Profit: A numbers game, but shit don’t add up somehow

An introduction to Marx’s theory of surplus value. By learning about surplus value, or profit, we see how capitalism exploits and appropriates, allowing the rich to get richer and the poor to become immiserated. It is a window into the secrets of the system.

Further reading, Ernest Mandel on Marx’s Theory of Surplus Value

More advanced, Marx on wages and on Value, Price and Profit

There are 13 comments

  1. John Walker

    This misses Marx’s insight that the capitalist does not pay for a worker’s labour. He or she pays for a worker’s ability to work – what Marx calls their labour power. The capitalist pays the full value of the labour power but receives the full value of the labour. The difference is surplus value. Because human beings can produce more than they consume, This surplus value id positive, and so the capitalists get wealthy.

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  2. Nikw211 (@Nikw211)

    Dear Michael,

    Even taking into account that you are trying to explain fairly complex ideas in a bit under 6 minutes means that you necessarily have to simplify, much of what you have said here makes no sense at all or at least if it does make sense then it is just flat out wrong.

    The most serious flaw is that you say it is obvious that ‘a capitalist’ either cannot or is very unlikely to make a profit simply by buying material X (silk in your example) or product Y (a bar of chocolate in your example) and sell it on without refining, altering or enhancing it.

    That is completely wrong – value and worth are contingent on context and circumstance e.g. desirability and availability/scarcity. A bottle of lager costing £2.20 in the supermarket can be valued at £5 or more by a vendor at, say, a concert or festival if (a) he is the only one who has bottles of lager and (b) people want the lager so much that they are willing to pay more of it then and there than wait until after the concert to have one at home. It’s the market (=context+circumstance) that sets the value of the finished product, and not the capitalist producer as you appear to imply.

    Another point – again, even while accepting you are deliberately simplifying – is you don’t say anything about how availability/scarcity of raw materials can impact on an employees wages.

    Imagine silk was produced in abundance by every common garden spider and it was easy to collect and refine into silk to make ties. The abundance of the material means that those asked to collect and refine it into silk probably won’t get paid very much – why? Because given the abundance of the raw material (silk) in this scenario, it would be quite possible (and for sake of argument) easy for someone to collect, refine and produce their own silk ties at home without having to pay any money for it. So what the producer is selling in this example would be not so much the product but the convenience, i.e. what you are paying for is a saving in time and effort.

    It’s likely that the value of ties in this case would probably be quite low and so any wages or profits would be correspondingly low as a result. The producer of the ties can only increase the value of the ties he/she sells by creating scarcity and/or more desirable types of tie – e.g. by producing ties with a unique and attractive design.

    Conversely, imagine a situation in which 99% of all silk worms were wiped out by a disease. The cost of producing ties would leap significantly, even astronomically. So much so that very few silk-tie producers would be left. It’s also likely that employees making silk ties in this would likely be able to charge much higher wages than before the silk worms were wiped out. Why? Because when the raw material becomes rare and therefore extremely valuable the producer is not going to trust any Tom, Dick and Harry to work with the material in case they ruin or destroy it by accident. So the silk-tie makers in this case would have to be skilled specialists (who can therefore charge higher wages than other types of worker).

    I won’t go on but I will also add that profit is not derived by clawing it out of some notional value that you think the employees should be receiving.

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  3. Michael Di Benedetto

    Dear John

    Thanks for your comment. I am not sure that the video missed that insight. When I refer to the £4 wage, I speak of the minimum that the labourer needs to survive – the value of labour-power. Unfortunately, to try to keep the video within 7 minutes, a later bit when I speak about the make up of wage and actually refer to the value of labour-power had to be edited out.

    You are right to point out that it is not clear enough.

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  4. Michael

    Dear Nikw211

    Thanks for your comment. Unfortunately, I cannot reply extensively right now. I will get back to you as soon as possible.

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  5. Michael

    Dear Nikw211
    I appreciate that you recognise that I was trying to explain the concepts in under 7 minutes. This means that I could not have involved everything and that I had to simplify. This would not excuse me from making theoretical mistakes, so I would like to push back on the “serious flaw” that you identify.
    You say… ” This is completely wrong – value and worth are contingent on context and circumstance e.g. desirability and availability/scarcity. A bottle of lager costing £2.20 in the supermarket can be valued at £5 or more by a vendor at, say, a concert or festival if (a) he is the only one who has bottles of lager and (b) people want the lager so much that they are willing to pay more of it then and there than wait until after the concert to have one at home. It’s the market (=context+circumstance) that sets the value of the finished product, and not the capitalist producer as you appear to imply.”
    You have conflated value with market price. This is a mistake.
    The £5 that the vendor charges for a bottle of lager is a result of a temporary fluctuation in market price. Prices fluctuate all of the time. The relationship between the market price and *value* of the lager is highly mediated and it cannot be read across. Value is provided by the socially necessary labour time (plus skill) required for its production.
    This is Marx’s labour theory of value. Marx did of course recognise the importance of supply and demand in giving the market price of a commodity, but it is not on supply and demand (temporary fluctuations in price) that value rests.

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  6. John Walker

    The value of the labour power is not the minimum that the worker needs to survive. It’s more complex than that. Marx points out that there are social and cultural aspects to this, and, of course, it depends on the strength of the trade union movement amongst other things.

    The notion that the worker gets paid the minimum necessary to survive comes from a misunderstanding of Marx’s argument with Adam Smith. Adam Smith argued that competition would force wages down. Eventually, he said, they would go so low that no one would be prepared to work for them. This is central to his argument that competition in a free market would get rid of the capitalists. The corporation, he said, was more or less done as a form of economic organisation. The future, he claimed, was independent workers producing for a free market.

    Marx pointed out the flaw in this logic. There was a biological minimum below which wages could not fall, and, in any case, there were other factors – which I mention above – that determine wages. The future, for Marx, was one of centralising capital and ever-bigger firms.

    Empirically, Marx has won the argument. But you don’t need to discuss the biological minimum to point this out.

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  7. Michael

    Dear Nikw211

    I appreciate that you recognise that I was trying to explain the concepts in under 7 minutes. This means that I could not have involved everything and that I had to simplify. This would not excuse me from making theoretical mistakes, so I would like to push back on the “serious flaw” that you identify.

    You say… ” This is completely wrong – value and worth are contingent on context and circumstance e.g. desirability and availability/scarcity. A bottle of lager costing £2.20 in the supermarket can be valued at £5 or more by a vendor at, say, a concert or festival if (a) he is the only one who has bottles of lager and (b) people want the lager so much that they are willing to pay more of it then and there than wait until after the concert to have one at home. It’s the market (=context+circumstance) that sets the value of the finished product, and not the capitalist producer as you appear to imply.”

    You have conflated value with market price. This is a mistake.

    The £5 that the vendor charges for a bottle of lager is a result of a temporary fluctuation in market price. Prices fluctuate all of the time. The relationship between the market price and *value* of the lager is highly mediated and it cannot be read across. Value is provided by the socially necessary labour time (plus skill) required for its production.

    This is Marx’s labour theory of value. Marx did of course recognise the importance of supply and demand in giving the market price of a commodity, but it is not on supply and demand (temporary fluctuations in price) that value rests.

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  8. Michael

    John

    The value of the labour-power IS the minimum that the worker needs to survive. Marx wrote “the value of labour-power is the value of the means of subsistence necessary for the maintenance of the labourer” and that its minimum level “is determined by the value of the commodities, without the daily supply of which the labourer cannot renew his vital energy, consequently by the value of those means of subsistence that are physically indispensable”.

    You are right to point out the “historical and moral element” of the wages, and that they reflect victories of the trade union movements. I actually spoke about exactly that with regards to Grangemouth, but it had to be edited out!!

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  9. Nikw211 (@Nikw211)

    Dear Michael,

    Thank you for getting back to me so promptly. However, unforunately I’m afraid that I still do not agree with your assessment (or your interpretation of Marx’s assessment more accurately, I suppose):

    You have conflated value with market price. This is a mistake.

    I don’t think this is a mistake at all – you say I have conflated two different things, but I haven’t. Or, to be fair to you, if I have made such a mistake I cannot see what distinction you (you/Marx) are drawing between ‘value’ and ‘(market) price’ – it is as if you have an understanding that there is some underlying Platonic ‘real’ value to things that is completely independent of ‘surface’ prices.

    I’m sorry but that simply cannot be the case because it’s the market price that is the very instrument we use to measure ‘value’ (I’m talking about value only in the strictly economic/commercial sense here – i.e. I recognize that there all manner of life experiences which can have ‘value’ – let’s call it ‘worth’ – which cannot be given any kind of market valuation, e.g. a small child making a drawing of her parents has enormous ‘worth’ in that family but no commercial market value whatsoever).

    Prices fluctuate because, on the one hand, the price of a thing is relative to the prices of all other things that can be measured using the same instrument (i.e. price) and, on the other, context and circumstance (e.g. relative scarcity, desirability etc.). In other words the price of a thing (product/service) can never be independent of the system of measurement of which it is just one part – consequently I don’t see any way for a thing (e.g. a bottle of lager) to have a purely notional ‘value’ that is distinct from its market price/value. We elect to measure things through market price but do not have to.

    Value is provided by the socially necessary labour time (plus skill) required for its production … it is not on supply and demand (temporary fluctuations in price) that value rests.

    Again, I just don’t see how this can be true. Supply and demand are precisely what (economic) value is predicated on, which in turn is measurable by price (it’s not the only measure of course but it appears to be the best means of measurement available from all the other options I’m aware of). For example, I know a number of genuinely talented musicians who are lucky to make a pittance (if anything at all) through playing music and consequently, they all have other jobs. That their musical talent has worth is beyond doubt to me if no one else but having worth doesn’t necessarily equate to having a high market value because, to be honest, there are many, many thousands of other talented musicians out there. If the musicians I know of decided to refuse to play in local pubs unless they received higher fees (or any fee at all for that matter), there would be hundreds of others in the same city let alone the rest of the country who’d be more than willing to take their place.

    We might consider that to be a shame, but they could only start earning a decent living from their music if (a) large enough numbers of people wanted to see them more than they wanted to see other bands. or (b) someone – a government? – controlled the supply of musicians through some form of legislation – demand (scarcity) would then have been created – albeit to the detriment of everyone else who wanted to play music. I hope you agree that a world in which a Government Ministry or ‘People’s’ Committee deciding who and who cannot be allowed to play music would be a hideous on its own terms as well as being open to the most flagrant kinds of abuse, bribery and corruption.

    This is not to say there aren’t problems with the system we have now. There are certainly inequities and scandals, but in short I don’t think the solution is to rip it up and start over again with something new (which seems to be your suggestion).

    Quite apart from anything else – and I’m sure you must have heard this ad nauseum so apologies in advance – but apart from anything else, you really do need to explain why you still think Marx has a working solution when in every single case where centrally planned Marxist-inspired economies have been introduced it has ended in abject failure. Not one of them has succeeded in all its permutations across the world.

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  10. Iago Bones

    I’d like to offer my thoughts on this debate.
    There is a major problem with attributing price to supply and demand (or scarcity/abundance, which amounts to the same thing): Assuming that supply and demand are equally matched, what determines the price? In fact Marx worked with this assumption of balance in what he called Exchange Values for the bulk of his analysis of capitalism. This isn’t to say that he ignored or failed to recognise that imbalances of supply and demand exist and that their expression as price changes are one of the most glaring ways that capitalism manifests itself to us as Nikw211 describes. Rather, Marx did not see it as useful in attempting to explain the dynamics of the system as a whole.
    As the media and politicians often remind us the crucial indicator of the health of the economy is *growth*, from the level of an individual enterprise right up to the world net GDP growth rate. Growth implies something new, in this case new value (embodied in money). It’s an analysis of the process of how this new value comes into being that Marxist economics proposes.
    Thus I’d argue that purely “buying low and selling high” doesn’t offer any explanation since although a speculator may make a ‘profit’ it is at the expense of another, and there is no net increase.
    Marx located the source of new value in labour power, the term given to people’s ability to produce goods for sale. The employer yields a surplus in the production process described in Michael’s video.
    On a different note, I think it’s interesting to consider that the value or price of labour power, dependent on the specific context, is not only that required for a worker to sustain herself, the physical minimum, but also to reproduce the system as a whole. Capitalists rely on the working class to purchase and consume their products, particularly as markets for what were originally luxury goods for the wealthy reach saturation. For example technology gadgetry in the last decade or so. I think this is both a more realistic view and enables us to counter the idea that the working class has been ‘bought off’ in parts of the world.

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  11. Nikw211 (@Nikw211)

    Dear ‘Iago Bones’ (great name by the way!) and Michael,

    I’m neither an economist or someone who is directly familiar with Marx (i.e. apart from excerpts from the Manifesto, I have never read any of the volumes of ‘Capital’) so you may have to tolerate a certain amount of naivety in my comments. On the other hand, I feel I am much more familiar with complex systems, so anyway, caveats aside …

    Assuming that supply and demand are equally matched, what determines the price?

    There would never be such a case as this, even hypothetically speaking. Supply can never be equal to demand because demand is never a fixed value; because supply is effective at creating demand; and because the relationship between the two is a continuously changing dynamic.

    Supposing just for one moment though, that such a thing were possible – that for every person that wanted one at a single moment t, there was a ready-made supply of product X – the price/value of product X would be determined relative to all other known available products and services.

    If Seller A decided that product X should be priced at £9,999 but no one else did, then the demand would evaporate because no one would spend that much money on acquiring it, more likely is that a rival – Seller B – would offer product X at £99 thus running Seller A completely out of business – Unless, that is, Seller A modified his prices accordingly (of course, if Seller A was right and that all the combined processes and components required to produce a single unit of product X was equal to £9,990 then both he and Seller B would be bankrupt in no time at all – leaving in its wake a demand that someone else might try to meet, perhaps using innovative techniques that reduce the cost of producing a single unit to £95)

    A significant number of inventions and innovations are based on the principle of putting supply in advance of demand (see e.g. the apocryphal quote attributed to Henry Ford on the question of involving customer feedback during the development of Model T cars: ‘If I had asked people what they wanted, they would have said faster horses.’). Another and admittedly crude example would be to say that the supply of the album Lungs helped create an exponentially much larger demand for music from Florence and the Machine.

    … a speculator may make a ‘profit’ it is at the expense of another, and there is no net increase.

    This is a curious case – sticking with the example of Florence and the Machine, are you saying here that you believe that everyone (including myself) who bought a copy of the album Lungs was participating in a mass case of larceny? In other words, that for every single copy of Lungs that was bought or downloaded (legally that is!), another band’s album sales took a hit – one that may have reduced the members of that band to penury?

    I just don’t buy that (no pun intended). It seems to assume that if I and millions of others had not bought Lungs we would have bought another album instead – but no. There is nothing to suggest that that would have happened at all.

    I might be argued that this is an unfair example, because music is essentially a luxury item but I think the same principle can be applied to a lot of other commodities and services that are more essential.

    You make an interesting point about growth but I might have to come back to that later as my lunch break is almost over.

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  12. Iago Bones

    Nikw211,

    Just to be clear I’m no expert either!
    Also apologies I haven’t responded sooner.
    When you say that if supply and demand are equal “the price/value of product X would be determined relative to all other known available products and services” the question arises, relative using what benchmark or ratio? There must be a common attribute of all products which determines that the ratio of two commodities is 2:1 or 2000:1, which will be expressed in money. Marx argued that this common attribute was the value of the labour (time, effort) used to make the product.
    He wasn’t the first to do this – the classical economists held the same view – but Marx developed the theory as Michael and John have mentioned.

    I don’t think your description of a product decreasing in price from £9999 to £95 is inexplicable using this theory. The cost includes a portion of the cost of the machinery or equipment used to produce it, plus the raw materials, plus the labour cost of manufacture. The machinery itself was produced by someone’s labour, and the raw materials were extracted, mined etc by labour. A new product may have had a lot invested in R&D, new techniques etc, and to start with the manufacturing process may be wasteful and time consuming, but over time the costs are brought down by the original manufacturer and competitors who get in on the act.

    I do agree about supply being put before demand in some cases. Marx talks about this in terms of increased consumption and the ‘expansion of use values’.

    It seems to me that if we want to understand where profits come from we have to look beyond supply and demand because they obfuscate the underlying dynamics of profit creation. It’s in this context that I was talking about buying low and selling high. I was specifically referring to the situation where a capitalist middleman in a ‘wholesale’ capacity doesn’t modify the product or serve a useful purpose in distribution therefore not creating any surplus value.

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