in today capitalism. The current crisis has to do a lot with what happens when capital gets accumulated in very few corporative hands. They find it hard to expand, so they only can create speculative bubbles to profit, but those bubbles are short lived.

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Jun 24 2011 01:15

Yes, I wholly agree that technological change only makes 'sense' in a competitive environment.

bruji76 wrote:
888, you are right, the only "profit" for that island-capitalist would be the produced goods themselves, but then he would be more like a feudal lord, rather than a capitalist. He wouldn't be able to get profits from selling those products, what kind of defeats the reason to produce them in the first place. Basically he would give workers the minimum to survive, and they would work for his needs.

Why, you're right. The model begins to look like just like feudalism. Would you expect a lot of overlap between feudalism and capitalism, or have I done something wrong?

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Jun 24 2011 03:18

Because there is are no other capitalists or workers to sell products to, there isn't the production for the purpose of exchange that is required for capitalism to make sense...

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Jun 24 2011 11:18
Quote:
On technological development, Marx is pretty clear (at least in my reading, I don't really want to get into who can read Capital better) that it only makes sense in the context of more than one capitalist. Technological change is necessarily uneven. It's motor is the need to produce faster than the competition.

Would partially disagree with this - true that competition is the motor and the means in which the 'inner laws of capital are realised' - but marx was quite clear that competition doesn't invent those 'laws', nor does it actually reveal them

From the Grundrisse for instance:-

Smith explained the fall of the rate of profit, as capital grows, by the competition among capitals. To which Ricardo replied that competition can indeed reduce profits in the various branches of business to an average level, can equalize the rate, but cannot depress this average rate itself. Smith's phrase is correct to the extent that only in competition—the action of capital upon capital—are the inherent laws of capital, its tendencies, realized. But it is false in the sense in which he understands it, as if competition imposed laws on capital from the outside, laws not its own.

Competition can permanently depress the rate of profit in all branches of industry, i.e. the average rate of profit, only if and in so far as a general and permanent fall of the rate of profit, having the force of a law, is conceivable prior to competition and regardless of competition. Competition executes the inner laws of capital; makes them into compulsory laws towards the individual capital, but it does not invent them. It realizes them. To try to explain them simply as results of competition therefore means to concede that one does not understand them

And in general from capital v1 & 3 - it's fairly clear (at least in my reading) that to reduce technological/productivity development to competition alone sidelines the real inner driver of everything which is class struggle - i.e. not the phenomanal surface forms of competition between individual capitals, but capital v labour.

Marx makes the statement that 'in competition everything is reversed' (or something along those lines) quite a lot, meaning that it can appear that individual capital v individual capital competition itself is the inner law and core of everything, but that's only just an appearance and not the real inner essence. That's the basis for his attack on Smith & Ricardo above in the grundrisse, and political economy in general. When he says stuff like....

that in their appearance things often represent themselves in inverted form is pretty well known in every science except Political Economy

....then this is the kind of thing he's meaning.

So I think his position on it is fairly clear I would say. Also for pretty much all of volume 1, he abstracts away from individual capitals to focus on a purely conceptual a priori capital v labour type situation, and it's in this context that the essence of relative surplus value through increased productivity are situated (in his words revealing the inner core of capitalism etc..) So for marx these tendencies are inherent in the very concept of the capital/labour contradiction - and even when individual capital competition is abstracted away, they still remain and make sense. So even in a capitalism where there was only one capital, the necessity of increasing labour productivity, through technoligical development, to reduce necessary labour time, to maximise relative surplus value production would still exist (albeit in a more visible & revealed form)

I'm not arguing against the notion that individual capital competition is the indirect method in which relative surplus value extraction comes around though - just situating it a bit more in the wider context of how marx thought about it

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Jun 24 2011 11:40

Your right it was a bit of a faux par of me to say competition rather than Capital vs. Labour. I haven't actually read the Grundrisse but that second quote really clears things up.

I have read Capital and some other stuff but I think I might need to pick up Smith and Ricardo so I can better place Marx's Critique in context....

RedHughs
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Jun 25 2011 19:11

Oisleep does great describing competition as important but not fundamental.

As far as balancing an input-output model goes, any Marxian model has to assume that the labor power is not free but comes at the cost of reproduction (we can assume the price of a unit of labor power is "1" but only if some factor has to guaranteed there's minimum price ). For a somewhat illuminating model then, you'd need a "survival good" sector, ie farms where food is grown. Otherwise, if labor and air are free, there's no real basis to price the widgets and no clear reason why workers would bother to work for the capitalists rather than making their own widget out of air.

As far as selling the widgets, if you want to balance things, you would have the capitalists buy all the widgets the workers didn't buy. That would allow things to balance but it really wouldn't be a complete model for the reason above (there's no basis for the cost of survival).

Unless you have a proletariat, a group of people who have nothing and must sell their labor in order to buy their survival, you don't have capitalism as such.

I did a spreadsheet model of the declining rate of profit. It incidentally shows price and value quantities balanced in a two-commodity economy. A spreadsheet is useful if you want to create a model with enough dimensions to show a completely system (notice that increasing ground-rent is necessary to balance the model).

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Jun 25 2011 05:15

RedHughs, your spreadsheet looks fascinating. Can you upload the original .xml file somewhere?

You're right, my model doesn't account for 'cost of living' or 'cost of tools' on the grounds that factoring that stuff in would lower the potential profits, and since the model is being used to hunt for the sources of profit, making profits smaller would make that task harder.

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Jun 25 2011 11:41
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So you're saying that profit of X in one part of the economy requires losses of X in the rest of the economy? That makes perfect sense to me. So much so that it seems self-evident. lHas this economic 'law' been mentioned by anyone else?

Sorry but that is a nonsensical notion of where profit comes from - crude vulgar political economy at it's worst. Capitalist profit is not a zero sum game as far as Capital is concerned (although it is at the level of capital & labour combined) - what you describe there is simply a reallocation of value from one capitalist to another, it's not profit at the social level as it just cancels itself out at that level, merely a shifting around of existing value. This is the problem of looking at value production & profit from the perspective of an individual capital.

If you're really interested in finding out Marx's views on your question you should read section 3 of Volume II of Capital - The Reproduction and Circulation of the Aggregate Social Capital. It's incomplete, not that well a laid out, contradictory, unfinished and begs more questions than it answers - but it's a good solid start (and far better than anything that came before or after it) and at least in the preliminary areas like simple reproduction it gives a good basis on which to think about these kind of things - also worth reading luxembourg's accumulation of capital alongside it/or after it, to get a fairly decent (if also flawed) marxist critique of marx's reproduction schema and also in itself a probably more easier to understand exposition of Marx's reproduction schema