Measuring the mass and rate of profit

As Andrew Kliman correctly emphasizes, the rate of profit is the most important economic variable under the capitalist mode of production. Capitalist production is production for profit and only for profit.

But exactly how do we define profit, and in what medium is profit measured? As we will see, there is no general agreement among present-day Marxists on exactly what profit is and how it should be measured. And if we lack a precise definition of profit, we will obviously have difficulties in understanding the significance of the law of the tendency of the rate of profit to fall and the role that this historical tendency plays in real-world capitalist economic crises.

Should we use historical or current prices in calculating the rate and mass of profit?

Kliman strongly supports the use of historical prices rather than current prices to measure the rate of profit. But other Marxists believe that profits are more meaningfully measured in terms of current prices, or what comes to the same thing, replacement costs.

Suppose after an industrial capitalist has purchased the means of production that are necessary for him to carry out the production of his commodity, a sharp fall in prices of the means of production occurs. If we measure profits in terms of historical prices, we may find that our industrial capitalist has not made a profit at all but rather a loss.

However, since the purchasing power of money has risen relative to the means of production used by our capitalist, he will be able to purchase a greater quantity of the means of production than before. Therefore, in real terms he will be able to carry out production on anexpanded scale. In that case, hasn’t our capitalist made a profit after all?

Suppose the fall in the level of prices reflects a fall in labor values of the commodities that make up the means of production. In terms of value—abstract human labor embodied in commodities measured in terms of time—he will be in possession of less value than when he started. In value terms, he will have made a loss, but in terms of material use values he will have made a profit.

As we know, capitalists are forced under the pressure of competition among themselves to maximize their accumulation of capital and not means of personal consumption, nor in terms of means of production used to produce means of personal consumption. Instead, each individual capitalist, according to Marx, is forced to maximize the accumulation of capital in terms of value.

Therefore, if an industrial capitalist is losing wealth as measured in value terms, won’t he be losing capital, not accumulating it? And if this continues, won’t he lose all his capital? That is, at a certain point won’t he cease to be a capitalist? Kliman, if I understand him correctly, would strongly agree with this argument.

However, not all economists would agree. For example, the “neo-Ricardians”—or “physicalists” as Kliman likes to call them—claim that labor values have no relationship to prices. The physicalist economists therefore deny that labor value has any importance at all to the capitalist economy. According to these economists, the accumulation of capital cannot therefore be measured in terms of labor values; it must be measured in terms of the accumulation of material use values.

Our physicalists would argue—and the physicalists here include not only “neo-Ricardians” but economists of the neo-classical and Austrian persuasions—that once the effects of deflation—falling prices—have been taken into account, our industrial capitalist has indeed made a profit. (1)

Profits are measured in terms of money

However, despite the claims of the physicalists of all schools, as far as actual capitalists are concerned profits are measured not in terms of physical means of production but in terms of money.

We often hear that the shares of a given corporation soared—or declined—on the stock exchange because the company “beat its numbers”—or fell short of the “Street’s” expectations. For example, a given company might “beat its numbers” by 25 cents a share or fall short of expectations by 25 cents. We don’t read that the company beat its numbers or fell short of them by 0.001 lathes per share, or 0.004 industrial robots per share or 0.005 employed workers—labor power—per-share.

Ask any businessman and he will tell you his aim is to make money—not increase the quantity of factory buildings, lathes, industrial robots or number of workers at work in his factories or other productive enterprises.

But wait a minute! In order to make money, isn’t it necessary for industrial capitalists to increase their factory buildings, lathes, industrial robots and number of workers employed and thus increase the overall wealth of society? Any physicalist economist will explain that the real purpose of a “free market economy,” as they prefer to call capitalism, is to increase the wealth of human society to the maximum extent possible.

Profit measured in terms of dollars and cents—money—is simply the way real wealth is measured, according to the physicalists. The real purpose of a “free market economy” is to increase as much as possible the wealth of society measured in terms of utilities (use values) that are desired by the members of society.

This is, however, not the way the capitalists engaged in the day-to-day struggle of capitalist competition see it. From the viewpoint of the capitalists themselves, the making of money is indeed the end, and any increase in material wealth that results from this is merely an unintended side effect.

If a capitalist can make the same amount or even a greater amount of money by lending money at interest (M—M’), for example, this is just as legitimate as far as the “bottom line” is concerned as making the same amount of money by building a new factory that produces medicines to fight childhood diseases.

The aims and historical significance of capitalist production

According to the Marxist theory of historical materialism, the justification of the capitalist mode of production, with its cruel exploitation, is precisely the vast increase of the material wealth of society in terms of the use values of commodities. It also brings about a vast increase in the productive powers of labor as well as the creation of a class of wage workers that has both the material interest and potential to transform exploitive capitalism into a classless society.

Remember, historical materialism teaches us that any conception of socialism without the huge accumulation of material wealth that has occurred during the era of capitalist production is a pipe dream. So what is a mere side effect for the capitalists themselves is actually the most important historical result of capitalist production.