2010s >> 2019 >> no-1375-march-2019

Cooking the Books: What are normal profits?

In his column in the Times (7 January) Oliver Kamm gave both a description of how the profit system works and a defence of profit-seeking as ‘a benign and socially useful activity’:

‘Businesses are run with an eye to generating profit… Expectations of higher profits will induce businesses to invest.’

Yes, but, equally, expectations of low or no profits induce businesses not to produce even if there is a need for their product. They only respond to paying – what economists cynically call ‘effective’ – demand, as Kamm admits:

‘If companies are confident about future demand, they will invest in plant, machinery and labour. If they’re not, they won’t – and this will accelerate an economic downturn. In an efficient economy, there’s no way of avoiding this.’

Kamm went on to describe another feature of capitalism – the averaging of the rate of profit across all sectors of the economy:

‘… if profits are abnormally high then other companies will enter the markets. This added production will constrain prices and cause profits to be no greater in one sector than in other industries.’

This is indeed what tends to happen and was noticed by Marx too. He devoted a whole section of Volume III of Capital, comprising five chapters, to ‘the transformation of profit into average profit’:

‘Capital withdraws from a sphere with a low rate of profit and wends its way to others that yield higher profit. This constant migration, the distribution of capital between the different spheres according to where the profit is rising and where it is falling, is what produces a relationship between supply and demand such that the average profit is the same in the various different spheres.’

So there is no disagreement between Marx and Kamm on what happens. The disagreement is over the source of this average, or ‘normal’, profit. Kamm argues:

‘A ‘normal’ profit is not, contrary to critics of the market system, exploitative of either consumers or workers. It is a genuine contribution by businesses and investors to public welfare. By deferring consumption and taking on risk, investors are expanding the possibilities of future production. They deserve a reward for this.’

This is not an economic explanation of the origin of ‘normal’ profits, merely an attempted justification for capitalists receiving a profit. It’s moral preaching not economics. And it doesn’t explain how its level is determined. Marx provided the economic explanation: the normal rate of profit is determined by the total amount of surplus value produced in the whole economy divided by the total amount of capital invested. Competition between capitals, embodied in companies, in their quest for higher profits leads to each capital tending to receive a share of profits pro rata to its size.

Noting that ‘the various different capitals here are in the position of shareholders in a joint-stock company, in which the dividends are evenly distributed for each 100 units,’ Marx concluded that:

‘… each individual capitalist … participates in the exploitation of the entire working class by capital as a whole, and in the level of this exploitation; not just in terms of general class sympathy, but in a direct economic sense, since… the average rate of profit depends on the level of exploitation of labour as a whole by capital as a whole.’

Kamm’s claim that a normal profit does not arise from the exploitation of workers could not be more wrong.