If we believe human beings, and things, have an ethical value, profits are necessarily an ethical violation.
The most significant difference, economically, between a liberal and a socialist, is that the liberal still believes there is nothing in principle wrong with being a profitable business. They will of course admit that many businesses are profitable because they are abusive, evil, and taking advantage of the legal and political system, but other businesses (especially heroic “small businesses”) stand up for what is right and good, and are cornerstones of their communities! What’s wrong with them making a little profit? If consumers really want a product, they might simply be willing to pay more than the business owner pays to create it, and thus profit arises out of a series of free exchanges. This sounds innocent enough, but it hides a darkly cynical take on the system — that businesses succeed or fail based on how “smart” they are, meaning whether they have some secret, occult knowledge of the market, or even worse, merely by chance; there is no “right” way the system ought to be run. Marx helps us have a little more self-confidence than this. The economy ought to operate in a way that correctly identifies and satisfies human desires — and it doesn’t have to ingratiate itself to an exploiting class to do so.
Let me explain the problem with the modern economic framework. What microeconomics suggests is to understand profits through a radical decoupling of revenue and costs.¹ Assume for a moment you are a capitalist. On the one hand, you contribute a certain amount of money towards the business, paying for materials, staff, marketing, etc., creating at the end a finished product. On the other hand, your customers come to you and spend whatever income they are willing on your product. If the consumers spend more than you did, then at the end of the day you make a profit, and if they do not, you take a loss. It is your job to be “smart” enough to uncover a market which will satisfy this condition. There is a misleading sense of contingency here — as if profits and losses were equally likely outcomes. Obviously, they are not: most businesses profit most of the time. If capitalism is a casino of “risk,” it is a peculiar one where the gamblers have the advantage over the house. This opposition between revenue and cost presumes two groups of people (producers and consumers) independently evaluate the product, and the preponderance of businesses for which revenue exceeds cost is explained not as a structural outcome but a Darwinistic one: unprofitable businesses stop existing quickly, thus only profitable ones remain.
The Marxian interpretation is built on an entirely different notion of a market. We do not see the market as the economy’s judgement system, meaning where one discovers whether revenue, which represents the product’s value to the customer, is greater than cost, which represents the product’s value to the capitalist. Rather, the economy is at its core a process of production, where markets play an important but not decisive role. A business produces a good or service, which we will interchangeably call a commodity, with a particular value, and then customers buy it, hopefully at that value. For any commodity, this quantity “value” is recursively equal to the sum of values that go into its production. In the process of production, a business (or a capitalist) buys raw materials, land, and machinery on the one hand, and then pays laborers on the other. The laborers work, and they use the machinery to transform the materials into a new commodity. The new commodity has a value equal to the value of the labor plus the value of the materials and tools; in other words value is conserved in production.
Instead of the opposition between revenue and cost, in the Socialist interpretation of capitalism, it is the opposition between value and price from which profits can arise. Each commodity has an objective, social value, but it is not necessarily the case that it is always exchanged for that value. The amount actually paid for the commodity is known as its price. If a commodity is sold at a price above its value, the seller benefits at the expense of the buyer, and if it is sold at a price below its value, the buyer benefits at the expense of the seller.
This notion of price vs. value is not unique to Marx, but of those who approached it this way, it is only Marx from whom we can finally get a good answer to the question, where do profits come from? All economists should agree on the following: a capitalist has a certain amount of value M, known as capital, and they invest it in some productive enterprise C. The enterprise produces a product, and that product sells for a final value M’, which if the business successfully profits, is greater than M. Marx’s contemporaries argued from the left that the profit is simply theft (from the consumer); the real value of the commodity is still M, but the capitalist jacks up the price to M’ out of greed. From the right, Adam Smith and others argue the excess value is generated by capital itself; capital has a metaphysical power to add value through its mere presence in production.
Marx refuses both of these notions. The first, on the grounds that consumers cannot be generally exploited; after all, capitalists, who are simultaneously consumers (of means of production) and producers (of commodities) would not accept being exploited by their peers in every market. More fundamentally, at its most basic level, we have to assume that the economy works. We are not willing to suppose that you get exploited every time you make a transaction. The second is rejected on materialist grounds. The value of a thing can increase only through some kind of material transformation. Capital does not have any material effect on its products, and thus cannot effect their value — only labor does that.
Marx’s radical claim is that, most of the time, goods on the market are paid for at their proper value, which is determined in a materialist way: the socially necessary labor-time invested in their creation.² If prices are equal to values, then profits, strictly speaking, do not come from the market. They come from the process of production. What happens is, the capitalist sells their goods at the correct price, but buys their inputs for less than their value. One part of their input is raw materials and tools — if these come from other capitalists, they can’t buy them below their value (by assumption). But the other part is the labor of workers. Workers are at a disadvantage: they have to take whatever they can get because their labor-power is rendered worthless as soon as they become idle, but their employer can wait for a good deal. Thus they are structurally weaker than their employer, and can be used to solve the paradox: pay them a price for their labor less than they supply in value, and pocket the difference as surplus-value. In precisely this way, profit comes from exploitation of workers.
However, I claim Marx moved too hastily at this point. His insight is to presume most goods are sold at their value, and therefore the economy in general functions correctly, and consumers do not have to be exploited with every purchase for the system to work. But I disagree that we should assume everything is sold at its value but labor. I mean the following: isn’t rent a commodity sold above its value? Medical costs? Student loans? These are far from negligible aspects of capitalist exploitation. In general, a business is not satisfied with exploiting its workers, but rather they will attempt to exploit anyone they can; to buy labor and materials below their value, and sell their products above their value. Marx’s notion that most goods are sold at their values with one exception (labor-power)³ ought to be expanded: most goods are sold at their values, with a few exceptions. These exceptions are commodities where the social relation between the class of buyers and the class of sellers has a power differential, usually due to unique material and historical properties of the commodity in question. In other words, exceptions to the labor theory of value are sites of exploitation.
If there is any sense in the economist’s radical separation of revenue and cost, it is this insight that businesses have no obligation to buy or sell goods at their value, and will avoid doing so if it is to their benefit. Yet, it is still worthwhile to listen to Marx, and declare there is an objective, socially decided “value” for any commodity — if only to see who is being taken advantage of: is it the workers only? Or is it the the workers and the consumers? Is it workers in one country to the benefit of consumers in another? Etc. Capitalism is much cleverer now than it was back in Marx’s time; even superficially “unprofitable” businesses or nonprofits may not be free of exploitation (perhaps they underpay their low-level workers but overpay their executives).
A helpful tool for analyzing this concept is what I will call a “value diagram.” The x-axis represents value, and the y-axis represents price. A commodity on the market has both a price and a value, and will be represented by an arrow on the diagram. If the commodity is sold at its correct value, it will be on the diagonal line y = x. If it sells above its value, it will be above the line, and If it sells below its value, it will be below the line. Being above the line is to the benefit of sellers and the detriment of buyers, and being below is the opposite.
Different exploitative schemes in our economy have different manifestations on this graph, and we will examine many of them as our work progresses. But the most basic will be the cost and revenue vectors. To return to the conventional story presented in the introduction, a business will in general pay for means of production on the one hand and labor on the other, and together those exchanges are represented by a cost vector c — in the best case for the business, this is below the line, meaning they pay someone in the process of production less than they get in value. Usually, this is the worker, but it may equally be the supplier. Then, they sell the commodity thus created to the world, represented by a revenue vector r — in the best case, consumers are willing to pay more than its value, that is it is above the line. Profit is the (vertical) difference between these two vectors, r - c. If it is to be positive, then r had better be higher than c in the graph.
It appears we have returned to the radical separation between cost and revenue. But there is a crucial difference: instead of comparing these two independent numbers to each other, or to nothing at all, we compare them to a third number, value, which they are both supposed to represent. The thesis, “profit is exploitation,” merely states that the real value, the x-coordinate, of the inputs that the capitalist buys is the same as the real value of the commodity they sell — in other words, the two vectors r and c cannot have different horizontal lengths.⁴ While value is created by the business in the process of production, it is created by its workers and therefore should be already accounted for as part of its costs (the cost of labor). If they have the same horizontal length, the only way for them to form a profit is for the one to be directly above the other, and therefore at least one of the vectors cannot align price with value; otherwise they would both be identical, and thus unprofitable.
The radical proposal here is that a commodity is not, in fact, worth more than the sum of its parts. So, if it sells for more than it costs to make it, either the parts (generally, the labor of workers) are bought below their value or the sum is sold above it. If a business profits, it is either underpaying for the commodities it buys, including labor, or it is forcing its customers to overpay for the commodity they sell — or at worst, both. No matter how much a company protests it is “ethically sourcing” its materials, i.e. paying for their materials and labor at instead of below the line, if they make a profit anyways, it is because their consumers are paying a price above the value the company returns with as a product. On the other hand, when a company slashes its prices to what appear to be “impossible” levels for the good of their customers, i.e. selling the commodity at or below the line, if they manage a profit anyways, it means they are exerting truly outrageous exploitation behind the scenes on their suppliers and/or laborers. Try any combination you like — moving the cost and revenue vectors up and down. If revenue is greater than costs, at least one of the two is exploitative.
Am I merely stating that there is no ethical consumption under capitalism? In fact, the opposite: all consumption is ethical under capitalism, unless you buy things above their value (that is, you are being exploited by the ones who sell it to you), or you buy things below their value (but, if you buy them from a profitable corporation, let me be the first to say, “fuck ‘em”). You shouldn’t feel guilt in either case, but rather outrage: either at the company that directly exploits you, in the first case, or on behalf of the workers that are necessarily being exploited far outside of your view, in the second case. No, the problem is there is no ethical production under capitalism. The remedy is not to refuse to buy products from unethical (read: profitable) corporations, but on the contrary, buy their products and then prosecute them for their crimes anyway.
When we say profit is exploitation, that is not to say production is exploitation. Instead, it is merely to say there must be a way to produce without profits. There is, it is called Socialism. What if the state (or individuals/community organizations) provided the necessary start-up funds for productive enterprises at zero interest, or even without repayment? What if the facility pays back whatever they owe with their revenue, and once that is done, it fully owns itself? What if, continuing into the future, it simply buys materials at their value, pays workers at their value, and sells products at their value? To invert Lenin’s famous question “who benefits?” — under socialism, “Who loses?”
This is not the place to quibble about the punishingly exact precision of this — some breathing room is fine, let’s say under socialism companies are allowed a small amount of profit, for a limited time, and if they are merely better craftsmen than their competitors they can get themselves an extra month off every year. But the principle is sovereign: The Socialist state has the right to demand any enterprise’s prices, both as buyer (of materials and labor) and seller (of finished commodities), remain in the neighborhood of their values. If this diverges too far, the State has the right to use any vehicle it deems appropriate to force them back into alignment, whether that be price controls, nationalization, or merely establishing and subsidizing competitors. Under socialism, the “success” of a company is simply no longer measured by profits, but instead by the creation of use-values through human labor. When workers create value-bearing commodities, in a socially useful way, and are paid the full value they contribute, that is Socialist success. That is a world full of people who finally have the emotional, energetic, and leisurely freedom they need in order to make real decisions about the future of humanity.
Footnotes:
¹ To illustrate the extremity of this decoupling, here is an anecdote about a class I was a TA for on introductory economics. Students were given a “revenue function” r(q) and a “cost function” c(q), where q represents the level of production, and asked to find where “marginal revenue” dr/dq was equal to “marginal cost” dc/dq — in other words, where your costs increase by the same amount as your revenue if you increase production by 1. This is the “ideal” quantity produced, as any further additional production increases costs just as much as revenues. Of course it is ideal, this is profit maximization without using the word profit! Profit is of course revenue minus costs, and it is maximized when its derivative is zero. In this example, the capitalist injunction to maximize profits, dP/dq = dr/dq - dc/dq = 0 was replaced with the equivalent but mystifying formula, dr/dq = dc/dq, in which profit does not appear at all. What a difference a minus sign makes!
² We will analyze the precise significance of this phrase, “socially necessary labor time,” in a later essay.
³ I admit to slightly misstating Marx’s position here. In reality, Marx claims that workers are paid at their value, but the value created by their labor is more than the value of their labor-power. Besides being infamously confusing, I think this is simply not correct. The “value of labor-power” is purely a convention, enshrining the fact that workers are paid less than the value they generate with labor, and then (obviously) they spend only their own paycheck on themselves, and they cannot spend the surplus-value because they didn’t receive it. In my view, socialism is not “when surplus-value goes to the workers instead of the capitalists,” because this makes no sense. Rather, socialism is when surplus-value no longer exists as such, because the workers are paid (and spend) an amount equal to the value they generate.
⁴ One could certainly protest that the business does indeed create value, and therefore the revenue vector is both above and to the right of the cost vector — that is, profit is the value that capital directly creates, over and above the value of the inputs. This is what I will call the “capital theory of value,” to be contrasted with the “labor theory of value,” and I fully admit I have not given a full treatment to this alternative theory. However it is worth examining how much ground has already been ceded by an opponent who claims it. Value indeed exists and is objective, it just comes from two sources: labor and capital.
Thus there could be such a thing as exploitation, but the problem is now, how could we tell? Perhaps not all capital creates value equally. Ultimately, profits (can) come from capital creating more or less value, according to how well it was constructed. Liberals get easily stranded on this rock, but we will have to wait for a future article more focused on this objection to push off of it. The question must be, if capital creates value, how, materially, does it do so?
