Profit from Nowhere

How do people make money? The answer’s complicated — even if you’re Karl Marx.

A large part of most peoples’ time is taken up by what, at first glance, seems like a very strange activity. Douglas Adams pointed this out in The Hitchhiker’s Guide to the Galaxy:

This planet has — or rather had — a problem, which was this: most of the people on it were unhappy for pretty much of the time. Many solutions were suggested for this problem, but most of these were largely concerned with the movements of small green pieces of paper, which is odd because on the whole it wasn’t the small green pieces of paper that were unhappy.

On closer inspection, however, this “movement of small green pieces of paper”, or money, has more meaning to it: it is a medium of exchange. Specifically, for the exchange of, well, stuff.

Consider an example of ‘stuff’: books. Books have value to me, because they satisfy some need of mine — in this case, my desire to read. It doesn’t really matter whether it’s a serious desire or not: as long as that desire is there, a book will satisfy it. This usefulness of stuff, the ability to satisfy some need of a person, is often called a ‘use-value’. It is a ‘qualitative’ property, since you can’t really attach a number to it. After all, what number would you assign for having your hunger satisfied?

At the same time, though, we need to have some sort of differentiation. If someone says that one book is just as good as one car, most people will say that that’s absurd. A hundred books for one car makes a little more sense.

It seems like stuff has a quantitative property too — but only in terms of exchange. So, I can take some stuff and give it to another person, in return for some other stuff. This property, that stuff can be exchanged, is called ‘exchange value’.

But we still have a problem. There isn’t really anything common between books and loaves of bread, so how do people decide how many books equals one loaf?

One idea is to say that the one thing common to all stuff is that some effort is put into making it. So, if writing and printing a book takes more person-hours than baking a loaf of bread, it is more valuable (all other things being equal).

This ‘labour theory of value’ was developed first by eminent classical economist David Ricardo. It was later taken up by Karl Marx, who became famous for his strong critique of the economic theories of the time and for his revolutionary ideas.

This “labour theory” still has many complications. If bread is made by a bunch of very lazy people, who take a lot of time to do it, does that make it more valuable? What if others have a special mill, which grinds the wheat in such a way that it requires less kneading? Does that bread have less value?

And does one hour of book writing equal one hour of dough kneading?

Karl Marx tried to get over these complications by saying we should only consider “socially necessary” and “abstract” labour when determining the value of stuff. One shouldn’t look at the labour that went into a specific loaf of bread, but rather the average labour that is used in society, given its level of technological development at that time, to make a loaf.

Think of this ‘abstract social labour’ as an imaginary liquid, poured into stuff by a worker at a constant rate. The longer one works on making something, the more of this liquid is poured into it; but if one is lazier than average, the rate of pouring would be slower. Either way, though, it all adds up to the same level.

But if one has access to a machine that doubles your productivity, each product only gets half the liquid. Liquid is still flowing at the same rate, but products are made in half the time, so each product gets only half as much liquid as it would have otherwise got.

The value of each product, in other words, is now only half as much.

This is why ‘handmade’ items are often much more expensive compared to their ‘machine-made’ equivalents. This concept of ‘abstract social (or average) labour time’ fixes the theory’s problem of a lazy worker and access to technology, and allows people to exchange stuff of equal value.

And this is where money comes in.

Money, theoretically, is simply a way of facilitating this exchange of stuff. When you want some stuff, you don’t have to carry other stuff to exchange; you can just carry money (which you have gotten by selling something a few days back).

Marx called this process ‘the circulation of commodities’ or C-M-C (Commodity, sold for Money, which is used to buy another Commodity).

The phenomenon that Douglas Adams pointed out, then, seems to be explained: people constantly exchange these green pieces of paper (money) because that allows people to exchange stuff. And people want stuff, all the time. Money is not the object of peoples’ desire: stuff is. Right?

Unfortunately, that’s not quite true today.

A system has developed where, instead of stuff being the end goal, money itself is. This process can be described as M-C-M; Money is used to buy stuff (or Commodities), which are again sold to make Money.

This system was first named by the French politicians Louis Blanc and Pierre Joseph Proudhon. They called it “Capitalism”.

Of course, it doesn’t make sense to go through all of that and simply end up with the same amount of money that you started with. It only makes sense if you get more money at the end. And that is the fundamental tenet of capitalism.

The word ‘capital’, in fact, refers specifically to money that has been spent on stuff which is going to eventually be sold again for more money. If you buy a loaf of bread with sole intention of eating it, that money you used is not capital. On the other hand, if you’re a bakery owner, and you buy another oven for your factory, that money is then capital.

Now, suppose you are the owner of a large chain of bakeries. The setup, very simply, is this: several ovens, a building to put them in, and flour to make the dough. These are what Marx referred to as the ‘means of production’.

But these are not enough. You also need people who can knead the dough and operate the ovens. More abstractly, you need “labour”. And workers are the ones who can give it to you, in return for wages.

These two things — labour, and the means of production — combine to give you bread. Here is where the magic of capitalism lies, the clever knot on which it hinges.

Consider this: how much value, or average labour, is in the bread that comes out? According to the labour theory of value, it is equal to the labour of the hired workers, plus the value contained in the flour and oven.

As boss, however, when you sell the bread, you certainly don’t want to sell it at a price equal to the money you paid for wages and flour and oven. Why go to all that trouble, if you don’t end up with more money than you started with?

Today, it is taken completely for granted that the owner of a business will make a certain profit for every bit of stuff they sell. It is called many things — return to capital, overhead, profit margin — but they all mean the same thing: the company, or business, sells its stuff for more than what they paid to make it (or bake it, in this case).

This is so much a part of daily life that people often forget it’s not at all obvious where that profit comes from.

On the one hand, you have wages and costs, which supposedly represent the value being put in to the bread; on the other, you have the price of the bread, which represents its value. Somewhere in between, you, as the boss, are somehow extracting for yourself this profit, seemingly out of nowhere.

Karl Marx spent a lot of effort trying to describe this key aspect of capitalism. And, he came up with a theory. He resolved the apparent paradox of “profit from nowhere” by creating the concept of ‘labour-power’.

Labour-power, he said, is distinct from average labour. Labour power is actual people, and their ability to work. It’s stuff, and can be bought just like other stuff (its price, in this case, having the special name ‘wage’). Then, these people use their ability to work by — well, by working on something. That work pours the imaginary “value liquid” into the product they’re working on.

Then, in a confusing move, Marx claimed that the value of this labour-power stuff is less than the value it gives up to the product stuff. He further claims that that value can be determined from how much stuff it takes to ‘reproduce’ the worker.

It becomes a little clearer if you look at the big picture.

In a society, people are working away, creating stuff — food, houses, clothes, the occasional luxury car — which is useful to people in some way. Some of that stuff is necessary to just maintain the society, in the sense of allowing the people to survive and reproduce. (Exactly how much stuff is needed is obviously subjective, but very broadly speaking, it is determined). The value of that quantity of stuff, then, is the value that goes into creating people — that is, labour-power.

The sum of all productive labour in society, however, produces more stuff than what is strictly needed to reproduce the population. So all the value added, or the total ‘value liquid’ produced in society, can be divided into two parts: the amount required to ensure the survival and reproduction of the people (the value of labour-power), and the extra value — or ‘surplus value’, to use the technical term.

This way, the value of labour-power can be thought of as being equal to the value of the food, clothes, shelter, etc. that the worker needs to survive. Labour-power is just like any other type of stuff, since its value is equal to how much ‘value liquid’ went into making it.

Except in this case the ‘it’ is an actual working human being.

Things are a little clearer now. The total productive labour of society is more than enough for all its members to survive. The extra labour, or surplus value, is put to several uses — including scientific research, expanding production, war, space exploration, as well as variously improving the material conditions of people’s lives, ranging all the way from housing schemes for the poor to luxury cars.

Essentially, surplus value can be thought of as the extra stuff that allows societies to go beyond just reproducing themselves, and actually expand.

Capitalist production, therefore, can be thought of as a system where the surplus value that is produced goes into the owners’ hands. As the owner of the bakery, therefore, you have the right to all the surplus value that is produced in your factory, simply because it is your factory.

The crux of Marx’s theory is that the ones who own the means of production can claim control over the surplus value that the working class produces.

Naturally, then, since you’re looking to maximise the surplus value that you get, you look to do two things: push down what counts as ‘survival’ for your workers, so that you can pay them less; and invest some (or rather, a lot) of your surplus value in expanding your production. If you look at most of the big companies that exist today, the profit that they make (read: surplus value they appropriate) is far higher than what they actually spend. Most of that wealth is put right back into the business, expanding factories, advertising, developing technology, and lobbying the government in a big way, among other things.

That saying, “it takes money to make money”? It alludes to this method, where profit is used to make more profit. It also goes to show that Douglas Adams was right, really. Some people look to moving around, and more importantly, collecting, these small green pieces of paper, simply for their own sake, and not for what they represent. And it is claimed that it makes them happy.

I have my doubts, however.