Capitalist Profits

1. Capitalist Profits

2. Profit Rate in the NFC sector

3. Capitalism is often said to be a system of profit and loss. And so it is—when viewed from the standpoint of a firm. • Yet capitalists as a group generally see profits every year, not losses. ( 1932 and 1933 exceptions) • Owners of capital goods who received their income in the form of interest or rent did not suffer losses. • Despite the misfortunes of particular companies, the capitalist class as a whole makes a profit every year

4. Two sorts of profits • The profits that result from buying cheap and selling dear are called commercial profits. • Capitalist profits, on the other hand, are profits that result (directly or indirectly) from a labor process. Profit results because the price of what is produced is greater than the cost of the labor time and other inputs used to produce it.

5. Outline • Profit is the remainder or surplus left for capitalists after their output has been sold and the inputs—materials used, wear and tear on machines, and labor employed—have been paid for. • Corrolary-If workers received as wages the value of the goods that they (and the machines and materials they work with) produce, profits would not exist. • The profit rate is defined as the amount of profit divided by the value of the capital goods invested. • How high the profit rate is for the capitalist class as a whole depends on how successful that class is in waging a three-front war: to extract high levels of effort from workers at a low wage cost, to gain necessary services from the government at a low tax cost, and to acquire raw materials and other inputs from abroad at a low cost. • The determinants of the profit rate constitute a list of the various ways in which outcomes of the conflicts between the capitalist class and other groups influence the profit rate.

6. Example • Suppose that a farm produces only grain • Average producer: 100 bushels of grain. 30 bushels to replace the seed, feed the draft animals and take care of other maintenance activities, • net output of 70 bushels a year per producer. • Now assume farm is part of a capitalist society. Assume that they are paid a wage of $5 per hour that the market price of grain is $100 per bushel, and that a typical worker spends his or her annual income of $5000 purchasing 50 bushels of grain from the capitalist. This 50 bushels represents the customary level of consumption for workers. • The net output of 70 bushels per worker is owned by the capitalist. As stated, 50 bushels of this is sold to workers. The other 20 bushels is exported, also at a price of $100 per bushel. Total sales revenue for the year is $7000, of which $5000 is paid to the worker, leaving the capitalist with a profit of $2000 per worker.

7. Calculating Profit • Total revenues (assuming that all of the output is sold)$10,000 • Depreciation (feed and seed)$3,000 • Net revenues (from sale of net output) $7,000 • Wages paid$5,000 • Profit $2,000

8. Depreciation • Amount you set aside from revenues to account for wear and tear of machinery and equipment. Over the lifetime of the machine, depreciation pays for the use of the machine.

9. r=R/K • where r = rate of profit • R = amount of total profit (in dollars) • K = value of capital goods owned (in dollars).

10. Payments to owners of capital goods. • number of different types of payments that are made to the owners of the capital goods used in production • The first type of payment consists of dividends. A dividend is a payment made by a corporation to owners of shares of its “stock.” • The second type of payment is interest, paid to owners of corporate “bonds” and to bankers who have provided direct loans to firms. • A third type of payment is rent, paid to owners of land, office space, buildings or other facilities used by firms to carry out their operations. • Finally, there are retained earnings

11. Determining Profit Rates • Determinants of Profits : why study it? • Capitalists will use their surplus product to expand production in one country only if they can anticipate a rate of return there that is higher than what might be made building factories in other countries. • And of course capitalists will invest in productive, growth-enhancing enterprises only if these promise a higher rate of return than unproductive activities such as playing the stock market or speculating in real estate. • Moreover, knowledge of the relationship between the profit rate and investment is critical to an understanding of booms, busts and economic crises.

12. What is net output? • Y = S – M • where Y = value of net output (dollars per year) • S = value of total sales (dollars per year) • M = cost of materials and capital goods used (dollars per year)

13. What is the formula for Profits? r=(Y-W)/K where r = the profit rate Y = net output (dollars per year) W = total wages and salaries (dollars per year) K = value of capital goods owned (in dollars)

14. What is the profit per hour of work? • Divide previous formula by number of hours worked.

15. Example of problem from a book: what is the rate of profit • Good Cod owns 10 nets and employs 10 workers, with each worker using one net. The workers catch fish by throwing the nets out from the shore, and each worker, on average, brings in 25 pounds of fish per hour. • The workers are paid $10 an hour and they each work 100 hours a year for Good Cod. • Each net costs Good Cod $1,250, and it wears out after 100 hours of use; it therefore has to be replaced every year. • Finally, the price of fish in the market is $1.00 per pound.

16. Example Solved • (S) ($1.00 per pound) X 25,000 lbs. of fish S = $25,000. • $12,500 to replace the 10 nets (10 times $1,250 per net), hence M = $12,500. • net output (Y = S – M)Y = $12,500. • $10 an hour in wages to each of 10 men for 100 hours per man, so W = $10,000. • Total amount of profit (R = Y – W) =$12500- $10,000 R = $2,500. • Value of capital goods owned (K) is $12,500 (10 nets at $1250 per net), • Good Cod’s rate of profit: 2500/12500= 1/5=20%

17. That was only the short form! * Net output per hour of labor is affected not only by movements of output and input prices also depends on: (a) how much output workers produce in an hour (labor productivity) and (b) the quantity of materials required per hour and the wear and tear occurring on the machinery and other capital goods each hour. labor productivity (z) is itself the product of two other variables, which we introduce here. One is the level of work effort, e, and the other is the efficiency of labor, f.

18. E and F • “work effort” (e) refers to how hard a person works. It can be determined voluntarily by the worker, or it can be regulated by one or another kind of external threat or coercion. • The efficiency of labor (f) is a related but different concept. It refers to how effective a person’s work is in producing a product, given his or her level of work effort • Example—imagine you are a carpenter, cutting wood planks. You could be working very hard with a hand saw and get not much output. You could be working as hard or even less hard and get more from a machine saw.

19. Total revenues per hour of labor • Since z = e times f, we can sum up the preceding discussion as follows: • Total revenues (per hour of labor) = • Pz*z = Pz*(e*f) • where Pz = the price of the product • z = the number of units produced per hour • e = the intensity of work • f = the efficiency of labor

20. Machines and Materials • both materials and machines are intermediate goods, so we lump them together and use M to refer to their total amount and m to represent the amount of them used per labor hour. We use Pm as the symbol for their (average) price. Thus the total amount of money required to pay for the cost of materials and machines used per labor hour is: Pm*m (the price multiplied by the quantity of the materials and machines per hour of labor).

21. Long(er) form of Profit Rate!

22. Return to Boston... • let’s return to the “Good Cod” story, adding just one more piece of information. The new information is that each of the workers throws his or her net into the water 5 times each hour and, on average, brings in 5 pounds of fish with each throw of the net. (This is consistent with our earlier statement that each worker, on average, brings in 25 lbs. of fish per hour.) • What happens when e becomes 4 rather than 5 (i.e. each worker reduces number of times thrown to 4 rather than 5?)

23. Oops! • with f remaining at 5 lbs. of fish coming in with each throw of the net. Now, each worker brings in 20 lbs. of fish per hour, which adds up to $2,000 worth of fish per worker per year (assuming that each worker continues to work 100 hours a year). Since there are still 10 workers, Good Cod’s total revenues are now $20,000 and net revenues (no pun intended!) are $7,500 (since the cost of the non-human inputs, M, remains at $12,500). Using equation 10.3 we can easily calculate the new rate of profit:

24. What about denominator? • Possible for profits to be affected by value of capital goods in use. If same amount is being produced with cheaper nets, for example, profits go up. • To fully determine k (the value of capital goods owned per hour of labor), we need to introduce two new concepts: • The number of capital goods owned that are actually in use (CG in use) and, second, the capacity utilization rate (u)= fraction of owned capital goods that are actually in use (CG in use/CG). • And we also need to convert CG in use to a per-labor-hour form by dividing it by the number of labor hours, N. In doing this, we will use the letter c to refer to the quantity of capital goods (CG) that are actually in use per labor hour (CG in use/N). These last steps enable us to see how changes in either the capacity utilization rate (u) or the amount of capital goods in use per labor hour (c) will affect the profit rate (r).

25. k=capital goods in use per hour • Pc=Price of capital goods, • c=number of capital goods, • u= capacity utilization rate • When u is high, k is lower and profits are higher.

26. Complete form of Profit Rate (whew)!

27. Consider the table in chapter 10 • Each one of these can be affected...!

28. U.S. Workers Ranked as World's Most Productive • Thanks to longer workdays and better training, U.S. employees generate more overall value than those in other nations. • By Angus Loten |  Sep 18, 2007 • Despite recent gains in parts of Asia and Eastern Europe, longer workdays  are keeping the United States more productive than other nations, a new report shows. Last year, U.S. workers each produced $63,885 in value-added labor, compared to $55,986 by workers in Ireland, the next closest economy, according to the United Nation'sInternational Labor Office. • Yet, measured as value added per hour worked, American workers dropped behind those in Norway where workers produced $37.99 per hour, compared to $35.63 in the United States and $35.08 in France.

29. Newspaper article: Explain in terms of Profit rates Ford Union Workers Reject Wage Concessions Claycomo Members Refuse To Give Up Right To Strike POSTED: 5:53 pm CDT October 26, 2009UPDATED: 8:02 pm CDT October 26, 2009 • CLAYCOMO, Mo. -- Union workers at Ford assembly plant in Claycomo have taken a vote that could have national repercussions. The Ford union workers overwhelmingly rejected another set of concessions from the company, KMBC's Micheal Mahoney reported Monday. The union said it was being asked to give up the right to strike for increased wages and benefits for the next five years, among other concessions. "This is the only dual factory in North America -- the only factory that makes two separate products. We're a large local. This is an important plant," Claycomo UAW president Jeff Wright said. The union said the company is proposing a no-strike clause on higher wages and benefits until 2015. They wanted more multitasking on the job and more lower paid entry workers. It was similar to the offer Detroit had won from union workers at GM and Chrysler."Ford didn't go into bankruptcy like the others did -- that's what our members said," Wright said.

30. What are being discussed? • Goodyear Tire & Rubber (NYSE: GT) is another one of those generations-old stocks for which it's not easy to make a case. • The reason GT is not for the squeamish is obvious enough: a major decline in vehicle sales -- and equally significant: miles driven -- hits right at the company's core revenue stream: civilian tire sales. • Further, the U.S. recession will keep F2009 U.S. vehicle sales well below the normal, annual fleet replacement level (which typically is about 10.5 million vehicles). • Tire replacement sales for those keeping their existing car also should rise at the first sign of an improving economy, as they typically do, as selected drivers finally make that delayed purchase to replace old tires. This should increase capacity utilization. In addition, tire margins should be aided by falling raw material prices. That fact, combined with Goodyear's demonstrated business model and a P/E of 5 tips the scale in favor of a Buy.

31. What variable is being affected? • Work collaboration at Minnesota law firm sees productivity increase and costs reduced during summer vacation period • Posted August 5th, 2009 • Chicago (IL), Aug 5, 2009 – Quinlivan & Hughes, P.A., a Minnesota-based law firm, has announced it has realized considerable efficiency gains and cost savings from implementing BigHand voice productivity software. The software has allowed teams of experienced legal secretaries to collaborate instantly to get more work done, help each other out at peak times and adopt a highly proactive approach in regards firm-wide workload and client deadlines. The project has had a particularly positive impact during a summer vacation period where staffing levels can be abnormal.