Chapter 10: The Equalization of the General Rate of Profit through Competition. Market Prices and Market Values. Surplus Profit

In some branches of production the capital employed has a composition we may describe as ‘mean’ or ‘average’, i.e. a composition exactly or approximately the same as the average of the total social capital.

In these spheres, the production prices of the commodities produced coincide exactly or approximately with their values as expressed in money. If there were no other way of arriving at a mathematical limit, it could be done as follows. Competition distributes the social capital between the various spheres of production in such a way that the prices of production in each of these spheres are formed after the model of the prices of production in the spheres of mean composition, i.e. k + kp’ (cost price plus the product of the average rate of profit and the cost price). This average rate of profit, however, is nothing more than the percentage profit in spheres of mean composition, where the profit therefore coincides with the surplus-value. The rate of profit is thus the same in all spheres of production, because it is adjusted to that of these average spheres, where the average composition of capital prevails. The sum of the profits for all the different spheres of production must accordingly be equal to the sum of surplus-values, and the sum of prices of production for the total social product must be equal to the sum of its values. It is evident, however, that the equalization between spheres of production of different composition must always seek to adjust these to the spheres of mean composition, whether these correspond exactly to the social average or just approximately. Between these spheres that approximate more or less to the social average, there is again a tendency to equalization, which seeks the ‘ideal’ mean position, i.e. a mean position which does not exist in reality. In other words, it tends to shape itself around this ideal as a norm. In this way there prevails, and necessarily so, a tendency to make production prices into mere transformed forms of value, or to transform profits into mere portions of surplus-value that are distributed not in proportion to the surplus-value that is created in each particular sphere of production, but rather in proportion to the amount of capital applied in each of these spheres, so that equal amounts of capital, no matter how they are composed, receive equal shares (aliquot parts) of the totality of surplus-value produced by the total social capital.

For capitals of mean or approximately mean composition, the price of production thus coincides exactly or approximately with the value, and the profit with the surplus-value they produce. All other capitals, whatever might be their composition, progressively tend to conform with the capitals of mean composition under the pressure of competition. But since the capitals of mean composition are equal or approximately equal to the average social capital, it follows that all capitals, whatever the surplus-value they themselves produce, tend to realize in the prices of their commodities not this surplus-value, but rather the average profit, i.e. they tend to realize the prices of production.

It can also be added here, firstly, that wherever an average profit is established, i.e. a general rate of profit, and however this result may have been brought about, this average profit can be nothing other than the profit on the average social capital, the total sum of profit being equal to the total sum of surplus-value, and secondly that the prices produced by adding this average profit onto the cost prices can be nothing other than the values which have been transformed into prices of production. It would change nothing if, for whatever reason, capitals in certain spheres of production were not subjected to the process of equalization. The average profit would then be calculated on the portion of the social capital that was involved in the equalization process. It is clear enough that the average profit can be nothing other than the total mass of surplus-value, distributed between the masses of capital in each sphere of production in proportion to their size. It is the sum total of the realized unpaid labour, and this grand total is represented, just like the paid labour, dead and living, in the total mass of commodities and money that accrues to the capitalists.

The really difficult question here is this: how does this equalization lead to a general rate of profit, since this is evidently a result and cannot be a point of departure?

It is clear first of all that an assessment of commodity values in money, for example, can only be a result of exchanging them, and that, if we presuppose an assessment of this kind, we have to view it as a result of real exchanges of one commodity value against another. How therefore is this exchange of commodities at their actual values supposed to have come about?

Let us assume to start with that all commodities in the various spheres of production were sold at their actual values. What would happen then? According to our above arguments, very different rates of profit would prevail in the various spheres of production. It is, prima facie, a very different matter whether commodities are sold at their values (i.e. whether they are exchanged with one another in proportion to the value contained in them, at their value prices) or whether they are sold at prices which make their sale yield equal profits on equal amounts of the capitals advanced for their respective production.

If capitals that set in motion unequal quantities of living labour produce unequal amounts of surplus-value, this assumes that the level of exploitation of labour, or the rate of surplus-value, is the same, at least to a certain extent, or that the distinctions that exist here are balanced out by real or imaginary (conventional) grounds of compensation. This assumes competition among the workers, and an equalization that takes place by their constant migration between one sphere of production and another. We assume a general rate of surplus-value of this kind, as a tendency, like all economic laws, and as a theoretical simplification; but in any case this is in practice an actual presupposition of the capitalist mode of production, even if inhibited to a greater or lesser extent by practical frictions that produce more or less significant local differences, such as the settlement laws for agricultural labourers in England, for example. In theory, we assume that the laws of the capitalist mode of production develop in their pure form. In reality, this is only an approximation; but the approximation is all the more exact, the more the capitalist mode of production is developed and the less it is adulterated by survivals of earlier economic conditions with which it is amalgamated.

The whole difficulty arises from the fact that commodities are not exchanged simply as commodities, but as the products of capitals, which claim shares in the total mass of surplus-value according to their size, equal shares for equal size. And the total price of the commodities that a given capital produces in a given period of time has to satisfy this demand. The total price of these commodities, however, is simply the sum of the prices of the individual commodities that form the product of the capital in question.

The salient point will best emerge if we consider the matter as follows. Let us suppose the workers are themselves in possession of their respective means of production and exchange their commodities with one another. These commodities would not be products of capital. According to the technical nature of their work, the value of the means and material of labour applied in the different branches of production would vary; similarly, even ignoring the unequal value of the means of production applied, different masses of these means of production would be required for a given amount of labour, since a certain commodity can be prepared in one hour, while another takes a day, etc. Let us further assume that these workers work on the average for the same length of time, taking into account the adjustments that arise from the varying intensity, etc. of the work. Firstly, then, two workers would both have replaced their outlays, the cost prices of the means of production they had consumed, in the commodities that formed the products of their respective day’s labour. These outlays would vary according to the technical nature of the branch of labour. Next, they would both have created an equal quantity of new value, i.e. the working day added to the means of production. This would comprise their wages plus surplus-value, the surplus labour over and above their necessary requirements, though the result of this would belong to themselves. If we express ourselves in capitalist terms, they would both receive the same wages plus the same profit, which would be equal to the value expressed in the product, say, of a 10-hour working day. Commodity I, for example, might contain a greater share of value in relation to the means of production applied to produce it than commodity II; and in order to introduce all possible distinctions, commodity I might also absorb more living labour than commodity II and require more labour-time for its production. The values of these commodities I and II would therefore be very different. So, too, the sums of commodity value that are the respective products of the work performed by workers I and II in a given time. Profit rates would also be very different for I and II, if we give this name here to the ratio of the surplus-value to the total value laid out on means of production. The means of subsistence which I and II consume every day in the course of production, and which represent wages, here form the portion of the means of production advanced which we would elsewhere call variable capital. But the surplus-values would be the same for both I and II, given the same working time, or, more precisely, since I and II each receive the value of the product of one working day, they therefore receive equal values, after deducting the value of the ‘constant’ elements advanced, and one part of these values can be viewed as a replacement for the means of subsistence consumed in the course of production, the other as the additional surplus-value on top of this. If worker I has higher outlays, these are replaced by the greater portion of value of his commodities that replaces this ‘constant’ part, and he therefore again has a greater part of his product’s total value to transform back into the material elements of this constant part, while II, if he receives less for this, has also that much less to transform back. Under these conditions, the difference in the profit rate would be a matter of indifference, just as for a present-day wage-labourer it is a matter of indifference in what profit rate the surplus-value extorted from him is expressed, and just as in international trade the differences in profit rates between different nations are completely immaterial as far as the exchange of their commodities is concerned.

The exchange of commodities at their values, or at approximately these values, thus corresponds to a much lower stage of development than the exchange at prices of production, for which a definite degree of capitalist development is needed.

Whatever may be the ways in which the prices of different commodities are first established or fixed in relation to one another, the law of value governs their movement. When the labour-time required for their production falls, prices fall; and where it rises, prices rise, as long as other circumstances remain equal.

Apart from the way in which the law of value governs prices and their movement, it is also quite apposite to view the values of commodities not only as theoretically prior to the prices of production, but also as historically prior to them. This applies to those conditions in which the means of production belong to the worker, and this condition is to be found, in both the ancient and the modern world, among peasant proprietors and handicraftsmen who work for themselves. This agrees, moreover, with the opinion we expressed previously,27 viz. that the development of products into commodities arises from exchange between different communities, and not between the members of one and the same community. This is true not only for the original condition, but also for later social conditions based on slavery and serfdom, and for the guild organization of handicraft production, as long as the means of production involved in each branch of production can be transferred from one sphere to another only with difficulty, and the different spheres of production therefore relate to one another, within certain limits, like foreign countries or communistic communities.

If the prices at which commodities exchange for one another are to correspond approximately to their values, nothing more is needed than (1) that the exchange of different commodities ceases to be purely accidental or merely occasional; (2) that, in so far as we are dealing with the direct exchange of commodities, these commodities are produced on both sides in relative quantities that approximately correspond to mutual need, something that is learned from the reciprocal experience of trading and which therefore arises precisely as a result of continuing exchange; and (3) that, as far as selling is concerned, no natural or artificial monopolies enable one of the contracting parties to sell above value, or force them to sell cheap, below value. By accidental monopoly, we mean the monopoly that accrues to buyer or seller as a result of the accidental state of supply and demand.

The assumption that commodities from different spheres of production are sold at their values naturally means no more than that this value is the centre of gravity around which price turns and at which its constant rise and fall is balanced out. Besides this, however, there is always a market value (of which more later), as distinct from the individual value of particular commodities produced by the different producers. The individual value of some of these commodities will stand below the market value (i.e. less labour-time has been required for their production than the market value expresses), the value of others above it. Market value is to be viewed on the one hand as the average value of the commodities produced in a particular sphere, and on the other hand as the individual value of commodities produced under average conditions in the sphere in question, and forming the great mass of its commodities. Only in extraordinary situations do commodities produced under the worst conditions, or alternatively the most advantageous ones, govern the market value, which forms in turn the centre around which market prices fluctuate – these being the same for all commodities of the same species. If the supply of commodities at the average value, i.e. the mean value of the mass that lies between the two extremes, satisfies the customary demand, the commodities whose individual value stands below the market price will realize an extra surplus-value or surplus profit, while those whose individual value stands above the market price will be unable to realize a part of the surplus-value which they contain.

It is of no assistance to say that the sale of commodities produced under the worst conditions shows that these are required to meet the demand. If the price were higher than the mean market value in the case assumed, the demand would be less. At a given price, a species of commodity can only take up a certain area of the market; this area remains the same through changes in price only if the higher price coincides with a smaller quantity of commodities and a lower price with a greater quantity. If the demand is so strong, however, that it does not contract when price is determined by the value of commodities produced in the worst conditions, then it is these that determine the market value. This is possible only if demand rises above the usual level, or supply falls below this. Finally, if the mass of commodities produced is too great to find a complete outlet at the mean market value, market value is determined by the commodities produced under the best conditions. These commodities may be sold completely or approximately at their individual value, for instance, in which connection it may happen that the commodities produced under the worst conditions may fail even to realize their cost prices, while those produced under average conditions realize only a part of the surplus-value they contain. What we have said here of market value holds also for the price of production, as soon as this takes the place of market value. The price of production is regulated in each sphere, and regulated too according to particular circumstances. But it is again the centre around which the daily market prices revolve, and at which they are balanced out in definite periods. (Cf. Ricardo on the determination of price of production by producers working under the worst conditions.)*

In whatever way prices are determined, the following is the result:

(1) The law of value governs their movement in so far as reduction or increase in the labour-time needed for their production makes the price of production rise or fall. It is in this sense that Ricardo, who certainly feels that his prices of production depart from the values of commodities, says that ‘the inquiry to which I wish to draw the reader’s attention relates to the effect of the variations in the relative value of commodities, and not in their absolute value’.†

(2) The average profit, which determines the prices of production, must always be approximately equal to the amount of surplus-value that accrues to a given capital as an aliquot part of the total social capital. Suppose that the general rate of profit and hence the average profit itself is expressed in a money value that is higher than that of the actual average surplus-value. As far as the capitalists are concerned, it is all the same whether they charge one another 10 per cent profit or 15 per cent. The one percentage covers no more actual commodity value than the other does, since the inflation of the monetary expression is mutual. For the workers, however (we assume that they receive their normal wages, so that the rise in the average profit is not an actual deduction from the wage, expressing something completely different from the capitalist’s normal surplus-value), the increase in commodity prices resulting from this rise in the average profit must correspond to an increase in the monetary expression of the variable capital. In actual fact, a general nominal increase of this kind in the profit rate, and hence in average profit, over and above the level given by the proportion of the actual surplus-value to the total capital advanced, is not possible unless it brings with it an increase in wages and similarly an increase in the price of those commodities which form the constant capital. The same is true the other way round with a decrease. Since it is the total value of the commodities that governs the total surplus-value, while this in turn governs the level of average profit and hence the general rate of profit – as a general law or as governing the fluctuations – it follows that the law of value regulates the prices of production.

What competition brings about, first of all in one sphere, is the establishment of a uniform market value and market price out of the various individual values of commodities. But it is only the competition of capitals in different spheres that brings forth the production price that equalizes the rates of profit between those spheres. The latter process requires a higher development of the capitalist mode of production than the former.

In order that commodities from the same sphere of production, of the same type and approximately the same quality, may be sold at their value, two things are necessary:

(1) First, the different individual values must be equalized to give a single social value, the market value presented above, and this requires competition among producers of the same type of commodity, as well as the presence of a market on which they all offer their commodities. Looking at the market price for identical commodities, commodities which are identical but each produced under circumstances of a character which varies slightly according to the individual, we may say that if this market price is to correspond to the market value, and not diverge from it, either by rising above or falling below, then the pressures that the various sellers exert on one another must be strong enough to put on the market the quantity of commodities that is required to fulfil the social need, i.e. the quantity for which the society is able to pay the market value. If the mass of products oversteps this need, commodities have to be sold below their market value, and conversely they are sold above the market value if the mass of products is not large enough, or, what comes to the same thing, if the pressure of competition among the sellers is not strong enough to compel them to bring this mass of commodities to the market. If the market value changes, the conditions at which the whole mass of commodities can be sold will also change. If the market value falls, the social need is on average expanded (this always means here the need which has money to back it up), and within certain limits the society can absorb larger quantities of commodities. If the market value rises, the social need for the commodities contracts and smaller quantities are absorbed. Thus if supply and demand regulate market price, or rather the departures of market price from market value, the market value in turn regulates the relationship between demand and supply, or the centre around which fluctuations of demand and supply make the market price oscillate.

If we consider the matter more closely, we see that the same conditions that obtain for the value of the individual commodity reproduce themselves here as conditions for the value of the total amount of any one type; we see how capitalist production is, right from the start, mass production, and how even what is produced in smaller amounts by many petty producers in other, less developed modes of production is concentrated on the market as a common product in great quantities in the hands of a relatively few merchants, at least as far as the major commodities are concerned, and accumulated and brought to sale in the same way: as the common product of a whole branch of production, or of a bigger or smaller contingent of such a branch.

Let us note here, but merely in passing, that the ‘social need’ which governs the principle of demand is basically conditioned by the relationship of the different classes and their respective economic positions; in the first place, therefore, particularly by the proportion between the total surplus-value and wages, and secondly, by the proportion between the various parts into which surplus-value itself is divided (profit, interest, ground-rent, taxes, etc.). Here again we can see how absolutely nothing can be explained by the relationship of demand and supply, before explaining the basis on which this relationship functions.

Even though both commodities and money are unities of exchange-value and use-value, we have already seen (Volume 1, Chapter 1, 3) how, in the course of buying and selling, the two determinations are distributed in a polarized way at the two extremes, so that the commodity (seller) represents use-value and money (buyer) represents exchange-value. It was one precondition for the sale that the commodity should have use-value, and thus satisfy a social need. The other precondition was that the quantity of labour contained in the commodity should represent socially necessary labour, that the individual value of the commodity (and what is the same thing under this assumption, the sale price) should therefore coincide with its social value.28

Let us now apply this to the mass of commodities present on the market and forming the product of an entire sphere.

The matter will be represented most easily if we conceive the entire mass of commodities, to start with that of one branch of production, as a single commodity, and add together the sum of the prices of many identical commodities to arrive at one price. What we said of the individual commodity now applies word for word to the mass of commodities of a certain branch of production which are to be found on the market. The fact that the individual value of a commodity agrees with its social value is now realized in, or subsequently determines, the fact that the total quantity contains the socially necessary labour involved in its production and that the value of this mass equals its market value.

Let us now assume that great quantities of these commodities are produced in something like the same normal social conditions, so that this value is also the individual value of the individual commodities making up this mass. If only a relatively small proportion are produced in worse conditions, and another portion in better conditions, so that the individual value of the one part is greater than the mean value of the great bulk of the commodities, and that of the other part lower than this mean, then these two extremes will cancel one another out, so that the average value of the commodities at the extremes is the same as the value of the mass of average commodities, and the market value is determined by the value of the commodities produced under average conditions.29 The value of the overall mass of commodities is equal to the actual sum of values of all individual commodities taken together, both those produced in average conditions, and those produced in better or worse ones. In this case, the market value or social value of the mass of commodities – the necessary labour-time they contain – is determined by the value of the great middling mass.

Now assume on the contrary that the total quantity of the commodities in question brought to market remains the same, but the value of those produced under worse conditions is not balanced out by the value of those produced under better conditions, so that the part of the total produced under worse conditions forms a relatively significant quantity, both vis-à-vis the average mass and vis-à-vis the opposite extreme. In this case it is the mass produced under the worse conditions that governs the market, or social, value.

Let us finally assume that the mass of commodities produced under better-than-average conditions significantly exceeds that produced under worse conditions and is itself of significant magnitude in relation to that produced under average conditions. In that case the market value would be regulated by the part produced under the most favourable conditions. We leave aside here the situation where the market is over-supplied, in which case it is always the portion produced under the most favourable conditions that governs the market price; here we are not dealing with market price in so far as this differs from market value, but simply with the various determinations of this market value itself.30

Strictly speaking (though this is of course only approximately true in actual practice and is modified there in a thousand ways), in case I the market value of the entire mass, as governed by the average values, is equal to the sum of its individual values; even though for the commodities produced at the two extremes this value is expressed as an average value which is imposed on them. Those producing at the worst extreme then have to sell their commodities below their individual value, while those at the best extreme sell theirs above it.

In case II, the individual amounts of commodities produced at the two extremes do not balance one another, but it is rather those produced under the worst conditions that decide the issue. Strictly speaking, the average price or market value of each individual commodity or each aliquot part of the total mass is now determined by the total value of this mass, which is arrived at by adding together the values of the commodities produced under various different conditions, and by the aliquot part of this total value that falls to the share of the individual commodity. The market value obtained in this way is not only above the individual value of the favourable extreme, but also above that of the middle stratum of commodities; but it would always remain less than the individual value of the commodities produced at the unfavourable extreme. How close it would be to this, or whether it would ultimately even coincide with it, depends completely on the volume of the commodities produced at the unfavourable extreme in the sphere of commodities in question. If demand is only marginally predominant, it is the individual value of the unfavourably produced commodities that governs the market price.

Finally, if, as in case III, the commodities produced at the favourable extreme are greater in quantity, not only compared with the other extreme, but also with the middle conditions, then the market value falls below the average value. The average value, calculated by adding the sums of value at the two extremes and in the middle, here stands below the middle value and is nearer or further from it according to the relative place taken by the favourable extreme. If demand is weak in relation to supply, the favourably situated part, however big it might be, forcibly makes room for itself by drawing the price towards its individual value. The market value can never coincide with this individual value of the commodities produced under the most favourable conditions, except in cases where supply sharply outweighs demand.

This establishment of the market price, which we have depicted here only abstractly, is brought about on the actual market itself by competition among the buyers, assuming that demand is strong enough to absorb the whole mass of commodities at the values established in this way. And here we come to the other point.

(2) To say that a commodity has use-value is simply to assert that it satisfies some kind of social need. As long as we were dealing only with an individual commodity, we could take the need for this specific commodity as already given, without having to go in any further detail into the quantitative extent of the need which had to be satisfied. The quantity was already implied by its price. But this quantity is a factor of fundamental importance as soon as we have on the one hand the product of a whole branch of production and on the other the social need. It now becomes necessary to consider the volume of the social need, i.e. its quantity.

In the above determinations of market value, we assumed that the mass of commodities produced remains the same, is given; that the only change taking place is in the proportion between the components of this mass which are produced under different conditions, and therefore that the market value of the same mass of commodities is regulated differently. Let us take this mass to be the customary quantity supplied and ignore here the possibility that one part of the commodities produced may be temporarily withdrawn from the market. If the demand for this commodity now also remains that customary, the commodity is sold at its market value, which may be governed by any one of the three cases investigated above. The mass of commodities not only satisfies a need, but it satisfies this need on its social scale. If however the quantity supplied is less than the demand, or alternatively more, this market price deviates from the market value. In the first case, if the quantity is too small, it is always the commodities produced under the worst conditions that govern the market value, while if it is too large, it is those produced under the best conditions; i.e. it is one of the two extremes that determines the market value, despite the fact that the proportions produced under the different conditions, taken by themselves, would lead to a different result. If the difference between the demand for the product and the quantity produced is more significant, the market price will diverge more sharply from the market value, either upwards or downwards. This difference between the quantity of commodities produced and the quantity of these commodities which would be sold at their market value can arise for two reasons. Either the former quantity itself changes, becoming either too little or too much, so that reproduction would take place on a scale different from that which regulated the given market value. In this case it is the supply that has changed, even though the demand remains the same, and in this way we have relative overproduction or underproduction. Alternatively, however, the reproduction, i.e. the supply, remains the same, but demand rises or falls, something which can happen for various reasons. Even though the absolute size of the supply remains the same here, its relative magnitude has changed, i.e. its magnitude compared with or measured against the need. The effect is the same as in the first case, but in the opposite direction. Finally, if changes occur on both sides, but either in the opposite direction, or else in the same direction but not to the same degree, if in other words changes occur in both directions, which nevertheless affect the earlier proportion between the two sides, the end result must still amount to one of the two cases considered above.

The real difficulty in pinning down the general concepts of demand and supply is that we seem to end up with a tautology. Let us first take supply, the product which is actually on sale in the market or can be delivered to it. So as not to get entangled in useless details, we refer here to the mass of the annual reproduction in each particular branch of industry and ignore therefore the greater or lesser capacity that various commodities possess for being withdrawn from the market and stored up for consumption next year, say. This annual reproduction is firstly expressed as a definite quantity, in measure or number, according to whether the commodity is measured continuously or discretely; it is not just mere use-values that satisfy human needs, but these use-values are available on the market on a given scale. Secondly, however, this quantity of commodities has a definite market value, which can be expressed as a multiple of the market value of the individual commodity, or the measure that serves as a unit. There is no necessary connection between the quantitative volume of commodifies existing on the market and their market value, since some commodities, for example, have a generically high value, others a generically low one, so that a given sum of value may be expressed in a very small quantity of the one and a very large quantity of the other. Between the quantity of the article on the market and the market value of this article there is only this one connection: on a given basis of labour productivity in the sphere of production in question, the production of a particular quantity of this article requires a particular quantity of social labour-time, even though this proportion may be completely different from one sphere of production to another and has no intrinsic connection with the usefulness of the article or the particular character of its use-value. All other things being equal, if quantity a of a certain species of commodity costs labour-time b, then quantity na costs labour-time nb. Moreover, in so far as society wants to satisfy its needs, and have an article produced for this purpose, it has to pay for it. In actual fact, since commodity production presupposes the division of labour, if the society buys these articles, then in so far as it spends a portion of its available labour-time on their production, it buys them with a certain quantity of the labour-time that it has at its disposal. The section of society whose responsibility it is under the division of labour to spend its labour on the production of these particular articles must receive an equivalent in social labour represented in those articles that satisfy its needs.

There is no necessary connection, however, but simply a fortuitous one, between on the one hand the total quantity of social labour that is spent on a social article, i.e. the aliquot part of its total labour-power which the society spends on the production of this article, and therefore the proportion that the production of this article assumes in the total production, and on the other hand the proportion in which the society demands satisfaction of the need appeased by that particular article. Even if an individual article, or a definite quantity of one kind of commodity, may contain simply the social labour required to produce it, and as far as this aspect is concerned the market value of this commodity represents no more than the necessary labour, yet, if the commodity in question is produced on a scale that exceeds the social need at the time, a part of the society’s labour-time is wasted, and the mass of commodities in question then represents on the market a much smaller quantity of social labour than it actually contains. (Only when production is subjected to the genuine, prior control of society will society establish the connection between the amount of social labour-time applied to the production of particular articles, and the scale of the social need to be satisfied by these.) These commodities must therefore be got rid of at less than their market value, and a portion of them may even be completely unsaleable. (The converse is the case if the amount of social labour spent on a particular kind of commodity is too small for the specific social need which the product is to satisfy.) But if the volume of social labour spent on the production of a certain article corresponds in scale to the social need to be satisfied, so that the amount produced corresponds to the customary measure of reproduction, given an unchanged demand, then the commodity will be sold at its market value. The exchange or sale of commodities at their value is the rational, natural law of the equilibrium between them; this is the basis on which divergences have to be explained, and not the converse, i.e. the law of equilibrium should not be derived from contemplating the divergences.

Let us now examine the other aspect, demand.

Commodities are bought as means of production or as means of subsistence (it makes no difference that many kinds of commodity may serve both these ends), they are bought to go into either productive or individual consumption. There is therefore both demand from producers (here capitalists, as we assume that the means of production are transformed into capital) and demand from consumers. Both of these at first appear to assume a given volume of social needs on the demand side, to which definite quantities of social production in the various branches are to correspond. If the cotton industry is to carry on its annual reproduction at a given level, it requires the usual amount of cotton, and as far as the annual expansion of production is concerned, other things being equal, capital accumulation will require an additional quantity. The same is the case as regards means of subsistence. The working class must find at least the same amount of necessary provisions available, even if perhaps somewhat differently distributed among various kinds of provision, if it is to go on living on the average in its customary manner; and taking the annual growth in population into account, it also needs an additional quantity. The same is also true for the other classes, with varying degrees of modification.

It appears, therefore, that there is a certain quantitatively defined social need on the demand side, which requires for its fulfilment a definite quantity of an article on the market. In fact, however, the quantitative determination of this need is completely elastic and fluctuating. Its fixed character is mere illusion. If means of subsistence were cheaper or money wages higher, the workers would buy more of them, and a greater ‘social need’ for these kinds of commodity would appear, not to mention those paupers, etc. whose ‘demand’ is still below the narrowest limits of their physical need. If cotton, on the other hand, became cheaper, the capitalists’ demand for cotton would grow, more excess capital would be put into the cotton industry, and so on. It must never be forgotten in this connection that the demand for productive consumption, on our assumptions, is the capitalist’s demand, and that his true purpose is the production of surplus-value, so that it is only with this in mind that he produces a particular kind of commodity. This does not prevent the capitalist, in so far as he is present on the market as buyer of cotton, for example, from being the representative of the need for cotton, since it is completely unimportant for the seller of cotton whether the buyer transforms it into shirting or gun-cotton, or whether he uses it to stop up his own and the world’s ears. And yet the capitalist’s purpose exerts a great influence on the kind of buyer he is. His need for cotton is modified fundamentally by the fact that all it really clothes is his need to make a profit. The extent to which the need for commodities as represented on the market, i.e. demand, is different in quantity from the genuine social need is of course very different for different commodities; what I mean here is the difference between the quantity of commodities that is demanded and the quantity that would be demanded at other money prices, or with the buyers being in different financial and living conditions.

Nothing is easier to understand than the disproportions between demand and supply, and the consequent divergences of market prices from market values. The real difficulty lies in determining what is involved when demand and supply are said to coincide.

Demand and supply coincide if they stand in such a relationship that the mass of commodities produced by a certain branch of production can be sold at its market value, neither above it nor below. This is the first thing we are told.

The second is that when commodities can be sold at their market value, demand and supply coincide.

If demand and supply coincide, they cease to have any effect, and it is for this very reason that commodities are sold at their market value. If two forces act in opposing directions and cancel one another out, they have no external impact whatsoever, and phenomena that appear under these conditions must be explained otherwise than by the operation of these two forces. If demand and supply cancel one another out, they cease to explain anything, have no effect on market value and leave us completely in the dark as to why this market value is expressed in precisely such a sum of money and no other. The real inner laws of capitalist production clearly cannot be explained in terms of the interaction of demand and supply (not to mention the deeper analysis of these two social driving forces which we do not intend to give here), since these laws are realized in their pure form only when demand and supply cease to operate, i.e. when they coincide. In actual fact, demand and supply never coincide, or, if they do so, it is only by chance and not to be taken into account for scientific purposes; it should be considered as not having happened. Why then does political economy assume that they do coincide? In order to treat the phenomena it deals with in their law-like form, the form that corresponds to their concept, i.e. to consider them independently of the appearance produced by the movement of demand and supply. And, in addition, in order to discover the real tendency of their movement and to define it to a certain extent. For the disproportions are contrary in character and, since they constantly follow one another, they balance each other out in their movement in contrary directions, their contradiction. Thus if there is no single individual case in which demand and supply actually do coincide, their disproportions still work out in the following way – and the result of a divergence in one direction is to call forth a divergence in the opposite direction – that supply and demand always coincide if a greater or lesser period of time is taken as a whole; but they coincide only as the average of the movement that has taken place and through the constant movement of their contradiction. Market prices that diverge from market values balance out on average to become market values, since the departures from these values balance each other as pluses and minuses, when their average is taken. And this average figure is by no means of merely theoretical significance. It is, rather, practically important for capital whose investment is calculated over the fluctuations and compensations of a more or less fixed period of time.

The relationship between demand and supply thus explains on the one hand simply the divergences of market price from market value, while on the other hand it explains the tendency for these divergences to be removed, i.e. for the effect of the demand and supply relationship to be cancelled. (The exceptional cases of those commodities which have prices without having any value will not be considered here.) Demand and supply can cancel the effect that their disproportion produces in various different ways. If demand falls, for example, and with it the market price, this can lead to a withdrawal of capital and thus a reduction in the supply. But it can also lead to a fall in the market value itself as a result of inventions which reduce the necessary labour-time; this would also be a way of bringing the market value into line with the market price. Conversely, if demand rises, so that the market price rises above the market value, this can lead to the investment of too much capital in this branch of production and a consequent rise in production so great as to make the market price actually fall below the market value; alternatively it may lead to a rise in price that depresses demand. It may also lead, in this or that branch of production, to a rise in the market value itself for a shorter or longer period, because part of the products demanded have to be produced during this time under worse conditions.

If demand and supply determine the market price, then market price in turn, and at a further remove market value, also determine demand and supply. As far as demand is concerned, this is self-evident, since this moves in the opposite direction to price, expanding when it falls and vice versa. But the same is true of supply. For the prices of means of production that go into the commodities supplied determine the demand for these means of production, and hence also the supply of the commodities whose supply brings with it a demand for those means of production. Cotton prices determine the supply of cotton goods.

On top of this confusion – the determination of price by demand and supply, and the determination of demand and supply by price – demand also determines supply and conversely supply determines demand, production determines the market and the market determines production.31

Even the ordinary economist (see footnote) understands that without a change in supply or demand brought about by extraneous circumstances, the relationship between the two can still change as the result of a change in the commodity’s market value. Even he has to concede that, whatever the market value may be, demand and supply must balance out in order for this market value to emerge. In other words, the relationship between demand and supply does not explain market value, but it is the latter, rather, that explains fluctuations in demand and supply. The author of the Observations continues, after the passage quoted in the above footnote: ‘This proportion’ (between demand and supply) ‘however, if we still mean by “demand” and “natural price”, what we meant just now, when referring to Adam Smith, must always be a proportion of equality; for it is only when the supply is equal to the effectual demand, that is, to that demand which will neither more nor less than pay the natural price, that the natural price is in fact paid; consequently, there may be two very different natural prices, at different times, for the same commodity, and yet the proportion, which the supply bears to the demand, be in both cases the same, namely, the proportion of equality.’

It is conceded, then, that in the case where we have two different ‘natural prices’ for the same commodity at different times, demand and supply can and must coincide each time, if the commodity is to be sold at its ‘natural price’ in both cases. But since there is no difference in the relationship between demand and supply from one occasion to the other, but rather a difference in the magnitude of the ‘natural price’ itself, the latter is evidently determined independently of demand and supply and can certainly not be determined by them.

If a commodity is to be sold at its market value, i.e. in proportion to the socially necessary labour contained in it, the total quantity of social labour which is applied to produce the overall amount of this kind of commodity must correspond to the quantity of the social need for it, i.e. to the social need with money to back it up. Competition, and the fluctuations in market price which correspond to fluctuations in the relationship of demand and supply, constantly seek to reduce the total quantity of labour applied to each kind of commodity to this level.

In the relationship of demand and supply for commodities we have firstly a repetition of the relationship between use-value and exchange-value, commodity and money, buyer and seller; secondly, we have the relationship of producer and consumer, even though both may be represented by third parties, in the shape of merchants. As far as the buyer and seller are concerned, the relationship can be created simply by putting the two face to face with one another as individuals. Three persons are enough for the complete metamorphosis of a commodity, and hence for the whole process of sale and purchase. A transforms his commodity into B’s money by selling B the commodity and he then transforms his money back into commodities which he buys with this money from C; the entire process takes place between these three parties. Moreover, in dealing with money we assumed that commodities were sold at their values; there was no reason at all to consider prices that diverged from values, as we were concerned simply with the changes of form which commodities undergo when they are turned into money and then transformed back from money into commodities again. As soon as a commodity is in any way sold, and a new commodity bought with the proceeds, we have the entire metamorphosis before us, and it is completely immaterial here whether the commodity’s price is above or below its value. The commodity’s value remains important as the basis, since any rational understanding of money has to start from this foundation, and price, in its general concept, is simply value in the money form. In treating money as means of circulation, moreover, we did not assume simply one metamorphosis by a single commodity. We considered rather the way these metamorphoses were socially intertwined. Only in this way did we come to the circulation of money and the development of its function as means of circulation. But however important this framework was for money’s transition into its function as means of circulation and for the altered form that it assumes as a result, it is immaterial as far as the transaction between individual buyers and sellers is considered.

When we consider supply and demand, on the other hand, the supply is equal to the sum of commodities provided by all the sellers or producers of a particular kind of commodity, and the demand is equal to the sum of all buyers or consumers (individual or productive) of that same kind of commodity. These totals, moreover, act on one another as unities, as aggregate forces. Here the individual has an effect only as part of a social power, as an atom in the mass, and it is in this form that competition brings into play the social character of production and consumption.

The side that is temporarily weaker in competition is also that in which the individual operates independently of the mass of his competitors, and often directly against them, illustrating precisely in this way the dependence of one on the other, whereas the stronger side always acts towards its opponent as a more or less united whole. If demand is greater than supply for this particular kind of commodity, one buyer outbids the others – within certain limits – and thus raises the commodity’s price above its market value for everyone, while on the other hand the sellers all seek to sell at a high market price. If, inversely, the supply is greater than the demand, one seller begins to unload his goods more cheaply and the others have to follow, while the buyers all work to depress the market price as far as possible below the market value. Each is only concerned with the common interest as long as he obtains more with it than he would against it. And this unity of action ceases as soon as one entire side or other weakens, when each individual independently tries to extract what he can. If one seller produces more cheaply and can more easily undercut the others,carving out a bigger share of the market by selling below the current market price or market value, then he does so, and the action once begun, it gradually forces the others to introduce the cheaper form of production and thereby reduces the socially necessary labour to a new and lower level. If one side has the upper hand, each of its members profits; it is as if they had a common monopoly to exert. As for the weaker side, each member can try for his own part to be stronger (e.g. he may try to be the one operating with lower production costs), or at least he may endeavour to come out as well as possible, and here it is a case of devil take the hindmost, even if this action ultimately affects all his associates.32

Demand and supply imply the transformation of value into market value, and in as much as they act on a capitalist basis, and commodities are the products of capital, they imply capitalist processes of production, i.e. conditions that are much more intricate than the mere purchase and sale of commodities. Here it is not simply a question of the formal conversion of commodity value into price, i.e. a mere change of form; what is involved are specific quantitative divergences of market prices from market values and, at a further remove, from prices of production. For simply buying and selling, it is enough that commodity producers confront one another. Demand and supply, on further analysis, imply the existence of various different classes and segments of classes which distribute the total social revenue among themselves and consume it as such, thus making up a demand created out of revenue; while it is also necessary to understand the overall configuration of the capitalist production process if one is to comprehend the demand and supply generated among the producers as such.

In capitalist production it is not simply a matter of extracting, in return for the mass of value thrown into circulation in the commodity form, an equal mass of value in a different form – whether money or another commodity – but rather of extracting for the capital advanced in production the same surplus-value or profit as any other capital of the same size, or a profit proportionate to its size, no matter in what branch of production it may be applied. The problem therefore is to sell commodities, and this is a minimum requirement, at prices which deliver the average profit, i.e. at prices of production. This is the form in which capital becomes conscious of itself as a social power, in which every capitalist participates in proportion to his share in the total social capital.

Firstly, capitalist production as such is indifferent to the particular use-values it produces, and in fact to the specific character of its commodities in general. All that matters in any sphere of production is to produce surplus-value, to appropriate a definite quantity of unpaid labour in labour’s product. And it is similarly in the very nature of wage-labour subjected to capital that it is indifferent to the specific character of its work; it must be prepared to change according to the needs of capital and let itself be flung from one sphere of production to another.

Secondly, one sphere of production really is as good and as bad as any other; each yields the same profit and each would be pointless if the commodity it produced did not satisfy some kind of social need.

If commodities were sold at their values, however, this would mean very different rates of profit in the different spheres of production, as we have already explained, according to the differing organic composition of the masses of capital applied. Capital withdraws from a sphere with a low rate of profit and wends its way to others that yield higher profit. This constant migration, the distribution of capital between the different spheres according to where the profit rate is rising and where it is falling, is what produces a relationship between supply and demand such that the average profit is the same in the various different spheres, and values are therefore transformed into prices of production. Capital arrives at this equalization to a greater or lesser extent, according to how advanced capitalist development is in a given national society: i.e. the more the conditions in the country in question are adapted to the capitalist mode of production. As capitalist production advances, so also do its requirements become more extensive, and it subjects all the social preconditions that frame the production process to its specific character and immanent laws.

This constant equalization of ever-renewed inequalities is accomplished more quickly, (1) the more mobile capital is, i.e. the more easily it can be transferred from one sphere and one place to others; (2) the more rapidly labour-power can be moved from one sphere to another and from one local point of production to another.

The first of these conditions implies completely free trade within the society in question and the abolition of all monopolies other than natural ones, i.e. those arising from the capitalist mode of production itself. It also presupposes the development of the credit system, which concentrates together the inorganic mass of available social capital vis-à-vis the individual capitalist. It further implies that the various spheres of production have been subordinated to capitalists. This last is already contained in the assumption that we are dealing with the transformation of values into prices of production for all spheres of production that are exploited in the capitalist manner; and yet this equalization comes up against major obstacles if several substantial spheres of production are pursued non-capitalistically (e.g. agriculture by small peasant farmers), these spheres being interposed between the capitalist enterprises and linked with them. A final precondition is a high population density.

The second condition presupposes the abolition of all laws that prevent workers from moving from one sphere of production to another or from one local seat of production to any other. Indifference of the worker to the content of his work. Greatest possible reduction of work in all spheres of production to simple labour. Disappearance of all prejudices of trade and craft among the workers. Finally and especially, the subjection of the worker to the capitalist mode of production. Further details on this belong in the special study of competition.*

From what has been said so far, we can see that each individual capitalist, just like the totality of all capitalists in each particular sphere of production, participates in the exploitation of the entire working class by capital as a whole, and in the level of this exploitation; not just in terms of general class sympathy, but in a direct economic sense, since, taking all other circumstances as given, including the value of the total constant capital advanced, the average rate of profit depends on the level of exploitation of labour as a whole by capital as a whole.

The average rate of profit coincides with the average surplus-value that capital produces for each 100 units, and as far as surplus-value is concerned, what has been said above is evident enough from the very start. As far as the average profit goes, the only additional aspect determining the profit rate is the value of the capital advanced. In actual fact, the particular interest that one capitalist or capital in a particular sphere of production has in exploiting the workers he directly employs is confined to the possibility of taking an extra cut, making an excess profit over and above the average, either by exceptional overwork, by reducing wages below the average, or by exceptional productivity in the labour applied. Apart from this, a capitalist who employed no variable capital at all in his sphere of production, hence not a single worker (in fact an exaggerated assumption), would have just as much an interest in the exploitation of the working class by capital and would just as much derive his profit from unpaid surplus labour as would a capitalist who employed only variable capital (again an exaggerated assumption) and therefore laid out his entire capital on wages. With a given working day, the level of exploitation of labour depends on its average intensity, and, conversely, given the intensity, on the length of the working day. The rate of surplus-value depends on the level of exploitation of labour, and thus, for a given mass of variable capital, the size of the surplus-value and the amount of profit also depend on this. The special interest possessed by the capital in one sphere, as distinct from the total capital, in the exploitation of the workers directly employed by it, is paralleled by the interest of the individual capitalist, as distinct from his sphere, in the exploitation of the workers exploited personally by him.

Each particular sphere of capital, however, and each individual capitalist, has the same interest in the productivity of the social labour applied by the total capital. For two things are dependent on this. Firstly, the mass of use-values in which the average profit is expressed; and this is important for two reasons, as it serves both as the accumulation fund for new capital and as the revenue fund for consumption. Secondly, the value level of the total capital advanced (both constant and variable), which, with a given size of surplus-value or profit for the entire capitalist class, determines the profit rate, or the profit on a particular quantity of capital. The specific productivity of labour in one particular sphere, or in one individual business in this sphere, concerns the capitalists directly involved in it only in so far as it enables this particular sphere to make an extra profit in relation to the total capital, or the individual capitalist in relation to his sphere.

We thus have a mathematically exact demonstration of why the capitalists, no matter how little love is lost among them in their mutual competition, are nevertheless united by a real freemasonry vis-à-vis the working class as a whole.

The price of production includes the average profit. And what we call price of production is in fact the same thing that Adam Smith calls ‘natural price’, Ricardo ‘price of production’ or ‘cost of production’, and the Physiocrats ‘prix nécessaire’, though none of these people explained the difference between price of production and value. We call it the price of production because in the long term it is the condition of supply, the condition for the reproduction of commodities, in each particular sphere of production.33 We can also understand why those very economists who oppose the determination of commodity value by labour-time, by the quantity of labour contained in the commodity, always speak of the prices of production as the centres around which market prices fluctuate. They can allow themselves this because the price of production is already a completely externalized and prima facie irrational form of commodity value, a form that appears in competition and is therefore present in the consciousness of the vulgar capitalist and consequently also in that of the vulgar economist.

*

We saw in the course of our argument how market value (and everything that was said about this applies with the necessary limitations also to price of production) involves a surplus profit for those producing under the best conditions in any particular sphere of production. Excluding all cases of crisis and overproduction, this holds good for all market prices, no matter how they might diverge from market values or market prices of production. The concept of market price means that the same price is paid for all commodities of the same kind, even if these are produced under very different individual conditions and may therefore have very different cost prices. (We say nothing here about surplus profits that result from monopolies in the customary sense of the term, whether artificial or natural.)

But a surplus profit can also arise if certain spheres of production are in a position to opt out of the transformation of their commodity values into prices of production, and the consequent reduction of their profits to the average profit. In the Part on ground-rent, we shall have to consider the further configuration of these two forms of surplus profit.