Ricardo’s Principles, Chapter 6: On Profits

Ricardo reminds us that we have seen that ‘[t]he profits of stock in different employments hav[e] been shown to bear a proportion to each other, and to have a tendency to vary all in the same degree and in the same direction.’ In this chapter, therefore, ‘it remains for us to consider what is the cause of the permanent variations in the rate of profit, and the consequent permanent alterations in the rate of interest.’

The price of corn is determined by the amount of labour necessary to produce it on the land that pays no rent. The price of the product that is produced on this land, likewise the price of manufactured goods, is ‘resolved’ into two components, the profits of stock and the wages of labour. If prices are constant, and productivity constant, then the only factor that can impact profits is wages: if they rise, profits fall, and vice versa.

But now, imagine that there is a fall in the productivity of corn-producing labour. Corn will rise in price. The price of manufactured goods would not change, but if wages, tending towards subsistence, rise in function of the rise in corn, then manufacturing profits will fall. Corn-producing profits will also fall, since the corn producer will also be hiring the new, higher-cost labour. The farmer on the previous highest-cost land, land on which now rent is paid, will dispose of labour of unchanged productivity, but part of the product will now pass to the landowner in the form of rent; the farmer on the new, less productive land, will employ more labour to produce a higher value product – in both cases, profits will conform to those of the manufacturer.

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Ricardo’s Principles, Chapter 5: On Wages

The natural price of labour is ‘that price which is necessary to enable the labourers, one with another, to subsist and to perpetuate their race, without either increase or diminution.’ Subsistence is of course a function of the real wage: ‘[t]he power of the labourer to support himself, and the family which may be necessary to keep up the number of labourers, does not depend on the quantity of money which he may receive for wages, but on the quantity of food, necessaries, and conveniences become essential to him from habit, which that money will purchase.’ Given the subsistence real wage, then, the money wage will move with the price level.

From this Ricardo draws the conclusion that the natural price of labour exhibits a long term tendency to rise, because ‘one of the principal commodities by which its natural price is regulated’ (Ricardo means corn) tends over the long term to become more expensive, even if ‘improvements in agriculture [and] the discovery of new markets […] may for a time counteract […] [this] tendency […].’

The natural price of commodities in general (‘excepting raw produce and labour’), however, display a long term tendency (‘in the progress of wealth and population’) to fall: this is due to the cheapening effect of technical and scientific advancements, which more than offset the effect on price of ever more expensive raw materials. The market price of labour is the price, under the effect of supply and demand, it actually sells at on the market; nevertheless, as is the case with other commodities, ‘[h]owever much the market price of labour may deviate from its natural price, it has, like commodities, a tendency to conform to it.’

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Ricardo’s Principles, Chapter 4: On Natural and Market Price

Ricardo turns his attention to the effect of demand and supply. Although the ‘foundation of value’ of commodities is the quantity of labour necessary for their production, ‘[i]n the ordinary course of events, there is no commodity which continues for any length of time to be supplied precisely in that degree of abundance, which the wants and wishes of mankind require, and therefore there is none which is not subject to accidental and temporary variations of price. But these variations are self-correcting. ‘Whilst every man is free to employ his capital where he pleases, he will naturally seek for it that employment which is most advantageous; he will naturally be dissatisfied with a profit of 10 per cent., if by removing his capital he can obtain a profit of 15 per cent.’ Capital is accordingly apportioned in function of the variations of price. ‘With the rise or fall of price, profits are elevated above, or depressed below their general level, and capital is either encouraged to enter into, or is warned to depart from the particular employment in which the variation has taken place.’ But it is not the case that capitalists – the ‘owners of stock’ – limit themselves to the application of their own capital in production.

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Ricardo’s Principles, Chapter 3: On the Rent of Mines

Metals (for example) are produced by nature, but are extracted by labour. Like agricultural land, mines tend to pay a rent; as in the case of agricultural land, the rent of mines is the effect, and not the cause, of the price of the product. Again as in the case of agricultural land, were there an abundance of mines of the same degree of fertility, there would be no rent: the price of the product would depend on the amount of labour required for its extraction and bringing it to market. But, given that there exist mines of varying productivity, the poorest (least productive, highest cost) mines would pay no rent, but the value of its product must be sufficient to cover the costs of to provide for the real wage of the workers working the land and to produce a normal profit. All other mines, of greater productivity, will produce a rent equal to the excess over the normal profit. This is exactly as the case of agricultural land examined in the previous chapter. Hence, the value of the product of mines depends not on the rate of profit, nor on the level of wages, nor on the rent paid.

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Ricardo’s Principles, Chapter 2: On Rent

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Ricardo opens: ‘It remains […] to be considered whether the appropriation of land, and the consequent creation of rent, will occasion any variation in the relative value of commodities, independently of the quantity of labour necessary to production.’ The ultimate object of Ricardo’s enquiry is thus not rent as such, but the effect of rent on relative prices.

But what is rent? ‘Rent is that portion of the produce of the earth, which is paid to the landlord for the use of the original and indestructible powers of the soil.’ However, ‘It is often[…] confounded with the interest and profit of capital, and, in popular language, the term is applied to whatever is annually paid by a farmer to his landlord.’ Ricardo imagines two farms, of the same extension and natural fertility, but one endowed with the conveniences of buildings, drainage, hedges and the like, and the other not. The farmer on the first farm would naturally pay more ‘rent’ than that on the second, but only a part of what she would be paying ‘would […] for the original and indestructible powers of the soil; the other portion would be […] for the use of the capital which had been employed in ameliorating the quality of the land, and in erecting such buildings as were necessary to secure and preserve the produce. The distinction between the two components is important because ‘the laws which regulate […] rent are widely different from those which regulate […] profits, and seldom operate in the same direction[:] […] that which is annually paid to the land-lord […] is sometimes kept stationary by the effects of opposing causes; at other times advances or recedes, as one or the other of these causes preponderates.’

‘On the first settling of a country,’ (Ricardo’s own ‘early and rude state’, so to speak) there is no rent: land is abundant, and freely available. No one pays for its use, because there is no need to. ‘If all land had the same properties, [and] […] were unlimited in quantity, […], no charge could be made for its use […].’ Rent arises, reasons Ricardo, precisely because land is limited in its availability, and is not of the same quality. Once land of the highest fertility has been completely taken into cultivation, then land of the second level of fertility must start to come into use, and rent appears on the best land. As this second level of land is all used up, then land of a third level of quality will come into use and rent will now appear on the land of second-best quality. And so on.

Imagine that the yields of the first, second and third types of land are 100, 90 and 80 quarters of corn per acre respectively. ‘On the first settling’, the abundance of land 1 means that ‘the whole net [i.e. surplus] produce will belong to the cultivator, and will be the profits of the stock which he advances.’ But once population growth requires the use of land 2, then a rent appears on land 1; ‘or either there must be two rates of profit on agricultural capital, or ten quarters, or the value of ten quarters must be withdrawn from the produce of No. 1, for some other purpose.’ The logic of Ricardo’s argument is this. If we assume a given per-acre capital investment (a certain quantity of seed corn), and a given surplus product on land 1 (a certain quantity of corn produce), then the per-acre profit will be equal to the net surplus product (i.e. product net of, let us say, wages – paid in corn – and seed for the next harvest). The rate of profit will be the ratio of this surplus and the seed corn sown plus the wages (in corn) paid out (these two factors summed being effectively capital laid out and under the operative assumptions being the farmer’s costs). If an inferior land comes under cultivation, its yield will be less (because it is inferior) and hence its net surplus (as defined above) will be less. In order for the rate of profit to be equal on both lands (Ricardo cannot permit different rates of profit to coexist), the rate of profit on land 1 is calculated by subtracting from its net product the difference in surplus between the two lands: this difference is rent. Rent is surplus profit; surplus in the sense that it is above that profit that yields a ‘normal’ profit.

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Ricardo’s Principles, Chapter 1: On Value

I  ‘Value in use’ and ‘value in exchange’

Ricardo notes Adam Smith’s distinction between ‘value in use’ and ‘value in exchange’, and comments:

Utility […] is not the measure of exchangeable value, although it is absolutely essential to it. If a commodity were in no way useful […] it would be destitute of exchangeable value, however scarce it might be, or whatever quantity of labour might be necessary to procure it.

(Notice Ricardo’s use of the term ‘exchangeable value’; value, for Ricardo, is value in exchange, i.e. relative price: Marx’s ‘exchange value’.)

II  The two sources of value

Ricardo now notes:

Possessing utility, commodities derive their exchangeable value from two sources: from their scarcity, and from the quantity of labour required to obtain them.

Some commodities’ exchangeable value is only determined by scarcity: rare statues and pictures, scarce books and coins, wines of a particular quality: ‘[n]o labour can increase the quantity of such goods, and therefore their value cannot be lowered by an increased supply.’

But such goods form only a small minority in the world of commodities; here, we will be dealing with ‘such commodities only as can be increased in quantity by the exertion of human industry, and on the production of which competition operates without restraint.’

III  Value is determined by labour required for production and not labour commanded in exchange

To appreciate the significance of the next step in Ricardo’s exposition, we need to look back briefly at how Adam Smith conceived of value.

Smith had argued that in the ‘early and rude state’ (‘which precedes both the accumulation of stock and the appropriation of land,’), the products of human labour exchange exclusively according to the amount of labour required for their production.

If among a nation of hunters, for example, it usually costs twice the labour to kill a beaver which it does to kill a deer, one beaver should naturally exchange for or be worth two deer. It is natural that what is usually the produce of two days or two hours labour, should be worth double of what is usually the produce of one day’s or one hour’s labour.

What is specific about the ‘early and rude state’ (an analytical device rather than an actual historical stage) is that ‘the whole produce of labour belongs to the labourer’. In these circumstances, ‘the quantity of labour commonly employed in acquiring or producing any commodity is the only circumstance which can regulate the quantity of labour which it ought commonly to purchase, command, or exchange for.’

But we can see here that Smith distinguishes between two measures of value (although the measure is labour in both cases). First, he refers to the labour ‘employed in […] producing […] [a] commodity’; second, to the labour ‘which it ought to […] exchange for’ on the market. The first of these measures is clear enough. What is the second? How does a commodity ‘command’ labour in exchange?

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Capital volume 3: An Interpretive Glossary

Like my glossaries for volumes 1 and 2, this glossary of volume 3 of Marx’s Capital has been produced principally for purposes of self-clarification. It is thus not exhaustive of the volume’s terms and concepts, but it does try to deal with some of the most important of them. It is ‘interpretative’ in the sense that the definitions given are my recapitulated interpretations of what I think the terms mean, rather than direct textual citations of what Marx says or implies they mean (even if, given that the glossary has been prepared from my own reading notes, I may in places more or less closely paraphrase Marx). I cite references to Marx’s text where relevant. At some point in the future I do intend to produce a textual glossary of some of these terms using Marx’s own words – the two glossaries, the textual and the interpretative, would then complement one another.

Where I think there are supporting citations in Marx, however, these are indicated in blue: the reference is to Karl Marx, Capital volume 3 (Harmondsworth, 1981). Main entries and cross-references appear in bold red. Terms here that are of my own confection, rather than Marx’s, appear within “double quotation marks”.

Given that this glossary forms part of a longer term and ongoing project, I welcome being corrected on errors of fact, superfluity, omission, and interpretation; and I naturally welcome all other constructive comments.

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Capital Volume 3, Chapter 52: Classes

‘The owners of mere labour-power, the owners of capital and the landowners, whose respective sources of income are wages, profit and ground-rent – in other words wage-labourers, capitalists and landowners – form the three great classes of modern society based on the capitalist mode of production.’

This social articulation is most developed in England; however, even here it does not exist in pure form: ‘middle and transitional levels always conceal the boundaries (although incomparably less so in the countryside than in the towns).’ Nevertheless, it is a constant feature of the development of capitalist production that means of production are taken from the hands of labour and concentrated into the possession of capitalists. Alongside this, capitalist production pursues the divorce of landed property from capital and labour.

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Capital Volume 3, Chapter 51: Relations of Production and Relations of Distribution

The relations of distribution account for the way that value newly created in production is divided up into the revenues of wages, profit and rent and passed on to the owner of labour power, the owner of capital and the owner of land. The appearance within capitalist society is that these relations are ‘natural relations […] arising from the nature of all social production, from the laws of human production pure and simple’; even when, in pre-capitalist society, relations of distribution take on other forms, this is explained away as underdevelopment.

The truth in this conception is that once there is any kind of production the social product always assumes two parts: one that is destined for direct consumption by the producers (and their dependents) and one – ignoring for the moment productive consumption – that is ‘surplus labour’, i.e. that serves to satisfy general social needs. From this point of view social distribution does indeed take on the same form across historical epochs, but all that says is that if we abstract from what makes historical epochs different they are all the same.

Marx argues for the ‘specific historical determinacy’ of the capitalist mode of production. Like all modes of production ‘it assumes a given level of social productive forces and of their forms of development as its historical precondition’. The relations of production –  ‘relations into which men enter in their social life-process, in the production of their social life’ – which correspond to this historically determined mode of production are themselves historically transient. The relations of distribution ‘are essentially identical with these relations of production, the reverse side of the same coin, so that the two things share the same historically transitory character.’

It would be an error to deal with capitalist relations of distribution simply from the appearance that the annual value product is divided into wages, profit and rent. The social product is divided into capital and revenues. One revenue – wages – assumes the form of revenue after assuming the form of capital. The fact that the direct producers under capitalism face the conditions of labour and the products of labour as capital gives the material conditions of production an immediate specific social character and conditions the specific relationship among the workers and between the workers and the owners of the conditions of production. (It is also the case that the transformation of the conditions of labour into capital also involved the expropriation of the immediate producers from the land, and thus conditioned a specific form of landed property.) The fact that one part of the social product assumes the forms of wages profits and rents is a consequence of the fact that the other part is transformed into capital. Further than this, this social form of the conditions of production is not only the precondition of capitalist production, it is reproduced by it as well: capitalist production ‘not only produces the material products, but constantly reproduces the relations of production in which these are produced, and with them also the corresponding relations of distribution.’

(Marx makes a distinction between the ‘distribution’ supposed by the process of ‘primitive accumulation’ (the expropriation of workers from the means of production, the concentration of these in the hands of a minority of individuals, the exclusive ownership of the land by other individuals) – the foundation of particular social functions which are ascribed to specific agents of production within the relation of production itself, as distinct from the immediate producers – and the subject of our inquiry here: the relations of distribution of a historical character which compose the different rights to the part of the social product that falls to individual consumption.)

There are two characteristics that are immediately constitutive of the capitalist mode of production.

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Capital Volume 3, Chapter 50: The Illusion Created by Competition

The ‘illusion’ referred to here is the illusion that the value of commodities is the result of the independent determination of the components of wages, profit and rent.

The value of the commodity product can be broken down into the following parts:

1 A value component that replaces constant capital; ‘the value or price at which these means of production went into the commodity’s production process.’

2 A value component which is transformed into wages, i.e. paid labour.

3 Surplus-value: ‘the value component of the commodity product in which the unpaid labour or surplus labour is expressed.’ This component ‘assumes those independent forms that are at the same time forms of revenue: the forms of profit on capital (interest on capital as such, and profit of enterprise on capital as functioning capital), and ground-rent, which falls to the owner of the land which is playing its part in the production process.’

Components 2 and 3 are the value components that assume the revenue forms of wages, profit and rent; their sum expresses the new value created in production.

Disregarding the constant capital component of value, even though commodity value is always reducible to the three elements of wages profit and rent (the three forms of revenue), and each of these parts are determined by their own, specific laws, it is still not the case that the value of these parts is determined independently of the value of the commodity.

For example, let us take the product of a capital value of ₤500 as 400_c + 100_v + 150_s , If average profit is 15 % , then the 150_s will subdivide into 75_r and 75_R (r indicating profit and R rent), rent of course being surplus profit, profit above the average.

If we take the wage-level, the value of labour-power (composed of a subsistence component and a moral-historical element) as given, then the value of s is determined by the length of the working day, such that the total new labour created in production is equal to ₤250. The socially average rate of profit in turn determines rent.

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