Loss of Profit

Profit, like sausages… are esteemed most by those who know least about what goes into them.

— Alvin Toffler

Profit is one of many economic terms whose meaning is cloaked in mystery. It is referred to either as one of the greatest gifts to mankind or a terrible scourge that embodies pure evil, often in the same discussion. It is hidden at tax time and exaggerated at board meetings.

Profit, although also vaguely defined economically, is an accounting term. Bean counters tell us it is the difference in total cost between that which is produced or bought and its selling price. The difference between what the seller paid when he bought or produced a good and what the buyer paid to the seller for the same item.

While this definition is practical and helpful, it doesn’t really reach the core of the concept. From what source did profit originate? Knowing this would certainly give us a better understanding of how our existing capital economy works and maybe how the economy might work under conditions of greater freedom.

The argument as to whether one can profit from barter has been waged since the initial days of barter. It would seem that absent force or great need, both parties probably engage in barter because they believe they will be better off with what they receive from the exchange or they have little concern for what they are exchanging and don’t mind actually being a bit worse off. So, without claiming to have settled the dispute, let’s take up where barter leaves off.

If we take some simple examples, we may be able to unearth the source of profit. Say one of our early ancestors procured a limb from the forest and carved it into a walking stick. He has gathered the wood at no cost and carved it with his own labor, using a sharp stone he also found. He sells it to a local walker for a small amount. Has he profited?

In this transaction, the only “cost” is the woodworker’s labor. All materials and tools were “free” and he has been compensated enough to relinquish the stick. If there is profit, he must be able to “profit” on his own labor; the labor cost must be less than the compensation received. If we hold that the worker owns his own labor, that he is not enslaved, then his labor is his own and has no cost to himself other than time. For the worker to profit on labor that is his own, he would need to be two people rather than one. There is no profit.

If we assume a further “division of labor” and in time he must “pay” to acquire his wood from a worker who collects wood and provides it to the woodworker, then procuring the material or resource now has a “cost”. Is it possible for the woodworker to profit by “marking up” the cost of the stick or resource, selling it for more than he paid the wood collector?

As long as there is equal access to the purchase of the resource, wouldn’t free competition in a pure market allow another carver to then “mark up” the wood material a bit less, therefore underselling the original worker until the wood again reached its lowest price? After all, the carvers already feel they are receiving their due for the labor involved, any amount above the labor compensation would be gravy.

Other than the effort to purchase the stick and transport it to his workplace, what other compensation would carvers as a whole demand to be included in the final cost? Unless competition between carvers can be lessened or eliminated or access to the wood suppliers restricted, the carver must pass on the wood at cost or very close to cost to remain competitive. He will look to the value he receives from his labor instead, as the means of his living, and allow the wood collector to look to collection for his. This does not preclude a carver from also being a collector, simply permits the choice to be made.

Tools and implements fill a vital role in an economy. Can the carver pass on a greater amount than the actual cost of his tools? The same above principles apply; free competition will force down the “mark up” of tool costs to the minimum that is necessary to maintain most efficient production, in fact, the “means of production”. The producer of our walking stick sees no sustained profit in his enterprise from procuring the tools and machines necessary to provide his product, simply because what is available to him in a true free market, which unlike our present system would be free of force, should be available to all.

The initial availability of a tool that speeds up production may allow a short lived spike of profit. The first worker to attain the new tool will be able to sell his product at the old price until the tool is acquired by his competitors. Once a number of producers attain the labor saving tool, then competition will again drive the price down and profit will diminish.

This ever present competitive force that seems to drive prices and cost down to their very minimum might be looked upon as a detrimental force to labor, but in a true free market, that would not be the case. Production that increases over the same output of labor may appear to only lower price but is actually identical to raising the value of labor. In a free economy, they would be virtually one and the same. Labor value increases as product value declines simply because those that produce also consume.

But through this example of production tools, it is very easy to see how profit can be created by prohibiting the distribution of the means necessary to produce, as it is within our present controlled economic system. It is not “ownership” of the means that creates monopoly as Marx stated, but the use of force to slow or prohibit the free appropriation of the means throughout the economy. Any “barrier” to ownership will limit competitive forces and create profits based on ownership, rather than value created through utility.

Land rent is a fee for the use of land. People have always valued premium land sites and if more than one party desires the same site and views it as valuable to them, then they must agree on a method of distributing the site. Rent is the economic alternative to rocks, sticks or a big gun.

Who the rent goes to has been a continuous discussion. Georgists favor returning the rent as a social dividend, Marxists favor the controlled ‘society’, and some free market activists favor the “first come, first get the rent” scenario, while others dissolve the concept of rent entirely. Our existing status quo gives the rent to the same folks who create the money, the banksters and their buddies.

When land has rent, the woodworker producer must now “pay” to occupy the land beneath his workspace. What determines the “cost” of this rent?

In a free economy, the amount of rent levied would simply be the result of the “supply and demand” of rent receivers and those who utilize the land. As long as access to land is freely available, the rent will be based on the amount above and beyond the return to those who utilize the land.

In other words, the productive sector would freely receive its proportionate share based on land which is freely available in contrast to premium land. Why would one opt for “premium” land if that choice would lower the return one received for the same amount and quality of work performed on freely accessible land?

Land, while valuable in countless other ways, has no economic value until labor is applied. Due to this condition, the non productive rent receiver, whether an individual or group, will accept the very minimum that the productive sector will pay for the use of freely available land.

The rent receiver who is also a producer on his land has the advantage of not owing rent to anyone but himself. This also helps drive down the overall cost of land rent, since he is able to “discount” the cost of his rent when he prices his product, therefore restricting land rent profits and speculation through competitive product pricing. Either way, it is labor that enables land to produce and in a system of true free exchange this will be reflected in the “affordability” of land rents. Rents will obviously be “economical” by nature, since unproductive land, while having maintenance costs that at present are subsidized and socialized, would generate no rent.

Would any of the rent received be considered “profit”? If rents are competitive, then it would stand to reason that land that had value would have a “competitive” value. Free exchange would force the ownership price of the land to be driven down to the lowest amount that one would pay to entail the responsibilities and returns of ownership. This relationship of “value” to rent would prohibit speculative land profits.

Since that “return” is fundamentally based on the utilized value of the land, what is left over for the ownership sector would be the least amount owners would accept to perform the tasks of ownership. In that sense, free exchange would allow the “value” of ownership to be determined on the value that others placed on ownership, rather than on coercive laws and regulation that imposed false monopoly value. In true competition, the more value all placed on ownership, the more actors would move toward ownership driving that value back down. Equilibrium is attained.

Rack rents would be impossible without coercive land monopoly, even though land itself exists in limited form. The productive sector would simply abandon the rack rents and land would lay unproductive, forcing owners to lower rents to obtain tenants. In this sense, within the freedom of true exchange, the barriers that currently exist between those who own and those who rent would all but disappear. Ownership might be considered a convenience to those who rent rather than a privilege to those who own.

When our original producer, the woodworker, has sold a number of his walking sticks, he may have accumulated a surplus beyond what he requires for a living or what we commonly refer to as “capital”. He might use this to “hire” a worker or two to do the actual production work while he carries on the “business” and organization of his enterprise. Is it possible, as Marx observed in the monopoly capital system, for him to “profit” in this manner on the labor of his employees?

If all avenues of the economy are free and open, this “profit” on labor would be demanded by other employer/entrepreneurs and soon the “profit” would be driven down to the “wage” necessary for our woodworker/employer to complete his new tasks. This employer wage would also be dictated by supply and demand and the amount of work that an employer took to task. Adam Smith recognized and described this organizational function in The Wealth of Nations. It is only our present lack of free exchange that creates the false impression that the role of employer differs markedly from the employed.

Since our woodworker now has possession of capital, which is his basis for funding his future operations, is it possible for him to draw “interest” on this capital if he finds he has a surplus? Does it have value to others and if it does, is its value over time greater than its “principle”, providing a “return”?

It certainly would have a value to those who lack their own capital and wish to perform a similar economic function. The “rate of interest” is somewhat limited as any “borrower” of capital must also compete with those who are “self-capitalized”, reinvest their own production capital and have no interest payment. Self-sufficient producers have a greater control and flexibility with overall product cost due to lack of interest liabilities, which would be in direct competition with a borrower of capital and the rate of interest. The woodworker creditor would need to loan his capital at such a rate that the producer borrower could still compete with non leveraged producers. High returns would be extremely unlikely in all but the riskiest ventures; those ventures as likely to produce no return as a high return.

Much has been made in our present economy of the great “expansionary” power of Capital, but if we are to recognize the all encompassing role of competition in a pure free market, then rather than “expansion” of capital, we would most likely witness dispersion and dilution. If capital cannot be produced without labor, then it only seems natural that labor would have much more say in its direction absent the monopolies and force that currently hold court.

Our simple examples have brought out a few points: profit in a pure free market seems to be sporadic and short lived. Premium land may generate rent, but rents are based solely in economic realities and competitive factors. Land is ultimately reliant upon labor and production. Capital may draw interest dependent on its ability to aid the production process. Interest would be solely economically based and must compete in the market place with self financed production, keeping rates at low levels and putting the debtor at advantage.

Of particular note is profit drawn from employees, Marx’s pebble in the shoe. Not only would free access to economical capital allow the competition among employers to forbid wage profiteering, but the free access to productive capabilities and the marketplace, itself, would allow any worker receiving less than real value for his role in production to seek his solution through his own production or that of another producer. It is force that creates barriers between value produced and value received; not natural economic conditions.

None of this stuff is groundbreaking. Most all economists admit that profit diminishes the closer we approach free competition. Real profit, not to be confused with compensation for true economic labor, rent and interest, is the difference between all costs and selling price. If we take that real profit apart and analyze it and find out that no real value exists there, then real profit is simply the coercive exchange of actual value for nothing.

That is a condition that free people simply wouldn’t put up with.

Gene DeNardo is a freelance writer and jazz musician living in the Pacific Northwest. Read other articles by Gene, or visit Gene's website.

21 comments on this article so far ...

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  1. ajohnstone said on November 13th, 2010 at 3:47am #

    “From what source did profit originate? Knowing this would certainly give us a better understanding of how our existing capital economy works and maybe how the economy might work under conditions of greater freedom.”

    Profit at its most basic is the difference between the money a business obtains from the sale of its products and the money it has to spend on producing them.

    One of Marx’s crucial discoveries in the field of political economy was that the working class of wage and salary earners gets paid less than the value of the goods it creates, the difference being a surplus value which accrues to the owning class in the form of ground rent, interest and profit. Capitalism turned human labour power into a commodity – something bought and sold. When capitalists buy a worker’s labour they buy the worker’s capacity to work for a full day. Wages are set, however, like every other commodity, by the value of labour-power needed to reproduce them, which in the case of labour is the value of food, clothing, etc. needed to keep the worker in a fit condition to work. But the value of ‘labour power’ is different from the value created by the worker’s labour and this difference, called surplus value, belongs to the capitalist. The working day under capitalism therefore divides into two parts; ‘necessary labour’ when the workers actually earns what they are paid in wages, and ‘surplus labour’ which is the time spent producing ‘surplus value’ for the capitalist employer. The aim of capitalist production is the production of surplus value.The new value added by labour in the process of production to the previously existing value of the raw and other materials is divided into wages and surplus value, which goes to the capitalist employer and is the source of profit. Profits are made in the sphere of production but only “realised” in the market. What is so vital about profit that makes this necessary? It is the source of the capitalist’s capital. The more capital they can accumulate out of the profits accruing to them the more effectively can they compete–by investing in more productive technologies to undercut their competitors–and thus claim a larger share of the market for themselves. If they did not do this then their competitors would, and could knock them out of business. Economic competition between enterprises fuels the drive towards capital accumulation. This in turn necessitates profit maximisation which expresses itself as a continuous downward pressure on wages (reinforced by competition between workers on the labour market)

    We’re the ones who build things, make things, provide services, make things work, provide the ideas. But though we build the world around us, it does not belong to us. Everything that has been built around us is the result of our work and yet we don’t work for ourselves. We produce not for ourselves, but at the behest’s and whims of others. The worker is compelled to labour for the purpose of producing something to satisfy the wants of others who, holding the things necessary for his life, thereby control him. He is, therefore, still a slave.We are the ones who are told what to produce, how to produce it, how much, and how fast.We are the ones who receive a paycheque, be it high or low, not for selling what we produce but for selling our power to work. With that paycheque we try to buy back what we make. The source of someone else’s profits comes from our work.

    Speculation is the use of money-capital, not to invest in the production of new wealth and new surplus value, but unproductively to try and swindle other capitalists’ out of their past profits. It’s a zero-sum game in which the total amount of profits remains the same but merely gets redistributed differently amongst capitalists depending on their speculative skills.

    Individualists such as yourself , Gene, attack socialism because you fear the whole of the wealth of society shall be owned by a number of persons incorporated into a State or a bureaucracy, instead of being, as at present, owned by private individuals. You maintain that the right of the individual is supreme, and condemns any action on the part of a State or collection of individuals, that interferes with your desires. But i have tried to point out to you that socialists are not statists, that if the working class was compelled to work for a State instead of for individual employers then wage-slavery is not abolished, but is intensified.The worker to-day, while compelled to work for an employer, still has some sort of a choice among those masters, but with the State as the only employer he is compelled to work for that employer and under all of that employer’s conditions, or take the only other alternative – starvation. State -capitalism ( or as you like to call it State Socialism) would intensify slavery, but state- capitalism is not socialism.

  2. Kim Petersen said on November 13th, 2010 at 9:37am #

    The way I look at Gene’s articles is that they are purely theoretical, and that this theory cannot be applied to present context. Hence, the articles are informational about how an economic system could function under idealistic conditions (conditions that in no way exist).

    For any of this theory to have practical meaning, then equality of conditions must first be present. This would require the dismantling of capitalism.

    After that, why would anyone want to return to a system of coerced wage slavery.

  3. gene said on November 13th, 2010 at 10:56am #


    Thanks, you hit the nail on the head. I would just add that economic systems that are fraudulent, dismantle themselves, time is the only factor.


    Consider this, assuming Marx’s observations that you have put forth. The basic idea is that wage is forced down below the “value” of the product.

    But that misses a vital interaction. Lower wages in a true free market does nothing but “lower” the product price, as I have pointed out in the article, lower wage cannot increase profit when free exchange is the true norm. You cannot have “wage slavery” unless you can control the product price by artificially raising the price above the true production costs. That is the source of surplus labor value, not the depression of the wage. The state capitalists must control {and inflate} market prices above competitive levels. The amount above natural levels is profit.

    So, in Marxs term, it is the inflation of the “value” {price used as a @ but not completely valid measure of value} of the product that determines profit. This doesn’t mean that labor value cannot be out of whack among and between workers. forceful market intervention can cause this also.

    The competition you mention for capital accumulation, is a competition based on the elimination of price competition through forceful market intervention. It is the LACK of competition that cheats the worker. Competition is the enemy of monopoly capital and the friend of labor.

    Slavery is the ultimate expression of forceful elimination of competition {among other evils}.

  4. Max Shields said on November 13th, 2010 at 11:15am #

    Gene, while I agree that monopoly is at the root of much of our problem, I would not conclude that an improvement in competition is the solution.

    Certainly a so-called level playing field would provide for the ideal exchange amongst goods and services based on value. While I may have some issues with the Tragedy of the Commons, it has much to consider regarding the competition for limited resources allowed to be plundered by the limited rationale of each “player”.

    So if a pure level playing field regarding competition is unattainable than ipsofacto it cannot be a viable solution. Instead I would go back to the notion of monopoly and see if there are other ways to mitigate its impact.
    I think the notion of the common, what is in the public domain, and recapturing ever more of that would undermine the hubristic tendencies that produce monopoly. Determining a viable means of impartical stewardship then become the challenge. Should these commons find a means of legal refuge under trustees? Can the government (doubtful with today’s corporate owned government) provide this kind of oversight?

    There is no perfect answer. That a form of competition may in some cases be appropriate while cooperation in others can flourish within the context of accessibility to all, and the commons which begins to take on ever more of the land/air-scape can bring this issue of monopoly under control.

  5. gene said on November 13th, 2010 at 11:32am #


    very good point.

    it brings into play the idea that even the smallest associative group would be accountable outside its group in some organizational way.

    i would propose the “full consent” idea, rather than democratic decision. if, contested commons are not used in a manner of full consent of a group and any group that can prove “effect” or “affect”, then the area or resource would remain “unused”.

    but, yeah, tough one that has stumped people forever. what we don’t need is another system that enforces the use of the commons to create “profit” for its beneficiaries {a profit area marx missed big}. that is the tragedy, not a couple of herdsman overgrazing.

  6. Max Shields said on November 13th, 2010 at 11:55am #

    Gene, I’m quite familiar with Consent decision making or dynamic governance. This approach needs to consider scale and localization.

    Forms of trusteeship has been explored by Peter Banes. Much of this overlaps with Henry George…and the emergence of new economics institute which is gaining ground as an alternative to neoclassical growth economics.

  7. gene said on November 13th, 2010 at 1:09pm #

    the basis for preservation type commons is a belief that the “value” of a specific natural good is greatest in its natural state. if that is the case, then it is unimportant if it actually is “purchased”, it is only important that its value is realized.

    we don’t have to hold that its value is “removed” from other values, just that that is its value. if that is truly the case, then it really “can’t” be purchased, since we can never “pay” its producer. likewise, there is no higher use for it.

  8. Max Shields said on November 13th, 2010 at 3:21pm #

    We cannot “own” natural resources, i.e., commodify them. However we can use them in ecologically prudient ways; and we can assure a stewardship of those commons. A responsive local government could provide that. Nationally and at the state levels the government is owned by private interests (primarily corporate) and so cannot be fully trusted as stewards. Also, the dynamic governance you mentioned is unyieldy at best at those large scaled levels of government.

    It would be unfair to say, however, that community land trusts, open space conservation and farm trusts have not been successful at the local and even state levels, and at times the federal level (national parks and wild life preserves). However there is an massive imbalance between the American plutocracy and corporate elite and the populace at large in terms of effecting change and running the national affairs; and access to capital.

    As far as profit and the story about how advantage works, the very point of Progress and Poverty is to illustrate how the first person to settle a fertile area has a significant advantage that is passed along to his/her heirs for generations. We see this throughout the nation in towns and cities (and the world). Where ever you reside ask: Who’s in charge? The answer will provide the lineage of those advantaged in the community.

    To your illustion: It is not merely the production of a tool, but access to the capital to make the tool. The answer in part to commoditization of goods would be self-provisioning. Making what you need, and making what you need of high quality so fewer commodities are needed. A consumer driven growth based economy creates the monopoly and creates through marketing needless and endless consumption.

    Gene you may want to check out Fab Lab which is the manufacturing counterpart to permaculture. These are both examples of new means of production which are knowledge intensive. They each change the economic dynamic and at least can provide along with say, workers cooperatives a transformation of a worthless economic model.

    Again, competition vs cooperation, the age old argument between Hobbes and Locke will haunt us. Vigilence is the only answer to that human condition.

  9. gene said on November 13th, 2010 at 4:32pm #

    as long as we account in a way that it is economically advantageous to “inefficiently” use the resources, we will do so.
    as you mentioned, as long as we grant “advantage” and one of the primary advantages is “privleged” access to the resource, that is what will occur.
    when that changes on a large scale, we will know what to use and what not to use and it will be reflected in our economics or lack of economics. ecology/economics, same origin that has been warped to fit the demands of a system of privlege.

  10. hayate said on November 15th, 2010 at 10:34pm #

    Kim Petersen said on November 13th, 2010 at 9:37am #

    “The way I look at Gene’s articles is that they are purely theoretical, and that this theory cannot be applied to present context. Hence, the articles are informational about how an economic system could function under idealistic conditions (conditions that in no way exist).

    For any of this theory to have practical meaning, then equality of conditions must first be present. This would require the dismantling of capitalism.

    Max Shields said on November 13th, 2010 at 11:15am

    gene said on November 13th, 2010 at 11:32am

    Max Shields said on November 13th, 2010 at 11:55am

    gene said on November 13th, 2010 at 1:09pm

    Max Shields said on November 13th, 2010 at 3:21pm

    gene said on November 13th, 2010 at 4:32pm

    You two do realise that you can get a private room…..?

    After that, why would anyone want to return to a system of coerced wage slavery.”

    In other words,they’re just nonsense, then?



  11. hayate said on November 15th, 2010 at 10:36pm #

    How’d that happen?

    “After that, why would anyone want to return to a system of coerced wage slavery.”

    In other words,they’re just nonsense, then?


    ;D ”

    Should be after:

    “For any of this theory to have practical meaning, then equality of conditions must first be present. This would require the dismantling of capitalism.”

    Not where it ended up in that post. 😀

  12. gene said on November 15th, 2010 at 11:00pm #

    Theories are based on sound conditions, it would be pointless to do otherwise. It would be like trying to solve a math equation using 2 plus 2 equals 7.

    Theory is contemplation and reason as opposed to observation or action. The article reasons that “wage isn’t slavery” when free and just conditions exist. If that is nonsense to you, that’s not my problem. The article is an exercise in logic, not an attempt to change your religion.

  13. ajohnstone said on November 16th, 2010 at 2:00am #

    Gene argues that ” wage isn’t slavery when free and just conditions exist.”

    Ah , if only that were the case –

    Workers sell their labour power to capitalist enterprises for a wage as stated above in earlier post . As a commodity, labour power has an exchange value and a use value, like all other commodities. Its exchange value is equal to the sum total of the exchange values of all those commodities necessary to produce and reproduce the labour power of the worker and his or her family. The use value of labour power is its value creating capacity which capitalist enterprises buy and put to work as labour. However, labour power is unlike other commodities in that it creates value. During a given period it can produce more than is needed to maintain the worker during the same period. The surplus value produced is the difference between the exchange value of labour power and the use value of the labour extracted by the capitalists. In capitalism, however,the wage-worker is a “free” agent. No master holds him as a chattel, nor feudal lord as serf. This modern worker is free and independent: he has choices. He can dispose of his services to this or that capitalist owner, or he can withhold them. But this freedom is ephemeral. He must sell his working ability to some one or other employer or face starvation. In a capitalist society workers have the option of finding a job or facing abject poverty and/or starvation. Little wonder, then, that people “voluntarily” sell their labour and “consent” to authoritarian structures! They have little option to do otherwise. So, within the labour market workers can and do seek out the best working conditions possible, but that does not mean that the final contract agreed is “freely” accepted and not due to the force of circumstances, that both parties have equal bargaining power when drawing up the contract or that the freedom of both parties is ensured. His slavery is cloaked under the guise of wage-labour.

    When the worker has found an employer he receives in return for his labour a price known as wages which represents on the average what is necessary for his sustenance so that he can reproduce the energy to go on working, and also produce progeny to replace him when his working days are over. During the working-day the worker produces wealth equivalent to that for which he is paid wages, but this does not require all the time of the working day. In providing for his own keep he has also produced a surplus and this surplus belongs to the employer. This may eventually be split into profit to the manufacturer, rent to the landlord, and interest on capital invested by a financier. As capitalism develops the time in which the worker produces his own keep decreases while the surplus accruing to the capitalist increases. During this development the productivity of labor increases at an accelerating tempo: The worker continually produces more with less.

    So when a man sells his labour power a number of hours for a certain wage, the amount of necessaries to produce his wages is always smaller than the amount of labour which the employer receives from him, the difference between what the worker receives as wages and what his labour power produces during his working time, constitutes the sole source of unearned income, i.e., capitalist profits. So profits exist because the worker sells themselves to the capitalist, who then owns their activity and, therefore, tries to control them like a machine.

    Wage levels will vary with “the respective power of the combatants” as Marx puts it and in the long run this will determine the value of labour-power and the necessaries of life. From the point of view of wage-labour , wage levels and the value of labour-power depends on the balance of class forces, on what workers can actually get from their employers. As wages are also regulated by the relation of supply and demand, a surplus of labour power (the unemployed) is necessary to prevent wages swallowing up all profit. Therefore the unemployed army is a vital necessity to capitalist production, and there can be no solution under capitalism.
    It would be wrong to confuse exploitation with low wages. It does not matter if real wages do go up or not. The absolute level of those wages is irrelevant to the creation and appropriation of value and surplus-value. Labour is exploited because labour produces the whole of the value created in any process of production but gets only part of it back. On average workers sell their labour-power at a “fair” market price and still exploitation occurs. As sellers of a commodity (labour-power) they do not receive its full worth i.e. what they actually produce. Nor do they have a say in how the surplus value produced by their labour gets used.

    Capitalism is a market economy, but not a simple market economy. A key difference of course is that under capitalism production is not carried out by self-employed producers but wage and salary workers employed by business enterprises. In other words, by profits we mean income that flows to the owner of a workplace or land who hires others to do the work. In other words, under capitalism, the producers have become separated from the means of production. This makes all the difference.

    Marx explained the difference when he said that what happens in a simple market economy is that the producers brought to market a product of a certain value which they sell for money in order to buy another product or products of equal value. The economic circuit is commodity-money-commodity (C-M-C), the aim being to end up with a basket of useful things. Under capitalism the economic circuit is different. A capitalist sets out with a sum of money which they use to buy commodities (factory buildings, raw materials, working skills) that can be used to produce other commodities with the aim of ending up, after these other commodities have been sold, with more money than they started off with. So the circuit is now money-commodities-more money (M-C-M+).

    But the picture of capitalism is still not complete.

    Capitalist investors want to end up with more money than they started out with, but why? Is it just to live in luxury and consume? It is possible to envisage such an economy on paper. Marx did, and called it “simple reproduction”, but only as a stage in the development of his argument. By “simple reproduction” he meant that the stock of means of production was simply reproduced from year to year at its previously existing level; all of the profits (all of M+ less M) would be used to maintain a privileged, exploiting class in luxury . As a result the M in M-C-M+ would always remain the same and the circuit keep on repeating itself unchanged. This of course is not how capitalism operates. Profits are capitalised, i.e. reinvested in production, so that production, the stock of means of production, and the amount of capital, all tend to increase over time . The economic circuit is thus money-commodities-more money-more commodities, even more money (M-C-M+-C+-M++). In order to make more money, money must be transformed into capital.

    This is not the conscious choice of the capitalists. It is something that is imposed on them as a condition for not losing their original investment. Competition with other capitalists forces them to reinvest as much of their profits as they can afford to in keeping their means and methods of production up to date. They cannot act contrary to the inner nature of capitalism which requires the constant accumulation of capital and the opening of new markets throughout the world. And it cannot avoid that increasing productivity of labor which means more production for less expenditure of labour.

    The worker goes into the labour market as an article of merchandise, and his wages, that is, his price, is determined like that of any other article of merchandise, by the cost of production (i.e. the social labour necessary), and this in the case of the worker is represented by the cost of subsistence. The price of labour power fluctuates by the operation of supply and demand. There are generally more workers in the market than are actually required by the employers, and this fact serves to keep wages from rising for any length of time above the cost of subsistence. Moreover, machinery and scientific applications are ever tending to render labourers superfluous, with a consequent overstocking of the labour market, decrease of wages, and an increase in the number of the unemployed. Under these conditions reelative poverty is necessarily the lot of the working-class.

    We have the worker entirely dispossessed of the means of getting a living except by selling himself as an article of merchandise to the owners of the means of living. This is wage-slavery. While capitalists are as a class against the workers as regards the ownership of the wealth produced by the working-class, they, the capitalists, are also antagonistic to one another in the endeavour to get the larger share of the markets. It wasn’t just Marx but also Fourier who pointed long ago that this competition could only end in monopoly, and we do see concentration an going on in every branch of industry.

  14. Deadbeat said on November 16th, 2010 at 2:08am #

    This is one of the most BS articles I’ve ever read on DV and what qualifies this guy to be be considered a dissident is beyond me. He writes …

    In true competition, the more value all placed on ownership, the more actors would move toward ownership driving that value back down. Equilibrium is attained.

    Competition is the antithesis of equilibrium. The idea of “perfect competition” is an oxymoron. History show this to be the case. Common sense shows this to be the case. This article was an exercise in futility and a complete waste of time and energy.

  15. Deadbeat said on November 16th, 2010 at 2:15am #

    Apparent Hayate has Hue Longer’s number.

  16. Deadbeat said on November 16th, 2010 at 2:28am #

    ajohnstone writes ….

    As capitalism develops the time in which the worker produces his own keep decreases while the surplus accruing to the capitalist increases. During this development the productivity of labor increases at an accelerating tempo: The worker continually produces more with less.

    This is why Keynesian solutions to the current crisis won’t work and why it is extremely important for Socialist (Leftist) to distinguish themselves apart from Liberals. The “jobs, jobs, jobs” mantra of Liberal doesn’t address this fundamental contraction of Capitalism. The level of productivity during the past 30 years that has been co-opted by the Capitalist class has been TREMENDOUS while at the same time the working class took on huge levels of debt in order to maintain their standard of living especially in the most important and costly sectors: housing, health care, transportation, child care, taxes. While at the same time the productivity gains means that more work can be achieve with FEWER workers. This is like a game of “musical chairs” and thus jobs creation is unsustainable under Capitalism due to the contractions of productivity gains, profit growth, and capitalist ownership.

    Liberal are only will to distributive the means of survival via exploitative relationship as aptly described by ajohnstone. As dissident, I think this is this crisis presents the opportunity to educate people not only about the contradiction of Capitalism but also about a real Socialist alternative.

  17. bobo said on November 16th, 2010 at 3:05am #

    Thank ajohnstone very much for a very educational post.

  18. gene said on November 16th, 2010 at 9:28am #

    ” It wasn’t just Marx but also Fourier who pointed long ago that this competition could only end in monopoly, and we do see concentration an going on in every branch of industry. ”

    This was an Ajohn… quote and the only one that pertained to the article. First, you misunderstand the basis of the article as I explained a couple times above. The article is based on theory not observation. It is impossible to extract anything from a theoretical argument when you are interpreting in observational views or vice versa.

    The competition you refer to is competition for capital accumulation, which yes, can only end in greater monopoly. It also starts in monopoly.

    Free competition expresses itself in price competition. With true free price competition, capital accumulation is impossible. The lowest price would most naturally meet production costs and little else. firms cannot compete for capital accumulation when they are competing for price competition. This is basic math and is explained in the article.

    Marx admitted to the lack of price competition and pre existence of monopoly in his surplus value theorem. It is impossible to “suppress” the value of labor without controlling the “price” or relative value of the product. In other words, it is monopoly {land, capital} that precedes and allows surplus value, not the other way around. The market product prices must be controlled {raised} to realize profit on the suppression of proportional labor value. There must be no or little price competition, which requires monop0ly and force. A quick look into history will reveal an abundance of proof of both land and capital monopoly that predates the capital period. In fact, history is a study of monopoly.

    suppressing the relative labor value does nothing in a truly free market but lower the relative product value, which raises the value of labor. Competition is the enemy of monopoly, just ask bill gates.

  19. bozh said on November 16th, 2010 at 10:15am #

    i haven’t read marx’ books. i read what jesus said or the words put in her/his mouth only to confirm my very firm conclusion that all of them were at least a bit looney and at most hitlerian in-thought.
    not in behavior, tho, but only because they cldn’t behave so and not because they did not want to do what hitler did.

    ok, now back to accumulation of wealth. so what’s new about that? and since pharoahs, god-kings, US presidents, churchill, otto the idiot, and idiots like peter, alexander, suileman, rabin, and the like lowlife?

    ok, mao was indeed bad, but only to fascists. good for him. stalin, lenin were also bad, but only to badder people than they were.
    on the other hand the ‘good’ americans r killing better people than they are!
    god bless all children– the devil all clergy and nobles, ceos, u.s constitution; the last being root of all evil done by americans. tnx

  20. hayate said on November 16th, 2010 at 9:48pm #

    Deadbeat said on November 16th, 2010 at 2:15am

    Cheers 🙂

  21. Deadbeat said on November 16th, 2010 at 10:41pm #

    gene writes …

    Competition is the enemy of monopoly, just ask bill gates.

    Karl Marx. The Poverty of Philosophy Chapter Two: The Metaphysics of Political Economy

    Competition and Monopoly

    In practical life we find not only competition, monopoly and the antagonism between them, but also the synthesis of the two, which is not a formula, but a movement. Monopoly produces competition, competition produces monopoly. Monopolists are made from competition; competitors become monopolists. If the monopolists restrict their mutual competition by means of partial associations, competition increases among the workers; and the more the mass of the proletarians grows as against the monopolists of one nation, the more desperate competition becomes between the monopolists of different nations. The synthesis is of such a character that monopoly can only maintain itself by continually entering into the struggle of competition.

    Next we’ll have gene telling us that Marx was a disciple of Ayn Rand.