Capital III. Chapter 9: Formation of a General Rate of Profit (Average Rate of Profit), and Transforamtion of Commodity Values into Prices of Production

Marx introduces the general rate of profit (p’), prices of production, cost-price plus the average profit (k + kp’), and average profit, the capital advanced indexed to the general rate of profit (Cp’), in this chapter.

The substantial move the he makes is the substitution of the inequality of surplus-value and profit for its equality: s = p —> s ≠ p. The substance of this chapter is the explanation and the consequences of this substitution

One of the historical consequences of this substitution has been the so called transformation problem, but it is interesting that Marx flags the désoeuvrement of his theory to the analysis of individual capitals, or to developing the analysis from the individual capitals (260), and that thinking about s and p only works from the level of the total social capital.

One direct consequence that Marx flags is that the determination of value is entirely displaced; and that this is the basis of the ideological representation of capital. Two other things of note. (1) he says that the determination of P’ goes on behind-their-backs (268) and (2) he introduces the notion of chance and accident to talk about the formation of P’, average profit, p, that refluxes to a capital is “in fact only accidentally determined” (272).

  • The organic composition of capital depends on the ratio between means of production and labour power; and on their prices. Marx doesn’t say it like this, he says simply the means of production and its price; but presumably we have to take into account the price of labour-power.
  • Marx’s first move is to say that a number of capitals can be counted as one. This count-for-one is primary; it precedes the individuation of capitals; a capital cannot exist without there already existing many capitals, its profit cannot exist with there already existing a general rate of profit (p’). For Aristotle this is actuality preceeding its own possibility.
  • The set of capitals Marx works with, I: 80c + 20v; II: 70c + 30v; III: 60c + 40v; IV: 85c + 15v; V: 95c + 5v, each have different organic compositions and each give a difference portion of their constant element to their product. ex. Ic is 80 but only 50c enters its product. The value of the commodities I produces is therefore 50c + 20v (and with a rate of exploitation of 100%) + 20s = 90, the rate of profit, p’, is s ÷ (c + v), or 20 ÷ 100 = 20%. However its cost price, k, is c + v, or 70. The sum of capital I-V is 500 = 390c + 110v. Marx reduces this to percentages: 78c + 22v, which give the average profit (p) for each element, I-V: 22s. ex. the price of production for I is k + p = 70 + 22 = 92. Marx particularly wants to not that the individual rate of profit for I is 20%, but that the average rate of profit is 22%. If its average profit is 22, then it is claiming 2 more units of surplus-value than it created (for every 100 units invested). He immediately notes that this is what compeition does: “These different rates of profit are balanced out be competition to give a general rate of profit which is the average of all these different rates” (257). Taken together all commodities are sold both above and below their values, canceling out the variations.
  • The formation of prices of production depends on the prior existence (operation) of the general rate of profit, p’. Any individual capital is already a generalised an element of the set making up its branch of production or the total social capital. The entire  surplus-value that a given capital produces, ex. 20 s on capital I: 80c + 20v, does not reflux, or if it does this is only down to chance or accident. Compeition may direct part of this surplus-value to a capital with a higher composition of capital and thus a value creation below the social average; it thus reaps what David Harvey calls ‘ephemeral surplus-value’ – this surplus-value is appropriated through competition, it is ephemeral because the capital’s competitors aren’t going to put up with this appropriate for long.
  • Marx begins working up the disctinction between k and p. k is determined within a given capital as the value necessary to its reproduction, c + v. p is determined externally, Marx will say “behind his back” (268). Though it ought to be kept in mind that even c + v is under the condition of the law of value, and thus revolutions of value. This becomes important when talking about those things that change p’ over time. Marx: “His costs are specific. But his profit on top of this cost price is independent of his particular sphere of production” (259). This is a major claim. Everyone accepts that a capitalist would be aware of k. But this acceptance breaks down when Marx says that the profit “they add” – their mark-up – to k is determined behind-their-backs.
  • Marx says that his theory of value doesn’t work at the level of individual capitals (260). If we try to think p’ from the individual capitals, s is counted twice because it capital A takes it as profit and capital B includes it in its cost price. But there isn’t a process where capitals add p to k; this doesn’t actually take place, even if they derive this retrospectively, or represent their margin to themselves: they never added the actual margin that refluxes. This is because the social cost price is k – np, where np is the total profit made in a given set of spheres of production. To look at the actual cost prices of indivual capitals you would fist have to derive this social cost price. Marx’s equations k – np, P = p + p1, k + P and P = k + p + p1 are there to track where value goes, that ought to be kept in mind; there is no suggestion that capitals actually operate in this way. His concern is that a given value is not counted twice. So he says, when A sells commodity k + p to B, A has never outlayed p; B pays p to A; this is the first time that p has appeared as a real value; to this point it had been bounded by k + p; it is now a discrete value.
  • Then there is this: “With the whole of capitalist production, it is always only in a very intricate and approximate way, as an average of perpetual fluctuations which can never be firmly fixed, that the general law prevails as the dominant tendency” (261). To put it the other way around: The dominant tendency prevails through perpetual fluctuation from itself. The exception is the rule. The dominant tendency is the average of what it isn’t. If you were going to analyse the law of value, you would have a research agenda that was “intricate and approximate” and involves an “average … which can never be firmly fixed”. This sort of ridicules Francis Bacon’s empiricist idea of making lists of observations in order to arrive at scientific knowledge. The law can’t be derived from experience but only from abstraction, as Marx noted in the the preface to Capital I.
  • Two things determine p’: (1) the organic compositions in various spheres of production and (2) the distribution of the total social capital through these spheres.
  • The notion of higher and lower composition of capital refers to the higher or lower development of productivity; the average composition is a ratio and only ever occur in reality be chance or accident. At 263-4 Marx introduces the idea of chance to account for the average composition.
  • Specifiying the price of production (π): k + p = π; p = kp’; π = k + kp’, or π is k + p; p is the product of k and p’; π is the sum of k and the sum of k and p’. π is changed by: (1) a change in  p’, (2) value revolutions, either within a capital’s sphere of production of in a sphere or production that supplies c, value revolution in department II change v, or (3) both. p’ changes is c or v changes. p’ = s ÷ C, where C = c + v, or p’ changes if the rate of exploitation, and thus the quantity s, increases or decreases.
  • On pages 267-8 Marx really insists on the change from s = p to s ≠ p. In the equality there is only a distinction between the form of value, s and p. With the concept p’, there is no longer a direct relationship between the magnitude p and s. This is the guts of what has gone down in history (and into its dust-bin) as the transformation problem. Here Marx notes that any change in p’ goes on behind-their-backs, also bringing in the notion accidental again:

“It is now purely accidental if the surplus value actually produced in a particular sphere of production, and therefore the profit, coincides with the profit contained in the commodity’s sale price [≠π?]. In the case now under consideration, profit and surplus value themselves, and not just their rates, will as a rule be genuinely different magnitudes. At a given rate of exploitation of labour, the mass of surplus-value that is created in a particular sphere of production is now more important for the overall average profit of the social capital, and thus for the capitalist class in general, than it is directly for the capitalist within each particular branch of production. It is important for only in so far as the quantity of surplus value created in his won branch intervenes as a codeterminant in regulating the average profit. But this process takes place behind his back. He does not see it, he does not understand it, and it does not in fact interest him” (267-8, emphasis added).

  • What does the obliteration of p = s mean? “With the transformation of values into prices of production, the very basis for determining value is now removed from view” (268).
  • Marx then makes interesting point about the ideological thematic he mentioned in the first par of Chapter 1 of this Volume. In the everyday running of a capital profit is detached from the costs of reproduction (c + v). The substitution s = p —> s ≠ p actually coincides with the way capitalists represent their capitals to themselves, “in the everyday consciousness of the agents of production themselves” (117). The ideological representation of capital is confirmed when surplus-value takes the form of profit. The capital can make some decisions about its costs, but its cannot decide about its profits (except at Enron and Lehman Brothers – which totally confirms the point). While a given rate of exploitation x will like clockwork produce s from vx, it will not give either the rate of profit p’ (which is now properly distinguished from the rate of exploitation as its own concept) nor the average profit p. Marx finally notes, again referring to change and accident, that, “the average profit is in fact only accidentally determined” (272).

2 Responses to “Capital III. Chapter 9: Formation of a General Rate of Profit (Average Rate of Profit), and Transforamtion of Commodity Values into Prices of Production”

  1. 1 justice 29 February 2012 at 11:01 am

    Brilliant. Thank you so much for this. I didn’t understand the chapter but now I (more or less) do. I’m still confused about the ephemeral SV point, but i’ll get there!

  2. 2 wrong arithmetic 1 March 2012 at 1:54 am

    Wow, thanks for your comment! I read back through this and found it surprisingly useful, to me as well. I’m glad it helped you through this important chapter.

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Reading Capital in Sydney records reading notes on Marx's Capital I, II and III, and other bits and pieces.

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