Where does profit come from?

This article is part of Fightback’s “What is Capitalism” series, to be collected in our next magazine issue. To subscribe to our e-publication ($20 annually) or physical magazine ($60 annually) please click here.

Take a KFC store, rented from the corporation by a franchisee. How does the store produce profit? It’s just a building.

For Marxists, the “material elements of capital” are “man [people] and Nature.”1 Take the window of a KFC drive-through, an element of the ‘capital’ that is the KFC store. The window’s glass began as sand; miners extracted the sand from an open pit; transport workers moved the sand into massive silos; through a complex scientific process in a factory, workers heated the sand, transformed it into liquid glass, flattened it with tin, cooled and solidified it, resulting in glass as we know it; workers cut, transported and installed the glass in the store window; a KFC worker now slides the window open, and hands over a delicious Zinger Burger. At every step of the way, workers transformed and re-transformed natural elements for human need. This is what the capitalists profits from; the transformation of ‘natural’ elements by workers.

So, there is no productive capital without labour (or Nature). By contrast, labour (not to mention Nature!) without a capitalist is possible. In the Argentinian occupied factory movement, workers took over factories and ran them democratically, instead of accepting redundancies. While these factories still operate within a capitalist market, their victory demonstrates how workers can operate without capitalists – whereas the opposite is not true.

But if workers are not reliant on capitalists, where do wages come from? Let us return to KFC. Max Caulfield makes 50 burgers in one hour. Each burger is sold for $5. She is paid $15 an hour. In other words, her first 3 burgers have already covered an hour’s wages in the first 10 minutes. 7 more burgers cover the price of ingredients, and a share of the store’s fixed costs. The remaining 40 burgers in the hour make $200. Stretch that out to 8 hours, and she will be paid $120, while the company will make $1,600 out of her labour. Max was not paid out of profits: rather, the profits were the surplus of the value of produced by her work. (Of course, other steps in the supply chain – the slaughter of chickens, the sale of the burger – also cost and reproduce capital, but the worker is essential at each step).

What about investment? Isn’t the investor also essential to the process? Doesn’t the investor take the risk? To get into this question, I’m going to go into a bit of detail about corporate structure and culture – if you get bored, the short version is that capitalism still sucks. So, investment requires prior capital. Capital may be inherited, as with Trump. It may be reinvested from a prior business: Warren Buffet serves as the entrepreneurial ideal, the teenager who brought a pinball machine for $25, brought more pinball machines out of the profit from that, and so on.2 For a KFC store, a franchisee must hire the real estate to run the restaurant – KFC’s owner Yum Brands don’t so much run restaurants as hire large amounts of real estate to franchisees. Setup costs are substantial,3 so the franchisee is likely to be independently wealthy. Franchisee average profits aren’t publicly available, but we can safely bet they’re better off than their employees, and inconsequential compared to the CEO or owners. The franchisee may be a tyrant, they may be perfectly lovable, but their job is essentially to ensure the corporate machine continues unhindered. Yum Brands are very restrictive about how KFC stores must be run, down to minute details like how often you shake the chicken after taking it out of the brine (7 times): they must protect the brand, and ‘product quality’ factors into that. Occasionally stores go through periods of laxness, followed by tight clampdowns. Like many companies, Yum Brands is financed through debt. They have $2.5billion of long-term debt,4 which sounds like a lot to me, but they haven’t gone bankrupt so obviously they’re getting some money back too (meanwhile McDonalds has 24.4billion dollars in long-term debt, economics is counterintuitive). In 2016, Yum Brands was on the market selling $2bn of bonds5 – a bond is basically selling your debt. Why would you buy debt? Apparently, bond buyers make money from the interest on the debt, or from random fluctuations in the market which bond buyers pretend they can predict.6 So, here we have our investor, let’s call him Guy White: he just brought Yum Brands bonds on his laptop. Now let’s rewind the corporate chain: he’s earning interest on the capital loaned to a company for selling real estate to a franchisee who employs people to sell food. This brings us back to Max, who has just made her 400th burger for the day, and just before she clocks off, been asked to clean up urine in the bathroom (not in her job description). Guy is now considering whether to invest in Lockheed Martin. The gap between Max and Guy is significant, metaphorically and literally. Of course, Guy is only one of many investors, one beneficiary of the vortex that is Yum Brands, with CEO Greg Creed earning a $15.3 million salary in 2016, not to mention the profit extracted by owners.7 The most tangible, beneficial human service in this whole psychodrama, and KFC’s most visible commodity, is the service of food. But the distribution of rewards for actually making and selling food is shaped like an inverted pyramid, or a tornado: the rewards get bigger the further up the vortex you go from the actual work of making food. And we don’t need this destructive, exploitative structure to make food.

Of course, Yum Brands is not the only company on the market. Finance traders participate in an impenetrable blood-sport: the trading of debts, packaged into various exotic products, their origins ever more obscure. As we all saw in 2008, this is a house of cards. Even the most successful trader runs the risk of losing big and tragically having to sell his super-yacht. Marx used the term ‘fictitious capital’ for money that represents the promise of more money, rather than having any clear relationship to production.

The production process itself may even be fictitious, as with Enron’s infamous scandal, where some of their power plants weren’t even running in the first place. As Enron encouraged workers to buy shares, when the company collapsed, the loss felt by investors genuinely was unfortunate. David Harvey once observed that while he was excited about Syriza, he was also worried about how their winning would affect his pension (as pensions are increasingly financialised). Not all investors are demons, and capitalism has a way of drawing us all into complicity. But it’s hard to conclude that the global financial market allocates goods and services rationally, or justly.

So what next? What if machines replace our labour? Wouldn’t that mean the worker becomes redundant, and the machine generates the profit? Some in the scientific community believe a ‘Singularity’ of accelerating artificial intelligence will replace human intelligence – essentially robots taking over, but potentially nice ones. That would be one way of transcending capitalism!

However, despite appearances, current trends do not point to an absolute replacement of human labour by machinery. Capitalists make certain jobs redundant through automation, but they also invest in new ones to make more profit. Overall unemployment still appears unaffected by rapid revolutions in technology. Employment growth still closely correlates with GDP growth, an old trend,8 not with technological changes.

If you take a supermarket as an anecdotal example, self-service kiosks mean that customers must now scan and bag their own groceries, but there are still many attendants available to help if anything goes wrong – the nature of the work has changed.

Observably, what technological development means is a rearrangement of the labour market, increasing precarity, underemployment, jobs that don’t last, perpetual restructuring – not the end of work, but the destabilisation of work. For this reason, even many pro-capitalist theorists advocate a Universal Basic Income.

Automation has marched on since the inception of capitalism. Take the infamous 19th century struggle of the Luddites. The Luddites were textile workers who feared their work would be replaced by the new looms, which simplified the process of weaving. Previously a specialised form of labour, it was now becoming industrialised. Luddites sabotaged the looms. In a sense, they were absolutely right – their labour was replaced – however, it was replaced by people operating looms. The labour process is transformed, not entirely discharged.

Perhaps the role of capitalists, and managers, is to coordinate this extraordinarily complex process… by casting formerly valued workers onto the streets and hoping the state will foot the bill (before complaining about the taxes leveraged to do so).

Democratic, non-profit co-ops of workers and consumers would be much better suited to meeting human needs sustainably. As mentioned before, worker-owned factories operate from Argentina to Spain’s Mondragon, with democratic decision-making structures and no need of bosses.

In sum: Capitalists need us, we don’t need them.

1Karl Marx, Capital: Volume 1

2Brenton Hayden, Warren Buffet Knows It…, Entrepeneur https://www.entrepreneur.com/article/241196

3Hayley Peterson, Here’s what it costs to open a KFC, Business Insider

https://www.businessinsider.com.au/what-it-costs-to-open-a-kfc-2015-7?r=US&IR=T

5Adam Samson, Yum to offer $2.3bn in new bonds, Financial Times

https://www.ft.com/content/84422df9-004d-3de8-8053-bcf5c52e93d6

6Nickolas Lioudis, How does an investor make money on bonds?, Investopedia https://www.investopedia.com/ask/answers/how-does-investor-make-money-on-bonds/

7David A Mann, Pay for CEO of leaner Yum Brands more than doubled last year, Louisville Business First

https://www.bizjournals.com/louisville/news/2017/04/10/pay-for-ceo-of-leaner-yum-brands-more-than-doubled.html

8Doug Henwood, Workers: No Longer Needed?, LBO News https://lbo-news.com/2015/07/17/workers-no-longer-needed/

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