 So, we understood how industrial profit emerges through the competitive process. Next we want to understand the second fragment of surplus value which is the profit appropriated by commercial capital as commercial profit. To understand how and why commercial profit arises, let us go back to the circuit of capital. So, the circuit of capital in the circuit of capital surplus value is generated here. The circuit of capital shows that surplus value will be realized only through sale. Unless the surplus value is realized through sale, the circuit of capital gets interrupted because unless the commodity form transforms itself into the money form meaning unless the commodities are sold for a sum of money, the next cycle of the circuit of capital cannot begin. Therefore, a capitalist class which specializes which separates out from the industrial capitalist and starts specializing in organizing activities real related to the realization of surplus value emerges. And that fragment of capital is what Marx calls merchant capital. So, merchant capital is the fragment of capital which has separated out from industrial capital. Industrial capital organizes the process of production, production broadly understood remember to include the physical act of production, but also transportation storage etcetera. Commercial capital or merchant capital is the fragment of capital which organizes the pure buying and selling of commodities. Now, Marx distinguishes two types of merchant capital or two subclasses. One is what he calls one is what he calls commercial capital or commodity capital which is the fragment of capital which is involved in the pure buying and selling and the other part is what he calls money dealing capital. Money dealing capital is a part of merchant capital which is directly involved in facilitating the sale by managing the monetary aspects of the transaction meaning doing the bookkeeping doing the accounts keeping track of money and those kinds of things. Now, we are not going to use this distinction we will call all of this capital which specializes in facilitating the transformation of commodity into money and money into commodity which is the capital which is which helps in realizing the surplus value as merchant capital or commercial capital. And the profit that is earned by this fragment of capital is what we will call commercial profit. Now, how does commercial profit arise? What is the mechanism through which that happens? The mechanism through which commercial profit arises is the following. We can think of a two part sale of the commodity. So, on the one hand is industrial capital which has produced the commodity and then on the other side is the consumer which will consume the commodity. So far we have kind of assumed that the capitalist who produces it directly is able to sell to the consumer, but that is not what happens in advanced capitalist countries as capitalism develops there is a segment of capital who intervenes which is merchant capital. So, what happens is that instead of industrial capital directly selling to the consumer industrial capital sells to merchant capital and then merchant capital sells it to the consumer. The price at which the consumer buys is the price of production. So, that is the price at which we have done our calculation. So, that is the price of production. The price at which the industrial capital sells to merchant capital is some intermediate price let us call it the merchant price or the price of price of the merchant. No, not price of the merchant let us call it the an intermediate price. So, what happens is that the intermediate price is lower than the price of production. So, industrial capital sells the commodity to merchant capital at a price which is less than the price of production and then the merchant capital the merchant capitalists sells the commodity at the price of production to the consumer through this process the total surplus value which was supposed to be realized through this price of production gets divided into two parts. One part is realized by industrial capital another part is realized by merchant capital. Now since merchant capital also operates on a capitalist basis for the merchant capital to operate for the merchant to operate he has to maintain his office he has to hire workers that means he has to also lay out capital on the process of realizing surplus value. Now any capitalist who has sums of money would not get involved in the process of realizing surplus value as merchant capital unless the system guaranteed the same average rate of profit to merchant capital as to industrial capital and that is the principle which determines how the total surplus value gets distributed between industrial capital and merchant capital. Whatever is the total surplus value that is entailed by the price of production gets divided into two parts in proportion to the amount of capital involved in industrial capital and the amount of capital involved in merchant capital. Let us look at an example to make this more concrete. So let us go back to the example that we worked out in the last segment where we understood prices of production but instead of dividing the capital into five sectors let us pull them together and make them into one sector. So now we have industrial capital and industrial capital has constant capital of 390, variable capital of 110 and the rate of surplus value is 1 and therefore the surplus value generated is s is 110. Now the new factor which we are bringing in here is commercial capital. So now let us say the industrial capital does not directly go and sell the commodity to the consumer but instead sells it to commercial capital. Commercial capital requires to set up an office to maintain staff all of which requires constant and variable capital. Let us say commercial capital requires 40 constant capital and 10 variable capital so that a total of 50 units are required to be laid out as commercial capital to facilitate the sale of the commodities. Now we want to see how the two step sale of the commodity leads to emergence of two prices and how the total surplus value gets divided between these two segments of capital. The first and most important thing to realize is that commercial capital which is merely involved in selling the commodity does not generate any surplus value therefore the total surplus value generated in the system remains as before 110. But since the capital laid out in commercial capital must earn the same rate of profit as the capital laid out in industrial capital as industrial capital we will calculate the rate of profit the average rate of profit by taking account of this and this. So the average rate of profit now will be the total surplus value which remains the same as before divided not by just 500 but by 500 plus 50. So the average rate of profit is now the surplus value computed as a ratio of the amount of capital laid out as industrial capital plus the amount of capital laid out as commercial capital. So the rate of average rate of profit comes out as 20 percent remember when we did not have commercial capital in the picture the average rate of profit was 22 percent. So because of the intervention of commercial capital the average rate of profit falls and that is precisely because a part of the surplus value is now being appropriated by a fragment of capital which is not involved in its generation. But it gets that because it helps in realizing the surplus value by organizing the sale of the commodity. Now let us calculate these two prices. So what happens we have seen is that the industrial capital will sell it to merchant capital which will in turn sell it to the consumer. The price at which the consumer will buy is the price of production. So let us call that P and the price at which the industrial capitalist will sell to the merchant is some intermediate price let us call that P 0. So now let us calculate the two prices and then see how the total surplus value which in this case is 110 gets divided or shared between these two fragments of capital. So let us first calculate P 0. What is P 0? P 0 is the price at which industrial capital will sell to merchant. What will be the price? This will be the price which will enable industrial capital to get 20 percent rate of return on its capital. Its capital is 500 and a 20 percent rate of return on that means 1.2 multiplied by 500 which is 600. So the price at which the industrial capital will sell to merchant capital is 600. What is the price of production? The price of production is the price at which the merchant will sell to the consumer. Now what is the price of production? The price of production is the price which gives the 20 percent rate of return. So the total capital involved here is 500 plus 50, 500 as industrial capital, 50 as commercial capital. The total capital must get a rate of return of 120 percent. So we multiply it by 1.2 and therefore what we get is 660. So the price at which the industrial the price at which merchant capital sells it to the consumer is 660. Now when merchant capital sells it at 660, what does he get? He gets back 600 which he returns to industrial capital and then on top of that he get 60. What is the 60 represent? Well his capital outlay was 50. Therefore a 20 percent rate of return on 50 gives him 50 plus 0.2 times 50 which is exactly 60. So the 60 implies a 20 percent rate of return on the capital invested by commercial capital. Now this 600 which seems to be an expense that merchant capital has to bear does not really figure in his calculation. One can think of industrial capital selling the commodity to merchant capital as a credit. This is known as commercial credit. Once the merchant has sold it to the consumer at this price 660 he just returns the 600 to the industrial capitalist. So this does not really figure as a bound that could be counted as a capital that was invested or laid out by commercial capital. Therefore we will just consider 50 units as the amount of commercial capital that has been laid out. So now we can see what has really happened. The total the consumer has paid 660 and the industrial capital gets 600. The industrial capital had laid out 500 as his capital. So the profit of the industrial capital is 100. The merchant capital had laid out 50. So the profit of the merchant capital is 10. The total amount of capital invested is 550, 500 from the from industrial capital and 50 from commercial capital. The cost, the price at which the consumers purchases it is 660. Therefore the total surplus value that is realized by the sale of the commodity is 110. 110 now in turn gets divided into two parts. 100 is realized by industrial capital as industrial profit, 10 is realized by commercial capital as commercial profit. So this is how the capitalist system divides up the total surplus value as industrial profit which is appropriated by industrial capital and commercial profit which is appropriated by commercial capital. Commercial capital gets a part of the surplus value because it has the essential role of helping realize the surplus value created by industrial capital. It is essential because without realizing the surplus value without converting the commodities into its monetary form the next cycle of the circuit of capital gets interrupted. That is why it gets a part of the surplus value as commercial profit. Next we are going to be trying to understand the two other fragments of surplus value interest and rent.