The People's Marx, Abridged Popular Edition of the the Three Volumes of Capital, Borchardt 1921
(Extracted from vol. Ill, part. 1. sections 1 & 2; vol. 111. Part 2, pp. 356-358 & 398-402. German edition.)
Political Economy deals with the economic supply to mankind of the commodities needed by the latter in order to live. In modern capitalist States this process is accomplished exclusively by means of the sale and purchase of commodities, of which human beings become the proprietors by buying such commodities for the money that constitutes their income. There are various categories of income, which, however, can be divided into three main groups: every year capital brings in profit for the capitalist; the soil brings in ground rents for the landowner; and labour power - under normal conditions, and as long as such labour power can be utilized - earns wages for the worker. Thus capital appears to the capitalist, the soil to the landowner, and his labour power - or rather, his labour itself to the labourer, as the three different sources of their respective incomes, i. e. of profits, ground rents, and wages. All such incomes would seem to resemble the fruit of a tree that never withers, fruit which is consumed every year - or, to be precise, of three trees which furnish the annual income of three social classes: of the capitalist class, the landowning class, and the labouring class. The wealth which constitutes all categories of income appears to be derived from three distinct and independent sources: namely, capital, ground rents, and labour.
But the amount of income possessed by each class is not the only decisive factor in the supply of economic commodities. The price of such commodities is likewise a decisive element of the process; and the question as to what causes determine prices has, consequently, always formed the subject of searching inquiry on the part of economists.
At first sight this question does not appear to present any difficulty. If we take any product of industry, its price is determined by the manufacturer adding to the cost of production such profit as is customary in his particular branch. The price depends, in consequence, on the amount of the cost of production and on the amount of profit.
The manufacturer reckons as cost of production every- thing spent by him for the purpose of producing a given commodity. Such expenditure consists, in the first place of the sums spent on raw materials and such auxiliary materials as are needed (e. g. cotton, coal etc.); and, further, on machines, tools, and buildings. The expenditure consists, secondly, of the ground rent (e. g. the rent due for the premises), and, thirdly, of the wages paid for labour. We can therefore divide the manufacturer's costs of production into the three following categories:
1) the means of production (e. g. raw materials, auxiliary materials, machinery, tools, and buildings);
2) the ground rent (which will also be calculated in the event of the factory standing on its own ground);
3) wages.
If we analyse these three categories somewhat closer, we shall find ourselves confronted by unforeseen difficulties. Let us first of all take the wages. According as to whether the latter are high or low, the total costs of production - and, consequently, the price of the finished article - will be high or low. But what determines the rate of wages? Let us say, after labour power has been offered and demanded. The demand for labour power comes from the capitalist, who needs labourers for his undertaking. A large demand for labour power implies therefore a large increase of capital. What does capital consist of? It consists of money and commodities. Or, rather, seeing that money - as we shall point out in detail later on - is itself only a commodity, we may say that capital simply consists of commodities. The more valuable such commodities are, the larger is the capital, and the greater is the demand for labour power with its ensuing influence alike on the rate of wages - and as a further consequence - on the price of the finished article. Now let us see what determines the value (or price) of the commodities which constitute capital. That value is determined by the costs necessary for their own production. And among such costs of production we find wages! So that in the long run the rate of wages is, according to this theory, determined by - the rate of wages! And the price of commodities by - the price of commodities!
Or else it is stated that wages are determined by the price of the food needed by the labourer. But such foodstuffs are themselves commodities, and their price is in part determined by wages; and thus the error is obvious.
A second factor of the manufacturer's costs of production was seen to be the means of production. It is not necessary to go into details in order to understand that cotton, machinery, coal, etc., are also commodities, of which exactly the same holds good as of those commodities which constitute the food of the labourer or the capital of the employer of labour.
The attempt to explain prices by referring to the costs of production has thus proved a sorry failure. It has just simply resulted in "determining" prices by themselves!
To the cost of production the manufacturer adds the customary profit. It would seem as if, in this case, all difficulties were overcome, seeing that the percentage (or rate) of profit which he must calculate is known 'to the manufacturer as the amount customary in his particular branch of industry. This, of course, does not prevent an individual manufacturer, by reason of special circumstances, sometimes calculating his profit at a higher or lower rate than the customary one But on an average the rate of profits is the same in all the undertakings in a given branch of industry. In every branch there is thus a common average rate of profit.
But not only that. Owing to competition, the rates of profit in different branches are brought into a certain harmony with each other. And it cannot be otherwise, for, as soon as extraordinarily high profits are reaped in any given branch, capital emigrates from those branches which are less lucrative, and is invested in the more lucrative one. Or else new capital, which is continually being formed and which seeks profitable investment, will strongly favour such lucrative branches; production in the latter must in consequence increase considerably; and in order to sell the greatly increased number of commodities, prices - and therefore profits - must be reduced. Just the contrary will take place if in any branch extraordinarily low profits are made. Capital will emigrate from such a branch as rapidly as possible; production will thus be diminished to the extent of such emigration; and this, in turn, tends to increase prices and profits.
Competition thus tends to establish an equilibrium be- tween the rates of profit in all branches; and we are justified in speaking of a general average rate of profit, which, it" not identical, is at all events more or less similar in all branches of production. True, this phenomenon is not as obvious as is the equality of profits within one and the same branch, seeing that the general costs, the wear of the machinery, the use to which the latter is put, etc., are liable to vary very considerably from branch to branch. In order to bring about a balance between such variations it is possible that the brutto profit - i.e. the percentage actually calculated by the manufacturer over and above the costs of production - be appreciably higher (or lower) in one branch than in others. This phenomenon tends to obscure the real facts. But after deduction of the different costs of production there none the less remains, in the various branches of industry, a net profit rate which is approximately similar in all cases.
As a general average rate of profit thus exists, the amount of profit accruing in reality to any given undertaking depends on the amount of capital sunk in the latter. It is true that - as previously mentioned - it is not entirely indifferent whether a factory produce guns or cotton stockings, seeing that the profits vary a little according to the security of the investment, to the greater ease or difficulty with which the commodity produced is sold, etc. But such differences are unimportant. Let us suppose the general average rate of profit to be 10 per cent, and it is evident that a capital of £ 1 000 000 - must reap a profit which will be 10 times greater than that reaped by a capital of £ 100 000. (We assume, of course, the existence of proper business methods, just as we make abstraction of all those particular instances of luck or ill-luck which may possibly occur in the history of any individual undertaking).
We must further bear in mind that profits are made not only by industrial undertakings, which produce commodities; but also by commercial undertakings, which merely act as a medium between the producer and the consumer for the sale of such commodities to the latter; and likewise by banks, carriers and forwarding agents, railways, etc. In the case of all these undertakings - always assuming efficient business management - profits are determined by the amount of capital invested. It is no wonder that those persons who are concerned in the practical conduct of such undertakings should be convinced that profits arise, so to speak, spontaneously out of capital - that capital produces them just as the tree, if properly cultivated, produces fruit. And in so far as profits are not regarded as a natural characteristic inherent to capital, they are looked upon as the result of the work accomplished by the capitalist. As a matter of fact, we have invariably had to start, in our discussion, from the presumption that the management of the business is an efficient one. Much depends on the personal efficiency of the manager. Should the latter prove inefficient, the profit of any individual undertaking can easily sink below the general average rate, whereas a capable manager may succeed in raising it above that average.