How capitalists get their profit

-John Edmundson

(The Spark, November 2008)

With the financial turmoil dominating the news over the last two months, commentators are talking about the end of the free market. Some panicked commentators have even questioned the survival of capitalism itself. With capitalism in a state of panic and all sorts of people in the media suddenly talking about Marx, it does seem to be a good time to look at what Marx had to say about capitalism that made his ideas so resilient. karl-marx

What concerned Marx was the fact that while there were a lot of critics of capitalism active in his day, there had been no scientific analysis of how capitalism worked, so socialist projects were idealist and unable to gain much traction. Marx decided to start at the most basic level of economic production, the commodity, to discover how and why capitalism seemed to be so productive yet also so prone to crisis.

Picking up where earlier political economists had left off, Marx showed that the key to understanding the economy was the production of commodities - goods or services produced for sale. The one thing that all commodities have in common is human labour. Assuming people work at an average pace (which Marx called “socially necessary labour time”), eight hours of shoemaking is equivalent to eight hours of farming or eight hours of weaving. If I work for eight hours making shoes, I can buy goods to the value of eight hours’ labour (using a special commodity - money). If those goods are enough to feed and clothe me, I will do that labour every day to replace my used-up labour power.

For the economy to work overall, commodities must be exchanged at (or close to) their equivalent value in labour time. “Price” serves as a crude approximation of this. Otherwise one group of producers would be getting ripped off. This can happen sometimes but not overall, because capitalists simply reinvest in another sector of the economy if their own makes insufficient profit.
What Marx discovered was the significance of labour power itself as a commodity. Unlike all other commodities, which only transmit their value, labour power can create new value, beyond what it needs to replace it. With the advantage of tools and machinery, I might produce enough value to meet my needs in only four hours. But the boss makes an “equal” exchange. He doesn’t exchange a day’s pay for the labour needed to produce that value in the form of pay, but a day’s pay for a whole day’s work, even if my labour power is so productive that I can produce the value of my wage in four hours. The extra hours of work are “surplus” labour.

In older systems like feudalism, it is obvious that making a peasant work on the lord’s land, or simply claiming a right to some of the production, is exploitation. The exploitation is still there in capitalism; in fact it’s much greater - it’s just hidden within the wage system. We get paid an hourly rate for every hour we work: no more, no less. What could be fairer than that? The problem is that even if we negotiate a good pay rate, it will never equal the actual value of the work we do. If it did, the capitalist would have no need for us, because we wouldn’t be generating a profit.
So production in capitalism occurs not because people need things, which is reduced to a means to an end, but because it makes a profit. When the profit dries up, the capitalist moves on, no matter how important the production might be for society.

11 Responses to How capitalists get their profit

  1. Paul Drake says:

    Hi John I herd on the news the other day that Marx is ‘fashionable’ in Germany at the moment. Thats a bit of a worry.

    The above seems to agree with Capital though I am not going to scan the 724 pages this evening. However if the above mentioned serves to wipe out profit (which was Marxs’ intention) what other forms of incentive could replace profit?

    There are other forms of socialism that I think needs to be looked at like co-operatives where the workers are stake holders, owning a share of the co-op it runs like a business but a share of the profit goes to the workers not outside share-holders who don’t put any input into the venture but are always holding their hands out for more profit.

    What are WP’s views on the above mentioned?

  2. John Edmundson says:

    I don’t think the renewed popularity of Marx in (Eastern) Germany is a worry at all. I think it was almost inevitable although it’s happened sooner than I would have expected. With the worst aspects of capitalism hitting the former East Germany much harder than the West (unemployment, poor wages, work conditions and job security), it is hardly surprising that people are looking again at the works of Marx, even though their experience of “socialism” is something I wouldn’t want to see repeated. If Germans are able to build a new socialism that avoids the many negatives of the Soviet bloc experience then all power to them I say.

    In the WP, we don’t want to lay down any prescriptions about the details of a post-capitalist economy. I would expect though that worker control of the workplaces would have a lot in common with the co-operative model that you talk about. However, I think that if we don’t move beyond the profit motive (as opposed to producing a surplus) we are destined to return inevitably to capitalism and the socialism people will have fought and suffered long and hard for will be only an interlude in the capitalist epoch, just as the Stalin era was. The problem with profit as a motive is that it ignores social need as the purpose of production. And “a little bit of profit” doesn’t stay that way. It becomes the measure of success and necessary to compete.

    I think there are plenty of alternatives to profit as the driver for productivity at work. Voluntary organisations prove to us every day that profit need not be the motivating force. In the shorter term workers as a group could gain reduced hours or increased leave. In the longer term, people feel more motivated when they are working for a project they care about. I would imagine that all sorts of experiments would be tried by different worker controlled companies in a socialist society.

    Remember that the world we live in, where profit is held up as a magical deliverer of everything that is good, is one that actually only delivers profits to a tiny minority. Globally, for the vast majority of workers, the primary force to motivate them is fear, coercive fear in many places, the economic fear of losing your job for all. Even here, performance pay systems that supposedly provide incentives for performance often work more as sticks to beat workers with when unrealistic performance targets are unachievable in practice.

    So what does motivate people to work efficiently? In my own experience, all sorts of things - pride in my work, friendly competition and cooperation with my co-workers, the chance of an early getaway when on night shift!, the knowledge that I’m doing something socially useful . . . Of course a monetary incentive works too :-)
    Cheers,
    John

    ps. It should agree with Capital Vol. I; that was the purpose of writing that piece!

  3. Paul Drake says:

    Hi John;
    Yes what motivates workers besides profit also is giving encouragement and credit where credit is due. I know as an artist it is great when someone tells you that you have done a good painting. Even better to sell the thing, bills get paid.

    William Morris had a good co-operative going making wall-paper, very good quality and design. All the workers were skilled and dedicated, they enjoyed their work place.
    I have worked in factories when every body waited for the knock off siren at 5pm, I hope they become extinct establishments.
    Youre respectfully
    Paul Drake

  4. Daphna says:

    Profit as a motive of course never existed for tens of thousands of years when people lived and worked collectively without money.

    The advent of class society, and especially capitalist society elevated profit as a driver.

    People do many things that don’t involve any payment even in today’s capitalist society such as looking after their families, and doing voluntary work.

    John’s right, we don’t lay down prescriptions, but Marxist generally have a view that socialist society works along the lines “from each according to his ability, to each according to his work”. In other words, if you don’t work you don’t eat. (Exceptions being for people who genuinely can’t work).

  5. greenpagan says:

    Paul Drake says @ November 12, 2008 at 11:42 pm:

    >>>>what other forms of incentive could replace profit?

    I dunno. Maybe something sort of like the incentive to survive itself? The production of things like food clothing shelter and fuel for their own sake?

    Incentive is such a “capitalistic” reference within the context indicated. In point of fact it’s all these hyperactive overly-motivated highly incentivized types who’ve caused most of the problems in the world.

    At least that’s the way I feel about it…

    ====

  6. Paul Drake says:

    I think that you have a point Greenpagen, in anticipation of the neo fascist regime we are about to embark on (courtesey of Nat/Act) I have built a hot house, it is mostly out of polythene, I have just been in the back field collecting cow shit and sheep manure for it. I have tomatoes. cucumbers, peppers, basil, peas and peppermint. The point I am making is that I didn’t have to work eight hours a day to achieve what is almost self sufficiency.

  7. John Edmundson says:

    I think the single most important thing for us to realise a we go into this era of Nat/ACT/MP (note: not Nat/ACT) government is that what we face is NOT a “neo fascist regime” but a liberal capitalist government of a slightly different hue to the previous one. There is nothing remotely fascist about Key and co, and more importantly, there is nothing about the current social climate that points to a rise in fascism, neo or retro.

    If we want to be effective in opposing this new government, we need to be clear about what it is. Ranting against fascism might attract a bunch of radicals who’ll go on demos, but it won’t bring us any closer to challenging the system.

    I suspect that what we are actually going to be faced with is a pretty sophisticated National government which will operate in a way that balances ACT and the Maori Party to prevent the Nats from being captured by ACT. In fact, the Maori Party could come out stronger from this by being seen as the people who saved the country from ACT.

    We need to be clear and realistic about the true nature of the new government if we are going to be effective in fighting it and building a movement of well informed and clear-headed revolutionaries who can actually replace what we have with something better.
    Cheers,
    John

    ps. If people have the resources to grow their own food, that’s fine, but it won’t threaten capitalism. And we’re not facing a period that needs a turn to survivalism. Anyway, while that may start with a progressive approach - sharing produce etc - in the absence of an effective political movement (ie as a substitute for one) it is very likely to become quite reactionary.

  8. WP Admin says:

    Anyway, while that may start with a progressive approach - sharing produce etc - in the absence of an effective political movement (ie as a substitute for one) it is very likely to become quite reactionary.

    Indeed. While aspects of subsistence living, permaculture etc are worthwhile, there’s a definite snobbish undercurrent to their application as lifestyle choices within capitalism.

  9. Paul Drake says:

    John are you suggesting that the Key Government is more moderate than the Jenney Shipley government?

    I would like to here your definition of ‘fascist’.

    I call ‘subsistance’ gardening ‘self sufficient’ gardening and if organised into co-operative group I don’t see how that is reactionary, or how that could contribute to the capitalist system at all.
    Indiginous people have been doing co-op gardening for thousands of years, where is the cash increment of profit involved? Marx identifies this activity as ‘use values’.

    Marx should have visited Paul Gaugan in Tahiti and chilled out a bit.

    Yours Respectfully

    PD.

  10. John Edmundson says:

    Paul:
    “John are you suggesting that the Key Government is more moderate than the Jenney Shipley government?”

    Yes. I don’t think there is any question at all that the Key Government will be much more moderate than the Shipley government. Furthermore, I would suggest that it will not differ very much from the Clark government. The only caveat I would add to both those statements is that if the current financial drama does turn into a major crisis, then Key will launch new attacks on thee working class, but so would have Labour. They are not the same, but the differences are not enough to warrant supporting them. One main reason they can be more moderate is that the Shipley government completed the work of the fourth Labour government, meaning all the main attacks had been made and the working class gutted.

    Take the 90 Day policy. If it even gets implemented, what will it mean? With only 10% of private sector workers unionised, and those mostly in larger sites, the Act would mean very little. Those ununionised staff are already able to be easily fired without the need of such a law.

    Paul:
    I would like to here your definition of ‘fascist’.

    Rather than provide a detailed definition here (basically a fiercely nationalstic militarised state working in close cooperation with big capital and with a very tight rein on society and the economy, and intensely socially conservative - the antithesis of free-marketeers like Rodney Hide or centrists like John Key), I’ll say what it isn’t, in the context of the Key government. It’s not a government that would prefer to deal with the Maori Party than with Act, as Key seems to be. A fascist is not someone who courts the PI vote, has Chinese and Koreans as candidates, appoints an ex-DPB beneficiary and solo-mum to the Ministry of Social Development. If Key was a fascist, Maurice Williamson and Lockwood Smith (not that they’re fascists either) wouldn’t be the ones missing out on cabinet posts.

    Paul:
    “I call ’subsistance’ gardening ’self sufficient’ gardening and if organised into co-operative group I don’t see how that is reactionary, or how that could contribute to the capitalist system at all.”

    I didn’t say it “is reactionary”, I said it can go that way. Comments about starting to do more gardening sound more like survivalism than socialism to me. I have a bit of a vegetable garden at my place, which I share with a friend who has no room for a garden. Anything we can’t eat will be given away to people. I don’t see that as part of my revolutionary activity. There’s a tendency to try to live a “radical” lifestyle and think everything you do is part of that. Actually it’s not, and in the absence of a political struggle, gardening is not one of the areas that’s particularly radical.

    Paul:
    “Indiginous people have been doing co-op gardening for thousands of years, where is the cash increment of profit involved? Marx identifies this activity as ‘use values’.”

    Who said anything about a “cash increment of profit”? You’re right, vegetables are use values and if not grown for exchange, they remain as use values only. I’m not sure quite what point you are trying to make. More importantly, I cannot see what there is in the election result that should lead people to start vegetable gardening any more than they already were. Have I missed something here?

    Paul:
    “Marx should have visited Paul Gaugan in Tahiti and chilled out a bit.”

    Indeed, as should I . . .
    Cheers,
    John

  11. WP Admin says:

    The central problem with subsistence living as an alternative to capitalist production is that it doesn’t direct challenge agribusiness, let alone capitalism. Therefore it’s reduced to a lifestyle choice. This is similar to Fair Trade, which has certain valuable aspects but maintains and allows capitalist exploitation; the anarchy in capitalist production reduces most ‘ethical’ solutions to lifestyle choices, often expensive ones. Strikes by workers in agribusiness, occupations of factories, even freeing mistreated animals if you must - these all challenge capitalist production. Lifestyle choices, however worthwhile and socialistic in character, rarely challenge capitalism.

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