# The Theoretical System of Karl Marx/Chapter 6

We have seen in the preceding chapters that the facts relied on by Marx-critics to "refute" Marx fail them sig nally when put to the test. These facts rather tally with the Marxian theory. While, however, this may be sufficient to parry the attacks of these Marx-critics and work the discomfiture of all those who should attempt to attack Marx with the weapons of "logic" and "facts of experience," this does not furnish the highest kind of positive proof of the correctness of the Marxian theory, the proof demanded by Marx himself and his followers. Marx and the Marxists have often been reproached for being too strict and exacting. This they undoubtedly are. But first of all, with themselves, Marx has often been accused of being addicted to tedious repetitions in his writing, his critics being unable to see that Marx merely approached his subject from all justifiable points of view in order to make sure that his conclusions were correct. We have already stated before that he never rested his case on purely logical deductions. These only served him as a means of grasping and explaining the facts which must in each case supply the proof. But in looking to the facts for his proofs, he was not content merely with the ordinary facts of "experience" in the sense in which his critics understand the term. Of course, these had to tally with his conclusions before he adopted them, but they merely gave him the prima facia proof. True to his historical ideas, the real decisive proof he sought in the facts of history, or, ​rather, in the "facts of experience" considered in their historical setting and connection.
So it was with his theory of Value and Surplus-Value. Considering that the question of value lies at the very foundation of the capitalistic mode of production and distribution, he insisted that a theory of value in order to be accepted as correct, must not only be in accordance with the facts as they are, but it must furnish a key to the understanding of capitalistic development, to the understanding of the facts of capitalism in their movement. It must explain not only the statics of capitalism, but also its dynamics. A theory of surplus-value, in order to be accepted as correct must show the sources and volume of the profits of the capitalist class not only as they exist to-day, but throughout the entire historical epoch dominated by the capitalistic mode of production and distribution. It must account for the different variations in these profits, if any be discovered. It must explain the development of profits.
And it is here that the Marxian theory has to record its greatest triumph. In philosophy as well as in economics, it is its historical character that gives the Marxian theory its peculiar import, that forms its essence. What does the history of capitalistic profits show? If there is anything that is well established in connection with capitalistic profits, it is the tendency of the rate of profit on capital to diminish. With the development of capitalism and the growth of the mass of capital, the return on capital in the shape of profits is constantly becoming smaller. While the gross amount of profits obtained by the capitalist class is constantly increasing with the growth of the mass of capital, the amount of the profits in proportion to the whole capital employed, and therefore, the rate of profit on a given amount of capital, tends to constantly diminish. This is known in political economy as the "law of the falling rate of profit." Whence this law? How account for the falling rate of profit? No theory of value before or after Marx could give a satisfactory answer to these questions. As ​Marx said of the science of political economy as he found it:—
"She saw the phenomenon (of the falling rate of profit) and was agonized by attempts at conflicting explanations. It may be said, however, that because of the great importance of this law for capitalistic production, this law forms the great mystery about the solving of which the whole science of political economy revolves ever since the days of Adam Smith. And that the difference between the different schools of the science since Adam Smith consists in the different attempts to solve this problem."
There is no such mystery, however, when the Marxian theory of value sheds its light on the underlying basis of the capitalistic mode of production, and the laws of its development are exposed to the light of day. Not only does the Marxian theory offer a satisfactory explanation, but such explanation flows naturally and of necessity therefrom. And it is as simple and as clear as daylight.
The capital employed by a capitalist "producer" in his business is divided into two parts:—One which he spends for his place, fixtures, machinery, raw goods, etc.; and the other which he spends in paying wages to his men, in "employing labor" as it is euphoniously styled. Let us call the capital of the first category "constant" capital, and that of the second category "variable" capital. The reason for these appellations is that according to the Marxian theory, the first kind of capital remains constant, unchanged by the process of production, whereas the second kind of capital varies, changes, to be more specific, increases in that process. As was already shown, only labor creates value, and the capitalist's profits come from the "surplus" value. When a capitalist receives a profit out of the process of production,—his capital increases in the operation,—that variation is due to the capital invested in paying for labor; the other part of his capital, the raw materials and other things can not vary themselves, they are merely reproduced, they remain a constant quantity. Let ​us see how the development of capitalistic production affects the two parts of capital, and what bearing this has on the rate of profit.
John Brown, Sr., went into the business of manufacturing shoes in the year of Our Lord, 1850. He started out with a capital of, let us say, $500.00, four hundred of which he spent in fixing up his plant and buying a stock of raw material necessary in the business, and the remaining one hundred he used in paying his labor. We will assume, for the sake of simplicity, that he employed ten men, paying each ten dollars per week, and that the "turn-over" in his business was such that he cashed in every week the proceeds of his manufactured product, so that he did not need to invest for labor any more than one week's wages. Let us further assume that the state of the productivity of labor was such that the labor of one of our manufacturer's men during one week created a product of the value of twenty dollars. (In addition, of course, to the value of the raw materials, etc., consumed in its production.) Under these conditions the value of the product manufactured by John Brown, weekly, will be two hundred dollars, one hundred of which will be "necessary" value (the amount paid in wages), and one hundred, "surplus" value. This will be his profit. (In order to simplify matters, we assume that he deals with his consumers direct, thus cutting out the middlemen's share of the profit.) The ratio of the "necessary" to the "surplus" value, which we will call the rate of surplus value or the rate of the exploitation of labor, is that of 1 to 1 or 100 per cent. John Brown does not figure that way, however. While he is interested in paying his men as little as possible and make them produce as much as possible, whether by foul means or fair, he is not at all interested to know what proportion the surplus-value they create bears to their wages. Good business man that he is, he wants to know what return the capital invested by him in the enterprise has brought him. He finds that his investment of five hundred dollars has netted ​him a profit (consisting of the surplus-value), of one hundred dollars, or 20 per cent. per week.
On such profits John Brown's business thrived, and he accumulated a fortune. He is now resting in peace with his forefathers, and his son and heir, John Brown, Jr., now conducts the business. John Brown, Jr., upholds the traditions of the old house for making profits. But entirely new methods and processes of manufacturing shoes are now being used by him, as well as by everybody else who is in the market to compete with him. New machinery has been invented since the days when his sire started the business. This machinery is "labor-saving" to a high degree. That is to say, it increases the productivity of labor, so that one man can do by its aid the work of several men working without its aid. This machinery, however, is very costly; and its employment requires a large outlay for raw materials, since a man employs more raw materials in the same proportion as the productivity of labor increases. The "composition" of his capital,—that is to say, the proportionate shares thereof used as "constant" and "variable" capital, respectively,—is, therefore, different from the composition of his father's capital, when the old man started in business. John Brown, Jr., employs a capital of twenty thousand dollars. Of this fully nineteen thousand are used as constant capital, and only one thousand to pay for the labor employed by him. This composition of capital, because it signifies a higher stage of the development of capitalism, we will call the higher composition, and the composition of the capital at the time the business was started we will call the lower composition. Now let us see what effect did the change in the composition of the capital have on the profits of the business.
Let us assume that the firm still retains the old scale of wages. Let us also assume that owing to the introduction of the improved machinery (and allowing for the cheapening of the product in consequence), the value of the product of a man's labor has increased two-fold. What will be the ​result? His variable capital amounting to one thousand dollars, John Brown now employs one hundred men. The value of the weekly product of each man is forty dollars, and the value of the aggregate weekly product, four thousand dollars. Out of this, one thousand dollars represents the necessary value and three thousand is surplus value. His profits have increased enormously, but yet not in proportion to his capital. That is to say, while the gross amount of his profits is enormous, the rate of his profits, the percentage return of each dollar of capital, is considerably smaller. A profit of three thousand dollars on a capital of twenty thousand makes only fifteen per cent., a decrease of five per cent. as compared with the older days.
The different ways in which the business of the older and the younger John Brown is organized, and the results flowing from the different organizations of the business, are typical of the development of capitalistic production in general, and correctly exemplify it. It shows the fact of the falling rate of profit, and also gives the explanation therefor. The development of capitalist production consisting in the increased productivity of labor, by reason of which the composition of capital becomes higher, this development must necessarily tend to lower the rate of interest or profit; for the profit is obtained only from the variable part of capital, which is constantly being diminished as compared with the constant part, whereas it is figured on the whole capital.
Our example, does not, however, show the full effect of the change of the composition of capital on the profit rate. When left to itself, the change in the composition of capital has a tendency to lower the rate of profit much more than appears from our example. The reason for it is, that in our example we did not present the workings of this law in its purity, by changing the conditions of the problem. In the first instance we represented the workingmen as receiving one-half of the value they produced, whereas in the second we assumed that they received only one-quarter. ​Had we left the conditions of the problem the same in the second instance as in the first, that is, one-half the labor was necessary and one-half surplus, we would have had in the second instance with even a somewhat lower composition of capital than that assumed by us, say of eighteen thousand constant and two thousand variable,—a rate of interest of only ten per cent. instead of fifteen per cent. This would show the tendency in its purity. But it would not show the actual facts of capitalistic development. Our example does that—in outline, of course. For, with the higher composition of capital, and the greater productivity of labor which it represents, grows the surplus part of the value produced, grows the rate of exploitation of labor. And this quite irrespective of the fact whether the workingmen are receiving poorer pay or not, or whether the standard of living is becoming lower or not. They may even receive in real wages, that is, in products, more than they received before, and still the rate of exploitation will grow. For with the productivity of labor commodities become cheaper, so that for the same amount of money received by them as wages the workingmen may buy a larger amount of the products produced by them, and yet this amount will necessarily become constantly smaller in proportion to the amount retained by the capitalist as surplus-product. In our example we have allowed for the cheapening effect of the productivity of labor on commodities, otherwise the increase in the value of the product would have to be more than twice with such a high composition of capital. The products consumed by them being cheaper, the workingmen of John Brown, Jr., will get more products for their ten dollars per week than did their forefathers who worked for John Brown, Sr., and yet their share of the product produced will be one-half of that of their forefathers, and the rate of exploitation of labor will have increased threefold since the times of John Brown, Sr. This is what actually happens in the course of the development of capitalist production.
​The greater productivity of labor resulting from the introduction of improved machinery gives the capitalists the possibility of increasing the rate of exploitation of labor, and they are never too slow to grasp the opportunity. This increases the mass of surplus-value, and consequently also the rate of profit. We, therefore, have two cross tendencies:—first, the tendency to lower the rate of profit by raising the composition of capital, thus diminishing, proportionately, the amount of variable capital which alone produces surplus-value; and second, to increase the rate of profit by increasing the rate of exploitation and thereby increasing that part of the product produced by the variable capital employed which goes to the capitalist as his surplus or profit. As the variable part of capital diminishes in proportion, the rate of exploitation grows. Of these two tendencies, however, the first is necessarily stronger, and the second can not overcome it for the simple reason that a part can not be greater than, nor even as great as, the whole. No matter to what proportions the rate of exploitation should grow, it can never absorb the whole product. In order that there should be a surplus-product or value, there must necessarily be a necessary product or value. Any diminution, therefore, of the proportionate part of the capital employed by the capitalists as variable, must necessarily lead to some diminution of the rate profit, be it ever so small. Hence, the resultant tendency of a falling rate of profit. The actual extent of the fall will depend on the co-operation of a number of factors, no mean part being played by the success which the capitalists will meet in their efforts to raise the rate of exploitation of labor in order to counterbalance the effects of the change in the composition of their capital.
This question of the rate of profits brings us to the so-called Great Contradiction in the Marxian theory, and to the question of the relation between the first and the third volumes of Capital. Before, however, entering upon the discussion of this question, the present writer desires to ​state that he intends in a later work to put before the public some matters which will, in his opinion, put the whole subject in a new light. Those matters are, however, not specifically treated by Marx, and as the present work is merely intended to present the Marxian theory as stated by Marx, and the criticism of the theory as so stated, no reference will be made to them here, except to say that their net result does not in any way change the Marxian theory as here outlined, but amplifies it.
The Contradiction was first formulated and placed before the public in a somewhat sensational manner by Frederick Engels himself. In his preface to the second volume of Capital, published in 1884, after the death of Karl Marx, Engels challenged those Marxian critics of that day who had declared that Marx said nothing that was new, and that all the wisdom contained in Capital had already been promulgated before by Rodbertus (from whom Marx was supposed by them to have borrowed his theory of value), to explain "how an equal average rate of profit can and must be formed, not only without injury to the law of value, but really by reason thereof." He argued that if Marx said nothing new and his theory of value is no different than that of Rodbertus, these critics ought to be able to do that by the aid of Robertus' writings as supplemented by Marx's. This had the effect of setting a host of men to solving the problem. Most of those who attempted to accomplish the task were, however, not the Marx-critics to whom the challenge was directed, but disciples of Marx who went about the business not on the basis of Rodbertus' writings, which had very little to offer towards the solution of the problem, but on the basis of the laws of value as laid down by Marx in the first volume of Capital. It was the ambition of these writers to forestall the solution which Engels promised would be given by Marx himself in the third volume. In his preface to the third volume, published by him in 1894, Engels reviews the various efforts at solving this problem, and comes to the conclusion that ​none of those who attempted it gave the correct solution, although some of them came pretty near it, notably Dr. Conrad Schmidt in his work on the subject which appeared in 1889. The correct solution, Engels says, is contained only in the third volume of Capital itself.
The solution of this problem, as given by Marx himself, in the third volume of Capital, and which is supposed to explain the great contradiction, is as follows:—
Assuming that the rate of exploitation of labor is the same in all the spheres of production in society, producing an equal rate of surplus-value in all these spheres; that the capitals employed in the different spheres of production are of different degrees of composition, that is, of different character as to their division into constant and variable capital; and that nevertheless the rate of profit is equal in all the spheres of production, the problem is:—how does this come about, if the laws of value are as laid down by Marx. If two capitals, one whose composition is 90 c. plus 10 v. (90 per cent. constant and 10 per cent. variable), and one whose composition is 10 c. and 90 v. (10 per cent. constant and 90 per cent. variable), the rate of exploitation being the same, produce the same rate of surplus-value or profit, it is quite evident that the surplus-value, and therefore, all value, must have some source entirely different from labor. But that is just what is claimed by all political economists. It is assumed to be an established fact that the rate of profits is equal at any given time in all spheres of production or circulation of commodities, no matter what the degree of the composition of the capital employed in their production. In other words, that at any given time equal capitals will give equal returns, irrespective of the particular branch of industry in which they are employed and of the composition of the capital employed in that branch. But, says Marx, the supposed fact that equal amounts of capital bring equal returns, no matter how employed, gives no indication whatever as to the source of this profit. This, however, is really where the ​contradiction is supposed to lie. It is a contradiction of the law of value that equal amounts of capital produce the same amount of surplus-value irrespective of their composition. But it is no contradiction of the law of value that possessors of equal amounts of capital receive equal profits if it could be shown that the two capitals have produced different amounts of surplus-value, but that for some reasons, compatible with the law of value, part of the surplus produced by the capital of lower composition was transferred to the owner of the capital with a higher composition. This, says Marx, is just what actually happens wherever the law of equal return comes to the surface.
In actual life capitals of different organic composition produce different rates of surplus-value commensurate with the amounts of variable capital contained in them. But we have already seen before that the whole surplus-value produced by any given capital is not retained by the owner of that capital as profit on his capital. We have seen that, by reason of the social nature of capitalistic production and of the category of exchange-value, this surplus-value is distributed among a number of other capitalists, who are concerned in bringing the produced commodity to its social destination through the circulation process. All the capitals employed in the course of the life-career of the commodity share in the surplus-value created in its production, and their share is proportionate to their size, the rate of profit for each being arrived at by a division of the surplus-value by the aggregate amount of capital used in the production and circulation of the commodity. This is accomplished through the laws of supply and demand by means of the category which we have called Price of Production, and at which commodities are actually sold at certain stages of their existence instead of at their values.
We have seen already that it is in accordance with the laws of value as understood by us that commodities are not always sold at their values; are, in fact, habitually sold at prices other than their values, by reason of an under cer​tain economic conditions; and that a capitalist may, and under certain conditions usually does, receive as profits on his capital surplus-value created by some capital other than his own. The price of production at which commodities are sold at a certain stage of their existence is always below their value; and the capitalists engaged in the circulation of commodities exclusively, the merchants, get as profits on their capitals surplus-value not produced by them but merely realized by them. The capitalists who produced this surplus-value are forced to divide up with them by the very economic conditions which permit them to retain their own proportionate share.
This principle, which we have heretofore examined with relation only to one sphere of production, must be extended to all the spheres of production wherein the law of equal return prevails. Where the law of equal return prevails in spheres of production wherein the capital employed is of different organic compositions, the prices at which the commodities are finally sold are not their actual values, but a sort of modified Prices of Production which may be either above or below their value, and which will be above their value in the branches of industry with a capital whose organic composition is above the average, and below their value in the branches of industry with a capital whose organic composition is below the average. Just as in the single commodity the surplus-value produced by one capital had to be distributed among all the capitals engaged in its production and circulation, so here the various amounts of surplus-value produced in the different spheres of production must be distributed ratably among the whole social capital or that part thereof which enters into the equalization process, that is, of those branches of industry where the law of equal return prevails. The whole social capital is regarded as one, and the whole amount of surplus-value produced in the different spheres of production is distributed ratably among the different individual capitals, by the formation of the price of production, and the goods in ​each branch of industry being sold according to that price of production which will consist of the value of its cost of production together with a share of profit out of the general fund of surplus-value in proportion to the size of the capital employed in its production and circulation. By means of this price of production the excess of surplus-value above the average rate produced in one sphere of production by reason of the low organic composition of the capital employed therein, will be transferred to that sphere of production wherein the amount of surplus-value produced is below the average, by reason of the high organic composition of its capital. In those branches of industry where the organic composition of capital corresponds with the average or social composition of capital, commodities will be sold at their values, their prices of production will coincide with their values; in those branches whose organic composition is above the average, the prices of production will be above their values in proportion to the composition of their capital; and in the branches whose composition is below the average the prices of production will be proportionately below their values.
The appearance in 1894 of the third volume of Capital created a sensation in interested circles. While it does not stand in any direct relation to the Revisionist movement, it can hardly be denied that it made its formal argumentation more plausible. The solution of the Great Contradiction contained in the third volume, and the rest of the matter therein contained and intimately connected with this solution, opened the door to no end of discussion as to the relation between the first and third volumes of Capital. So that the problem to many has turned into the question how to reconcile the supposedly opposed doctrines taught in these two volumes of Marx's life work. The Great Contradiction, in the opinion of many, was not solved, but extended so as to embrace the whole Marxian theory. This was confidently asserted by all the opponents of Marxism, who drew breath. It was heralded from one ​end of their camp to the other, and it took its classic form in Böhm-Bawerk's, "Karl Marx and the Close of his System." The opponents of Marx were not, however, alone in this opinion. The discussion which has continued until the present day has shown that a good many Marxists, of different shades of orthodoxy, shared in this view. So much so, that a Russian Marxist of some prominence and of strict orthodox profession of faith, being unable to reconcile the doctrines laid down in the two volumes, respectively, denied, in his desperation, the genuineness of the "unfortunate" third volume! He claimed that because the third volume was published long after his death, and was compiled from unfinished manuscripts and random notes, Marx appears therein as saying things which he really never intended to say and which are in crass contradiction to his real views, which are contained only in the first volume. Engels' preface to the third volume is sufficient to show the absurdity of this last assertion. So that there was the great contradiction, which made plausible the assertion that Marx completely abandoned his own theory of value, laid down by him in the first volume, and returned to the theory of the cost of production, of the economists dubbed by him "vulgar." The half-and-half Marxists, à la Bernstein, would not go so far (timidity and eclecticism being their specialty), and they tried to minimize the discrepancies between the first and third volumes, claiming that Marx did not abandon his theory of value as laid down in the first volume, but merely modified it, on second thought, in the natural course of the evolution of his theory. Modification by evolution, or evolution in modification became their favorite theme.
In discussing Marx's philosophico-historic views we already had occasion to refer to this favorite theme of Revisionism. The burden of the song is that Marx's theoretical ideas had passed through an evolutionary process, the main tendency of which was from "unscientific," hard and fast monistic dogmas, at the outset, to mild and loose ​eclectic "science" at the conclusion. This they applied equally, and with equal justification, to the whole Marxian theoretical system, to his historico-philosophic and his economic theories alike, although they failed to grasp the inner relation between these theories. Their lack of discrimination proved to be their undoing. If they had stuck to Marx's historico-philosophic views alone, they might perhaps have been able to hold their ground, as Marx's views on the subject are not contained in any treatise, are strewn over the whole mass of his writings in a more or less fragmentary condition, and it requires an intimate acquaintance with his theories to see the improbability of this claim. Not so with his economic theories. He went into elaborate discussions of all phases of the subject, and the dates of the different manuscripts, with a few unimportant exceptions, are well known. And these testify loudly to the whole world to the absurdity of these assertions. It appears that most of the third volume, and particularly those portions of it which are supposed to modify the first volume, were actually written down by Marx in its present form before the publication of the first volume! To speak in the face of that of a modification, by Marx, in the third volume of the doctrines laid down by him in the first is too palpable an incongruity to merit any particular attention. So, and even more so, would be the claim of an intentional abandondonment in the third volume of the theory of value of the first volume in favor of some other theory. We could then well afford to let the matter rest where it is. It is not so, however, with the question of a contradiction between the two volumes. If there really is such a contradiction, and if the doctrine of the third volume is a virtual abandonment of the labor theory of value, it makes, of course, very little difference when the different portions of Marx's book were written, or what he thought of one portion when writing the other, except, of course, as an interesting study of a great aberration of an extraordinary mind.
Professor Werner Sombart, the noted German economist, ​best known to English readers through his graceful study "Socialism in the 19th Century," opened the discussion on the subject soon after the appearance of the third volume in an essay entitled, "Some Criticism of the Economic System of Karl Marx." In the introductory remarks of that essay Professor Sombart observes that Marx was a "most misunderstood author," and that an intelligent statement of his assertions was the highest duty of a reviewer of his work. Such a statement he undertakes to give, and goes about it very conscientiously. It must be stated, however, that notwithstanding his conscientious efforts and considerable acumen the execution fell short of the design. His conclusion, therefore, that there was no contradiction between the first and third volume can not be accepted as final.
According to Sombart, the theory laid down in the third volume of Capital is not much different from the traditional theory of the cost of production. This does not conflict, however, with the theory of value expounded in the first volume, for the simple reason that the labor theory of value was never intended by Marx to represent the actual facts, or, as he puts it, "the (Marxian) value does not reveal itself in the exchange relation of the capitalistically-produced commodities." Nor does it play any part in the distribution of the yearly product of society. It has no place in real life. Its office is merely that of an aid to our thinking, by means of which we can understand the economic phenomena, and its place is in the mental operations of the economic theorist. In short, "it is not an empirical but a mental fact." Value, thus banished from economic life into the realms of pure thought, can no longer come into conflict with the gross facts of this life. Its existence is none the less real, at least to the mind of the German scholar who must have been educated on the writings of the great German idealist philosophers.
Aside from the questionable value of such "value," the ​chief trouble with Sombart's conception of the Marxian "value" is,—that it is not Marxian. Marx never dreamt of banishing his "value" from real life, from the facts of actual, every-day, economic life. He not only insisted that his theory of value had an application to the actual economic life of capitalist society, but claimed that the laws of value as laid down by him controlled that life and prescribed the course of its development. He claimed that while Production Prices, and prices in general differed from the values of commodities, they were always governed by the laws of value and were dictated, normally, and in the last instance, by these laws. That all declination of these prices from the actual values, except accidental and temporary, are governed by the very laws of value which are supposed to be infringed thereby. Truly, Marx was "a most misunderstood author."
We, therefore, agree for once, with Böhm-Bawerk, that, whatever the merits of Sombart's conception of value, it does not in any way remove the contradiction in the Marxian theory of value as Marx stated it. Assuming, of course, that there is such a contradiction, if Marx intended his theory to represent the actual course of events of capitalistic production and distribution. That there is such a contradiction is assumed, as we have seen, even by some orthodox Marxists, and Marx-critics do not tire of proclaiming the fact. Says Böhm-Bawerk:
"In what relation does this doctrine of the third volume stand to the celebrated law of value of the first volume? Does it contain the solution of the seeming contradiction looked for with so much anxiety? Does it prove 'how not only without contradicting the law of value, but even by virtue of it, an equal average rate of profit can and must be created?' Does it not rather contain the exact opposite of such a proof, viz., the statement of an actual, irreconcilable contradiction, and does it not prove that the equal average rate of profit can only manifest itself if, and because, the alleged law of value does not hold good?
​"I see here no explanation and reconciliation of a contradiction, but the contradiction itself. Marx's third volume contradicts the first. The theory of the average rate of profit and of the price of production cannot be reconciled with the theory of value. This is the impression which must, I believe, be received by every logical thinker. And it seems to have been very generally accepted. Loria, in his lively and picturesque style, states that he feels himself forced to the 'harsh but just judgment' that Marx, 'instead of a solution has presented a mystification.' He sees in the publication of the third volume 'the Russian campaign' of the Marxian system, its 'complete theoretic bankruptcy,' a 'scientific suicide,' 'the most explicit surrender of his own teaching,' and the 'full and complete adherence to the most orthodox doctrine of the hated economists.'"
Böhm-Bawerk then quotes with approval the following passage from Sombart: "Most of them (the readers of the third volume) will not be inclined to regard 'the solution' of 'the puzzle of the average rate of profit' as a 'solution;' they will think that the knot has been cut, and by no means untied. For, when suddenly out of the depths emerges a 'quite ordinary' theory of cost of production, it means that the celebrated doctrine of value has come to grief. For, if I have in the end to explain the profits by the cost of production, wherefore the whole cumbrous apparatus of the theories of value and surplus-value?"
Slonimski says: "Contrary to all expectations the theory of surplus-value is repeatedly asserted (in the third volume); in reality, however, it is denied by its author and replaced by the old theory with all the familiar elaborations on the cost of production as the only regulators of value. The equality of profits is derived from the phantastic assumption that the capitalists amicably divide among themselves the incomes of the different undertakings, by equalizing the sums of surplus-value which they separately drew ​from wage-labor, and that this is accomplished either by way of brotherly arrangement or through competition. As to the special surplus-value for which the rival capitalists fight so mercilessly, why that is lost sight of and plays no part either in the income of the individual capitalist, or in the establishment of the rate of profits or in the formation of prices.
"After Marx has led us in the course of two volumes through an elaborate analysis by which he sought to prove that surplus-value is produced by hired human labor-power, he turns a somersault and admits that all his laws and formulas are in direct conflict with reality, and cannot be brought into harmony. That surplus-value in the form of profits is yielded by every productive capital as such in equal amount, even though it be used in such a manner that no wage-laborers are employed thereby. Instead, therefore, of surplus-value, which we put to the credit of unpaid labor appropriated by the capitalists, we are confronted with the average rate of profits, which is conditioned neither upon the number of workmen nor upon the degree of their exploitation, nor is it influenced by either."
And Masaryk declares: "De facto we have in the third volume the ordinary theory of cost of production, and the law of supply and demand plays the decisive part."
"Bernstein"—says he—"admits the breach between the third and first volumes. Marx has certainly modified his theory. The theory of value of the first volume is incomplete, and therefore vulnerable, without the elaborations of the third volume. Bernstein admits that the first volume offers for the real economic relations a 'sea of generalities without any shore,' and that the determination of value by the quantity of labor is inadequate; a more specific measure is necessary. Commodities are exchanged not at their value but at their cost of production, the exchange-value of goods is directly determined by competition of capital, and only indirectly by the law of value. I believe that Bernstein correctly judges the Marxian teaching. The ​third volume speaks only too plainly against the first." And he adds:
"These expressions (of the third volume) show the general change in Marx's views. We have seen how Marx modified in the third volume his older definition of historic materialism—the whole third volume makes also by its tone a different impression than the first. The first volume is not so ripe.... Bernstein attempts another explanation of the contradiction between the older and the newer doctrines, which contradiction, as we have seen, he unqualifiedly admits."
Yes, "we have seen." We have seen how absurd it is to speak of a modification of the older unripe doctrine by the newer and riper doctrine, when the supposed older doctrine was formulated after the supposedly new one.... And this, as Masaryk himself says, applies to all of Marx's views, whether historico-philosophic or economic. Yet, its evident absurdity will not deter Marx-critics, particularly of the milder and revisionist sort, from continually repeating this statement.
This, however, by the way. What does interest us just now is the relation of the third to the first volume, incident to Marx's solution of the "Great Contradiction." Singularly enough, most of the Marx-critics are content with merely stating ex cathedra their conclusions or assertions that Marx has, in the third volume, "modified" or "abandoned" the theory stated by him in the first volume, that he contradicts it, that he has adopted a new theory, without giving themselves any particular pains to show the reader just how they arrived at these conclusions, or what is the basis of their assertions, except in the most general way. Always excepting the methodical Böhm-Bawerk, who, besides his general remarks, has also particular objections, separately stated and numbered. We shall pay our respects to them in due time, if there is anything left of them after our general discussion.
Before entering, however, upon the discussion of the ​theoretical questions involved, we must call attention to the circumstance that the facts themselves are not in dispute here, but only their interpretation. Notwithstanding the apparently unanimous verdict of the critics that the Marxian theory is on this point "in direct conflict with reality" and "opposed to the facts," there is really no question here of facts, but merely of their interpretation. The phenomenon itself which, as Marx asserts, brings the Marxian law of value in harmony with the law of equal rate of profit, that is to say: the alleged fact that the products of labor in spheres of production with a higher organic composition of capital are sold at higher prices than the products of labor in spheres with a lower composition of capital, this fact itself, we say, is not disputed by the Marx-critics. It is only as to the explanation of this fact that they differ from Marx. Marx's explanation is based, in the main, on the fact, undisputed by his critics, that the same amount of labor results in a product which will be sold for a higher or lower price according to the higher or lower organic composition of capital in the sphere in which it was employed. The difference between Marx and his opponents is as to the reason for this alleged fact. Marx says the reason is that in the spheres with a higher composition of capital commodities are sold above their value and in spheres with a lower composition of capital below their value; and that the additional value included in the higher price of commodities produced in the first sphere is created in the other sphere and is transferred to their possessor by the very sale of commodities produced in the second sphere below their value. With this reasoning his critics disagree, as they undoubtedly have a right to. But they have no right whatever to hide the circumstance that it is their reasoning that is opposed to Marx and not the facts. It is a question of logic and not of fact.
Now, as to the logic of the matter. That there must have been some very poor logic used by somebody can easily be seen from the fact that all Marx-critics who agree that ​Marx in his "riper" judgment abandoned his theory of value, also agree that even the Marx of the riper judgment never knew that he was propounding in the third volume an old and commonplace theory and was abandoning his own theory, on the exposition of which he wasted the entire first and second volumes of his life work.
In what does this abandonment consist according to the Marx-critics? Stripped of their verbiage the statements of these critics amount to this: In the first volume Marx said (1) that the value of a commodity depends on the amount of labor necessary for its (re)production, and that such value was the point about which its price will oscillate; (2) that the profits of the capitalist, therefore, come from the amount of surplus-value created by his workingmen; and (3) that the cost of production has nothing to do with the value or price of a commodity or the profits of the capitalists. In the third volume, on the other hand, he admits that (1) the price of a commodity may be, and usually is, permanently fixed at, or oscillates about, a point which is different from its value as measured by the amount of labor necessary for its (re)production; (2) that the amount of profits which a capitalist obtains from his capital does not depend upon the amount of surplus-value produced by his own workingmen; and (3) that the old theory of cost of production as to value, price and profit holds good.
We will discuss the last proposition first, for the reason that it may throw some light on the whole subject.
Marx says nowhere in the third volume that the cost of production of a commodity determines either its value or its price, except to say that the old values which go into its production in the shape of raw material, etc., are reproduced in it and form part of its value and consequently of its price, a proposition which nobody will claim is an innovation of the third volume. Wherein does the "quite ordinary" theory of cost of production of the third volume then consist? Evidently in the theory of the Price of Pro​duction developed in the third volume. But has the price of production anything to do with the cost of production? Have not the learned critics been misled by the similarity of terms? Let us see. What is the "ordinary" theory of cost of production? That the value of a commodity is equal to the cost of its production, plus the average rate of profit on the capital invested in its production. Marx's Price of Production consists of the costs of production (that is, of the value of the different ingredients which go into the production) plus the average rate of profit on the capital invested in the production process. The two things look so much alike to the uninitiated that one is not surprised to hear Sombart complain that if that is what we were to come to in the end, wherefore the "cumbrous apparatus" of value and surplus-value?
Let us examine the matter a little closer, however. A close examination will show, in the first place, that the Marxian cost of production which forms a part of the Price of Production, is determined by its value according to the labor theory of value, whereas the "ordinary" theory of cost of production has no such determining element. As a result, the "ordinary" cost of production theory revolves in a vicious circle: The value of a commodity is determined by the cost of its production, the cost of its production is determined by the value of the commodities which go into its production, the value of these commodities is determined by the cost of their production, and so on, and so forth, ad infinitum. In other words, the "ordinary theory of cost of production can no more explain either the value or the price of commodities than a man can pull himself out of the mire by his own bootstraps.
This is not, however, the principal point. The "cumbrous apparatus" of the Marxian theory of value and surplus-value was necessary in order to attain the principal object of the science of political economy, the discovery of the laws governing the production and distribution of profits in the capitalist system. We have already dwelt on this ​point at length in a preceding chapter. And this "cumbrous apparatus" is still necessary, and is still the only means of attaining this object of political economy, all the Marx-critics to the contrary notwithstanding. Neither the ordinary nor any extra-ordinary theory of cost of production even as much as attempts to solve this problem, which is the problem of political economy. The theory of cost of production, which even the "Marxist" Sombart places on a level with the Marxian theory, tells us gravely that the value of a commodity is equal to the cost of its production plus "the average rate of profit." But what is this "average rate of profit"? By what is it determined? Where do profits, whether average or non-average, come from?
In vain will the inquirer look to the theory of cost of production for an answer. But these questions are all answered by the Marxian theory, which our astute critics evidently did not begin to understand. The first volume shows the genesis and general laws of profits; the second volume shows the distribution of profits between the different capitalists, instrumental in the production and distribution of commodities, and the influence of the circulation process on profits; and the third volume shows the reciprocal influences of the different spheres of production and distribution of commodities in the whole capitalist system, and the mode of distribution of all the profits netted to the capitalist class among its different members, the formation of the average rate of profit.
By reason of the formation of an average rate of profits, the profit of the individual capitalist does not depend on the amount of surplus-value produced by his own workingmen. This, as we have seen, is the second point on which the third volume is supposed to conflict with the earlier volumes. This objection rests on the grossest misunderstanding of the first and second volumes. Marx never said, and could never have said, that every individual capitalist's profits consist of the surplus-value created by his own ​workingmen, or that every capitalist pockets all the surplus-value produced by his workingmen. Such a statement would be absolutely repugnant to the spirit of the Marxian doctrine as laid down in the first volume. The cardinal difference between the Marxian theory of profits and the theories which preceded it, is that according to Marx all profits of the capitalist class are derived from the process of production. It is with the exhaustive elaboration of this doctrine that the first volume is chiefly concerned, and this is supplemented in the second volume by showing the negative implied thereby,—that no profits are created in the circulation process. But Marx certainly knew that profits are made by the capitalists engaged in the circulation process. It was this very knowledge that impelled him to write so exhaustively in order to prove that while these capitalists derive their profits from the circulation process, they merely realize during this process, and by means thereof, the profits which are created in the form of surplus-values during the process of production.
Of course, this could only happen if some of the capitalists receive profits not created in the form of surplus-value by their own workingmen; nay, notwithstanding the fact that their workingmen created no surplus-value whatever, or that they employed no workingmen at all. This, again, could only happen if the capitalists engaged in the production process did not retain all the surplus-value created by their workingmen, but divided them with the capitalists engaged in the circulation process. It is with the explanation of these facts that the first and second volumes are filled. Yet, some Marx-critics evidently missed even this!
This disposes of the proposition placed first by us because of the prominence given to it by Marx-critics. How could all the surplus-value be produced in the production process of commodities and yet part of it realized in the circulation process, if goods are actually sold at their values? If the value of commodities is the point about which their prices oscillate at all stages of their existence, all the surplus-​value contained in them must evidently be realized as soon as they are sold by the producer, and unless some new value attaches to them in the circulation process, the capitalist engaged in that process cannot possibly make any profit. Here was a contradiction greater than any that could result from the supposed law of a common rate of profits, assuming that Marx ever did say that the price of commodities will always oscillate about their value. The "solution" of this "Great Contradiction" is that Marx, as we have repeatedly pointed out, never did say any such thing, and the reading of such a thing into Marx is simply preposterous. A careful reading of the first and second volumes of Capital clearly shows that the price of commodities is governed by their value, but that it need not conform to it, nor even always oscillate about it. Quite to the contrary. Under given conditions, which are necessary at certain stages of the existence of every commodity, its price will remain constantly away from its value. Always, however, subject to the general laws of value, and by reason of the laws of value. The price formed under these conditions is the Price of Production.
It is generally assumed that the category of the Price of Production is an innovation introduced by Marx in the third volume in an effort to solve the contradiction between the law of value and the law of equal return. This is a mistake. While the term "Price of Production" is first used in the third volume (because there only are all the conditions under which it forms discussed for the first time) the principle itself is contained in the earlier volumes, and has absolutely nothing to do with the particular problem presented by the question of the equal rate of profits. When Marx came to treat of that problem he simply applied to it a principle which already was part of his system as expounded by him in the first and second volumes. The only difference between the category of Price and Production as implied in the first and second volumes and as expressed in the third volume is this: The condi​tions for the formation of this price discussed in the first two volumes were such as made it always below the value of commodities, whereas the conditions for its formation discussed in the third volume make it possible for the price of production to be either below or above the value of the commodity. But whether above or below value, whether formed by reason of the average rate of profit or under the conditions described in the first and second volumes, or both, the price of production is governed by the value of the commodity, and exists by reason thereof and in conformity to its laws. In other words, notwithstanding the fact that prices may, in the capitalist system of production and distribution, be permanently at, or oscillate about, a point different from the value of commodities, the formation of these prices, and, consequently, their movement, is governed by the laws of value.
This ought to be plain to all Marx students. But the trouble with Marx-critics, in the economic branch of his theory, as with those who treat of his historico-philosophic ideas, is, that they cannot distinguish between the individual and social element and cannot see things in their motion. Because the profit of an individual capitalist does not depend merely on the amount of surplus-value produced by his workingmen, they conclude that the theory of surplus-value does not explain the profits which the capitalists get under the capitalist system. And because the price of some commodities may be more or less permanently above or below their value, they assert that the law of value governing the formation and movement of prices in the capitalist system is incorrect. They cannot see that before the capitalist could get his profits at any given general rate, that rate must have been established in society according to some law; and that before the price could be at a certain point, it had to be put there by some social law of value. And they cannot therefore see how the individual and statical cases, while apparently deviating from the general laws in their movement, are actually governed by them.
​To borrow an example from another science, and an "exact" one at that. The critics of the Marxian law of value are exactly in the same situation as would be the critic of the law of gravity, who would declare that law to be false for the reason that bodies do not fall in actual experience in accordance with the rules formulated by it. Indeed, such a critic would be in a better position than the Marx-critics. For, while according to the laws of gravity falling bodies acquire an acceleration of 981 centimeters per second, and that irrespective of their nature, form or size, the "facts of experience" prove conclusively that not one body in a million actually falls at that rate, and any child of some intelligence will tell you that the nature, the form, and the size of a falling object, make all the world of difference in the velocity which it can acquire. Yet, the law of gravity is correct when properly understood. And the Marxian law of value is no less correct. But it requires a greater intelligence than that usually displayed by intelligent children, observers of "facts of experience," and some Marx-critics, to understand it properly. Therein lies the whole trouble.