In the last lesson, we learned how to compute the rate of surplus value, or the rate of exploitation (same thing). We divided the surplus value created by the variable capital. In other words, the extra wealth created divided by the amount that the worker gets: s/v.

We’re going to make it only barely more complicated to figure out the rate of profit.

The value of machinery comes from labor

The boss needs more than workers to manufacture a product. He also needs things like raw materials and machinery. These things have value because they were made with labor. You might say that labor is “congealed” in them. As they get used up, they release a little bit of that congealed value into every new product.

As machines wear out, they impart value to the new products

Let’s say a boss owns a sewing machine. It’s strong enough to make 10,000 pairs of pants before it has to be replaced. So each pair of pants gets 1/10,000ths of its value transferred. It’s important to realize that no new value was created in this process, because the value of the sewing machine goes down by 1/10,000th every time a new pair of pants is created. That's not just Marxist economics, it's ordinary cost accounting.

New value comes only from labor, not in the process of transferring congealed value from a machine to a new product. That’s important to remember. It’s also one of those things that the boss would not want you to know.

The value of raw materials comes from the labor already in them

If the capitalist also buys denim material for making pants, then the value of that denim is also congealed from the labor it took to make it. It transfers old value to the pants the same way, without adding any new value.

He probably has to rent a building, pay for utilities, etc. All of those things are in the same category as the denim and the sewing machine. They transfer value but they don’t create any new value.

The new value comes from the people operating the sewing machine or otherwise working on making pants. Their labor power is the only new value in this process. Labor power is the only commodity which, as it gets expended, creates new value.

Nevertheless, the boss needs the raw material and the machinery as well as the workers if he is going to get those new products made. Marx called the congealed value in such things as raw materials and machinery “constant capital” or “c.” He explained that profit comes from surplus value divided by the variable capital and the constant capital combined. Not very complicated, huh?

Just as in all the other economics explanations, we are talking about averages, not any particular event or person.

The average profit is the average surplus value divided by the average variable capital plus the average constant capital.

Profits tend to average out

Capitalists really like profits, and they tend to move into whichever realm of economic activity yields the most profit. Consequently, under capitalism, no one capitalist is supposed to get an extraordinarily high rate of profit for long. Other capitalists will move in on him, and the average rate of profit for different enterprises will tend to drop toward an overall average for all enterprises. If our sewing machine guy is making 20% profits off his pants project and other capitalists are only making 12%, they are going to start making pants, too.

We saw this when IBM and Apple started making a lot of money with home computers around 1990. Before you could blink, there were dozens of companies making home computers and they became cheaper every year.

If we didn’t have monopolies controlling whole industries, and if we didn’t have companies making back door deals with government, then one average rate of profit would tend to prevail throughout capitalism. Those special cases make capitalism even worse, but we will now see that capitalism is bad enough even without them.

Profits tend to fall

Surplus value has to be divided by the capital expended, both variable capital and constant capital, to obtain a profit rate. In actual capitalist practice, constant capital grows and grows because the capitalist, still competing with other capitalists, keeps improving the production process. He does this primarily by adding more machinery and reducing the number of workers.

When the capitalists compete with one another in a given industry, they have to make their products cheaper than the other capitalists. They can do that by paying the workers less or by working them longer, or by some new innovation in the production process. Mostly, they replace workers with machines, and that leads us to the best and worst thing about capitalism. As they buy more machinery and save on labor costs, products may get less expensive and more available for consumers. That’s the good side of it.

Gross profits and profit rates

The bad side is that their profit rate always tends to fall. The “c” in s/(v+c) keeps rising and driving the entire profit formula downward. One could argue that capitalist profits could be restored by increasing surplus value or by paying lower wages, and it’s true in a strictly theoretical sense, but those are only temporary fixes.

If their rate of profit falls, and it generally does as constant capital rises, then their best way to maintain gross profits is to make and sell more and more stuff. That means that they have to expand. If they saturate their market, then they have to find new markets. If the entire planet becomes saturated, then there are no new markets. Capitalists then have to find some way to destroy their competitors and take over their markets....

Ultimately, the capitalist “solution” is war. It’s built into capitalism. That’s the bad side. It's a fatal flaw.



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