The capitalist mode of production - Roma Tre...

Economia Politica – Corso Avanzato

Advanced Economics

Chapter 2

The capitalist mode of production

Saverio M. Fratini

2.1 The capitalist system: a stylized representation (1)

CAPITAL : from the Latin word “caput” [head].

Roma, caput mundi / Rome, capital of the world

Used to denote the most important thing [e.g.: the capital city of a

country] or something that is at the beginning [e.g.: a capital letter].

Referring to the capitalist mode of production, capital is the amount of

value (purchasing power) invested at the beginning of the production

process in order to finance the costs of production.


1) Society is organized in classes: workers, landowners and

capitalists.

2) Capitalists are the ruling class. Capitalists are the direct or indirect

organisers of production processes. Capitalists are the entrepreneurs.

3) The capitalist system is a market system. Outputs (goods and

services) are produced in order to be sold on the market. Inputs are

purchased on the market (the separation of the labourers from the

means of production forces them to sell their labour-power). Both

inputs and outputs are commodities.


Since the employment of inputs must precede the production of output

for every single process, inputs are generally purchased before output is

sold.

The costs and revenues of the same process are therefore not

simultaneous, as the former generally precede the latter. As a result,

costs of a certain process cannot be financed by its revenues.

PRODUCTION PROCESS

INPUTS OUTPUT

moment t moment t+1

COSTS REVENUES


4) Capital is the amount of purchasing power that is required for

each process to advance its costs. The capital invested is then

recovered out of revenues when the output is sold.

5) Profits are the difference between the revenues and costs of

each process. They are a surplus or a residual that capitalists obtain

from revenues over and above the costs, which correspond to their

initial investment of capital.

Revenues – Costs = Profit

2.2 The capitalist system: an example (1)

Kt ℝ+M : vector of capital goods (means of production)

Lt ℝ+A : vector of labour services

Nt ℝ+B : vector of productive services of natural resources

Yt+1 ℝ+M : vector of outputs

Production process

Kt Lt Nt Yt+1


pt ℝ+M : vector of commodity prices in period t

wt ℝ+A : vector of wage rates in period t

t ℝ+B : vector of rent rates in period t

Costs (in period t)

pt Kt + wt Lt + t Nt = Ct


pt+1 ℝ+M : vector of commodity prices in period t+1

Reveneues (in period t+1)

pt+1 Yt+1 = Revenues

Revenues allow the capitalists to recover the capital advanced with

profit.

pt+1 Yt+1 = Ct + t+1


pt+1 Yt+1 Ct = t+1

Profit is the difference (surplus) between revenues and costs (capital).

It is the self-valorization (self-expansion) of capital, namely the increase

of the value of capital by means of its own employment.

The ratio rt,t+1 = t+1 / Ct is the rate of profit, namely the profit for each

unit of capital invested in the process from t to t+1.

2.3 The capitalist circuit (1)

Money – Commodities – Money

• Pre-capitalistic circulation of commodities: C – M – C

• Capitalistic circulation of commodities: M – C – M

Capital, understood as an amount of purchasing power, is needed in

order to advance the costs of production and therefore to start up the

production process.

At the end of the production process, with the revenues from the sale of

outputs, the capital invested becomes purchasing power again.


Revenues leave a surplus over and above costs: profit. Profit is the self-

expansion of capital. It represents the increase in the value of capital

which arises as a result of its own employment.

M – C – M’

M : value of the costs anticipated by capital

C : commodities purchased or produced by means of capital

M’ : value of the revenues generated at the end of the process, when outputs are sold

Profit : 𝛱 = M’ – M


Remarks

i) Capital is not an input. The inputs are the capital goods

(commodities); the labour services; the productive services of natural

resources.

ii) Capital is an economic object of the same kind as costs and revenues.

Thus, capital is an amount of value.

iii) The rate of profits is not the price of capital. Profits are just a

residual.

2.4 Real wages (1)

In the capitalist system, icome distribution depends on the class

conflict.

Social Net Product = Wages + Rents + Profit

If wages = workers’ subsistence, then rents + profit = surplus.

If wages > works’ subsistence, then rents + profit < surplus.

Once the level of output in each sector and the methods of production

are taken as given, then the amount of incomes different from wages

depends on the wage rate level.

2.4 Real wages (2)

Workers’ bargaining position (strength) depends on economic,

institutional and social elements.

Economic elements: level and composition of the aggregate

demand.

Institutional elements: existence of trade unions; local or central

bargaining; typical or atypical contractual forms; frictional

unemployment (employment agencies); … .

Social elements: workers’ habits; class consciousness; … .

2.4 Real wages (3)

The determination of the wage rate is not a market phenomenon: the

presence of involuntary unemployment of labour does not entail a fall of

the real wage rate.

1. Increasing unemployment may affect the wage rate, but indirectly:

reducing workers’ bargaining power

2. The possible fall of the real wage rate does not necessarily lead to a

reabsorption of unemployment

3. There is a minimum level, the 'subsistence’ level, below which the

normal or ordinary wage rate cannot fall even in the event of high

unemployment

2.4 Real wages (4)

Subsistence wage level:

Social subsistence:

The amount of commodities “which is necessary to enable the

labourers, one with another, to subsist and to perpetuate their race,

without either increase or diminution.” (Ricardo, Works I: 93)

It allows the economic system to have a constant (persistent) labour

force available.

It depends on social and institutional elements (consumer habits,

pension system, public education, public health system, …).

individual

social

2.5 Natural prices and general rate of profit (1)

𝑃𝑟𝑜𝑓𝑖𝑡 = 𝑅𝑒𝑣𝑒𝑛𝑢𝑒𝑠 − 𝐶𝑜𝑠𝑡𝑠

𝑅𝑎𝑡𝑒 𝑜𝑓 𝑃𝑟𝑜𝑓𝑖𝑡 = 𝑃𝑟𝑜𝑓𝑖𝑡

𝐶𝑎𝑝𝑖𝑡𝑎𝑙 𝐼𝑛𝑣𝑒𝑠𝑡𝑒𝑑

Adam Smith: each commodity has a market and a natural price.

Market prices: the prices at which the commodities are actually sold.

Natural prices: the system of prices that allows the same proportion

between profit and capital in every sector.


“Of every commodity there are two different prices, which tho’

apparently independent will be found to have a necessary connection,

viz. the natural price and the market price” (Smith, LJ(B) 224).

The natural price of a commodity is “what is sufficient to pay the rent of

the land, the wages of the labour, and the profits of the stock employed

in raising, preparing, and bringing it to market, according to their

natural rates” (Smith, WN I.vii.4).

The market price is “[t]he actual price at which any commodity is

commonly sold’ and ‘is regulated by the proportion between the

quantity which is actually brought to market, and the demand of those

who are willing to pay the natural price of the commodity”, i.e. “the

effectual demand” (Smith, WN I.vii.7, 8).


Natural price and market price of a commodity are different in nature

and depend on different forces:

• the former is a theoretical variable and the latter an actual

(observed) magnitude;

• the former depends – for a given technique – on the ‘ordinary or

average’ rates of wages, rents and profits, which in turn depend on

‘the general circumstance of the society’ (Smith, WN I.vii.1, 2),

whereas the determination of the latter is a market phenomenon

based on the quantity actually brought to market and effectual

demand.


The connection between natural and market prices is based on

competition:

1. Competition among buyers (or sellers) causes the market price to

rise above (or fall below) the natural price when the produced

quantity of a commodity is below (or above) the effectual demand.

2. Because of the discrepancy between natural and market prices, the

rates at which labour, land and capital are paid cannot be uniform

across sectors.

3. Labour, land and capital flow from one industry to another in search

of higher rates of remuneration.

4. Competition within each class ensures that the rates of wages, rent

and profits in different sectors tend to balance.


“It is then the desire, which every capitalist has, of diverting his funds

from a less to a more profitable employment, that prevents the market

price of commodities from continuing for any length of time either

much above, or much below their natural price. It is this competition

which so adjusts the exchangeable value of commodities, that after

paying the wages for the labour necessary to their production, and all

other expenses required to put the capital employed in its original state

of efficiency, the remaining value or overplus will in each trade be in

proportion to the value of the capital employed” (Ricardo, Works I: 91).


“competition levels the rates of profit of the different spheres of

production into an average rate of profit […]. This is accomplished by

continually transferring capital from one sphere to another, in which the

profit happens to stand above the average for the moment. […] These

incessant emigrations and immigrations of capital, which take place

between the different spheres of production, […] create a tendency to

reduce the rate of profit everywhere to the same common and universal

level.” (Marx, Capital III: 243).


Gravitation (an example)

Two commodities: A and B. Let pa and pb be their natural prices.

• In the moment t, the market prices are: 𝑝 𝑎 ≠ 𝑝𝑎 and 𝑝 𝑏 ≠ 𝑝𝑏.

• This means 𝑟 𝑎 ≠ 𝑟 𝑏, for instance 𝑟 𝑎 > 𝑟 𝑏.

• Capitalists tend to invest in sector A and disinvest in sector B.

• Hence 𝑄𝑎 ↑ and 𝑄𝑏 ↓.

• Accordingly 𝑝 𝑎 ↓ and 𝑝 𝑏 ↑.

• Then 𝑟 𝑎 ↓ and 𝑟 𝑏 ↑.

The process arrives at a rest position when 𝑝 𝑎 = 𝑝𝑎 , 𝑝 𝑏 = 𝑝𝑏 and

𝑟 𝑎 = 𝑟 𝑏 = 𝑟.

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