Faux frais of production
Encyclopedia
Faux frais of production is a concept used by classical political economists and by Karl Marx
in his critique of political economy
. It refers to "incidental operating expenses" incurred in the productive investment of capital, which do not themselves add new value to output. In Marx's social accounting, the faux frais are a component of constant capital, or alternately are funded by a fraction of the new surplus value
.
When owners of capital
invest in production, they do not just invest in labor power
, materials, buildings and equipment (or means of production
). They must also meet a range of other operating expenses. These can include all kinds of things like bookkeeping, training, catering, cleaning & repairs, advertising, insurance, security services, bribes, taxes & levies etc. Marx has in mind mainly those circulation costs directly necessary and indispensable to keep production going, not "fringe benefits".
In modern medium-sized to large-sized business, fixed capital
assets will "on average" be the largest single component of the annual tangible capital outlay. After that, materials and wages. But depending on the nature of the business, the faux frais might be a considerable proportion of the total capital outlay.
In general, Marx seems to have regarded net insurance and tax payments from gross production income as part of surplus value
. But he never elaborated on this point in detail; presumably it depends on the nature of the tax and insurance claims themselves.
Professor Makoto Itoh
comments: "Unlike pure circulation costs such as bookkeeping and advertising costs which are faux frais specific only to a commodity
economy, some portions of the costs of storage and transport belong substantially to production processes that are continued in the circulation sphere, and therefore add to the substance of value and surplus-value just as production costs. The rest of the costs of storage and transport, together with pure circulation costs, proceed from the mere change in the form of value, and cannot enter into the substance of value of commodities. Such circulation costs are faux frais which must be maintained by a part of surplus value." (Makoto Itoh, The Basic Theory of Capitalism, Barnes & Noble 1988, p. 227).
In the NIPA
s, the Bureau of Economic Analysis
adds $26.2 billion worth of expensing on meals and entertainment, oilwell bonus payments
written off, adjustments for insurance carriers and savings and loan associations, amortization of intangible assets, and tax-exempt interest
income.
Karl Marx
Karl Heinrich Marx was a German philosopher, economist, sociologist, historian, journalist, and revolutionary socialist. His ideas played a significant role in the development of social science and the socialist political movement...
in his critique of political economy
Political economy
Political economy originally was the term for studying production, buying, and selling, and their relations with law, custom, and government, as well as with the distribution of national income and wealth, including through the budget process. Political economy originated in moral philosophy...
. It refers to "incidental operating expenses" incurred in the productive investment of capital, which do not themselves add new value to output. In Marx's social accounting, the faux frais are a component of constant capital, or alternately are funded by a fraction of the new surplus value
Surplus value
Surplus value is a concept used famously by Karl Marx in his critique of political economy. Although Marx did not himself invent the term, he developed the concept...
.
When owners of capital
Financial capital
Financial capital can refer to money used by entrepreneurs and businesses to buy what they need to make their products or provide their services or to that sector of the economy based on its operation, i.e. retail, corporate, investment banking, etc....
invest in production, they do not just invest in labor power
Labor power
Labour power is a crucial concept used by Karl Marx in his critique of capitalist political economy. He regarded labour power as the most important of the productive forces of human beings. Labour power can be simply defined as work-capacity, the ability to do work...
, materials, buildings and equipment (or means of production
Means of production
Means of production refers to physical, non-human inputs used in production—the factories, machines, and tools used to produce wealth — along with both infrastructural capital and natural capital. This includes the classical factors of production minus financial capital and minus human capital...
). They must also meet a range of other operating expenses. These can include all kinds of things like bookkeeping, training, catering, cleaning & repairs, advertising, insurance, security services, bribes, taxes & levies etc. Marx has in mind mainly those circulation costs directly necessary and indispensable to keep production going, not "fringe benefits".
In modern medium-sized to large-sized business, fixed capital
Fixed capital
Fixed capital is a concept in economics and accounting, first theoretically analysed in some depth by the economist David Ricardo. It refers to any kind of real or physical capital that is not used up in the production of a product and is contrasted with circulating capital such as raw materials,...
assets will "on average" be the largest single component of the annual tangible capital outlay. After that, materials and wages. But depending on the nature of the business, the faux frais might be a considerable proportion of the total capital outlay.
In general, Marx seems to have regarded net insurance and tax payments from gross production income as part of surplus value
Surplus value
Surplus value is a concept used famously by Karl Marx in his critique of political economy. Although Marx did not himself invent the term, he developed the concept...
. But he never elaborated on this point in detail; presumably it depends on the nature of the tax and insurance claims themselves.
Professor Makoto Itoh
Makoto Itoh
is a Japanese economist and is considered internationally to be one of the most important scholars of Marx's theory of value. He teaches at Kokugakuin University, Tokyo, and is professor emeritus of the University of Tokyo....
comments: "Unlike pure circulation costs such as bookkeeping and advertising costs which are faux frais specific only to a commodity
Commodity
In economics, a commodity is the generic term for any marketable item produced to satisfy wants or needs. Economic commodities comprise goods and services....
economy, some portions of the costs of storage and transport belong substantially to production processes that are continued in the circulation sphere, and therefore add to the substance of value and surplus-value just as production costs. The rest of the costs of storage and transport, together with pure circulation costs, proceed from the mere change in the form of value, and cannot enter into the substance of value of commodities. Such circulation costs are faux frais which must be maintained by a part of surplus value." (Makoto Itoh, The Basic Theory of Capitalism, Barnes & Noble 1988, p. 227).
Illustration
In 2002, the US IRS tax-assessed capital costs of all US corporations with a positive net income included the following items:- Depreciable assets (includes depletable and intangible assets) $4,715 billion
- Less: Accumulated depreciation (includes accumulated depletion and amortization) $2,330 billion
- Depreciation charged $411 billion
- Depletable assets $148 billion
- Less: Accumulated depletion $76 billion
- Depletion charged $6 billion
- Land $213 billion
- Intangible assets (amortizable) $1,411 billion
- Less: Accumulated amortization $269 billion
- Amortization charged $68 billion
- Other assets $2,396 billion
- Intermediate goods $7,541 billion
- Compensation of corporate officers $262 billion
- Salaries and wages $1,362 billion
- Employee benefit programs $167 billion
- Pension, profit-sharing, stock bonus, and annuity plans $99 billion
- Repairs $85 billion
- Bad debts $98 billion
- Rent paid on business property $260 billion
- Taxes paid $283 billion
- Interest paid $638 billion
- Advertising $160 billion
- Charitable contributions $10 billion
- Net loss, non-capital assets $15 billion
- Other deductible operating expenses $1,752 billion
In the NIPA
Nipa
NIPA, Nipa or nipah may refer to:* Nipa palm, Nypa fruticans* Nipa grass, Distichlis palmeri* Nipah virus, a Henipavirus* National Income and Product Accounts * National Institute of Public Administration...
s, the Bureau of Economic Analysis
Bureau of Economic Analysis
The Bureau of Economic Analysis is an agency in the United States Department of Commerce that provides important economic statistics including the gross domestic product of the United States. Its stated mission is to "promote a better understanding of the U.S...
adds $26.2 billion worth of expensing on meals and entertainment, oilwell bonus payments
written off, adjustments for insurance carriers and savings and loan associations, amortization of intangible assets, and tax-exempt interest
income.
See also
- Das KapitalDas KapitalDas Kapital, Kritik der politischen Ökonomie , by Karl Marx, is a critical analysis of capitalism as political economy, meant to reveal the economic laws of the capitalist mode of production, and how it was the precursor of the socialist mode of production.- Themes :In Capital: Critique of...
- Capital accumulationCapital accumulationThe accumulation of capital refers to the gathering or amassing of objects of value; the increase in wealth through concentration; or the creation of wealth. Capital is money or a financial asset invested for the purpose of making more money...
- Constant capitalConstant capitalConstant capital , is a concept created by Karl Marx and used in Marxian political economy. It refers to one of the forms of capital invested in production, which contrasts with variable capital...
- Intermediate consumptionIntermediate consumptionIntermediate consumption is an economic concept used in national accounts, such as the United Nations System of National Accounts , the US National Income and Product Accounts and the European System of Accounts .Conceptually, the aggregate "intermediate consumption" is equal to the amount of the...