Exploitation and The Rate of Profit

Marx had not been mainly concerned about value in exchange. He was concerned with a theory of exploitation, which he regarded as a tool for the dynamic theory of capitalism. But the story did not stop with the relative prices. The drop in the price of bread, and the rise in the price of beer, would also change the rates of exploitation in the two industries. Since bread is being sold for less than its value, the rate of exploitation in the baking industry would drop below 100%, while the rise in the price of beer would mean that beer is sold for more than its value and the rate of exploitation in the beer industry would rise above 100% (as employers appropriate more of the sales revenue than they pay in wages). Profits would be equalized when the difference in the rate of exploitation is just enough to offset the difference in the organic composition of capital. Suppose, for example, that the rate of exploitation in the baking industry drops to 0.4, while the rate of exploitation in the brewing industry rises to 1,467. Then the rate of profit would be equal at 13%. (Check me on that!)

This was a problem for Marx, because he thought of the rate of exploitation as primary -- his idea was to reason from the rate of exploitation to the rate of profit to the values in exchange. But, if the rate of exploitation has to differ from industry to industry, what is the rate of exploitation we should start with?

Marx left that as an unsolved problem for some brilliant young Marxist economist, but the first (partial) answer came from a self-described "vulgar" (common-sense) economist, Professor Wilhelm Lexis. Lexis' idea is that the concepts of surplus-value and rate of exploitation be applied to the working class as a whole. There is then no difference in the organic composition of capital to worry about -- the organic composition of capital to use in the computation is the composition for the entire capitalist economic system. That determines the rate of profit, which then determines the "values in exchange."

That isn't quite the whole story. Remember, the wage is the labor cost of the goods and services workers consume. In our example, that beer gets more expensive and bread gets cheaper. That may increase or decrease the cost of goods and services workers consume. So the rate of exploitation for the economy as a whole is not independent of the relative prices. We still can't do what Lexis suggested: take the rate of exploitation for the economy as a whole and use that to compute the relative prices, because the price of beer and bread that we come up with may not be consistent with the cost of labor that we started with. There has to be a rate of exploitation and profits and relative prices that all work together. Figuring out what they could be is called the "transformation problem," i.e. the problem of transformation from labor values to market prices.

Where does that leave Marxism? Most likely, where you stand depends on where you sit. For a committed Neoclassical economist, it leaves Marxism without any foundation, a system of logical contradiction. (It leaves the Classical Political Economy in the same situation, with the distinction of being less complete). For a committed Marxist, it leaves a complex problem to be solved by ongoing research and a more complicated set of tools than Marx might have expected. You pick.

Twentieth Century Work Copyright