How should we measure the rate of profit?

In Kliman’s analysis, the rate of profit is therefore the crucial variable that determines the fate of capitalist production. But how exactly should we measure the rate and mass of profit? The answer to this question, as Kliman explains, is not as straightforward as it may seem. Here Kliman’s latest book represents a continuation of his earlier book against the “neo-Ricardians.”

If you ask an ordinary businessman how he measures his profit, he will answer that this is very easy to explain. Why we businessmen measure profit in terms of money. At the beginning of the year, I know my total capital is a certain value measured in terms of money. By value I mean my estimate of the amount of money I would get if I decided to sell all my assets—factories, machines, stocks of raw materials, and inventories—for money and decided to lay off all my workers rather than spend the money I lay aside for payment of wages to provide employment for my workers. My accountants then come up with a monetary figure that represents the value of my capital at the beginning of the year.

At the end of the year, our businessman explains, I have used up a portion of the value of my capital. This includes the wages I have paid my workers, the raw materials I have used to make my products, plus my electricity expenses, and so forth. In addition, I have to make allowances for depreciation on my fixed assets— factory buildings, machines and so on. My accountants will estimate for me the amount of capital I use up in a year including the amount of money I spend on labor. When I sell my products, their prices must cover these expenses plus an additional sum that I must add on that represents a reasonable profit. If I don’t make such a profit, I won’t be able to stay in business and provide continued employment for my workers.

So, we ask our businessman, you measure profits in terms of money. Yes, that is exactly what I do, he answers. But what exactly is the money that you measure your profits in terms of? Well, our businessman scratches his head, isn’t it that stuff produced by the Federal Reserve System—it’s green with pictures of dead presidents on it. Or maybe it is also the bank accounts. Yes, I think the economists say money is also the accounts created by the commercial banks through their loans.

Frankly, our businessman continues, I never really did understand that economic stuff. I am only a practical man. The only thing I know is that I must make money or go out of business. That is something that those who complain about the “greed” of us businessmen refuse to understand. Running a business is hard enough without having to worry about philosophical questions such as what the nature of money is. I leave that to the economists whose job it is to concern themselves about such matters.

The naive Marxist

Now let’s ask a naive Marxist. You know the type, a young person who has joined a socialist group, attended a few classes in Marxist economic theory and assumes that he or she has now fully mastered the subject. (7)

Our young socialist explains that Marx said labor alone creates value. Therefore, profit is simply the unpaid labor produced by the working class. Since prices are determined by value, money merely reflects the values of commodities. Therefore, when your businessman—I would call him a capitalist exploiter—explained that he measures profits in terms of money, what he is really saying is that profits are measured in terms of labor, which is measured in terms of time. Your businessman is really measuring profit in terms of the unpaid labor that he has forced his workers to perform, whether he knows it or not.