I.2. Profit of Capital

[I] (1) What is the basis of capital, that is, of private property in the products of other men’s labour?

“Even if capital itself does not come down to theft or fraud, it still needs the help of legislation to sanctify inheritance.” Say, vol. I, p. 136, note.

How does one become a proprietor of productive funds? How does one become the owner of the products created by means of these funds?

By positive law. Say, vol. II, p. 4.

What does one acquire with capital, with the inheritance of a large fortune, for example?

“A person who, for example, inherits a large fortune does not thereby directly acquire political power. The kind of power that this possession transfers to him immediately and directly is the power to buy; it is a right of command over all the labour of others, or over all the produce of this labour, that exists on the market at the time.” Smith, vol. I, p. 61.

Capital is thus the power of command over labour and its products. The capitalist possesses this power not because of his personal or human qualities, but in so far as he is the owner of capital. The purchasing power of his capital, which nothing can resist, is his power.

We shall see later, first, how the capitalist exercises his power of command over labour by means of capital, and then the power of command of capital over the capitalist himself.

What is capital?

“A certain quantity of labour stored up and held in reserve.” Smith, vol. II, p. 312.

Capital is stored-up labour.

(2) Fonds, or stock, is any accumulation of products of the soil and of manufacturing labour. Stock is called capital only when it yields its owner a revenue or profit. Smith, vol. II, p. 191.

The profit or gain of capital is entirely different from wages. This difference shows itself in two ways. First, the profits of capital are regulated wholly by the value of the capital employed, although the labour of supervision and direction may be the same for different capitals. Further, in large factories this whole labour is entrusted to a principal clerk, whose salary bears no relation to the [II] capital whose operation he oversees. Although the labour of the proprietor is here reduced almost to nothing, he still demands profits in proportion to his capital. Smith, vol. I, pp. 97–99.

Why does the capitalist demand this proportion between profit and capital?

He would have no interest in employing the workers if he did not expect from the sale of their work more than is needed to replace the funds advanced for wages; and he would have no interest in employing a large rather than a small sum of funds if his profit did not stand in proportion to the size of the funds employed. Vol. I, pp. 96–97.

The capitalist thus draws a profit, first, on the wages, and second, on the raw materials advanced.

What relation, then, does profit bear to capital?

If it is already hard to determine the ordinary average rate of wages in a given place and at a [given] time, it is still harder to determine the profit of capitals. Changes in the price of the commodities in which the capital deals, the good or bad fortune of its rivals and customers, a thousand other accidents to which commodities are exposed both in transport and in the warehouses, produce a daily, almost hourly change in profit. Smith, vol. I, pp. 179–180. Impossible as it is to determine the profits of capitals with precision, one can nevertheless form an idea of them from the interest on money. If much profit can be made with money, much will be given for the ability to use it; if little can be made through it, little. Smith, vol. I, p. 181. The proportion that the ordinary rate of interest must keep to the rate of net profit necessarily changes with the rise or fall of profit. In Great Britain what merchants call an honest, moderate, reasonable profit is reckoned at double the interest: all of them expressions that mean nothing but an ordinary and customary profit. Smith, vol. I, p. 198.

What is the lowest rate of profit? What is its highest?

The lowest rate of the ordinary profit of capitals must always be something more than is needed to compensate for the occasional losses to which every employment of capital is exposed. This surplus is properly the profit, or the net gain. The same holds for the lowest rate of interest. Smith, vol. I, p. 196. [III] The highest rate to which ordinary profits can rise is that which, in the majority of commodities, takes away the whole of the ground-rent and reduces the wages of the labour supplied to the lowest price, to the bare subsistence of the worker during work. In one way or another the worker must always be fed as long as he is employed in a day’s work; ground-rent can disappear entirely. Example: the servants of the East India Company in Bengal. Smith, vol. I, pp. [197,] 198.

Besides all the advantages of limited competition, which the capitalist may exploit in this case, he can keep the market price above the natural price in an honest way.

First, by trade secrets, when the market is very far from those who supply it: namely by keeping secret the changes in price, its rise above the natural level. This secrecy has the effect that other capitalists do not likewise throw their capital into this branch. Then by manufacturing secrets, where the capitalist, with lower costs of production, delivers his commodity at the same or even lower prices than his competitors and with more profit. (Is not deception by secrecy immoral? Stock-exchange dealing.) Further: where production is bound to a particular locality (as with a precious wine, for example) and the effective demand can never be satisfied. Finally: by the monopolies of individuals and companies. The monopoly price is as high as possible. Smith, vol. I, pp. 120–124.

Other accidental causes that can raise the profit of capital:

The acquisition of new territories or new branches of trade often increases the profit of capitals even in a rich country, because they withdraw part of the capitals from the old branches of trade, reduce competition, cause the market to be supplied with fewer commodities, whose prices then rise; those trading in them can then pay higher interest on borrowed money. Smith, vol. I, p. 190. The more a commodity is worked up, the more it becomes an object of manufacture, the more the part of its price that resolves into wages and profit rises in proportion to the part that resolves into ground-rent. As handicraft labour advances on this commodity, not only does the number of profits increase, but each succeeding profit is larger than the preceding one, because the capital from which [IV] it springs is necessarily always larger. The capital that sets the linen weavers to work is necessarily always larger than that which sets the spinners to work, because it not only replaces the latter capital with its profits but also pays the wages of the linen weavers; and it is necessary that profits always stand in some kind of proportion to capital. Vol. I, pp. 102–103.

The advance that human labour makes on the product of nature and on the worked-up product of nature thus increases not wages but partly the number of capitals making a profit, and partly the proportion of each succeeding capital to the preceding ones.

Of the gain the capitalist draws from the division of labour, later.

He gains doubly: first, from the division of labour; second, in general from the advance that human labour makes on the product of nature. The greater the human share in a commodity, the greater the gain of dead capital.

In one and the same society the average rate of profits of capital is much nearer to one level than the wages of the various kinds of labour. Vol. I, p. 228. In the various employments of capital the ordinary rate of profit varies with the greater or lesser certainty of the return of the capital. “The rate of profit rises with the risk, though not in full proportion.” Ibid. [pp. 226–227].

It goes without saying that the profits of capital also rise through the easing or cheapening of the means of circulation (paper money, for example).

The only motive that determines the owner of a capital to employ it in agriculture rather than in manufacture, or in a particular branch of wholesale or retail trade, is the consideration of his own profit. It never enters his head to calculate how much productive labour each of these different kinds of employment will set in motion, [V] or how much value it will add to the annual produce of the land and labour of his country. Smith, vol. II, pp. 400–401. The most useful employment of capital for the capitalist is the one that, with equal security, yields him the greatest profit. This employment is not always the most useful for society; the most useful is the one employed in drawing benefit from the productive forces of nature. Say, vol. II, p. 131. The most important operations of labour are regulated and directed according to the plans and speculations of those who employ the capitals; and the aim they set themselves in all these plans and operations is profit. Therefore: the rate of profit does not rise, like ground-rent and wages, with the prosperity of society, and does not fall, like them, with its decline. On the contrary, this rate is naturally low in rich countries and high in poor countries; and it is never so high as in the countries that are rushing fastest towards their ruin. The interest of this class, therefore, does not stand in the same connection with the general interest of society as that of the other two.... The particular interest of those who carry on a particular branch of trade or manufacture is always in some respects different from that of the public, and often even hostile and opposed to it. The interest of the merchant is always to widen the market and to narrow the competition of the sellers.... This is a class of people whose interest will never be exactly the same as that of society, and who in general have an interest in deceiving and outwitting the public. Vol. II, pp. 163–165, Smith.

The increase of capitals, which raises wages, tends to reduce the profit of the capitalists through competition among the capitalists. Vol. I, p. 179, Smith. “If, for example, the capital needed for the grocery trade of a town is divided between two different grocers, competition will make each of them sell more cheaply than if the capital had been in the hands of one alone; and if it is divided among twenty, [VI] competition will be all the more active, and there will be all the less possibility of their agreeing among themselves to raise the price of their goods.” Smith, vol. II, pp. 372–373.

Since we already know that monopoly prices are as high as possible; since the interest of the capitalists, even from the common standpoint of political economy, stands in hostility to society; since a rise in the profit of capital acts on the price of commodities like compound interest (Smith, vol. I, pp. 199–201): competition is the only help against the capitalists, which, according to political economy, acts as beneficially in raising wages as in cheapening commodities for the benefit of the consuming public.

But competition is possible only if capitals multiply, and in many hands. The rise of many capitals is possible only through many-sided accumulation, since capital in general arises only through accumulation; and many-sided accumulation necessarily turns into one-sided accumulation. Competition among capitals increases accumulation among capitals. Accumulation, which under the rule of private property is the concentration of capital in a few hands, is a necessary consequence in general when capitals are left to their natural course; and through competition this natural destiny of capital first really clears a free path for itself.

We have already heard that the profit of capital stands in proportion to its size. Leaving aside intentional competition entirely for the moment, a large capital therefore accumulates faster, in proportion to its size, than a small capital. [VI]

[VIII] Hence, even leaving competition quite aside, the accumulation of large capital is much faster than that of smaller capital. But let us follow the process further.

With the increase of capitals the profits of capitals fall, by means of competition. So the small capitalist suffers first.

The increase of capitals, and a large number of capitals, further presuppose advancing wealth of the country.

“In a country that has reached a very high stage of wealth, the ordinary rate of profit is so small that the rate of interest this profit allows to be paid is too low for any but the richest people to live on the interest of money. All people of middling fortune must therefore employ their capital themselves, carry on business or take an interest in some branch of trade.” Smith, vol. I, pp. [196,] 197.

This condition is the favourite condition of political economy.

“The proportion between the sum of capitals and of revenues everywhere determines the proportion in which industry and idleness will be found; where capitals carry the day, industry prevails; where revenues, idleness.” Vol. II, p. 325, Smith.

How, then, does the employment of capital stand in this increased competition?

“With the increase of capitals the quantity of funds to be lent at interest must successively become larger; with the increase of these funds the interest of money becomes smaller, (1) because the market price of all things falls the more their quantity increases, (2) because with the increase of capitals in a country it becomes harder to invest a new capital profitably. A competition arises among the different capitals, the owner of one capital making every possible effort to seize the business occupied by another capital. But mostly he cannot hope to push this other capital out of its place except by offering to deal on better terms. He must not only sell the thing more cheaply but often, in order to find an opportunity to sell, buy it dearer. The more funds are destined for the maintenance of productive labour, the greater becomes the demand for labour: the workers easily find employment, [IX] but the capitalists have difficulty in finding workers. The competition of the capitalists makes wages rise and profits fall.” Vol. II, pp. 358–359, Smith.

The small capitalist therefore has the choice: (1) either to eat up his capital, since he can no longer live on the interest, and so cease to be a capitalist; or (2) to set up a business himself, sell his goods more cheaply and buy more dearly than the richer capitalist, and pay higher wages; and so, since the market price already stands very low because of the high competition assumed, to ruin himself. If, on the other hand, the big capitalist wants to push out the smaller one, he has against him all the advantages that the capitalist as capitalist has against the worker. His smaller profits are made up for by the greater quantity of his capital, and he can even bear momentary losses until the smaller capitalist is ruined and he sees himself freed from this competition. So he accumulates to himself the profits of the small capitalist.

Further: the big capitalist always buys more cheaply than the small one, because he buys in larger quantities. He can therefore sell more cheaply without loss.

But if the fall in the interest of money turns the middle capitalists from rentiers into businessmen, conversely the increase of business capitals and the smaller profit resulting from it bring about the fall in the interest of money.

“As the benefit that can be drawn from the use of a capital diminishes, the price that can be paid for the use of this capital necessarily diminishes.” Vol. II, p. 359, Smith. “The more wealth, industry and population increase, the more the interest on money, and so the profit of the capitalists, diminishes; but they themselves increase nonetheless, and faster than before, despite the reduction of profits. A large capital, though with small profits, generally increases much faster than a small capital with large profits. Money makes money, says the proverb.” Vol. I, p. 189.

When, then, small capitals with small profits, as under the assumed condition of strong competition, confront this large capital, it crushes them completely.

In this competition the general deterioration of commodities, adulteration, sham production, the general poisoning to be seen in large towns, are then the necessary consequence.

[X] A further important circumstance in the competition of large and small capitals is the relation between fixed capital and circulating capital.

“Circulating capital is a capital employed in producing provisions, in manufacture or in trade. Capital so employed yields its owner no revenue or profit while it remains in his possession or continues in the same shape. It constantly goes out of his hands in one form to return in another, and is profitable only by means of this circulation, or this successive transformation and exchange. Fixed capital consists of capital employed in the improvement of land, the purchase of machines, instruments, tools and similar things.” Smith, [vol. II,] pp. 197–198. “Every saving in the maintenance of fixed capital is an increase of net profit. The total capital of every employer of workmen is necessarily divided between his fixed capital and his circulating capital. The sum being equal, the one part will be the smaller the larger the other is. Circulating capital supplies him with the material and wages of labour and sets industry in motion. So every saving in fixed capital that does not reduce the productive power of labour increases the fund.” Vol. II, p. 226, Smith.

One sees at once that the relation between fixed and circulating capital is much more favourable to the big capitalist than to the smaller one. A very big banker needs only insignificantly more fixed capital than a very small one. Their fixed capital is confined to the office. The implements of a bigger landowner do not increase in proportion to the size of his estate. Equally, the credit that a big capitalist enjoys over a smaller one is all the greater saving in fixed capital, namely in the money he must always have ready. Finally, it goes without saying that where industrial labour has reached a high level, and so almost all handicraft has become factory labour, the small capitalist’s whole capital is not enough even to possess the necessary fixed capital. It is well known that the work of large-scale farming usually employs only a small number of hands.

In general, with the accumulation of large capitals there also takes place a proportionate concentration and simplification of fixed capital, compared with the smaller capitalists. The big capitalist introduces for himself a kind of [XI] organisation of the instruments of labour.

“Likewise in the sphere of industry every manufactory and factory is already a more comprehensive combination of a larger material property with numerous and varied intellectual capacities and technical skills for a common purpose of production.... Where legislation keeps landed property together in large masses, the surplus of a growing population crowds into the trades, and so it is, as in Great Britain, in the field of industry that the greater number of the proletarians mainly accumulates. But where legislation allows the continued division of the land, the number of small and indebted proprietors increases, as in France, and the continuing fragmentation throws them into the class of the needy and the discontented. Finally, when this fragmentation and over-indebtedness have been carried to a higher degree, large landed property in turn swallows up small, just as large industry destroys small; and since larger estates are formed again, the number of propertyless workers not strictly needed for cultivating the soil is again pushed towards industry.” Pp. [58,] 59, Schulz, Bewegung der Production. “The character of commodities of the same kind changes through the change in the mode of production, and in particular through the use of machinery. Only by excluding human power has it become possible to spin from a pound of cotton, worth 3 shillings 8 pence, 350 hanks, 167 English or 36 German miles long, with a commercial value of 25 guineas.” Ibid., p. 62. “On average the prices of cotton goods in England have fallen by eleven-twelfths over the last 45 years, and according to Marshall’s calculations the same quantity of manufactured goods for which 16 shillings were still paid in 1814 is now supplied for 1 shilling 10 pence. The greater cheapness of industrial products increases consumption both at home and in the foreign market; and connected with this is the fact that in Great Britain the number of cotton workers has not fallen since the introduction of machines but has risen from 40,000 to one and a half million. [XII] As for the earnings of industrial employers and workers, the growing competition among the factory owners has necessarily reduced their profit in proportion to the quantity of products they supply. In the years 1820–1833 the gross profit of the Manchester manufacturer on a piece of calico fell from 4 shillings 1⅓ pence to 1 shilling 9 pence. But to make up for this loss the scale of manufacture has been extended all the more. The consequence is that partial overproduction occurs in particular branches of industry; that frequent bankruptcies arise, producing an uncertain fluctuation and surging of property within the class of capitalists and employers, which throws a part of the economically ruined into the proletariat; that a stoppage or reduction of work often becomes necessary, suddenly, whose disadvantages the class of wage-workers always feels bitterly.” Ibid., p. 63. “To hire out one’s labour is to begin one’s slavery; to hire out the material of labour is to establish one’s freedom.... Labour is man; matter, on the contrary, is nothing of man.” Pecqueur, Théorie sociale, etc., pp. 411–412. “The element matter, which can do nothing for the creation of wealth without the other element, labour, receives the magic virtue of being fruitful for them, as if they had put this indispensable element into it by their own act.” Ibid., loc. cit. “Supposing that a worker’s daily labour brings him on average 400 francs a year, and that this sum suffices for each adult to live a coarse life, every proprietor of 2,000 francs of rent, farm rent, house rent, etc., therefore forces five men indirectly to work for him; 100,000 francs of rent represent the labour of 250 men, and 1,000,000 the labour of 2,000 individuals (so 300 million (Louis Philippe) the labour of 750,000 workers).” Ibid., pp. 412–413. “The proprietors have received from human law the right to use and abuse, that is, to do what they want with the material of all labour.... They are in no way obliged by law to provide work to the propertyless when it is needed and always, nor to pay them a wage that is always sufficient, etc.” P. 413, loc. cit. “Complete liberty as to the nature, quantity, quality and timeliness of production, as to the use and consumption of wealth, and as to the disposal of the material of all labour. Everyone is free to exchange his property as he understands it, with no other consideration than his own interest as an individual.” P. 413, loc. cit. “Competition expresses nothing but optional exchange, which is itself the immediate and logical consequence of the individual right to use and abuse the instruments of all production. These three economic moments, which make up only one (the right to use and abuse, freedom of exchange and arbitrary competition), entail the following consequences: everyone produces what he wants, as he wants, when he wants, where he wants; produces well or badly, too much or not enough, too early or too late, too dear or too cheap; no one knows whether he will sell, to whom he will sell, how he will sell, when he will sell, where he will sell: and it is the same with purchases. [XIII] The producer knows neither the needs nor the resources, neither the demands nor the offers. He sells when he wants, when he can, where he wants, to whom he wants, at the price he wants. And he buys in the same way. In all this he is always the plaything of chance, the slave of the law of the strongest, the least pressed, the richest.... While at one point there is a dearth of some form of wealth, at another there is glut and waste. While one producer sells a great deal, or very dear, and at an enormous profit, another sells nothing or sells at a loss.... Supply does not know demand, and demand does not know supply. You produce on the strength of a taste, a fashion that has shown itself among the consuming public; but by the time you are ready to deliver the goods, the fancy has passed and settled on another kind of product.... Infallible consequences: the permanence and universalisation of bankruptcies; miscalculations, sudden ruins and fortunes made overnight; commercial crises, unemployment, periodic gluts or dearths; the instability and debasement of wages and profits; the loss or enormous waste of wealth, time and effort in the arena of a relentless competition.” Pp. 414–416, loc. cit.

Ricardo in his book (rent of land): nations are only workshops of production; man is a machine for consuming and producing; human life is a capital; economic laws rule the world blindly. For Ricardo men are nothing, the product everything. In the 26th chapter of the French translation it says:

“It would be quite indifferent to a person who made 2,000 francs a year profit on a capital of 20,000 francs whether his capital employed a hundred men or a thousand.... Is not the real interest of a nation the same? Provided its net and real income, and its farm rents and profits, are the same, what does it matter whether it consists of ten or twelve million individuals?” [Vol. II, pp. 194–195.] “Indeed,” says M. de Sismondi [in Nouveaux principes] (vol. II, p. 331), “nothing remains but to wish that the king, left all alone on the island, should, by constantly turning a crank, have all the work of England done by automata.” “The master who buys the worker’s labour at a price so low that it barely suffices for the most pressing needs is responsible neither for the insufficiency of wages nor for the excessive length of labour: he is himself subject to the law he imposes.... It is not so much from men that misery comes as from the power of things.” [Buret], loc. cit., p. 82. “In England there are many places where the inhabitants lack the capital for the full cultivation of the land. The wool of the southern provinces of Scotland must for the most part make a long journey by land over bad roads to be worked up in the county of York, because at its place of production there is a lack of capital for manufacture. There are in England several small manufacturing towns whose inhabitants lack sufficient capital to transport their industrial produce to distant markets, where it finds demand and consumers. The merchants here are [XIV] only agents of richer merchants who reside in a few great commercial cities.” Smith, vol. II, p. 382. “To increase the value of the annual produce of land and labour there is no other means than to increase, as to number, the productive workers, or to increase, as to power, the productive faculty of the workers previously employed.... In either case an addition of capital is almost always needed.” Smith, vol. II, p. 338. “Since it lies in the nature of things, then, that the accumulation of a capital is a necessary forerunner of the division of labour, labour can receive no further subdivisions except in proportion as capitals have gradually been accumulated. The more labour is subdivided, the more the quantity of materials that the same number of persons can work up increases; and since each worker’s task is gradually reduced to a greater degree of simplicity, a host of new machines are invented to make these tasks easier and shorter. The further the division of labour spreads, therefore, the more it is necessary, if the same number of workmen is to be constantly employed, that an equal stock of provisions, and a stock of materials, instruments and tools much larger than was needed in a less advanced state of things, should be accumulated in advance. The number of workers in each branch of labour increases at the same time as the division of labour increases there; or rather, it is this increase of their number that enables them to be classified and subdivided in this way.” Smith, vol. II, pp. 193–194. “Just as labour cannot obtain this great extension of its productive power without a previous accumulation of capitals, so the accumulation of capitals naturally [brings about] this extension. The capitalist wants, namely, to produce the greatest possible quantity of manufactured goods with his capital, and so strives to introduce the most fitting division of labour among his workers and to provide them with the best machines possible. His means of succeeding in these two objects [XV] stand in proportion to the extent of his capital and to the number of people that this capital can keep employed. So not only does the quantity of industry in a country increase by means of the growth of the capital that sets it in motion, but as a result of this growth the same quantity of industry produces a much greater quantity of manufactured goods.” Smith, loc. cit., pp. 194–195.

Hence overproduction.

“More comprehensive combinations of the productive forces ... in industry and trade, through the union of more numerous and more varied human and natural forces for undertakings on a larger scale. Also, here and there already, closer connection of the main branches of production with one another. Thus great manufacturers will try to acquire large landed property too, so as not to have to obtain at least a part of the raw materials their industry needs at third hand; or they will connect a trade with their industrial undertakings, not only for selling their own manufactures but also perhaps for buying products of other kinds and selling them to their workers. In England, where individual factory owners sometimes stand at the head of 10,000–12,000 workers ..., such combinations of different branches of production under one directing intelligence, such smaller states or provinces within the state, are already not uncommon. Thus in recent times the mine owners near Birmingham have taken over the whole process of iron-making, which was formerly divided among different entrepreneurs and owners. See “Der bergmännische Distrikt bei Birmingham”, Deutsche Vierteljahrs-Schrift, 3, 1838. Finally, in the joint-stock undertakings that have become so numerous, we see comprehensive combinations of the money powers of many participants with the scientific and technical knowledge and skills of others, to whom the execution of the work is entrusted. This enables the capitalists to employ their savings in more varied ways, and perhaps simultaneously in agricultural, industrial and commercial production, so that their interest becomes at the same time more many-sided, [XVI] and the oppositions between the interests of agriculture, industry and trade are softened and fused. But even this easier possibility of making capital profitable in the most varied ways must increase the opposition between the classes with means and those without.” Schulz, pp. 40–41.

The enormous profit that landlords draw from poverty. House rent stands in inverse proportion to industrial poverty.

Likewise percentages from the vices of the ruined proletarians. (Prostitution, drink, the pawnbroker.)

The accumulation of capitals increases and their competition decreases as capital and landed property come together in one hand, and also as capital is enabled by its size to combine different branches of production.

Indifference towards men. Smith’s twenty lottery tickets.

Net and gross revenue in Say. [XVI]