Where do profits come from?

Capitalists are the products of social conditions where the means of living are privately owned and production is for profit; they are not the makers of these conditions. So it is essential to understand how capitalism works.

Let us first consider the explanation of profits that is provided by orthodox economics. Orthodox economic theory takes for granted a world of private property where some people mysteriously own capital and earn a revenue from that, and where the rest of the population own only their ability to labour and so are forced to work for a wage or a salary. It assumes private property and the existence of profit to start off with. Its theory, therefore, can in no way provide an explanation of profit, but is merely a description of the way that capital can secure an income for its owners.

The ideological implications of such a theory are clear (although not to the economists, who would deny them). By focussing on a description of the way payments to capital are made, rather than examining WHY such payments are made — which would necessitate an analysis of the foundations of property society — orthodox economics sweeps under the carpet the potentially revolutionary issues and makes profits seem normal, right and inevitable.

Orthodox Theory

Marx was highly critical of this aspect of orthodox theory and regarded it as a complete mystification of the real situation. For example in The 1844 Manuscripts Marx says,

Political economy starts with the fact of private property; it does not explain it to us . . . Political economy throws no light on the cause of the division between labour and capital, and between capital and land. When, for example, it defines the relationship of wages to profit, it takes the interest of the capitalists to be the ultimate cause, i.e., it takes for granted what it is supposed to explain.

Marx’s analysis of profit starts off by investigating the underlying property relations of society. As profit is a general characteristic of capitalist society only its explanation is to be found in its specific features. The features that Marx took to be specific to capitalism were the following:

  1. The means of production take the form of capital. This means not only that the means of production are put into operation only if a profit can be expected from the sale of the commodities so produced, but that the function of these means of production is the production of profit for accumulation, and not the production of useful articles as such.
  2. These means of production are owned by a minority class who are forced by their position as capitalists to use these means of production as capital, to use them only for making profit.
  3. The non-owning class, the working class, are unable to undertake productive activity unless hired by an employer in return for a money wage with which the means of subsistence can be purchased.
  4. The economic relations between economic agents (including those between capitalists and workers) have the appearance of freely contracted relations.
  5. Money transactions are the norm.

Surplus Product 

Marx argued that it is a feature of all property societies that a surplus product is appropriated by a minority class. In his economic writings on capitalism, he explained how this appropriation takes place in capitalist society; in an economy where economic relations take the form of exchange relations, the appropriation of the surplus product is also effected on the basis of exchange.

Firstly, Marx considered whether the surplus could be appropriated by means of unfair exchanges amongst sellers where commodities are bought cheap and sold dear. If this were so then the surplus would actually be created within the sphere of exchange. This can be discounted as an explanation of the source of the surplus because as capitalists are both buyers and sellers, it would be impossible for them as a class to make profits by cheating themselves all the time, although some individual capitalists may sometimes make profits on this basis by defrauding others. Consequently Marx concluded that an explanation would have to be based on the assumption of ‘fair’ exchanges between buyers and sellers.

As Marx saw exchange itself to be a purely social act, he argued that when commodities are exchanged, what is really happening is that people’s labour is being exchanged. Exchange-value is determined by the value of the commodity, by the amount of socially-necessary labour-time that has been expended on it. By this he meant that the value of a commodity is determined by the amount of labour needed on average, given the prevailing level of technical development and efficiency, to produce it, including the labour needed to produce the machinery and raw materials. If all commodities exchange according to their values, then what is the source of the surplus product, the surplus value? (We assume here for the sake of simplicity that exchange-values are determined solely and directly by values. In fact, Marx showed in Capital volume 3 that this is not generally the case. The analysis of the source of profit is, however, unaffected by this simplifying assumption).

Marx’s answer to this question is that surplus value is produced by the working class in the ordinary course of their working activity in that the value newly produced by a worker is invariably more than the value that he or she receives in the form of wages. But  how could this happen if all commodities are exchanged at their value? Surely the worker is exchanging labour for less than its value if the worker receives less value than his/her labour produces? Marx’s answer to this was that what the worker actually sells to the capitalist is not labour, but the ability to labour, labour-power. And the value of the labour-power is what it costs the worker on average to maintain himself/herself and dependants. By and large, the wages received by the working class are sufficient to maintain them from one generation to the next, but clearly this is a smaller value than is produced by the working class. The difference between the value newly produced by the working class and the wages received by them is the source of surplus value.

The capitalist class is able to appropriate this unpaid labour by virtue of its monopoly of the means of production which enables it to dictate the terms on which the working class are forced to exchange their labour for wages. This coercion may be softened a little by trade union activity, but essentially is unchanged by it.

Marx then went on to show how this surplus value is distributed among the different sections of the capitalist class in the form of rent, interest, and profit. Thus all unearned income ultimately flows from the unpaid labour of the working class, this being the direct result of the monopoly of the means of production by the capitalist class.

What does all this mean for the worker?

It means that although the world’s wealth is produced by the working class acting on nature-given raw materials, a certain proportion of this wealth is siphoned off for a small parasite class. That enables this class to enjoy a standard of living far in excess of that of the working class. It also provides the capitalist class with the funds for further accumulation on an extended scale which serves to reproduce the existing class relations of society.

It also means that the aim of production is not the satisfaction of people’s needs, but the amassing of surplus value and accumulation on an ever larger scale. Instead of useful articles — food, clothing, shelter, being produced for people, people are subordinated to the production of commodities; instead of people controlling the productive forces of society, people are controlled by them. Consequently, in a world which has a productive potential hitherto unknown, we are faced with mass poverty, mass starvation, mass pollution.

It means that the time is long overdue for the working class to take political action to put an end to a system that works against their interests.

It means therefore that the time is long overdue for the establishment of socialism where all society’s productive forces are owned and democratically controlled by the entire community. In such a society the means of production will not function as capital but as aids to the production of the useful articles that we need to live. Production will not be for profit but will be directed towards satisfying our needs. Together with other relics of capitalism such as money, insurance policies and price tags, profits will have no role in socialism.