Profit and Exploitation

Following the ideas of the Classical Political Economists, Marx thought of the capital of a business as the sum of two components: a sum of "circulating capital," proportionate to the wages paid by the business, and a sum of "fixed capital," which is the value of the machinery and equipment used by the business. Modern economics tends to think of only the latter part as "capital." This Classical approach is easiest to understand if there is a definite "period of production," such as a year for agricultural production, during which all the equipment is used up (as seed corn and fertilizer would be used up during the agricultural year) and if the employer has to have a fund from which to pay wages, so that workers can eat during the period of production and before any crop is harvested or output is produced. In that case, the circulating capital, v, is the wages paid, and the fixed capital, c, is the cost for all inputs other than labor. Marx was well aware that this "period of production" is a simplifying assumption, and spent part of the third volume of Capital (chapters 4 and 5, book 1) exploring a less simple, more realistic view. But we will follow the simpler example here, since it captures the key ideas.

Recall, the labor day produces one labor day of value, but costs less than one labor day to produce. The wage paid will be the cost of production of a labor, and is less than the labor day of value produced, so each labor day is the sum of two components, wages and surplus value. For the entire work force of the business, v denotes the wage bill and s the aggregate surplus value.

The labor-time value of output is

c+v+s.
The fixed capital c is the (labor) value of the machinery and equipment used up in production, and so incorporated in the value of the output -- this is the labor value created in production of the machinery and thus indirectly embodied in the output. The rest, v+s, is the labor value directly embodied in the output. The capitalist begins with a capital of
C=c+v,
and, by appropriating the surplus-value produced by the worker, is able to expand that to a bigger capital
C'=c+v+s.
Marx expresses the rate of exploitation as
s/v,
the proportion of the labor day for which the employees are not paid. However, the rate of profit is
s/(c+v).
The rate of profit may be expressed as the product
(s/v) times v/(c+v).
In modern terms, a high ratio v/(c+v), that is, a high ratio of wage costs to total costs, would be described as "labor intensive, and it would correspond to a high ratio
v/c.
This last ratio Marx called the "organic composition of capital."

Now we arrive at the point. Classical Political Economists generally agreed that the rate of profit tends to fall as capital is accumulated. Marx explained this by the fact that capital accumulation raises the proportion of fixed to circulating capital, causing the organic composition of capital,

v/c,
to drop. As a result
v/(c+v)
drops, and with a constant rate of exploitation
s/v,
the rate of profit,
(s/v) times v/(c+v),
would drop.
Of course, that's not the whole story. Capitalists would naturally resist this decrease in profits by increasing the rate of exploitation, s/v. But Marx thought that would only slow, not stop, the decline of the profit rate. (The increase in s/v would only partly offset the drop of v/(c+v)). Relative to the value they produce, workers are worse off, immiserized. So we have a declining rate of profit at the same time as workers are immiserized.

Marx saw this as an unstable situation, arguing that falling profit rates and ever-increasing exploitation would lead to the collapse of the capitalist system followed by a workers' revolution in which the workers' government would take back the surplus-value that the employers had appropriated over the years, that is, the machinery and equipment of society.


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