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Norm’s note: in my humble opinion, although many so-called leftists decry the structural imperfections implicit in the economic system that we call capitalism, few seem to actually understand what the “flaw” in the system happens to be. Without further ado, then, as concisely and as clearly as I have been able to articulate it, I offer you my simplified aperçu of what I take to be the crux of Marx’s analysis of the ‘capitalist dynamic’ as such:

There is little doubt in my mind that if Marx were to appear upon our economic scene straight from the 19th Century, he would have no difficulty recognizing the relevance of his original analysis – in sharp contrast to the neo-liberal mindset of the Chicago School – to the nature of the capitalist game as it is currently played.

In its essentials, the game continues to be exactly what it was more than one hundred years ago, if only on a vastly greater and grander scale.  Most assuredly, if only on the question of how precisely “profit” is realized through the circulation phases of capital, there is today no competing explanation to that of “the old man’s” that comes anywhere close to it in both its internal logical consistency and its congruence with actual practice.

If we query the neo-liberal mindset as to how capitalism generates profit, the answer inevitably comes down to, through many contorted twists and turns, selling a product, whether a good or service, so compelling and widespread in its demand that consumers are willing to pay a price for it either marginally or greatly above what it originally cost the ‘entrepreneurial class’ to produce it.  In other words, profit is all about insightfully gauging the most prevalent and objective ‘desires’ of individuals and setting about the task of faithfully delivering to the market what those ‘desires’ demand at the ‘price’ that consumers are ‘arbitrarily’ willing to pay for it.

The problem with this explanation, however, is this:

On the one hand, in our ‘free’ markets – Marx being entirely of the mind that ‘our’ markets are in fact ‘free’ – the consumer does not generally negotiate the ‘price’ of anything that she wants to purchase.  Yes, on rare occasions, a person may haggle for the ‘price’ of a commodity, but how often in your experience does that happen?  I don’t know about you, but when I go to my local grocery store, long before I step foot inside, the ‘price’ of what I am going to buy, whether on sale or not, is already decided.  The only thing I get to decide with respect to the prices of the commodities at hand is whether I’m going to pay the ransom.  Consequently, from the standpoint of the ‘buyer’ of a commodity on the open market, I have little choice but to acquiesce to the market dictated prices of everything and anything that is on offer, to that and to the limits of the amount of money I have in my wallet, an amount that constrains which of my needs and desires I can practically satisfy, an amount that I therefore apportion by its constraining necessity among the preordained market prices of the commodities I can actually afford to buy.

On the other hand, though the consumer’s actual experience in the ‘free’ market is that the ‘seller’ seemingly ‘dictates’ his price to the buyer, the reverse is also true: retailers and wholesalers are not ‘free’ to choose at what price to sell their commodities in the ‘free’ market.  Just as the consumer is constrained by his wallet as to what he can or cannot afford, the peddler of commodities is likewise constrained by the contents of that selfsame wallet: he will by necessity have to adjust his ‘price’ to what consumers on the whole can afford to pay for his goods or services if he is to sell these, let alone make a profit over and above their costs of production and distribution.  “Price” is as much dictated to retailers and wholesalers as it is to consumers, and what dictates the market “price” of commodities overall, quite independently of the ambitions and desires of all market participants, is the aggregate “purchasing power” of all consumers at any given moment in time.

It  follows that  if “purchasing power” is the determinant of the aggregate price of all commodities, then if all businesses are to sell their commodities – if only to break even –  then the total sum of the “purchasing power” of all consumers must at a minimum “equal” or “cover” all of the costs of bringing all commodities to the market; and if a profit is to be “realized” by ‘all’ businesses, then the total sum of the “purchasing power” must be such that in the total spent in the market by all consumers, that “purchasing power” must actually exceed the total costs of bringing all commodities to the market.  However, since the predominant factor determining the aggregate “purchasing power” of all consumers is the overall wages and salaries earned by consumers in their jobs as employees, the aggregate market price of all commodities in the course of time must be adjusted downward to correspond to the sum of all moneys paid out in the form of wages and salaries.  Since wages and salaries are a cost of production, however, and by no means the only costs, it follows that the total sum of the “purchasing power” of all consumers must always fall a great distance short of the aggregate amount necessary to ensure that all businesses will “break even,” let alone make a profit.  Of course, in the contest to sell goods and services, some businesses will manage to sell their wares before consumers have on the whole spent all of their wages and salaries, and these will therefore record a profit above costs; but then these profits are and must be exactly balanced on the whole by corresponding loses on the balance sheets of other competing businesses.  Businesses on the whole can never extract more from their shared consumer base than the amount they collectively pay out as wages and salaries to their employees, because their employees are, after all, that selfsame consumer base.

By and large, then, commodity prices are nothing but the reflection of the wages and salaries earned by the working class, regardless of the prices at which capitalists would want those prices to be and in fact need them to be in order to cover their costs and make a profit into the bargain.

The effect, then, of the “free market” is actually to ‘erase’ rather than to ‘create’ or ‘expand’ profit margins, forcing commodity prices to come down to either their costs of production or even lower.

This conclusion completely contradicts the gospel preached by neo-liberalism, that markets, if only left to themselves to operate according to the natural laws of “free market” dynamics, will naturally trend toward an equilibrium that allows for “profit making” while creating an optimum, sustainable and stable metabolic interchange between, on the one hand, the sphere of production, and on the other, the sphere of free market exchange.  In accord with this fantasy, if capitalist markets are always in crisis, continuously caught up as they are in vicious cycles of economic contraction and persistent stagnation, it is because of the wrongheaded attempts of governments to actively manage natural market dynamics that would be better left alone.  But I think it is safe to say that this ‘faith’ in the ‘invisible hand’ of the market is, as we have just seen, just that, a delusion.  Capitalism cannot and does not pay the wages and salaries that would be necessary to absorb the products of its production at cost,  let alone at anything including a profit margin.

If, however, the ‘free’ market tends to equalize commodity prices to their costs of production, if capitalists are constrained by free market forces to eventually sell their commodities at prices that they do not themselves control and that simply become unprofitable over time, how then do capitalists ever make a profit?

Bearing in mind that it is always only a temporary profit margin that free market exchange will inevitably whittle down to nothing, as we have just seen, we can account for the fact of ‘profit making,’ as does Marx, in this way:

As Marx writes, “[t]he value of a commodity is expressed in its price before it enters into circulation, and it is therefore a pre-condition of circulation, not its result.” (Capital, Volume One, Vintage Books, 1977, p.260.)  In other words, at any moment in time, anyone can go to the market and discover the average, persistent and established price of a commodity for which there is an actual, already pre-existing market.  But as already demonstrated, that pre-existing market price will more or less be very close to its actual and current cost of production, especially so if it’s a commodity already entrenched in and widely distributed throughout the market, a state of affairs that applies to the vast majority of all commodities.

The capitalist game is therefore to find an answer to the following question: “given” that a commodity predictably sells for on average, say, ‘x’ number of dollars, what can be done to produce it at a profit at that already “given” and “established” or “customary” price?

There are essentially three ways in which this can happen, none of which are mutually exclusive, all of which can be used singly or in combination: a) force one’s private labour force to ‘accept’ a reduction in wages, thereby reducing the cost of producing the commodity using the customary and established material means of (instrumental-organizational) production at hand; b) improve upon the customary and established material means of (instrumental-organizational) production at hand in such a way as to greatly reduce the amount of time or labour that would otherwise be necessary to produce the commodity, i.e., “increase productivity;” or c) offshore the production of the commodity to a locality where either labour or resource costs, or both, are significantly lower than in the current localities where the commodity is being produced.  And after any or all of this is achieved in whatever combination, introduce the now more cheaply produced commodity into the pre-existing home market where the commodity will predictably fetch its customary and already established market price.  It is in this way that capitalist enterprise creates a profit margin for itself: its profit being the difference between the customary and pre-established market price of the commodity and the now decreased cost of bringing that commodity to the market.  Unfortunately for the capitalists who “innovate” in this way, other capitalists looking to their own advantage and viability, are quick to adopt the newly developed strategies for “creating” profit opportunities.  The moment that these strategies become generalized throughout the economy, profit margins once again deteriorate precipitously, and the crisis of shrinking margins asserts itself again with the implacability of a catastrophe.

All of this explains why under the capitalist mode of production, the means of production are constantly being revamped to ever higher degrees of efficiency; why private businesses are constantly trying to reduce the wages of their employees; and why in the system as whole, under the aegis of national governments overseeing highly developed capitalist markets, there is a constant propensity and drive to subjugate and integrate by military or other means peripheral regions where resources and peoples have yet to be incorporated into the system and thus represent means and opportunities as yet unexploited to further the pursuit of profit.

In a nutshell, this is Marx’s account of how capitalism actually works or, rather, how profit is not primarily a consequence of market exchange.

Profit may be ‘realized’ in and through market exchange, but market exchange is far from being the whole of the story, or even the primary element of that story.  And because of the inbuilt disparity between “the wages and salaries paid to workers” (i.e. the overall “purchasing power” of all consumers taken together) and the aggregate cost of all commodity production, some businesses somewhere must continuously go bankrupt, further compounding the effects of this original disparity on account of the unemployment that those bankruptcies generate.

Left to its own or not, capitalism is an inherently unstable system of production and distribution.  If Marx is correct in his analysis – and it appears that he is – the system is without rhyme or reason, and irredeemably so.  It cannot but be horrendous and brutal in its consequences, in terms of the widespread misery that it must entail,  just as we are made to witness day in and day out, and to which an already many centuries-long historical account does indeed attest.