Other explanations [and justifications]have been offered for the existence of profits. The profit earned by the entrepreneur, it was said, is actually his wages of management -- a more plausible rationale in the early days when businesses were routinely run by their owners. But this too is fairly obviously a non-starter. To see why, just consider a business inherited by the ne'er-do-well son of an industrious, hard-working capitalist, who, not wishing to spend his days on the shop floor overseeing his employees, hires a manager, to whom he pays whatever salary is the going rate in the labor market. That salary is one of the costs of doing business, to be subtracted from gross earnings before a profit rate is calculated. The young man would be quite surprised if he were informed that the salary of the manager had entirely gobbled up the company's profits, leaving nothing for him to disport himself on the Riviera.
Equally implausible is a more recent rationale, which traces profits to the compensation for entrepreneurship and innovation. No doubt, in any economic system, some compensation must be made for those indispensable talents, but why then do routine businesses, not engaged in daring and exciting flights of innovation and entrepreneurship, also earn a solid profit?
Marx poses the problem in its full difficulty by positing, as I have said, that commodities are exchanging at prices proportional to their labor values -- which, as we have seen, means that there is equal organic composition of capital in all lines of production. Now, under those circumstances, the capitalist pays for his inputs a money price proportional to the labor embodied in those inputs. He then hires workers to transform those inputs into salable output. What wage does he pay his employees? Well [this is the crucial point in the entire exercise], the workers are, from the point of view of the theory of laisser-faire capitalism, petty commodity producers, producing their laboring, so they, like everyone else, are paid a money wage proportional to the cost to them of producing their labor. This means that they are paid enough money to buy the food, clothing, and shelter they require to be able to continue to work. In addition, since their physical plant [their bodies] wears out, they must be paid enough for a depreciation fund so that when their physical plant is completely spent [and they die], it can be replaced. In short, they must be paid enough to raise children who, at the age of twelve or thirteen, are ready to take their place in the factories. [Yes, Marx fully intends this as bitterly ironical, which is to say BOTH literally true AND ALSO a devastating condemnation of capitalism. This is why he needs a complex language capable of capturing all of this. More of this anon.]
Now, when the capitalist combines his various inputs, the result is a product embodying a quantity of labor directly and indirectly applied. The product is then sold in the market, and by Marx's assumption, it, like the inputs, sells at a money price proportional to its labor value. And here is the nub of the problem. The capitalist has paid the labor value price for his inputs. He has combined them [including, perhaps, his own managerial laboring], thereby transferring to the output all of that embodied and direct labor. And he now sells the output for its labor value, which is to say for a money price proportional to the labor embodied in it. How on earth can he make a profit? If he decides arbitrarily to slap a 10% surcharge on the cost of his inputs, that will do him no good, because all the other capitalists will do the same, and the cost to him of his inputs will rise so as to eat up what he gained by upping the price of his output. As Marx writes at the very end of Chapter Five ["Contradictions in the Formula of Capital"]:
"Our friend, Moneybags, who as yet is only an embryo capitalist, must buy his commodities at their value, must sell them at their value, and yet at the end of the process must withdraw more value from circulation than he threw into it at starting. His development into a full-grown capitalist must take place, both within the sphere of circulation and without it. These are the conditions of the problem. Hic Rhodus, hic salta!" ["Here is Rhodes. Jump here!" -- the tag line of an ancient Roman story about a braggart who claimed to have made a great broad jump in Rhodes, and was challenged to reproduce it on the spot.]
And now, in the very next paragraph, Marx springs his great discovery, the solution to that puzzle that had stumped all of his predecessors, namely: In a capitalist system, how do the surplus-getters get the surplus? [As I have been phrasing it.] Here is his answer.
"In order to be able to extract value from a commodity, our friend, Moneybags, must be so lucky as to find, within the sphere of circulation, a commodity, whose use-value possesses the peculiar property of being a source of value, whose actual consumption, therefore, is itself an embodiment of labour, and consequently, a creation of value. The possessor of money does find on the market such a special commodity in capacity for labour or labour-power."
A few words about the language of this passage. First of all, the term translated by Aveling, Moore, and Engels as "Moneybags" is geldbesitzer, whose standard translation is "possessor of money." But the etymology of "geldbesitzer" suggests someone sitting on money, and that calls to mind the wonderful nineteenth century caricatures of Thomas Nast and others, who routinely represented capitalists as fat men in tails and top hats with big dollar signs or pound signs on their breasts, sitting on bags of money. The translation "Moneybags" perfectly captures Marx's mocking tone. This character is presented to us by Marx as a naive, decent fellow searching in the market for a commodity that will have the magical quality of adding more value, when it is consumed in production, than is contained within it. We are invited to imagine him trying first this commodity and then that, until, hey presto, he hits upon labor, and suddenly finds that he is making a profit.
This is crackbrained, mad, absurd, "verruckt," as Marx says. [I cannot do an umlaut in this damned blog, so you will have to supply the umlaut each time I write "verruckt."] But it is also true, and the solution to the mystery of profit. The fact that a proposition about capitalism can be both true and crack-brained is one of Marx's way of showing us that capitalism, despite its surface appearance of every-day simplicity and rationality, is in fact deeply mystified and shot through with what he calls, following Hegel, "contradictions."
The precise solution to the problem, Marx says, is that there is a distinction, in the case of labor but in the case of no other commodity, between the Labor-Power of the worker, which is a human capacity, and the Labor, which is what the worker does when hired by the capitalist. The worker is paid for his or her Labor-Power [strictly, although Marx does not say so, the Labor-Power is rented, not sold], and the natural price of that Labor-Power, as for any other commodity, is its replacement cost, which is to say the amount of labor embodied in it. When the worker eats food, wears clothes, and rests at night in a shelter, he or she is consuming commodities purchased in the market at their natural prices. The labor embodied in those wage goods is then transferred to the worker, or more precisely is transferred to the worker's Labor-Power, reconstituting it.
Now comes the real secret. Let us suppose that it takes six hours of labor a day, directly and indirectly, to produce the food, clothing, and shelter that the worker needs to reconstitute her Labor-Power for one more day. In that case, the worker will be paid a money wage proportional to those six hours of embodied labor. BUT, when the worker goes to work the next day, she will be required to work a full twelve-hour day. In working a twelve hour day, she will embody twelve hours of new labor, living labor, labor directly required, in the product that the capitalist will eventually sell. And the difference between the six hours of embodied labor she must purchase in the form of wage goods, and the twelve hours of labor she is required to perform, is the surplus labor, or Surplus Value, extracted from her by the capitalist. When the capitalist sells the product in the market, at its value, he appropriates that six hours of surplus labor, in the form of an equivalent amount of money, which thereupon becomes his profit.
How do I know that the embodied labor in the wage goods will be less than the labor time given up in the sphere of production? Because it is a mathematical truth, easily proved, that IF THERE IS A PHYSICAL SURPLUS IN THE SYSTEM AS A WHOLE, THEN THERE WILL BE SOME AMOUNT OF SURPLUS LABOR PERFORMED IN THE SPHERE OF PRODUCTION. What is more, THE LABOR VALUE OF THE PHYSICAL SURPLUS WILL EXACTLY EQUAL THE SURPLUS LABOR PERFORMED IN THE SYSTEM, AND THE MONEY VALUE OF THE PHYSICAL SURPLUS WILL EXACTLY EQUAL THE MONEY PROFIT.
Or, as we say these days, Ta da!
There is a very great deal more to be said, but I must go teach, so I will post this, and continue tomorrow.