Capital Vol. III Part II
Conversion of Profit into Average Profit

Chapter 10. Equalisation of the General Rate of Profit Through Competition.
Market-Prices and Market-Values. Surplus-Profit


The capital invested in some spheres of production has a mean, or average, composition, that is, it has the same, or almost the same composition as the average social capital.

In these spheres the price of production is exactly or almost the same as the value of the produced commodity expressed in money. If there were no other way of reaching a mathematical limit, this would be the one. Competition so distributes the social capital among the various spheres of production that the prices of production in each sphere take shape according to the model of the prices of production in these spheres of average composition, i.e., they = k + kp' (cost-price plus the average rate of profit multiplied by the cost price). This average rate of profit, however, is the percentage of profit in that sphere of average composition in which profit, therefore, coincides with surplus-value. Hence, the rate of profit is the same in all spheres of production, for it is equalized on the basis of those average spheres of production which has the average composition of capital. Consequently, the sum of the profits in all spheres of production must equal the sum of the surplus-values, and the sum of the prices of production of the total social product equal the sum of its value. But it is evident that the balance among spheres of production of different composition must tend to equalize them with the spheres of average composition, be it exactly or only approximately the same as the social average. Between the spheres more or less approximating the average there is again a tendency toward equalization, seeking the ideal average, i.e., an average that does not really exist, i.e., a tendency to take this ideal as a standard. In this way the tendency necessarily prevails to make the prices of production merely converted forms of value, or to turn profits into mere portions of surplus-value. However, these are not distributed in proportion to the surplus-value produced in each special sphere of production, but rather in proportion to the mass of capital employed in each sphere, so that equal masses of capital, whatever their composition, receive equal aliquot shares of the total surplus-value produced by the total social capital.

In the case of capitals of average, or approximately average, composition, the price of production is thus the same or almost the same as the value, and the profit the same as the surplus-value produced by them. All other capitals, of whatever composition, tend toward this average under pressure of competition. But since the capitals of average composition are of the same, or approximately the same, structure as the average social capital, all capitals have the tendency, regardless of the surplus-value produced by them, to realize the average profit, rather than their own surplus-value in the price of their commodity, i.e., to realize the prices of production.

On the other hand, it may be said that wherever an average profit, and therefore a general rate of profit, is produced — no matter by what means — such an average profit cannot be anything but the profit on the average social capital, whose sum is equal to the sum of surplus-value. Moreover, the prices obtained by adding this average profit to the cost-prices cannot be anything but the values transmuted into prices of production. Nothing would be altered if capitals in certain spheres of production would not, for some reason, be subject to the process of equalization. The average profit would then be computed on that portion of the social capital which enters the equalization process. It is evident that the average profit can be nothing but the total mass of surplus-values allotted to the various quantities of capital proportionally to their magnitudes in their different spheres of production. It is the total realized unpaid labour, and this total mass, like the paid, congealed or living, labour, obtains in the total mass of commodities and money that falls to the capitalists.

The really difficult question is this: how is this equalization of profits into a general rate of profit brought about, since it is obviously a result rather than a point of departure?

To begin with, an estimate of the values of commodities, for instance in terms of money, can obviously only be the result of their exchange. If, therefore, we assume such an estimate, we must regard it as the outcome of an actual exchange of commodity-value for commodity-value. But how does this exchange of commodities at their real value come about?

Let us first assume that all commodities in the different branches of production are sold at their real values. What would then be the outcome? According to the foregoing, very different rates of profit would then reign in the various spheres of production. It is prima facie two entirely different matters whether commodities are sold at their values (i.e., exchanged in proportion to the value contained in them at prices corresponding to their value), or whether they are sold at such prices that their sale yields equal profits for equal masses of the capital advanced for their respective production.

The fact that capitals employing unequal amounts of living labour produce unequal amounts of surplus-value, presupposes at least to a certain extent that the degree of exploitation or the rate of surplus-value are the same, or that any existing differences in them are equalized by real or imaginary (conventional) grounds of compensation. This would assume competition among labourers and equalization through their continual migration from one sphere of production to another. Such a general rate of surplus-value — viewed as a tendency, like all other economic laws — has been assumed by us for the sake of theoretical simplification. But in reality it is an actual premise of the capitalist mode of production, although it is more or less obstructed by practical frictions causing more or less considerable local differences, such as the settlement laws for farm-labourers in Britain. But in theory it is assumed that the laws of capitalist production operate in their pure form. In reality there exists only approximation; but, this approximation is the greater, the more developed the capitalist mode of production and the less it is adulterated and amalgamated with survivals of former economic conditions.

The whole difficulty arises from the fact that commodities are not exchanged simply as commodities, but as products of capitals, which claim participation in the total amount of surplus-value, proportional to their magnitude, or equal if they are of equal magnitude. And this claim is to be satisfied by the total price for commodities produced by a given capital in a certain space of time. This total price is, however, only the sum of the prices of the individual commodities produced by this capital.

The punctum saliens will be best brought if we approach the matter as follows: suppose, the labourers themselves are in possession of their respective means of production and exchange their commodities with one another. In that case these commodities would not be products of capital. The value of the various means of labour and raw materials would differ in accordance with the technical nature of the labours performed in the different branches of production. Furthermore, aside from the unequal value of the means of production employed by them, they would require different quantities of means of production for given quantities of labour, depending on whether a certain commodity can be finished in one hour, another in one day, and so forth. Also suppose the labourers work an equal average length of time, allowing for compensations that arise from the different labour intensities, etc. In such a case, two labourers would, first, both have replaced their outlays, the cost-prices of the consumed means of production, in the commodities which make up the product of their day's work. These outlays would differ, depending on the technical nature of their labour. Secondly, both of them would have created equal amounts of new value, namely the working-day added by them to the means of production. This would comprise their wages plus the surplus-value, the latter representing surplus-labour over and above their necessary wants, the product of which would however belong to them. To put it the capitalist way, both of them receive the same wages plus the same profit, or the same value, expressed, say, by the product of a ten-hour working-day. But in the first place, the values of their commodities would have to differ. In commodity I, for instance, the portion of value corresponding to the consumed means of production might be higher than in commodity II. And, to introduce all possible differences, we might assume right now that commodity I absorbs more living labour, and consequently requires more labour-time to be produced, than commodity II. The values of commodities I and II are, therefore, very different. So are the sums of the values of the commodities, which represent the product of the labour performed by labourers I and II in a given time. The rates of profit would also differ considerably for I and II if we take the rate of profit to be the proportion of the surplus-value to the total value of the invested means of production. The means of subsistence daily consumed by I and II during production, which take the place of wages, here form the part of the invested means of production ordinarily called variable capital. But for equal working periods the surplus values would be the same for I and II, or, more precisely, since I and II each receive the value of the product of a day's work, both of them receive equal values after the value of the invested "constant" elements has been deducted, and one portion of those equal values may be regarded as a substitute for the means of subsistence consumed in production, and the other as surplus-value in excess of it. If labourer I has greater expenses, they are made good by a greater portion of the value of his commodity, which replaces this "constant " part, and he therefore has to reconvert a larger portion of the total value of his product into the material elements of this constant part, while labourer II, though receiving less for this, has so much less to reconvert. In these circumstances, a difference in the rates of profit would therefore be immaterial, just as it is immaterial to the wage-labourer today what rate of profit may express the amount of surplus-value filched from him, and just as in international commerce the difference in the various national rates of profit is immaterial to commodity exchange.

The exchange of commodities at their values, or approximately at their values, thus requires a much lower stage than their exchange at their prices of production, which requires a definite level of capitalist development.

Whatever the manner in which the prices of various commodities are first mutually fixed or regulated, their movements are always governed by the law of value. If the labour-time required for their production happens to shrink, prices fall; if it increases, prices rise, provided other conditions remain the same.

Apart from the domination of prices and price movement by the law of value, it is quite appropriate to regard the values of commodities as not only theoretically but also historically prius to the prices of production. This applies to conditions in which the labourer owns his means of production, and this is the condition of the land-owning farmer living off his own labour and the craftsman, in the ancient as well as in the modern world. This agrees also with the view we expressed previously that the evolution of products into commodities arises through exchange between different communities, not between the members of the same community. It holds not only for this primitive condition, but also for subsequent conditions, based on slavery and serfdom, and for the guild organisation of handicrafts, so long as the means of production involved in each branch of production can be transferred from one sphere to another only with difficulty and therefore the various spheres of production are related to one another, within certain limits, as foreign countries or communist communities.

For prices at which commodities are exchanged to approximately correspond to their values, nothing more is necessary than 1) for the exchange of the various commodities to cease being purely accidental or only occasional; 2) so far as direct exchange of commodities is concerned, for these commodities to be produced on both sides in approximately sufficient quantities to meet mutual requirements, something learned from mutual experience in trading and therefore a natural outgrowth of continued trading; and 3) so far as selling is concerned, for no natural or artificial monopoly to enable either of the contracting sides to sell commodities above their value or to compel them to undersell. By accidental monopoly we mean a monopoly which a buyer or seller acquires through an accidental state of supply and demand.

The assumption that the commodities of the various spheres of production are sold at their value merely implies, of course, that their value is the centre of gravity around which their prices fluctuate, and their continual rises and drops tend to equalise. There is also the market-value — of which later — to be distinguished from the individual value of particular commodities produced by different producers. The individual value of some of these commodities will be below their market-value (that is, less labour time is required for their production than expressed is the market value) while that of others will exceed the market-value. On the one hand, market-value is to be viewed as the average value of commodities produced in a single sphere, and, on the other, as the individual value of the commodities produced under average conditions of their respective sphere and forming the bulk of the products of that sphere. It is only in extraordinary combinations that commodities produced under the worst, or the most favourable, conditions regulate the market-value, which, in turn, forms the centre of fluctuation for market-prices. The latter, however, are the same for commodities of the same kind. If the ordinary demand is satisfied by the supply of commodities of average value, hence of a value midway between the two extremes, then the commodities whose individual value is below the market-value realise an extra surplus-value, or surplus-profit, while those, whose individual value exceeds the market-value, are unable to realise a portion of the surplus-value contained in them.

It does no good to say that the sale of commodities produced under the least favourable conditions proves that they are required to satisfy the demand. If in the assumed case the price were higher than the average market-value, the demand would be smaller. At a certain price, a commodity occupies just so much place on the market. This place remains the same in case of a price change only if the higher price is accompanied by a drop in the supply of the commodity, and a lower price by an increase of supply. And if the demand is so great that it does not contract when the price is regulated by the value of commodities produced under the least favourable conditions, then these determine the market-value. This is not possible unless demand is greater than usual, or if supply drops below the usual level. Finally, if the mass of the produced commodities exceeds the quantity disposed of at average market-values, the commodities produced under the most favourable conditions regulate the market-value. They may, for example, be sold exactly or approximately at their individual value, in which case the commodities produced under the least favourable conditions may not even realise their cost-price, while those produced under average conditions realise only a portion of the surplus-value contained in them. What has been said here of market-value applies to the price of production as soon as it takes the place of market-value. The price of production is regulated in each sphere, and likewise regulated by special circumstances. And this price of production is, in its turn, the centre around which the daily market-prices fluctuate and tend to equalise one another within definite periods. (See Ricardo on determining the price of production through those working under the least favourable conditions.)

No matter how the prices are regulated, we arrive at the following:

1) The law of value dominates price movements with reductions or increases in required labour-time making prices of production fall or rise. It is in this sense that Ricardo (who doubtlessly realised that his prices of production deviated from the value of commodities) says that "the inquiry to which I wish to draw the reader's attention relates to the effect of the variations in the relative value of commodities, and not in their absolute value".

2 ) The average profit determining the prices of production must always be approximately equal to that quantity of surplus-value which falls to the share of individual capital in its capacity of an aliquot part of the total social capital. Suppose that the general rate of profit, and therefore the average profit, are expressed by money-value greater than the money-value of the actual average surplus-value. So far as the capitalists are concerned, it is then immaterial whether they reciprocally charge 10 or 15% profit. Neither of these percentages covers more actual commodity-value than the other, since the overcharge in money is mutual. As for the labourer (the assumption being that he receives his normal wage and the rise in the average profit does not therefore imply an actual deduction from his wage, i.e., it expresses something entirely different from the normal surplus-value of the capitalist), the rise in commodity-prices caused by an increase of the average profit must correspond to the rise of the money-expression of the variable capital. Such a general nominal increase in the rate of profit and the average profit above the limit provided by the ratio of the actual surplus-value to the total invested capital is not, in effect, possible without causing an increase in wages, and also an increase in the prices of commodities forming the constant capital. The reverse is true in case of a reduction. Since the total value of the commodities regulates the total surplus-value, and this in turn regulates the level of average profit and thereby the general rate of profit — as a general law or a law governing fluctuations — it follows the law of value regulates the prices of production.

What competition, first in a single sphere, achieves is a single market-value and market-price derived from the various individual values of commodities. And it is competition of capitals in different spheres, which first brings out the price of production equalizing the rates of profit in the different spheres. The latter process requires a higher development of capitalist production that the previous one.

For commodities of the same sphere of production, the same kind, and approximately the same quality, to be sold at their values, the following two requirements are necessary:

First, the different individual values must be equalized at one social value, the above-named market value, and this implies competition among producers of the same kind of commodities and, likewise, the existence of a common market in which they offer their articles for sale. For the market-price of identical commodities, each, however, produced under different individual circumstances, to correspond to the market-value and not to deviate from it either by rising above or falling below it, it is necessary that the pressure exerted by different sellers upon one another be sufficient to bring enough commodities to market to fill the social requirements, i.e., a quantity for which society is capable of paying the market-value. Should the mass of products exceed this demand, the commodities would have to be sold below their market-value; and conversely, above their market-value if the mass of products were not large enough to meet the demand, or, what amounts to the same, if the pressure of competition among sellers were not strong enough to bring this mass of products to market. Should the market-value change, this would also entail a change in the conditions on which the total mass of commodities could be sold. Should the market-value fall, this would entail a rise in the average social demand (this always taken to mean the effective demand), which could, within certain limits, absorb larger masses of commodities. Should the market-value rise, this would entail a drop in the social demand, and a smaller mass of commodities would be absorbed. Hence, if supply and demand regulate the market-price, or rather the deviations of the market-price from the market-value, then, in turn, the market-value regulates the ratio of supply to demand, or the centre round which fluctuations of supply and demand cause market-prices to oscillate.

Looking closer, we find that the conditions applicable to the value of an individual commodity are here reproduced as conditions governing the value of the aggregate of a certain kind of commodity. Capitalist production is mass production from the very outset. But even in other, less developed, modes of production that which is produced in relatively small quantities as a common product by small-scale, even if numerous, producers, is concentrated in large quantities — at least in the case of the vital commodities — in the hands of relatively few merchants. The latter accumulate them and sell them as the common product of an entire branch of production, or of a more or less considerable contingent of it.

It should be here noted in passing that the "social demand," i.e., the factor which regulates the principle of demand, is essentially subject to the mutual relationship of the different classes and their respective economic position, notably therefore to, firstly, the ratio of total surplus-value to wages, and, secondly, to the relation of the various parts into which surplus-value is split up (profit, interest, ground-rent, taxes, etc.). And this thus again shows how absolutely nothing can be explained by the relation of supply to demand before ascertaining the basis on which this relation rests.

Although both commodity and money represent a unity of exchange-value and use-value, we have already seen that in buying and selling both of these functions are polarised at the two extremes, the commodity (seller) representing the use-value, and the money (buyer) representing the exchange-value. One of the first premises of selling was that a commodity should have use-value and should therefore satisfy a social need. The other premise was that the quantity of labour contained in the commodity should represent socially necessary labour, i.e., its individual value (and, what amounts to the same under the present assumption, its selling price) should coincide with its social value.

Let us apply this to the mass of commodities available in the market, which represents the product of a whole sphere.

The matter will be most readily pictured by regarding this whole mass of commodities, produced by one branch of industry, as one commodity, and the sum of the prices of the many identical commodities as one price. Then, whatever has been said of a single commodity applies literally to the mass of commodities of an entire branch of production available in the market. The requirement that the individual value of a commodity should correspond to its social value is now realised, or further determined, in that the mass contains social labour necessary for its production, and that the value of this mass is equal to its market-value.

Now suppose that the bulk of these commodities is produced under approximately similar normal social conditions, so that this value is at the same time the individual value of the individual commodities which make up this mass. If a relatively small portion of these commodities may now have been produced below, and another above, these conditions, so that the individual value of one portion is greater, and that of the other smaller, than the average value of the bulk of the commodities, but in such proportions that these extremes balance one another, so that the average value of the commodities at these extremes is equal to the value of commodities in the centre, then the market-value is determined by the value of the commodities produced under average conditions. The value of the entire mass of commodities is equal to the actual sum of the values of all individual commodities taken together, whether produced under average conditions, or under conditions above or below the average. In that case, the market-value, or social value, of the mass of commodities — the necessary labour-time contained in them — is determined by the value of the preponderant mean mass.

Suppose, on the contrary, that the total mass of the commodities in question brought to market remains the same, while the value of the commodities produced under less favourable conditions fails to balance out the value of commodities produced under more favourable conditions, so that the part of the mass produced under less favourable conditions forms a relatively weighty quantity as compared with the average mass and with the other extreme. In that case, the mass produced under less favourable conditions regulates the market, or social, value.

Suppose, finally, that the mass of commodities produced under better than average conditions considerably exceeds that produced under worse conditions, and is large even compared with that produced under average conditions. In that case, the part produced under the most favourable conditions determines the market-value. We ignore here the overstocked market, in which the part produced under most favourable conditions always regulates the market-price. We are not dealing here with the market-price, in so far as it differs from the market-value, but with the various determinations of the market-value itself. [1]

In fact, strictly speaking (which, of course, occurs in reality only in approximation and with a thousand modifications) the market-value of the entire mass, regulated as it is by the average values, is in case I equal to the sum of their individual values; although in the case of the commodities produced at the extremes, this value is represented as an average value which is forced upon them. Those who produce at the worst extreme must then sell their commodities below the individual value; those producing at the best extreme sell them above it.

In case II the individual lots of commodity-values produced at the two extremes do not balance one another. Rather, the lot produced under the worse conditions decides the issue. Strictly speaking, the average price, or the market-value, of each individual commodity, or each aliquot part of the total mass, would now be determined by the total value of the mass as obtained by adding up the values of the commodities produced under different conditions, and in accordance with the aliquot part of this total value falling to the share of each individual commodity. The market-value thus obtained would exceed the individual value not only of the commodities belonging to the favourable extreme, but also of those belonging to the average lot. Yet it would still be below the individual value of those commodities produced at the unfavourable extreme. How close the market-value approaches, or finally coincides with, the latter would depend entirely on the volume occupied by commodities produced at the unfavourable extreme of the commodity sphere in question. If demand is only slightly greater than supply, the individual value of the unfavourably produced commodities regulates the market-price.

Finally, if the lot of commodities produced at the favourable extreme occupies greater place than the other extreme, and also than the average lot, as it does in case III, then the market-value falls below the average value. The average value, computed by adding the sums of values at the two extremes and at the middle, stands here below the value of the middle, which it approaches, or vice versa, depending on the relative place occupied by the favourable extreme. Should demand be weaker than supply, the favourably situated part, whatever its size, makes room for itself forcibly by paring its price down to its individual value. The market-value cannot ever coincide with this individual value of the commodities produced under the most favourable conditions, except when supply far exceeds demand.

This mode of determining market-values, which we have here outlined abstractly, is promoted in the real market by competition among the buyers, provided the demand is large enough to absorb the mass of commodities at values so fixed. And this brings us to the other point.

Second, to say that a commodity has a use-value is merely to say that it satisfies some social want. So long as we dealt with individual commodities only, we could assume that there was a need for a particular commodity — its quantity already implied by its price without inquiring further into the quantity required to satisfy this want. This quantity is, however, of essential importance, as soon as the product of an entire branch of production is placed on one side, and the social need for it on the other. It then becomes necessary to consider the extent, i.e., the amount of this social want.

In the foregoing determinations of market-value it was assumed that the mass of the produced commodities is given, i.e., remains the same, and that there is a change only in the proportions of its constituent elements, which are produced under different conditions, and that, hence, the market-value of the same mass of commodities is differently regulated. Suppose, this mass corresponds in size to the usual supply, leaving aside the possibility that a portion of the produced commodities may be temporarily withdrawn from the market. Should demand for this mass now also remain the same, this commodity will be sold at its market-value, no matter which of the three aforementioned cases regulates this market-value. This mass of commodities does not merely satisfy a need, but satisfies it to its full social extent. Should their quantity be smaller or greater, however, than the demand for them, there will be deviations of the market-price from the market-value. And the first deviation is that if the supply is too small, the market-value is always regulated by the commodities produced under the least favourable circumstances and, if the supply is too large, always by the commodities produced under the most favourable conditions; that therefore it is one of the extremes which determines the market-value, in spite of the fact that in accordance with the mere proportion of the commodity masses produced under different conditions, a different result should obtain. If the difference between demand and the available quantity of the product is more considerable, the market-price will likewise be considerably above or below the market-value. Now, the difference between the quantity of the produced commodities and that quantity of them at which they are sold at market-value may be due to two reasons. Either the quantity itself changes, becoming too small or too large, so that reproduction would have taken place on a different scale than that which regulated the given market-value. In that case, the supply changed, although demand remained the same, and there was, therefore, relative over-production or under-production. Or else reproduction, and thus supply, remained the same, while demand shrank or increased, which may be due to several reasons. Although the absolute magnitude of the supply was the same, its relative magnitude, its magnitude relative to, or measured by, the demand, had changed. The effect is the same as in the first case, but in the reverse direction. Finally, if changes take place on both sides, but either in reverse directions, or, if in the same direction, then not to the same extent, if therefore there are changes on both sides, but these alter the former proportion between the two sides, then the final result must always lead to one of the two above-mentioned cases.

The real difficulty in formulating the general definition of supply and demand is that it seems to take on the appearance of a tautology. First consider the supply — the product available in the market, or that which can be delivered to it. To avoid dwelling upon useless detail, we shall here consider only the mass annually reproduced in every given branch of production and ignore the greater or lesser faculty possessed by the different commodities to be withdrawn from the market and stored away for consumption, say, until next year. This annual reproduction is expressed by a certain quantity — in weight or numbers — depending on whether this mass of commodities is measured in discrete elements or continuously. They are not only use-values satisfying human wants, but these use-values are available in the market in definite quantities. Secondly, however, this quantity of commodities has a specific market-value, which may be expressed by a multiple of the market-value of the commodity, or of its measure, which serves as unit. Thus, there is no necessary connection between the quantitative volume of the commodities in the market and their market-value, since, for instance, many commodities have a specifically high value, and others a specifically low value, so that a given sum of values may be represented by a very large quantity of one commodity, and a very small quantity of another. There is only the following connection between the quantity of the articles available in the market and the market-value of these articles: On a given basis of labour productivity the production of a certain quantity of articles in every particular sphere of production requires a definite quantity of social labour-time; although this proportion varies in different spheres of production and has no inner relation to the usefulness of these articles or the special nature of their use-values. Assuming all other circumstances to be equal, and a certain quantity a of some commodity to cost b labour-time, a quantity na of the same commodity will cost nb labour-time. Further, if society wants to satisfy some want and have an article produced for this purpose, it must pay for it. Indeed, since commodity-production necessitates a division of labour, society pays for this article by devoting a portion of the available labour-time to its production. Therefore, society buys it with a definite quantity of its disposable labour-time. That part of society which through the division of labour happens to employ its labour in producing this particular article, must receive an equivalent in social labour incorporated in articles which satisfy its own wants. However, there exists an accidental rather than a necessary connection between the total amount of social labour applied to a social article, i.e., between the aliquot part of society's total labour-power allocated to producing this article, or between the volume which the production of this article occupies in total production, on the one hand, and the volume whereby society seeks to satisfy the want gratified by the article in question, on the other. Every individual article, or every definite quantity of a commodity may, indeed, contain no more than the social labour required for its production, and from this point of view the market-value of this entire commodity represents only necessary labour, but if this commodity has been produced in excess of the existing social needs, then so much of the social labour-time is squandered and the mass of the commodity comes to represent a much smaller quantity of social labour in the market than is actually incorporated in it. (It is only where production is under the actual, predetermining control of society that the latter establishes a relation between the volume of social labour-time applied in producing definite articles, and the volume of the social want to be satisfied by these articles.) For this reason, these commodities must be sold below their market-value, and a portion of them may even be altogether unsaleable. The reverse applies if the quantity of social labour employed in the production of a certain kind of commodity is too small to meet the social demand for that commodity. But if the quantity of social labour expended in the production of a certain article corresponds to the social demand for that article, so that the produced quantity corresponds to the usual scale of reproduction and the demand remains unchanged, then the article is sold at its market-value. The exchange, or sale, of commodities at their value is the rational state of affairs, i.e., the natural law of their equilibrium. It is this law that explains the deviations, and not vice versa, the deviations that explain the law.

Now let us look at the other side — the demand.

Commodities are bought either as means of production or means of subsistence to enter productive or individual consumption. It does not alter matters that some commodities may serve both purposes. There is, then, a demand for them on the part of producers (here capitalists, since we have assumed that means of production have been transformed into capital) and of consumers. Both appear at first sight to presuppose a given quantity of social want on the side of demand, corresponding on the other side to a definite quantity of social output in the various lines of production. If the cotton industry is to accomplish its annual reproduction on a given scale, it must have the usual supply of cotton, and, other circumstances remaining the same, an additional amount of cotton corresponding to the annual extension of reproduction caused by the accumulation of capital. This is equally true with regard to means of subsistence. The working-class must find at least the same quantity of necessities on hand if it is to continue living in its accustomed average way, although they may be more or less differently distributed among the different kinds of commodities. Moreover, there must be an additional quantity to allow for the annual increase of population. The same, with more or less modification, applies to other classes.

It would seem, then, that there is on the side of demand a certain magnitude of definite social wants which require for their satisfaction a definite quantity of a commodity on the market. But quantitatively, the definite social wants are very elastic and changing. Their fixedness is only apparent. If the means of subsistence were cheaper, or money-wages higher, the labourers would buy more of them, and a greater social need would arise for them, leaving aside the paupers, etc., whose demand is even below the narrowest limits of their physical wants. On the other hand, if cotton were cheaper, for example, the capitalists' demand for it would increase, more additional capital would be thrown into the cotton industry, etc. We must never forget that the demand for productive consumption is, under our assumption, a demand of the capitalist, whose essential purpose is the production of surplus-value, so that he produces a particular commodity to this sole end. Still, this does not hinder the capitalist, so long as he appears in the market as a buyer of, say, cotton, from representing the need for this cotton, just as it is immaterial to the seller of cotton whether the buyer converts it into shirting or gun-cotton, or whether he intends to turn it into wads for his own, and the world's, ears. But this does exert a considerable influence on the kind of buyer the capitalist is. His demand for cotton is substantially modified by the fact that it disguises his real need for making profit. The limits within which the need for commodities in the market, the demand, differs quantitatively from the actual social need, naturally vary considerably for different commodities; what I mean is the difference between the demanded quantity of commodities and the quantity which would have been in demand at other money-prices or other money or living conditions of the buyers.

Nothing is easier than to realise the inconsistencies of demand and supply, and the resulting deviation of market-prices from market-values. The real difficulty consists in determining what is meant by the equation of supply and demand.

Supply and demand coincide when their mutual proportions are such that the mass of commodities of a definite line of production can be sold at their market-value, neither above nor below it. That is the first thing we hear.

The second is this: If commodities are sold at their market-values, supply and demand coincide.

If supply equals demand, they cease to act, and for this very reason commodities are sold at their market-values. Whenever two forces operate equally in opposite directions, they balance one another, exert no outside influence, and any phenomena taking place in these circumstances must be explained by causes other than the effect of these two forces. If supply and demand balance one another, they cease to explain anything, do not affect market-values, and therefore leave us so much more in the dark about the reasons why the market-value is expressed in just this sum of money and no other. It is evident that the real inner laws of capitalist production cannot be explained by the interaction of supply and demand (quite aside from a deeper analysis of these two social motive forces, which would be out of place here), because these laws cannot be observed in their pure state, until supply and demand cease to act, i.e., are equated. In reality, supply and demand never coincide, or, if they do, it is by mere accident, hence scientifically = 0, and to be regarded as not having occurred. But political economy assumes that supply and demand coincide with one another. Why? To be able to study phenomena in their fundamental relations, in the form corresponding to their conception, that is, is to study them independent of the appearances caused by the movement of supply and demand. The other reason is to find the actual tendencies of their movements and to some extent to record them. Since the inconsistencies are of an antagonistic nature, and since they continually succeed one another, they balance out one another through their opposing movements, and their mutual contradiction. Since, therefore, supply and demand never equal one another in any given case, their differences follow one another in such a way — and the result of a deviation in one direction is that it calls forth a deviation in the opposite direction — that supply and demand are always equated when the whole is viewed over a certain period, but only as an average of past movements, and only as the continuous movement of their contradiction. In this way, the market-prices which have deviated from the market-values adjust themselves, as viewed from the standpoint of their average number, to equal the market-values, in that deviations from the latter cancel each other as plus and minus. And this average is not merely of theoretical, but also of practical importance to capital, whose investment is calculated on the fluctuations and compensations of a more or less fixed period.

On the one hand, the relation of demand and supply, therefore, only explains the deviations of market-prices from market-values. On the other, it explains the tendency to eliminate these deviations, i.e., to eliminate the effect of the relation of demand and supply. (Such exceptions as commodities which have a price without having a value are not considered here.) Supply and demand may eliminate the effect caused by their difference in many different ways. For instance, if the demand, and consequently the market-price, fall, capital may be withdrawn, thus causing supply to shrink. It may also be that the market-value itself shrinks and balances with the market-price as a result of inventions which reduce the necessary labour-time. Conversely, if the demand increases, and consequently the market-price rises above the market-value, this may lead to too much capital flowing into this line of production and production may swell to such an extent that the market-price will even fall below the market-value. Or, it may lead to a price increase, which cuts the demand. In some lines of production it may also bring about a rise in the market-value itself for a shorter or longer period, with a portion of the desired products having to be produced under worse conditions during this period.

Supply and demand determine the market-price, and so does the market-price, and the market-value in the further analysis, determine supply and demand. This is obvious in the case of demand, since it moves in a direction opposite to prices, swelling when prices fall, and vice versa. But this is also true of supply. Because the prices of means of production incorporated in the offered commodities determine the demand for these means of production, and thus the supply of commodities whose supply embraces the demand for these means of production. The prices of cotton are determinants in the supply of cotton goods.

To this confusion — determining prices through demand and supply, and, at the same time, determining supply and demand through prices — must be added that demand determines supply, just as supply determines demand, and production determines the market, as well as the market determines production. [2]

Even the ordinary economist (see footnote) agrees that the proportion between supply and demand may vary in consequence of a change in the market-value of commodities, without a change being brought about in demand or supply by extraneous circumstances. Even he must admit that, whatever the market-value, supply and demand must coincide in order for it to be established. In other words, the ratio of supply to demand does not explain the market-value, but conversely, the latter rather explains the fluctuations of supply and demand. The author of the Observations continues after the passage quoted in the footnote:

"This proportion" (between demand and supply), "however, if we still mean by 'demand' and 'natural price', what we meant just now, when referring to Adam Smith, must always be a proportion of equality; for it is only when the supply is equal to the effectual demand, that is, to that demand which will neither more nor less than pay the natural price, that the natural price is in fact paid; consequently, there may be two very different natural prices, at different times, for the same commodity, and yet the proportion, which the supply bears to the demand, be in both cases the same, namely, the proportion of equality."

It is admitted, then, that with two different natural prices of the same commodity, at different times, demand and supply are always able to, and must, balance one another if the commodity is to be sold at its natural price in both instances. Since there is no difference in the ratio of supply to demand in either case, but a difference in the magnitude of the natural price itself, it follows that this price is obviously determined independently of demand and supply, and thus that it can least of all be determined by them.

For a commodity to be sold at its market-value, i.e., proportionally to the necessary social labour contained in it, the total quantity of social labour used in producing the total mass of this commodity must correspond to the quantity of the social want for it, i.e., the effective social want. Competition, the fluctuations of market-prices which correspond to the fluctuations of demand and supply, tend continually to reduce to this scale the total quantity of labour devoted to each kind of commodity.

The proportion of supply and demand recapitulates, first, the relation of use-value to exchange-value, of commodity to money, and of buyer to seller; and, second, that of producer to consumer, although both of them may be represented by third parties, the merchants. In considering buyer and seller, it suffices to counterpose them individually in order to present their relationship. Three individuals are enough for the complete metamorphosis of a commodity, and therefore for the process of sale and purchase taken as a whole. A converts his commodity into the money of B, to whom he sells his commodity, and reconverts his money again into commodities, when he uses it to make purchases from C; the whole process takes place among these three. Further, in the study of money it had been assumed that the commodities are sold at their values because there was absolutely no reason to consider prices divergent from values, it being merely a matter of changes of form which commodities undergo in their transformation into money and their reconversion from money into commodities. As soon as a commodity has been sold and a new commodity bought with the receipts, we have before us the entire metamorphosis, and to this process as such it is immaterial whether the price of the commodity lies above or below its value. The value of the commodity remains important as a basis, because the concept of money cannot be developed on any other foundation, and price, in its general meaning, is but value in the form of money. At any rate, it is assumed in the study of money as a medium of circulation that there is not just one metamorphosis of a certain commodity. It is rather the social interrelation of these metamorphoses which is studied. Only thus do we arrive at the circulation of money and the development of its function as a medium of circulation. But however important this connection may be for the conversion of money into a circulating medium, and for its resulting change of form, it is of no moment to the transaction between individual buyers and sellers.

In the case of supply and demand, however, the supply is equal to the sum of sellers, or producers, of a certain kind of commodity, and the demand equals the sum of buyers or consumers (both productive and individual) of the same kind of commodity. The sums react on one another as units, as aggregate forces. The individual counts here only as part of a social force, as an atom of the mass, and it is in this form that competition brings out the socialcharacter of production and consumption.

The side of competition which happens for the moment to be weaker is also the side in which the individual acts independently of, and often directly against, the mass of his competitors, and precisely in this manner is the dependence of one upon the other impressed upon them, while the stronger side acts always more or less as a united whole against its antagonist. If the demand for this particular kind of commodity is greater than the supply, one buyer outbids another — within certain limits — and so raises the price of the commodity for all of them above the market-value, while on the other hand the sellers unite in trying to sell at a high market-price. If, conversely, the supply exceeds the demand, one begins to dispose of his goods at a cheaper rate and the others must follow, while the buyers unite in their efforts to depress the market-price as much as possible below the market-value. The common interest is appreciated by each only so long as he gains more by it than without it. And unity of action ceases the moment one or the other side becomes the weaker, when each tries to extricate himself on his own as advantageously as he possibly can. Again, if one produces more cheaply and can sell more goods, thus possessing himself of a greater place in the market by selling below the current market-price, or market-value, he will do so, and will thereby begin a movement which gradually compels the others to introduce the cheaper mode of production, and one which reduces the socially necessary labour to a new, and lower, level. If one side has the advantage, all belonging to it gain. It is as though they exerted their common monopoly. If one side is weaker, then one may try on his own hook to become the stronger (for instance, one who works with lower costs of production), or at least to get off as lightly as possible, and in such cases each for himself and the devil take the hindmost, although his actions affect not only himself, but also all his boon companions. [3]

Demand and supply imply the conversion of value into market-value, and so far as they proceed on a capitalist basis, so far as the commodities are products of capital, they are based on capitalist production processes, i.e., on quite different relationships than the mere purchase and sale of goods. Here it is not a question of the formal conversion of the value of commodities into prices, i.e., not of a mere change of form. It is a question of definite deviations in quantity of the market-prices from the market-values, and, further, from the prices of production. In simple purchase and sale it suffices to have the producers of commodities as such counterposed to one another. In further analysis supply and demand presuppose the existence of different classes and sections of classes which divide the total revenue of a society and consume it among themselves as revenue, and, therefore, make up the demand created by revenue. While on the other hand it requires an insight into the over-all structure of the capitalist production process for an understanding of the supply and demand created among themselves by producers as such.

Under capitalist production it is not merely a matter of obtaining an equal mass of value in another form — be it that of money or some other commodity — for a mass of values thrown into circulation in the form of a commodity, but it is rather a matter of realising as much surplus-value, or profit, on capital advanced for production, as any other capital of the same magnitude, or pro rata to its magnitude in whichever line it is applied. It is, therefore, a matter, at least as a minimum, of selling the commodities at prices which yield the average profit, i.e., at prices of production. In this form capital becomes conscious of itself as a social power in which every capitalist participates proportionally to his share in the total social capital.

First, capitalist production is in itself indifferent to the particular use-value, and distinctive features of any commodity it produces. In every sphere of production it is only concerned with producing surplus-value, and appropriating a certain quantity of unpaid labour incorporated in the product of labour. And it is likewise in the nature of the wage-labour subordinated by capital that it is indifferent to the specific character of its labour and must submit to being transformed in accordance with the requirements of capital and to being transferred from one sphere of production to another.

Second, one sphere of production is, in fact, just as good or just as bad as another. Every one of them yields the same profit, and every one of them would be useless if the commodities it produced did not satisfy some social need.

Now, if the commodities are sold at their values, then, as we have shown, very different rates of profit arise in the various spheres of production, depending on the different organic composition of the masses of capital invested in them. But capital withdraws from a sphere with a low rate of profit and invades others, which yield a higher profit. Through this incessant outflow and influx, or, briefly, through its distribution among the various spheres, which depends on how the rate of profit falls here and rises there, it creates such a ratio of supply to demand that the average profit in the various spheres of production becomes the same, and values are, therefore, converted into prices of production. Capital succeeds in this equalisation, to a greater or lesser degree, depending on the extent of capitalist development in the given nation; i.e., on the extent the conditions in the country in question are adapted for the capitalist mode of production. With the progress of capitalist production, it also develops its own conditions and subordinates to its specific character and its immanent laws all the social prerequisites on which the production process is based.

The incessant equilibration of constant divergences is accomplished so much more quickly, 1) the more mobile the capital, i.e., the more easily it can be shifted from one sphere and from one place to another; 2) the more quickly labour-power can be transferred from one sphere to another and from one production locality to another. The first condition implies complete freedom of trade within the society and the removal of all monopolies with the exception of the natural ones, those, that is, which naturally arise out of the capitalist mode of production. It implies, furthermore, the development of the credit system, which concentrates the inorganic mass of the disposable social capital vis-a-vis the individual capitalist. Finally, it implies the subordination of the various spheres of production to the control of capitalists. This last implication is included in our premises, since we assumed that it was a matter of converting values into prices of production in all capitalistically exploited spheres of production. But this equilibration itself runs into greater obstacles, whenever numerous and large spheres of production not operated on a capitalist basis (such as soil cultivation by small farmers), filter in between the capitalist enterprises and become linked with them. A great density of population is another requirement.— The second condition implies the abolition of all laws preventing the labourers from transferring from one sphere of production to another and from one local centre of production to another; indifference of the labourer to the nature of his labour; the greatest possible reduction of labour in all spheres of production to simple labour; the elimination of all vocational prejudices among labourers; and last but not least, a subjugation of the labourer to the capitalist mode of production. Further reference to this belongs to a special analysis of competition.

It follows from the foregoing that in each particular sphere of production the individual capitalist, as well as the capitalists as a whole, take direct part in the exploitation of the total working-class by the totality of capital and in the degree of that exploitation, not only out of general class sympathy, but also for direct economic reasons. For, assuming all other conditions — among them the value of the total advanced constant capital — to be given, the average rate of profit depends on the intensity of exploitation of the sum total of labour by the sum total of capital.

The average profit coincides with the average surplus-value produced for each 100 of capital, and so far as the surplus-value is concerned the foregoing statements apply as a matter of course. In the case of the average profit the value of the advanced capital becomes an additional element determining the rate of profit. In fact, the direct interest taken by the capitalist, or the capital, of any individual sphere of production in the exploitation of the labourers who are directly employed is confined to making an extra gain, a profit exceeding the average, either through exceptional overwork, or reduction of the wage below the average, or through the exceptional productivity of the labour employed. Aside from this, a capitalist who would not in his line of production employ any variable capital, and therefore any labourer (in reality an exaggerated assumption), would nonetheless be as much interested in the exploitation of the working-class by capital, and would derive his profit quite as much from unpaid surplus-labour, as, say, a capitalist who would employ only variable capital (another exaggeration), and who would thus invest his entire capital in wages. But the degree of exploitation of labour depends on the average intensity of labour if the working-day is given, and on the length of the working-day if the intensity of exploitation is given. The degree of exploitation of labour determines the rate of surplus-value, and therefore the mass of surplus-value for a given total mass of variable capital, and consequently the magnitude of the profit. The individual capitalist, as distinct from his sphere as a whole, has the same special interest in exploiting the labourers he personally employs as the capital of a particular sphere, as distinct from the total social capital, has in exploiting the labourers directly employed in that sphere.

On the other hand, every particular sphere of capital, and every individual capitalist, have the same interest in the productivity of the social labour employed by the sum total of capital. For two things depend on this productivity: First, the mass of use-values in which the average profit is expressed; and this is doubly important, since this average profit serves as a fund for the accumulation of new capital and as a fund for revenue to be spent for consumption. Second, the value of the total capital invested (constant and variable), which, the amount of surplus-value, or profit, for the whole capitalist class being given, determines the rate of profit, or the profit on a certain quantity of capital. The special productivity of labour in any particular sphere, or in any individual enterprise of this sphere, is of interest only to those capitalists who are directly engaged in it, since it enables that particular sphere, vis-a-vis the total capital, or that individual capitalist, vis-a-vis his sphere, to make an extra profit.

Here, then, we have a mathematically precise proof why capitalists form a veritable freemason society vis-a-vis the whole working-class, while there is little love lost between them in competition among themselves.

The price of production includes the average profit. We call it price of production. It is really what Adam Smith calls natural price, Ricardo calls price of production, or cost of production, and the physiocrats call prix nécessaire, because in the long run it is a prerequisite of supply, of the reproduction of commodities in every individual sphere. But none of them has revealed the difference between price of production and value. We can well understand why the same economists who oppose determining the value of commodities by labour-time, i.e., by the quantity of labour contained in them, why they always speak of prices of production as centres around which market-prices fluctuate. They can afford to do it because the price of production is an utterly external and prima facie meaningless form of the value of commodities, a form as it appears in competition, therefore in the mind of the vulgar capitalist, and consequently in that of the vulgar economist.

 Our analysis has revealed how the market-value (and everything said concerning it applies with appropriate modifications to the price of production) embraces a surplus-profit for those who produce in any particular sphere of production under the most favourable conditions. With the exception of crises, and of overproduction in general, this applies to all market-prices, no matter how much they may deviate from market-values or market-prices of production. For the market-price signifies that the same price is paid for commodities of the same kind, although they may have been produced under very different individual conditions and hence may have different cost-prices. (We do not speak at this point of any surplus-profits due to monopolies in the usual sense of the term, whether natural or artificial.)

A surplus-profit may also arise if certain spheres of production are in a position to evade the conversion of the values of their commodities into prices of production, and thus the reduction of their profits to the average profit. We shall devote more attention to the further modifications of these two forms of surplus-profit in the part dealing with ground-rent.


1. The controversy between Storch and Ricardo with regard to ground-rent (a controversy pertaining only to the subject; in fact, the two opponents pay no attention to one another), whether the market-value (or rather what they call market-price and price of production respectively) was regulated by the commodities produced under unfavourable conditions (Ricardo) [On the Principles of Political Economy, and Taxation, Third edition, London, 1821, pp. 661. — Ed. ], or by those produced under favourable conditions (Storch) [Cours d'economie politique, ou exposition des principes, qudeterminent la prosperite des nations, tome II, St.-Petersbourg, 1815, pp. 78-79. — Ed. ], resolves itself in the final analysis in that both are right and both wrong, and that both of them have failed to consider the average case. Compare Corbet [An Inquiry into the Causes and Modes of the Wealth of Individuals, London, 1841, pp. 42-44. — Ed. ] on the cases in which the price is regulated by commodities produced under the most favourable conditions. — "It is not meant to be asserted by him (Ricardo) that two particular lots of two different articles, as a hat and a pair of shoes, exchange with one another when those two particular lots were produced by equal quantities of labour. By 'commodity' we must here understand the 'description of commodity', not a particular individual hat, pair of shoes etc. The whole labour which produces all the hats in England is to be considered, to this purpose, as divided among all the hats. This seems to me not to have been expressed at first, and in the general statement of this doctrine." (Observations on Certain Verbal Disputes in Political Economy, etc., London, 1821, pp. 53-54.)

2. The following subtility is sheer nonsense: "Where the quantity of wages, capital, and land, required to produce an article, are become different from what they were, that which Adam Smith calls the natural price of it is also different, and that price, which was previously its natural price becomes, with reference to this alteration, its market-price; because, though neither the supply, nor the quantity wanted, may have been changed" — both of them change here, just because the market-value, or, in the case of Adam Smith, the price of production, changes in consequence of a change of value — "that supply is not now exactly enough for those persons who are able and willing to pay what is now the cost of production, but is either greater or less than that; so that the proportion between the supply and what is with reference to the new cost of production the effectual demand, is different from what it was. An alteration in the rate of supply will then take place if there is no obstacle in the way of it, and at last bring the commodity to its new natural price. It may then seem good to some persons to say that as the commodity gets to its natural price by an alteration in its supply, the natural price is as much owing to one proportion between the demand and supply, as the market-price is to another; and consequently, that the natural price, just as much as the market-price, depends on the proportion that demand and supply bear to each other." ("The great principle of demand and supply is called into action to determine what A. Smith calls natural prices as well as market-prices." — Malthus.) [Principles of Political Economy, London, 1820, p. 75. — Ed.] (Observations on Certain Verbal Disputes, etc., London, 1821, pp. 60-61.) The good man does not grasp the fact that it is precisely the change in the cost of production, and thus in the value which caused a change in the demand, in the present case, and thus in the proportion between demand and supply, and that this change in the demand may bring about a change in the supply. This would prove just the reverse of what our good thinker wants to prove. It would prove that the change in the cost of production is by no means due to the proportion of demand and supply, but rather regulates this proportion."

3. "If each man of a class could never have more than a given share, or aliquot part, of the gains and possessions of the whole, he would readily combine to raise the gain"; (he does it as soon as the proportion of demand to supply permits it ) "this is monopoly. But where each man thinks that he may anyway increase the absolute amount of his own share, though by a process which lessens the whole amount, he will often do it; this is competition." (An Inquiry into Those Principles Respecting the Nature of Demand, etc,, London, 1821, p. 105.)