Equal capital = equal profits ?

[Layano]

Hi ! That’s my first post here, I’m not sure if I should have posted this in the newbie section… and also sorry for my poor english, I’m french

I’m reading Karl Marx and the Close of His System by Eugen Böhm-Bawerk, and at one point he says that equal capital amount yield equal profit.

Marx’s theory demands that capitals of equal amount, but of dissimilar organic composition, should exhibit different profits. The real world, however, most plainly shows that it is governed by the law that capitals of equal amount, without regard to possible differences of organic composition, yield equal profits. We will let Marx explain this contradiction in his own words.

Well… where can I read proofs/explanation of that ? It seems weird and not obvious at all to me that equal amount of capital = equal amount of profit… that would mean that, for exemple, every 1€ of capital invested WILL give 2€ of profit to investors ? Or did I misunderstood (I have, for sure :p) ?

Thanks in advance !

EDIT : I’d also like to know if there is a text that answer Economic Theory of the Leisure Class by Bukharin

[Truth_and_Liberty]

I’ve not read Bohm-Bawerk so I could be completely wrong, but…

I think he is using the term ‘profits’ not in the modern Austrian sense of gains from entrepreneurial activity, but in the sense of what we call ‘interest’.

If you’re familiar with Mises’ analytical construction of an evenly-rotating-economy (ERE), you’ll know that in the long-run (entrepreneurial) profits tend to zero and hence the return on capital investment is only the interest gained by the capitalist for ‘waiting’. That is, in the ERE returns-on-investment are determined purely by time-preferences and hence equal the interest rate. In this sense, “equal capital” (which is a term that doesn’t really make sense to me unless you have a labor theory of value) will yield equal returns. i.e. It doesn’t matter where the capital is invested, it will always yield the same return: interest.

I think this is what he is getting at.

[filc]

As trulib said, it’s not profit in the sense you’re thinking of. Interest is profit when regarding capital.

IN other words.

I can choose to buy a widget today at $100, or I can choose to buy a claim on a widget next year at $80. If I am allowed to place a claim on a future widget, I may buy it today for $80. In one year it will mature to a greater value of $100+. I could then sell it, or consume it, but either way I made a 20% profit/interest.

Marx thought that Interest was the amount of money skimmed off the top by the capitalists from the total revenue generated by the “laborers”. Marx’s argument is that for laborer’s to receive their full pay there would be no interest as the laborers would receive full value for everything and nothing would be left over for the capitalist.

What Böhm-Bawerk is showing is that interest is not the result of exploitation of the laborer. Interest does not form from any type of exploitation of the laborers but instead is a naturally occurring phenomena that happens with regard to time, and the desirability of present consumption to future consumption. The rule of thumb here is that in general people tend to prefer present goods to future, and that there is a price discount for the consumption of future goods.Interest reveals a discrepancy regarding the consumption of present to future goods. So what he is saying is that it’s entirely non-sequitir to state that interest occurs due to the exploitation of labor workers, who don’t receive full value of their end product as interest occurs naturally across many things, not just capital alone. Interest is the result of the capitalist paying now for a future good, and the discrepancy of price there-in. Other parts of the argument aside, Interest is a naturally occurring phenomena, and it has nothing to do with exploitation and everything to do with the subjective preferences of individuals regarding consumption over time.

Böhm-Bawerk will also go on to explain, agreeing with Marx, that the laborer should receive full value for the efforts placed into creating the end product. He just goes to show that the full value of the laborer’s input does not equal the full total value of the end product, but a portion of it and its total calculated worth is done at the present(not the future). With this he also goes on to show that the laborer must decide whether to get paid today, in wages, or wait possibly years before the final product matures in value and is sold. If the laborer gets paid in today’s wages he’s going to get paid for his value in today’s market at today’s rate(Before the maturity of their final investment matures). The only way the laborer can ALSO earn interest on his labor is if he chooses not to get paid for the duration of the production process and receives his reward after the product has been sold(possibly years later). In this case all that’s happened is that the laborer in a way just became one of the capitalists(The laborer saves as opposed to consuming now). The laborer needs a way to live however, so they generally prefer to get paid in wages in the present(today), rather the future(years later).

In most cases the laborer will choose the wages. There is no coercion of any type beyond that of limitations that nature imposes on us, like time and scarcity.

That is an extremely crude explanation, hope it helps.

[Layano]

Thanks for the answers !

When you use the word “mature”, what does it mean exactly ? It is just selling products over their cost of production ? For exemple the entrepreneur pay 100€ to produce a good, and when the produce is “matured”, it is sold 120€ ?

And I don’t know if I understood why the same amount of capital yields the same amount of profits wherever it’s invested… is it because people invest where profit rates are high, which lower the profit rate and vice-versa ? And it makes profit rate equal in every branch of production where there is competition ?

[filc]

@Layano

When you use the word “mature”, what does it mean exactly ? It is just selling products over their cost of production ? For exemple the entrepreneur pay 100€ to produce a good, and when the produce is “matured”, it is sold 120€ ?

In a sense yes, but maturity just simply means getting closer to the date of completion. All other things aside, the profit is simply the difference in value of a present good to a future good. You would not generally pay the same price for an apple today, and an apple promised to you next year. It’s likely that if you want to buy a future apple you’ll pay a discounted price which accounts for the amount of time you’ll have to wait before receiving it. The matured date is simply the date at which you receive the final product, like in our case the apple. You originally paid only 80 dollars for the object a year ago, but the object’s market value has always been 100 in the present.

http://mises.org/daily/1369

@Layano

And I don’t know if I understood why the same amount of capital yields the same amount of profits wherever it’s invested… is it because people invest where profit rates are high, which lower the profit rate and vice-versa ? And it makes profit rate equal in every branch of production where there is competition ?

Time preference refer’s to all things, not just capital goods, and not just capital(money). Even objects themselves can offer an interest return in regarding time preference. Another thing to remember though is that different types of capital goods, investments, and products, and people, will all have their own individually derived subjective time preferences. Different industries operate at different speeds. When we speak of “interest rates” in general we are simply looking at an aggregate of those things across the whole market, as represented praxeologically via money.

Much of this stuff is still new to me as well so I don’t know how far I’d be able to go to fully answer your questions.