Ernest Mandel

Value, Surplus Value, Profit,
Prices of Production and Surplus Capital

A Reply to Geoff Hodgson

(Spring 1973)

From International, the theoretical review of the International Marxist Group, British Section of the United Secretariat of the Fourth International, Vol. 2, No. 1, Spring 1973, pp. 63-64.
Scanned and prepared by Paul Flewers for the Marxist Internet Archive.
Marked up by Einde O’Callaghan for the Marxists’ Internet Archive.

Comrade Hodgson’s article on the Permanent Arms Economy, which appeared in International, No. 8, is interesting and thought-provoking. Most of the polemics against the particular shibboleths of the IS [International Socialists – MIA] in economic theory one can easily approve of. But these polemics are seriously weakened because, as a result of a mistaken conception about the nature of prices of production, they do not go to the heart of the matter.

Following the tradition established by the debate on the so-called problem of ‘transformation of values into prices of production’ – a tradition which starts from the German author von Bortkiewicz and has subsequently been taken up by Paul Sweezy and the Cambridge economist Piero Sraffa – comrade Hodgson questions Marx’s ‘solution’ of this ‘problem’ based upon the theorem that the sum total of values must equal the sum total of prices of production.

Underlying this whole debate is a misunderstanding about the very nature of prices of production. In Marx’s theory, ‘prices of production’ are not ‘prices’ in the current sense of the word at all, that is, they have nothing to do with money or monetary units. It is therefore a red herring to bring in inflation and changes of monetary units to question the ‘realism’ of the theorem that the sum of prices of production must equal the sum of values. By definition, abstraction is made of monetary fluctuations in the analysis of prices of production. To deal in that context with monetary units is to start a useless quarrel with Marx.

Marx introduces the concept of ‘prices of production’ in Volume 3 of Capital exclusively with one purpose: to show how the sum total of surplus-value produced by productive wage-labour is divided among the capitalists, not in function of the division of wage-labour among individual firms, but in function of the fractions of total capital which each of them employs. What Marx tries to solve is not the problem of price fluctuations on the market, but the problem of the transformation of surplus-value into profit. ‘Prices of production’ arise out of the process of equalisation of the rate of profit between different capitalist firms: the whole way Capital, Volume 3 is constructed makes this crystal clear.

Under these conditions, to question the equality between the sum total of values produced and the sum total of prices of production of commodities is not just to question a mathematical method of computation or an ‘arithmetic error’ allegedly committed by Karl Marx. It is to question the whole theory of surplus-value, and thereby the Marxist version of the labour theory of value itself, that is, the very cornerstone of Marx’s economic theory.

For once it is understood that ‘prices of production’ differ from ‘values’ only as a result of the division of total profits among different industrial firms, it immediately follows that the sum total of prices of production could only differ from the sum total of values, if and when the sum total of profits could differ from the sum total of surplus-value. This then leads to the question: where could this difference come from?

Comrade Hodgson correctly insists on the key role which the production of surplus-value, during the process of production, plays in Marx’s theory. When this process is over, the mass of surplus-value available is a given quantity. It depends on the division of the total labour time spent by the productive wage labourers between the time necessary for the reproduction of their own labour power (the production of their ‘wage goods’) and surplus labour, spent on the production of surplus-value. This division is finished for a given period of time, once the process of production is finished and the workers have received and spent their wages. This means that the total mass of surplus-value is predetermined by what happened in the process of production and wage payment. This mass cannot be changed, neither reduced nor increased, through anything which happens on the market, during the process of competition or circulation of commodities and capitals. The circulation and competition process can only modify the division of the mass of surplus-value, not the quantity of this mass itself. If the sum total of profits were to be lower or higher than the sum total of surplus-value, this basic tenet of the Marxist theory of surplus-value would be destroyed. Profit, that is, surplus-value, could then somehow ‘originate’ outside of the process of production, outside of surplus labour produced by wage-labour.

What von Bortkiewicz, Sweezy, Sraffa and now unfortunately also comrade Hodgson, have been doing is in fact backsliding from Marx’s perfected labour theory of value into Ricardo’s imperfected one. Two basic issues are involved in this backsliding, eliminating two other major theoretical conquests of Marx.

In the first place, Marx, as against Ricardo, defined the qualitative substance of the value-producing process. He reduced value to quantities of abstract human labour. This implies that any human labour spent on commodity production is value-producing, provided it fulfils a social need in the bourgeois sense of the word, that is, it finds an equivalent of purchasing power on the market. All commodity-producing wage-labour under capitalism is therefore value-producing labour, abstraction made of the specific use-value of that commodity, and regardless of whether it enters or not the process of reproduction. Thus capitalist luxury goods output and armaments output is a value and surplus-value output, although these goods do not enter the process of social reproduction. Therefore surplus-value produced in process of production of these commodities is part and parcel of the total surplus-value and profit-producing process in society. One could not very well understand why private capital would otherwise be engaged in the production of these commodities at all: surely not for ‘patriotic’ reasons.

Secondly, as against Ricardo, Marx understood the double function of labour power in the process of production: not only to produce new value but also to conserve the value of the capital with which production occurs. He therefore understood that the rate of profit was not only dependent on the rate of exploitation of the working class (the rate of surplus value) but also on the organic composition of capital.

Ricardo does not make the distinction between the rate of profit and the rate of surplus-value, and therefore, logically, has a ‘rate of profit’ (in reality a rate of surplus-value in Marxist terms) only dependent on the prices of wage goods (stable wages assumed). His conclusion, to wit that neither the output of luxury goods nor foreign trade nor the relative prices of raw materials influence the ‘rate of profit’, stems from that basic confusion. It is obvious that the output and costs of luxury goods indeed do not influence in the least the rate of surplus-value (always provided one assumes a stable wage for the workers). But inasmuch as the organic composition of capital in these sectors can be different from that in the means of production and ‘wage goods’ sectors, it can seriously modify the average rate of profit, by modifying the average organic composition of capital.

All this was already developed by Marx in his polemics against Ricardo. It cannot be brushed aside for ‘mathematical’ reasons, without questioning the very essence of Marx’s economic theory.

The idea that value and surplus-value production in the armaments sector is ‘neutral’ to the average social rate of profit leads to absurd conclusions. Does it mean that no profit is made in that sector at all? Does it mean that all profit made in that sector originates only and exclusively from surplus-value produced in that sector, that is, that somehow the armaments sector is ‘insulated’ from the process of equalisation of the social rate of profit? How is this miracle achieved? Is private capital ‘forbidden’ to enter or to leave that sector? If, on the other hand, the arms sector participates in the equalisation process of the rate of profit – as it obviously does – how can it then not influence the average rate of profit, in function of its own sectoral organic composition of capital, reducing the average rate of profit if its organic composition of capital is above the social average in the other sectors, increasing it if its organic composition of capital is below the social average?

Here lies the real basic inconsistency of the IS theory on the role of the permanent arms economy. For it is impossible to argue that the organic composition of capital in the arms sector is below the social average, and it is therefore likewise impossible to argue that the arms sector has in the long run increased the average rate of profit or slowed down its decline, thereby stimulating capitalist growth. The real role of the arms sector does not lie there at all. It lies in its function to provide an additional field of investment for surplus capital. But this then leads to the examination of the whole phenomenon of surplus capital in the age of imperialism, that is, an entirely different interpretation of the reasons and manifestations of the structural crisis of world capitalism since World War I (and indeed of the origins of imperialism itself) from the one which is current in IS’s interpretation of Marxist economic theory and twentieth-century economic history.

For a similar reason, the use by comrade Hodgson of Shane Mage’s statistics on the assumed long-term decline of the rate of surplus-value in the US economy leads to perplexing results. The average organic composition of US capital is supposed to be clearly stable since World War II. The average rate of surplus-value is supposed to decline steeply. It follows that the rate of profit declines uninterruptedly since 1945. How then can one explain the miracle that the capitalist US economy has been growing much faster in the period 1945-68, with a strongly declining rate of profit, than it grew in the period 1919-40, with a stable or even an allegedly increasing rate of profit? This would make nonsense of Marx’s assumption that the rate of profit fluctuations are the basic guide for economic fluctuations under capitalism.

The mystery is easily solved as soon as one submits Shane Mage’s calculations to a critical examination. One then discovers that Mage subtracts taxes paid by capitalist firms from the mass of surplus-value – which is of course inadmissible – and adds wages received by service workers (including commercial employees) to variable capital, which is likewise in contrast to Marx’s theory. If his figures are corrected on both these counts, the ‘declining rate of surplus-value’ vanishes and is transformed into its opposite: a constant effort of capital to increase the rate of exploitation of the working class, which is only checked periodically by strong and victorious working-class struggles.

Last updated on 14.5.2011