 Welcome back, this is Dipankar Basu in the Department of Economics at UMass Amherst and you are listening to the course, Marx in Economics, econ 305. In the previous two modules, we have gone through the arguments in volume 1 and volume 2 of capital. Volume 1 helped us understand processes related to the generation of surplus value and its accumulation. Volume 2 helped us understand issues related to the realization of value. Now we must delve into the argument in volume 3, which is about the distribution of surplus value. The key motivation of Marx in volume 3 is to understand the sources of income of different fractions of the ruling class, different fractions of the capitalist class, but also resource owners and the state. We will see that the main argument that will be developed in volume 3 is that the real source of income of different fractions of the ruling class are really the surplus value and that is why this is an argument about the distribution of surplus value. What we will see is the total surplus value, which has been generated in production and realized through sale is as if redistributed across society and emerges as the income of different fractions of capital. The key idea here is that one can think of the whole ruling class as being involved in two types of activities. The primary activity if we may say so is those activities which are related to the production, the generation of surplus value and its realization. Those capitalists who are involved in the process of generation of surplus value, but does not manage to appropriate or realize the full surplus value, why? Because the overall process of capitalist production and reproduction of capitalist society requires other kinds of functions. Those other kinds of functions over time get specialized and individual capitalists or group of capitalist specialize in carrying out those functions. Now, even if those functions are not directly related to the generation of surplus value, even if they do not necessarily create surplus value, since they are essential to the overall reproduction of the system, the system manages to distribute a part of the surplus value generated in production into the income streams of these specialized capitalists. So, that is the basic idea that explains why lot of capitalists who are not involved in the production of surplus value do manage to get a part of it. And the answer is they get a part of the surplus value because the overall process of reproduction of capital requires different kinds of functions to be fulfilled. So, these are the functions which are different from the functions of generating surplus value. So, other than the capitalist who is directly involved in generating surplus value, other capitalist also get a part of the surplus value. That is what we will understand as we go through the argument in volume 3. We might summarize the main argument in volume 3 as follows. So, on this side we will write the names of different fragments of capital. So, the first fragment of capital is industrial capital. The second fragment of capital is merchant capital. The third fragment is money capital. And the fourth fragment of the ruling class is not a capitalist, but a resource owner. A resource owner like a land owner who in feudal times was a landlord or even in early capitalism was a capitalist landlord. Now, on this side let us see how the total surplus value that has been generated gets distributed. What is the industrial capitalist? The industrial capitalist is the capitalist who is directly involved in producing surplus value. So, this capitalist produces surplus value, but the production of surplus value is not the only task that is necessary for the reproduction of capital. And therefore, all the surplus value that is produced by the industrial capitalist is not realized by the industrial capitalist. He gets or she gets only a fragment of the total surplus value and industrial profit. A part of the total surplus value generated is distributed to the merchant capital. What is the merchant capital? Merchant capital is the capital which is involved in trade in the pure buying and selling of commodities. Remember we have seen in volume 2, merchant capital is related to the circulation process, to the mere transformation of the form of value. Merchant capital is important is essential because without realizing surplus value through sale the next phase of the circuit of capital cannot continue. And that is why the essential function of merchant capital is not to produce surplus value, but to help in realizing surplus value. And it is for that function that it gets a part of the surplus value as merchant profit or commercial profit. So, the fragment of capital that specializes in the buying and selling of commodities that helps in realizing surplus value. This fragment of capital is what Marx calls merchant capital and a part of the total surplus value is appropriated by this capital and that income of merchant capitalists is what we call merchant profit or commercial profit. In the process of production it is often the case that the industrial capitalist does not have the total amount of money that he or she needs to start the production process. And therefore, often the industrial capitalist and even the merchant capitalist might need to borrow money. Those fragments of the capitalist class who specialize in making loans of money to either industrial capitalist or merchant capitalist or in general is representative of merchant capital. Merchant capital has the important task of making loan available to industrial and merchant capital. So, money capital helps in making loans of money to either industrial capital or merchant capital and it is for this function that it is able to appropriate a part of the total surplus value as interest. So, the income that is received by fragments of the ruling class who specialize in making loans of money capital to either industrial capital or merchant capital that their income is known as interest. And finally, the capitalist production process often requires resources the most important being land. Owners of land in this case landowners, landlords or more generally resource owners therefore make available an important resource to be used in the capitalist production process. So, they make available some resource like land and it is for making available that resource that the owners of that resource are able to appropriate a fragment as a part of the total surplus value. That surplus value which is appropriated by resource owners is known as rent. So, therefore, the analysis in volume 3 shows us that the total surplus value that is generated in the production process through the exploitation of workers ultimately end up as the income of different fragments of the ruling class. One part emerges as industrial profit, the profit earned by those capitalists who are directly involved in the production process. A part emerges as commercial profit, those capitalists who are involved in the purchase and in the pure buying and selling of commodities. A part is appropriated as interest which is the income that is appropriated by owners of money capital and a part is appropriated as rent which is the income that is which is the part of the surplus value that is appropriated by resource owners. The important point to take away from this analysis is that the ultimate source of income of every fragment of the ruling class, every fragment of the class which is not directly producing commodities, the workers, the ultimate source of income of all of those groups of people is the surplus value appropriated through the unpaid labor of workers. So, surplus value might take different forms, it might take the form of industrial profit, it might take the form of commercial profit, it might take the form of interest or it might take the form of rent. But we must always understand and keep in mind that no matter what form it takes it is merely a form of surplus value and the ultimate source of surplus value is the unpaid labor of workers. That is the main thing that we should take away from this class. We will now try to understand each of the components of surplus value by looking at the details of how they are generated. We will start with industrial profit, then we will look at commercial profit, then we will look at interest and then finally, we will look at rent. There is a difference in the key mechanisms involved that will lead to these different kinds of incomes. The first two source of incomes come about through a mechanism which is competitive in nature. So, it will be analysis of a competitive process of the mobility of capital across sectors which will be the key to understanding industrial profit and merchant profit. But money capital's income as interest and the resource owner's income as rent, there the key mechanism will no longer be the competitive process but rather a process of bargaining. So, the key mechanism that will help us understand how a part of the surplus value is appropriated as interest or as rent will be a process of bargaining. So, even though these are all forms of surplus value, there are different mechanisms and processes involved which lead to their emergence and we would now like to understand the details of those. So, we will start by looking at industrial profit and to do that we will understand some of the details of the competitive process. So, we want to understand what I am calling as industrial profit. What we will see here is that even when we are looking at industrial profit we will see that there is a process by which surplus value is redistributed across sectors. So, to understand industrial profits let us think of the industrial economy. Now, let me clarify by the term industrial I do not only mean industrial production as in industry. Industrial profit refers to the profit earned by industrial capital and Marx means by industrial capital all capital which is involved in the production of commodities. Commodities which are produced by for making profits. Those commodities might be goods or might be services that does not really matter. It might be industrial products or it might be services does not matter. By industrial profit I mean the profit earned by industrial capital, capital involved in the production of commodities whether it is goods or services really does not matter analytically from the perspective of the labour theory of value. Now if we look at the whole range of capital involved in industrial production we will see that there is a difference in the organic composition of capital across industries. Remember what is C by V, C is the constant capital used up V is the variable capital. The ratio of the two is known as the organic composition of capital. What is the organic composition of capital? It captures roughly the capital intensity of production. So, there might be sectors where lot of machines are used per unit of labour. For instance let us say car manufacturing it is a much mechanized process and therefore lot of machinery used is used per workers that will have a high organic composition of capital. Now let us think of the restaurant industry. In the restaurant industry on the other hand lot of the capital goes towards hiring the workers. Therefore the ratio of constant capital to variable capital will be low the organic composition of capital will be low. So if we look at the industrial economy in any capitalist society there will be a difference of organic composition of capital across the sectors of production. What does it imply the fact that different industries have different organic composition of capital? What that means is that some industries will be able to generate more surplus value per unit of capital invested than others. Why? Let us compare a industry with low organic composition with the industry with high organic composition. When an industry has low organic composition the ratio C by V is low and when it has high organic composition it has a high ratio of C by V. What does that mean? It means that for every unit of capital invested since C is less than much lower in comparison to V, V is the amount that goes to purchasing labour power. Labour power is what generates value and surplus value therefore this will generate high surplus value per unit of capital rather than this. So this will generate this will generate high and this will generate low surplus value per unit of capital invested. Why? Because this has a low organic composition of capital therefore for let us say 100 dollars has a very low organic composition of capital so 20 dollars goes towards purchasing raw materials and machines 80 dollars goes towards purchasing labour power. Now it is labour power which generates surplus value so 80 dollars which was used to purchase labour power generates lots of surplus value. On the other hand let us say here the case is opposite 80 dollars went to purchasing machines 20 dollars went to purchasing labour power and therefore since labour power generates surplus value this high organic composition of capital will have low surplus value generated per unit of capital invested. Now this is important because if the total surplus value generated in a sector is realized within that sector then what will it mean? It would mean that the low organic composition of capital will have a high rate of profit. Why? Because it is generating much more surplus value per unit of capital invested and the rate of surplus value is precisely the surplus value per unit of capital invested. So therefore a low organic composition will have a high rate of profit and a high organic composition of capital sector will have a low rate of profit. But this cannot be a situation of equilibrium why? Because capital which is invested in high organic composition of capital and which is making low rates of profits will migrate from this sector and move into the low organic composition of capital sector to generate to in search of higher rates of profit. So there will be a migration of capital from here to here because of which lot more of these goods will be produced and the price of these goods will fall so that over time there will be a tendency for the rate of profit in this sector to fall. On the other hand since capital has migrated from this sector the amount of commodities produced will fall and therefore there will be lower supply relative to demand because of which the rate of profit will have a tendency to rise. The upshot is that because of the mobility of capital across sector in search of higher rates of profit which is the essence of the competitive process we can think of the equilibrium of this process of mobility of capital to be a situation where all sectors earn the same rate of profit. Why is that equilibrium? Because if all sectors earn the same rate of profit there will be no incentive for capital to move away from its current sector that is the sense in which it is a equilibrium. So the long run equilibrium of this process of mobility of capital across sectors will be a generation of an average rate of profit which is the same across all sectors. Now the emergence of the general average rate of profit which is the same across all sectors is conceptually important because it suggests that there is a redistribution of surplus value across sectors. To see that recall that if the surplus value generated in a low organic composition of capital sector were also realized in that sector then that sector would have a high rate of profit. The fact that mobility of capital has reduced the rate of profit in that sector means that there has been a movement of surplus value from this sector from the low organic composition of capital to the high organic composition of capital. So if with the red line we refer we refer to the movement of surplus value then the emergence of an average rate of profit implies a movement of surplus value from a low organic composition of capital sector which was generating relatively higher amounts of surplus value to a high organic composition of capital sector which was generating relatively low amounts of surplus value. So that is why I said that the argument in volume 3 of capital relates to different ways in which the surplus value is distributed. The competition between industrial profit the competition between industrial capital which leads to the emergence of an average rate of profit is a mechanism for the redistribution of the surplus value that has been generated in all the segments of industrial profit taken together. When we think of this average rate of profit we can also think of a set of prices that go with it. The set of prices which support this average rate of profit across all these sectors is known as the prices of production. So the price of production is the price which would emerge in the long run because of the competitive process whereby capital will move between sectors in search of higher rates of profit. The long run equilibrium of such a process will lead to the emergence of a set of prices which Marx calls the prices of production and a corresponding rate of profit which is same across all sectors which Marx calls the average rate of profit. So through the emergence of the prices of production and the average rate of profit the there is a redistribution of the surplus value across sectors. So this is the first step of a two step argument whereby we will understand how the surplus value that is generated in a sector is redistributed across the economy. To understand this process better let me work out an example that Marx worked with in chapter 9 of volume 3. In this example we will see that the economy is divided into 5 sectors. So there is sector 1, 2, 3, 4 and 5. C will refer to constant capital, V will refer to variable capital, S by V refers to the rate of exploitation, C by V refers to the organic composition of capital, S refers to the surplus value, W refers to the value of the commodity and R will refer to the rate of profit. So this is an example that Marx worked with in chapter 9 of volume 3. We will go through this example to understand the notion of the price of production, the average rate of profit and more importantly how the emergence of the average rate of profit is a way in which surplus value is redistributed across the sectors. So let us set up the problem. Sector 1 has a constant capital of 80, a variable capital of 20, a rate of surplus value of 1, C by V which is the ratio of these two in this case is 4. So that is the organic composition of capital. Since the rate of exploitation is 1 and variable capital is 20, therefore the surplus value generated is also 20. And therefore the value of the commodity which is the sum of constant capital, variable capital and surplus value is 120. What is the rate of profit? The rate of profit is the ratio of S divided by C plus V that is the surplus value as a ratio of the total cost of production. So in this case the surplus value is 20, the cost of production is 80 plus 200. So the rate of profit is 20 percent. Now let us look at sector 2. Sector 2 has 70 in constant capital, 13 variable capital, the rate of surplus value is the same across all sectors. So therefore the organic composition of capital in this sector is 7 by 3 which is 2.33. What is surplus value? Well since the rate of exploitation is 1, the surplus value is exactly equal to variable capital which is 30. Therefore the value of the commodity is 70 plus 30 plus 30 which is 130 and therefore the rate of profit which is S divided by C plus V is 30 percent. Now let us look at sector 3 which has 60 and 40. So the rate of exploitation is still 1. What is the organic composition of capital? It is 60 divided by 40 which is 1.5. What is surplus value that is equal to variable capital that is 40 and therefore the value of the commodity is 140. What is the rate of profit 40 divided by 100 which is 40 percent. Now let us look at sectors 4 and 5. Sector 4 has 85 and 15, rate of exploitation is still 1. What is the organic composition of capital? 85 divided by 15 which is 5.7. What is surplus value? It is equal to variable capital which is 15. What is the value of the commodity? C plus V plus S which is 115 and the rate of profit is 15. And finally the last sector has 95 and 5. The rate of exploitation is still 1. What is the organic composition of capital? C divided by V, 95 by 5 which is 19. What is the surplus value? It is equal to the variable capital 5 and therefore the value of the commodity is 105 and the rate of profit is 5 ok. So we have now set up the problem. Let us think a little bit about what we have here. So there are 5 sectors which are very different organic composition of capital. That was the key point that we were trying to understand. Sector 3 has the lowest organic composition of capital which is 1.5. Sector 5 has the highest organic composition of capital which is 19. The other sectors lie in between. Now if sector 3 were to realize all the surplus value it generated it would end up with a rate of profit of 40 percent. Low organic composition of capital sector high rate of profit. If on the other hand sector 5 manages to just get whatever surplus value it has generated it ends up with a 5 percent rate of profit. High organic composition of capital low profit. Now therefore this situation cannot be a situation of long run equilibrium. Why? Because capital will move from this sector to other sectors in search of higher rates of profit. Capital will move from sectors which have high low rate of profit to other sectors. And therefore the long run equilibrium of this process of mobility of capital will be such that it will lead to a situation where every sector will have the same rate of profit. For every sector to have the same rate of profit we will necessarily have a set of prices which will be different from the value of the commodities. It is only by a different set of prices that a different rate of profit will emerge which will be equal. What is that rate of profit and what are those prices that is what we want to understand now. So, let us put in two more columns here. The first column is P which is the price of production which is the price that will be necessary to ensure that every sector has the same rate of profit. Now, the first thing we want to understand is what is this same rate of profit. Now, to do so what we need to see is what is the total surplus value generated in this economy and what is the total capital invested. The total surplus value generated in this economy is 20 plus 30 which is 50 plus 40 90 plus 15 105 plus 5 110. What is the total capital invested 80 plus 70 plus 60 plus 85 plus 95 which is 390 and what is this? This is the same as this which is 110. So, the total capital invested is the sum of 390 plus 110 so total capital is 500. What is the total surplus value generated 110? So, if we forget the fact that there are five different sectors and merge them all into one sector what would be the average rate of profit the system was generating it would be 110 divided by 500 that is nothing but a 22 percent rate of profit which is 110 divided by 500. So, the average rate of profit is precisely that rate of profit which would emerge if we forgot if we fused all these capitals into one in which case there would be no competitive process every capitalist would earn this same rate of profit. Therefore, the average rate of profit which would emerge in this economy is the 22 percent. What would be the price which would be necessary for this sector's output to give a 22 percent rate of profit? Well the cost of production here is 80 plus 20 profit on top of that needs to be 22 percent of the cost therefore, the total price should be 100 plus 22 percent of 100 which is 122. So, the price is 122 similarly in sector 2 the total cost of production is 100 if it has to earn 22 percent rate of profit the price will have to be 122 and you can see by a similar argument that the price of production in each of the five sectors had to be 122. Now, what is important is to compare this column which gives us the value of the commodity and this column which gives us the price of production the distinction or the difference between the two gives us the amount of surplus value as a sector earns or loses. Now, let us look at that difference between P minus W in this case the difference is plus 2. So, sector 1 earns two units of surplus value when the whole process has worked itself through. Let us look at sector 5 P is 122 W is 105 what is the difference the difference is 17. So, a positive amount of surplus value which is plus 17. Let us look at sector 2 amount of price 122 value 130 what is the difference negative 8. Let us look at sector 3 value 140 price is 122 difference minus 18. Sector 4 value 115 price 122 difference plus 7. So, what happens at the end of the process sectors 2 3 lose surplus value sector 2 loses 8 units sector 3 loses 18 units. On the other hand sector 1 3 sector 1 4 and 5 gains surplus value sector 1 gains 2 units sector 4 gains 7 units sector 5 gains 17 units. What is going on? Well sector 1 4 and 5 had organic compositions of capital which was higher than the average sector 2 and 3 had organic compositions of capital which was lower than average. Therefore, sector 2 and 3 generated more surplus value per unit of capital invested than the other sectors and therefore, the price of production which emerged which leads to the same average rate of profit across sectors means that sectors 2 and 3 have to lose surplus value to the other sectors. And it is this set of prices the price of production which leads to an emergence of the average rate of profit which in this case is 22 percent and the corresponding set of prices. Analytically what is important to take away from this discussion is that this is the first step of Marx's two-step argument to understand the redistribution of surplus value. Through the competitive process what has emerged here is a redistribution of the surplus value generated in production. For instance the amount of surplus value generated in segment 3 was 40 units, but the amount of surplus value realized by the sale of that commodity was only 22 units and therefore, it lost 18 units of surplus value to other sectors. What that means is that the amount of surplus value generated and the amount of surplus value realized is not necessarily the same. In fact, they are different because of the competitive process and because there is a difference in the organic composition of capital across sectors. Because some production processes require much more capital than others and that in conjunction with the competitive process means that some sectors which generate more surplus value will lose surplus value when the competitive process runs its course. So, with that we have understood the first component of surplus value industrial capital through the competitive process and because of differences in the organic composition of capital across sectors a set of prices emerge which is the prices of production and an average rate of profit emerges which also leads to a redistribution of surplus value. In the next step we will see that part of the surplus value which is now appropriated as industrial profit will be divided will be broken up into two parts. One part will be kept by industrial capital another part will be shared with merchant capital and that will happen because industrial capital gives up the function of organizing the sale of commodities to some capitalist to specialize in the pure buying and selling of commodities. And for that function for carrying out that function that fragment of capital gets a part of the surplus value as commercial profit that is what we were going to see next.