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Cooking the Books: C, V and S

British Gas customers have been receiving a diagram with their bills which answers the question “where does your money go?” It shows that 56 percent goes on “gas bought from wholesale market”, 21 percent to “delivery to your home”, 10 percent to “government obligations and taxes”, 8 percent to operating costs, leaving 5 percent as “our profit”.

What does Marx make of this? To explain how capitalism works he employs three basic concepts, C, V and S. C stands for what he termed constant capital, V, for variable capital, and S, for surplus-value. By constant capital he means that part of total capital that is invested in factories, machinery, materials and energy.  Constant capital merely transfers its value (hence the name, ‘constant’) to the new product, either in one go or gradually through depreciation. Variable capital is that part of total capital that is invested in the purchase of labour-power and produces a greater value than its own (hence the name, ‘variable’).  This comes about because the exercise of labour-power is the source of new value.  The value that variable capital produces over and above its own value is S, surplus value.

From this Marx derived various explanatory concepts. S/V was the rate of surplus value or rate of exploitation. S/(C + V) was the rate of profit.

Some of Marx’s concepts can be translated into the categories of conventional bourgeois economics, except that Marx’s analysis is in terms of values whereas conventional economics is in terms of prices, which in practice are hardly ever the same. With this proviso, S + V corresponds to what conventional economists call “added value”. But there is a complication, even in Marx, regarding C. It can mean either total capital invested or only that part of constant capital that is transferred to a product in one process of production. Any confusion can be avoided by confining the “rate of profit” to the first case and introducing for the second the concept of “profit margin” as S/(C + V + S) even though this is not in Marx explicitly.

In his Guardian column (23 April) Aditya Chakrabortty drew attention to a study by the Centre for Research in Socio-Cultural Change (Cresc) on the “Apple Business Model”. He highlighted the fact it cost only $178.45 to assemble an Apple iPhone in China whereas it was sold in America for $680, “a whacking gross margin of 72%” as he put it.

There was, however, something more interesting in the article itself (which can be found on the Cresc website). Here the authors employ the concept of “labour share of value added” (LSVA), defining “value added” as “Labour costs including social charges (L) + cash surplus (C) (calculated as depreciation and amortisation + interest paid + profit retained & distributed)”.

The authors quote figures to show that “in the long run, US manufacturing LSVA has been declining unsteadily from a 70% level since the early 1980s to reach 55% in 2007; the German decline started later but there is a full 10 point difference between the 75% level of the early 1990s and 65% level of the early 2000s”. In China, on the other hand, “manufacturing LSVA ratios are currently at an extraordinary low level of 27.2% in 2007 and an estimated 26.2% in 2008.”

It’s good of conventional economics to provide us with a tool for calculating the rate of worker exploitation, since LSVA is L/(L + C), the equivalent in Marx of V/(V + S), from which the rate of exploitation S/V can be derived as C/L.