[Book] What is Marxism?

3. Marxist Economics

What Is Marxist Economics?

Rob Sewell

capital cartoonThe capitalist system is experiencing its worst crisis in living memory, possibly in its history. As a result, there is a renewed interest in understanding the way in which the system works and, above all, in Marxist economics.

At first glance, Marxist economics may seem quite difficult to understand. To begin with, the language appears difficult. That is the case with all sciences, which require their own shorthand. However, once you understand the basic principles it becomes quite straight forward, and the effort is certainly worth it. In fact, the rewards are truly amazing. Marxism will provide answers to many questions that are shrouded in mystery, not least, how workers are exploited and why the capitalist system experiences devastating periodic crises.

Marx never looked on the economic system from a subjective point of view, but from an objective one. It is the same approach as a natural scientist who examines the workings of a beehive. When you look at the society we live in, everything appears to be dominated by money and the buying and selling of things. Making money is the driving force behind almost everything. Money relations have become burned deep into everyday life and consciousness. Money even becomes personified, while people are viewed in cash terms. “The pound is doing a bit better today on financial markets,” says the financial news, as if referring to the health of a sick individual. On the other hand, the millionaire landowner Duke of Westminster is said to be “worth” so many millions. What is the reason for this strange state of affairs, which Marx describes as a “commodity fetish”?

Put simply, this bizarre concept is a product of the market economy, where social relations are distorted and reduced to a series of cash payments. As we live in a world dominated by such relationships, they permeate our thinking and view of things. This outlook mystifies, for example, our view of economic activities, of which we are a part. Our daily lives are dominated by mysterious forces. Such things operate behind our backs and we do not fully understand them. Like primitive peoples that worshipped inanimate objects, our world is dominated by money and commodities, which acquire seemingly extraordinary powers. No one has control over the market. And yet it dominates everyone.

This situation did not always exist. Under feudal society, for instance, social relations were starker and more transparent. They were based on social obligations, which in turn were based on a hierarchy of land ownership. Everyone had and knew their place. Society was socially static.

But the capitalists ruthlessly put an end to feudalism and its ways and established their own rule.

“The bourgeoisie, wherever it got the upper hand, has put an end to all feudal, patriarchal, idyllic relations,” state Marx and Engels in the Communist Manifesto. “It has pitilessly torn asunder the motley feudal ties that bound man to his ‘natural superiors’, and has left remaining no other nexus between man and man than naked self-interest, than callous ‘cash payment’.”

Capitalism revolutionises the productive forces in comparison to past societies, but brings with it its own laws and contradictions. The rising capitalist class dispossessed the peasants of their land and their independent means of living and turned them into wage labourers. They monopolised the means of production and forced the former serfs, the propertyless workers, to work for the new men of property. This new class division was the outcome of the new social order. This is what Marx described as the period of “primitive accumulation”, whereby capitalism came into being “dripping with blood from every pore”. Through this brutal process emerged the working class and the newly-enriched capitalist class, with their own separate class interests. The capitalists, the dominant class, ruthlessly exploited the workers, from which they derived surplus value, their wealth and economic power.

Every class society developed its own exploiting classes, namely, slave owners, feudal landlords and capitalists. Under slave society, the producers were the property of slave owners. Under feudalism, the land, to which the serfs were tied, the most important factor in an agricultural society, is owned by the feudal lords. Under capitalism, the machines and factories, the means of production, are privately owned by the capitalists, while the propertyless workers are forced to sell themselves – or, more correctly, their labour power – in order to survive.

Where production for exchange has developed and a wide range of goods are produced, a division of labour arises. Although production is common to all forms of society, production for exchange is not. In peasant societies, people live off the crops they produce, and exchange plays no role. Under feudalism, the lords simply expropriated the surplus production of the serfs who worked on their lands. Under capitalism, production for exchange becomes the dominant form.

To underline the difference between production in general and production for exchange, Marx uses the distinctive terms of use-value and exchange-value. The expression value has two senses. One is a use-value, which is something that satisfies a human want. It has the quality of being useful. A mobile phone is a use-value in that it is a device that allows us to talk to other phone users. However, a use-value need not be a physical thing. Singing has a use-value, providing someone with enjoyment; but when finished, nothing tangible remains. Again, not all use-values are products of human labour. Air is a use-value, as if it cannot be inhaled then people will die; but no labour is involved in its production. However, almost all products of human labour are nevertheless use-values.

Second is an exchange-value, which reflects the value of a commodity when one commodity is exchanged for another. So many pairs of shoes can be exchanged for so many pairs of trousers. A commodity is a thing that is produced for sale. It is a use-value that also has an exchange-value, namely something that can be sold on the market. The seller of commodities is only interested in exchange-value. They are interested in the price it will fetch and nothing more. The buyer, on the other hand, is interested in the use-value (what use something has) and also how much it costs. The exchange-value of a commodity is determined by its value.

These dual characteristics of a commodity – use-value and exchange-value – are intertwined. If a commodity that has been produced has no use to anyone, then nobody will buy it and it cannot be exchanged. In such a situation, exchange-value becomes meaningless. The commodity, therefore, contains useless labour.

It was the job of Marx to understand these relationships. Through this understanding he was able to reveal how the exploitation of the working class under capitalism occurs. He was able to do this by developing the labour theory of value, which became the cornerstone not only of early bourgeois political economists, such as Adam Smith and David Ricardo, but also of Marxist economics.

The basis of this theory is straight forward enough. The primary argument is that labour is the source of all value. Human beings can only live and satisfy their basic needs through labour, the production of use-values. We need to work in order to survive. Of course, this can also take the form of an exploiting class living off the labour of others, as under capitalism. Therefore, without labour we would all perish.“Every child knows that any nation that stopped working, not for a year, but let us say, just for a few weeks, would perish,” wrote Marx.

Prior to the development of capitalism, the majority of production was for personal consumption. Peasants tended their crops and made the things they needed. Any small surpluses were sold at the local market. But this was a secondary thing. However, as the market becomes dominant, most producers create commodities not for themselves but for others, namely for exchange. Here then lies the embryo of modern capitalist economic relations. Everyone becomes dependent on everyone else due to the social division of labour, i.e., because everyone needs the products produced by others. Exchange is the social tie between persons. This is the basis of generalised commodity production. It means the mass production of exchange-values.

The exchange of commodities is based on an exchange of equivalents. One thing is exchanged for something else of equal value. While some merchants buy cheap and sell dear, this is only a form of swings and roundabouts. One seller’s gain is another buyer’s loss, and vice versa. Society as a whole does not benefit from this; it merely distributes what is. Nevertheless, from barter onwards, there is a striving to exchange a certain quantity of a product for a certain quantity of another, but based on an exchange of equivalents.

Commodities, as we explained, are things that are produced for exchange. The question arises: what is being exchanged exactly? Things are so different and have different uses, so what have they all in common? What allows them to be compared, one with another?

This common feature is clearly not weight, colour, size, or any other physical quality, which all vary considerably between one commodity and another. A pair of shoes is very different from a pair of trousers. In exchange, what they have in common is that they are all products of human labour.

“Nature builds no machines, no locomotives, railways, electric telegraphs, self-acting mules, etc. These are products of human industry,” explained Marx. Nature provides the materials, but it is labour that fashions them into use-values and values. Nature provides us with materials for free, without any value. It is human labour, through the expenditure of time and effort that serves to create values.

As a consequence, through exchange, so much generalised labour in one commodity can be compared with so much generalised labour in another. In exchange, so many watches are traded for so many pairs of shoes, depending on the quantity of labour-time involved in their production. Commodities can therefore be regarded in exchange as a certain quantity of condensed labour-time. The expenditure of human effort is the real cost involved in production.

Even the early bourgeois economists accepted this principle. It was in The Wealth of Nations by Adam Smith that Marx first came across the classical definition of value which he copied down word for word in his notebook: “It was not by gold or by silver, but by labour, that all the wealth of the world was originally purchased; and its value, to those who possess it, is precisely equal to the quantity of labour which it can enable them to purchase or command.”

Marx discovered however an important truth in that value is a relationship between persons, a social relationship. However, under capitalism this appears in a “fantastic form” as a relation between things. It is people alone, with their own interests, who engage in this exchange, using inanimate objects for sale, not the other way round. Commodities do not take themselves to market.

We must see beyond the appearance of things to understand the real relationships that exist below the surface. The laws that govern capitalism operate behind the backs of society. It is the aim of Marxism, a genuine science, to discover these underlying relationships and laws.

Socially necessary labour time

Value, in the Marxist sense, appears a rather strange thing. It is neither a natural nor physical quality of the commodity. As such, value cannot be seen even with a powerful microscope. Neither can it be touched or smelled, as it has no physical presence. But exchange-value (or just “value”) certainly exists, just like gravity, and is not an arbitrary thing.

As Marx explained, value is a definite social quality and only appears when exchange takes place between commodities. In exchange, a certain quantity of generalised labour changes hands through the exchange of values. In exchange, the work of say the tailor or builder are made equivalent. The respective forms of labour are disregarded and their products are all reduced to generalised simple labour. All labour, whether it is simple, unskilled, semi-skilled or skilled labour is reduced in exchange to quantities of average labour, where skilled labour becomes simply a multiple of unskilled labour. As a social relation, value is expressed as a relationship between the labour of the different producers. Value is therefore the result not of a particular form of labour, but of abstract human labour, or labour in general.

Capitalists will not sell things at their cost value. They are looking for profit. In the process of production labour alone produces value. Machines do not create value but simply transfer their own value bit by bit to the new commodities through wear and tear or depreciation. Machines, in any case, have to be put to use by workers, otherwise standing alone they produce nothing. Raw materials, likewise, are used up in the process and simply transfer their value to the new products. In other words, a tailor adds value to that value transferred from the materials on which he is working by applying labour through cutting and sewing.

The cost of a house, for example, will be made up from the cost of materials needed to build it: bricks, cement, wood, plaster, etc., and the labour of the workers involved. What determines their price? The bricks, wood, cement, etc., were all produced by human labour. Therefore costs can be reduced to quantities of labour-time involved in their production. Therefore, prices are determined by production costs, namely the labour-time required to produce them. This is a combination of past and present labour (dead and living labour, as Marx called it).

More correctly, the value of a commodity is measured not by labour-time as such, but by the amount of socially necessary labour-time invested in its production. Marx made this vital distinction between “labour-time” and “socially necessary labour-time”. Value is not simply equal to the amount of labour involve in production, as a lazy or inefficient worker would then be the source of much greater values, having spent more time in producing things. Clearly this is false. Value is produced by “socially necessary” labour, namely the average labour used to produce goods under average social conditions and under the existing level of technique. Whether a commodity contains socially necessary labour or not will be revealed in exchange as commodities are sold or rejected in the market place.

If it takes longer to produce a certain commodity than the average time, then this excess labour-time is useless labour. In the market, such “high value” (over-priced) commodities will not find a buyer. All those commodities made at a cost higher than the social average will remain unsold or will have to be sold at a loss by the capitalist. Our capitalists employing unproductive (wasted) labour will soon find themselves driven out of business, unable to sell their goods at the “going rate”. Prices will tend to reflect the “socially-necessary” time spent on production.

Profits and Productivity

The drive of the capitalists is to make money. When a capitalist introduces new production techniques and produces commodities below the costs of production, then he will be able to sell more goods more cheaply and make super profits -- that is until everyone else follows suit and also introduces the new technique. Once this happens, and the new level of technique becomes the average, the price falls to a new level to correspond with the new “socially necessary” labour-time. Each commodity now takes less time to produce and therefore contains less value than before, thereby effectively reducing its cost and its price. Of course, socially necessary labour-time is always changing with the constant changes in technique. However, there exists a general average standard at any one point, which is in turn superseded in a never-ending process of technical advance.

Capitalism is an anarchic system. There is no planning whatsoever once the goods enter the market. Here the blind forces of the market dominate. If a capitalist produces 1,000 beds for sale at £100 each but finds other capitalists, more than usual, have done the same, he will fear that not all his beds will be sold. He then reduces his price to undermine his competitors, but the others follow suit. With prices falling, people who did not intend to buy, now become interested. As the price falls, demand increases. In this case, either some beds will remain unsold or the price of each bed will be lower than usual. Instead of making £100,000, as expected, he has to settle for say £70,000.

However, the capitalists making wardrobes have fared better. There were fewer sellers, but many people who were interested in buying wardrobes. The wardrobes that were normally selling for £200 were being lapped up. The capitalists then raised their prices. As this happens, fewer people buy the wardrobes. There is a limit to which the prices can be raised if they are all to be sold. The price rose to £300. At the end of the day, our capitalist sold all this wares and made £150,000 from the sales.

The capitalists making beds saw the profits being made by those making wardrobes. In the end, more and more began to switch their production to more profitable wardrobe production, rather than making beds.

In other words, capital flows to those sectors of the economy that offers the highest rates of return. But as new capacity comes on stream the production of wardrobes increases and the price of wardrobes falls (as well as the profits). As a consequence, capital then seeks out other areas of higher rates of profit, possibly in bed production, which now experiences shortages and thus a rise in the price of beds. As one opportunity opens up, another one closes. This results in a new division of labour in society, reflecting the changes in demand and prices.

While the value of a commodity, based upon the socially necessary labour-time needed for its production, is not immediately visible, prices certainly are. Walk into any shop and all the goods have price tags. While commodities of equal value tend to have equal exchange-values and prices, this is not always the case. In fact, in most cases they don’t. Indeed, the law of value would not operate unless prices did not differ from values. A new division of labour and allocation of resources arises from prices rising above or falling below values in response to changes in the supply and demand for particular goods.

So prices do not on all occasions reflect values, but tend to orbit around the value of a commodity. This fluctuation of prices can be compared to sea-levels. While the tide ebbs and flows, it nevertheless has a certain reference point, a certain average level, around which the sea rises and falls. The variation arises from the fact that the sea is in constant motion, and affected by gravitational pull. Nevertheless, there is a certain level, the sea-level, around which these ebbs and flows take place.

In regard to the economy, whatever the degree of divergence individually, the sum of all prices is equal to the sum of all values, “for in the final reckoning only the values that have been created by human labour are at the disposal of society,” explained Trotsky, “and prices cannot break through this limitation, including even the monopoly prices of trusts; where labour has created no new value, there even Rockefeller can get nothing.”

Through this means, the law of value determines the ratios of commodities that need to be produced and the distribution of labour power throughout the various sectors of the economy. This demonstrates how the law of value operates, through price signals and market forces, as the basic regulator of the capitalist system.

It is worthwhile underlining the difference, which is often muddled, between material wealth and value. Value is a social and historical category, which is only valid as long as commodity production exists. When commodity production disappears and we have production for need, value will also disappear. This takes place under socialist society. Wealth, on the other hand, is something material, and consists of use-values, irrespective of the form of society.

All things being equal, a rise in the productivity of labour will generate a rise in the material wealth of society: more clothes, cars, TV sets, houses, etc., etc. However, the total amount of existing values may at the same time remain unchanged, provided that the quantity of labour expended is the same. If a car worker produces 100 car engines instead of 50 in the space of 8 hours, still 8 hours labour would be spent in their production. One car would now incorporate half the value or labour-time as before. Again, a favourable harvest increases the wealth of a country, but the total values represented by the harvest would remain the same if the amount of socially-necessary labour expended remained unaltered.

The bourgeois critics take delight in pointing to such apparent “contradictions” in Marx, without understanding Marx’s scientific method of analysis. Incapable of answering him, they instead prefer to distort and twist everything he says. All they are interested in is the market and market relations, which constitute the surface appearances of capitalist economic relations.

The constant drive of the capitalists to keep up with “socially necessary” labour-time also explains why capitalism cannot exist without continually revolutionising the mode of production. In its turn, the introduction of machinery, together with an expansion of capital, means an increase in the productivity of labour.

“The development of capitalist production,” states Marx, “makes it constantly necessary to keep increasing the amount of capital laid out in a given industrial undertaking, and competition makes the immanent laws of capitalist production to be felt by each individual capitalist, as external laws. It compels him to keep constantly extending his capital, in order to preserve it, but extend it he cannot, except by means of progressive accumulation.”

Prices and Values

Marx never said that exchange-value was the only thing that determined price. He never denied the effects of supply and demand on price. Neither did he deny the existence of monopoly prices. He drew the distinction between value and price and recognised that a price tag can be applied to anything, including things that have no value whatsoever. Things, such as virgin land, can be priced and sold for enormous amounts of money. Rare works of art are sold for millions, far beyond the original intrinsic “value”, due to the frenzied speculation of those with money, keen to “invest” in these unique artefacts. With supply limited to a single object, individual Rembrandt paintings can be sold for a fortune. The only thing that determines their price is the amount that the super-rich are prepared to pay. Works of art cannot be produced or reproduced, except as inferior imitations, and therefore such things are unique, one-off things. This monopoly situation has a direct bearing on their price or what people are prepared to pay. If the item is one of a kind, the restricted supply means it can attract an astronomical price.

Such examples, despite the rational explanations, have been used to attack the labour theory of value. However, these attacks are groundless.

In practice, such unique things, such as original classical paintings, lie beyond the realm of the labour theory of value, which deals with commodities that can be reproduced without limitations or restrictions. Otherwise, what we are dealing with here are monopoly prices.

Economic textbooks will tell you that all prices are determined by supply and demand. But this is only partly true. Of course, a corner shop can charge customers more for things at midnight, as either you buy or you go home empty handed. While the price of beans can rise very high for reasons of scarcity, it can only rise within limits. But whatever the cost of bread or baked beans, they will always be less than a tractor. While prices may vary due to supply and demand, they will always hover around an axis, namely the value of a commodity. That is why certain commodities, like a tin of baked beans, will always be cheaper than commodities that contain a higher labour-time expended on their production, whether it is a motor car or tractor. Increased prices will, as explained, cause capital to flow into this sector, attracted by high profits, and will increase the future production of baked beans, thereby reducing their price. Such a process takes place across the entire economy.

This demonstrates the fluctuation of market prices, but still leaves the question of what it is that lies behind these prices. For Marx, the answer is the labour theory of value. As for bourgeois economists, they simply ignore this question, as they do not want to be seen to justify such heretical ideas.

Utility theory

The Austrian School of economists was the chief artillery of the bourgeois counter-offensive against Marxism. For them, wages were simply regarded as a part of the national income, along with rent, interest and profit. Labour had no special place in production and surplus value for them did not exist. Their concept of value was not based on any objective criteria, but simply expressed a subjective choice or wishful thinking. In the words of the Reverend Archbishop Whately, “It is not that pearls fetch a high price because men have dived for them, but on the contrary, men dive for them because they fetch a high price.”

In fact, the high price of pearls arises from the difficult labour involved in retrieving them, and their high value spurs people to engage in this activity. Our Archbishop is blind to the essential question: what is the value of a pearl and how is it determined? Marx explains the reason in regard to diamonds:

“Diamonds are of very rare occurrence on the world’s surface, and hence their discovery costs, on average, a great deal of labour-time. Consequently, much labour is represented in a small volume.”

The same can be said of pearls.

While Marx regards value as an objective thing, the advocates of marginal utility theory regard it as a subjective question. They place the whole business on its head in an idealist fashion. This was then taken up by later economists and became the basis of modern bourgeois economics. At this point, bourgeois economics ceased to be a science. Its whole purpose was simply to justify the capitalist system.

According to them, if someone wants something badly, it has considerable utility for that person; the more he wants it, the more he is willing to pay for it. It depends on your point of view, namely how much satisfaction a person gets from consuming a certain commodity. Oddly, while it is possible to see that the same commodity has different amounts of utility for different people, it nevertheless sells in a supermarket at the same price. This means that price cannot be subjective, but must be based upon a real foundation of value. If utility is supposed to measure value, how is it that different amounts of utility are sold for the same price? They attempt to get around this contradiction by reference to the “margin”, and in economic textbooks to “marginal utility”. But we will leave this realm of idealist fantasy.

Labour Power and Wages

Under feudal society, the existence of exploitation is very clear for all to see. The serfs work on their own land to grow the crops for themselves and their families. They then work on the lord’s land to produce a surplus that is appropriated by the lord. Both are separated by both time and place. Under slavery, surplus labour is not performed in this way. The illusion is created that the slave-owner takes everything. In fact, the slave has to eat in order to work. The slave owner must provide this. Therefore some slave labour is necessary labour (to cover their keep) while the remainder is surplus labour taken by the owner. Under capitalism, exploitation is hidden, as necessary and surplus labour are not separated in time and space. The whole process is shrouded in a veil.

But Marx shows how surplus value under capitalism is produced. He explains that the capitalist finds in the market place a particular commodity, which, unlike all other commodities, is the source of values greater than its own value. This commodity is called labour power. This labour power is the ability to work using brain and muscle. Marx defined it as the “aggregate of those mental and physical capabilities existing in a human being”. The purchase and use of these “mental and physical capabilities”, all the effort and strain that goes into the labouring process, when put to work by the capitalist, constitutes the exploitation of the working class. The capitalists squeeze every ounce of energy from the worker during every minute of the working day.

What is the price of labour power, or the value of wages, paid to workers? Human labour power is a commodity like any other. Like all commodities, this value is determined by the labour-time socially necessary for its production. Labour power is directly linked to the wellbeing of working people. They need food, clothing, housing, etc., to survive and be fit for work the following day. This must also include the upkeep of the family, the next generation of workers. Workers also need to be educated and trained. Therefore the value of labour power is determined by the value of the means of subsistence, namely the means by which labour power is reproduced. There is also a historical element in addition, dependent on time and place. Wages, the price of labour power, are regarded as the “going rate” for the job. However, the capitalist is interested in keeping wages as low as possible. The workers have the opposite need. Wages – the price of labour power – can therefore fluctuate to a certain extent according to the struggle of living forces, i.e., the class struggle.

After purchasing labour power for a certain wage, the capitalist proceeds to put his “hired hands” to work. While the worker has a contract to work for, say, 8 hours, he/she covers the value of their wage in perhaps only 4 hours. This initial period Marx describes as necessary labour-time. This is where the worker produces values equivalent to the value of the means of subsistence necessary for the reproduction of his/her labour power. But once having covered the value of their wage, the worker does not stop work, but continues until the end of their 8-hour shift. This extra period beyond the necessary part is called surplus labour-time and is where the worker produces surplus value for the capitalist. This 4 hour period is unpaid labour and is where capitalists’ profits come from.

The value of the raw materials and the tools, etc., used up in the production of the commodity do not create new value, but simply transfer their existing value to the new product. This includes the wear and tear of the machines, which only gradually transfer their value, known as depreciation. Labour (combined with nature) is the source of all new value, including surplus value. A machine simply increases the productivity of human labour, which allows the effort of the workers to produce more in a given time. However, it is not the machine that creates the new values, but the labour of the workers.

All the existing value (from past labour) contained in the raw materials, the wear and tear, etc., is transferred to the new commodities created by the worker. This transferred value is referred to by Marx as “dead labour”, as opposed to the new value that has been added, which Marx describes as “living labour”. He compares it to a blood-sucking vampire. “Capital is dead labour,” explains Marx, “that vampire-like, only lives by sucking living labour, and lives the more, the more labour it sucks.”

The overriding driving force of capitalism is the production of surplus value. The capitalist is determined to squeeze the last drop of profit from the unpaid labour of the working class. He does this through a combination of ways: lengthening the working day; speeding up the machines; introducing labour-saving machines; rationalisation; productivity deals; new shifts; time and motion studies; lean production techniques, etc. There is a whole host of these things which workers have become very familiar with, especially over the past period of years.

The total capital invested by the capitalist was divided by Marx into two parts. The capital made up of means of production, raw materials, power, etc., is deemed constant capital, as it simply transfers its value to the new commodities. The value they impart is fixed. However, the capital represented by labour power (the cost of wages) is regarded as variable capital, as it is the source of all new additional value. The amount of value it imparts is not fixed, but expanding, thus the name variable.

Therefore, total capital can be presented as c + v, where c is the constant part and v is the variable. It follows that the total value of all commodities is made up of c + v + s, where s represents the surplus value. During the production process surplus value (s) is created. As the surplus value is “locked up” inside the commodity, the capitalist can only obtain or realise this surplus value when the commodities are sold on the market. Thus, whilst surplus value is created in production, it can only be realised in exchange, in the market place. If a commodity cannot be sold it cannot realise its surplus value and is worthless.

The capitalist class forces the working class to perform more labour than required to cover their means of subsistence, thus producing surplus value. The capitalists are constantly seeking to increase the rate of surplus value – that is, the amount of surplus value that can be produced for a given quantity of purchased labour-power. This rate of surplus value can be expressed in terms of the ratio of surplus labour to necessary labour, or s/v. In simple terms, it is the rate of exploitation of labour by capital; of the worker by the capitalist.

The capitalists squeeze increases this rate of exploitation by lengthening the working day through over-time and shift work. Many industries work on a 24 hour basis, forcing its workers to follow suit. While labour is the source of value, there are physical limits to its exploitation. A worker may be able to work 8, 10 or 12 hours a day, but they have to eat and sleep in order to be revived for the next working day. Workers also have to travel to work, which make take two hours or more on top of this. So despite the demands of capitalism for 24 hour production, there is nevertheless a barrier to the amount of surplus value that can be physically extracted in a 24-hour period. Nevertheless, the struggle to lengthen the working day is an on-going battle. Such exploitation produces, according to Marx, absolute surplus value.

Since there are limits to lengthening the working day, the capitalists revert to measures to increase the intensification of labour. New machines are introduced to speed up the production process. The continuous increase in the intensity of labour becomes the means of reproducing the value of machinery (constant capital) in the shortest possible time. Workers are forced to work harder in a shorter space of time. Marx called this the production of relative surplus value.

“There cannot be the slightest doubt that the tendency that urges capital, so soon as a prolongation of the hours of labour is once and for all forbidden, to compensate itself, by a systematic heightening of the intensity of labour, and to convert every improvement in machinery into a more perfect means of exhausting the workman, must soon lead to a state of things in which a reduction of the hours of labour will again be inevitable,” states Marx.

The capitalists, however, will never shorten the working day of their own account, for they will never voluntarily renounce their surplus value. Only the struggle of the working class can hope to bring this about. It is the class struggle that decides.

Of course, the capitalists seek to conceal this system of exploitation. They maintain that they buy the workers’ labour rather than the workers’ labour power. But this is not the case. The capitalists would not employ workers unless they could make a profit from them, and the unpaid labour of the workers is the source of this profit. They therefore pay in wages less than the worker produces in value.

The circulation of money as capital may be described as M-C-M’, where money capital is turned into commodities, which are then in turn sold for more money. This Marx calls the “general formula for capital”, where M’ exceeds M. The difference between M’ and M, the value gained by the capitalist, is surplus value. While exploitation is transparent under feudalism, as the serf labours on the lord’s land for free for so many days, under capitalism, surplus and necessary labour performed by the worker are not separated in time and space and therefore the exploitation of workers is not so obvious. The exploitation is the same, but the mode of exploitation is different.

“The essential difference between the various economic forms of society, between, for instance, a society based on slave labour, and one based on wage labour,” explained Marx, “lies only in the mode in which this surplus labour is in each case extracted from the actual producer, the labourer.”

Productive and Unproductive Labour

As we can see, the production of surplus value takes place in production and not in circulation. It is through the exploitation of the working class during the production process that profit is produced. What kind of work is performed is irrelevant. Marx explains that the capitalist is not interested whatsoever in the particular use-values created in the production process. Whether they produce pencils, shoes, motor cars or luxury yachts is irrelevant. These are simply a means to an end for the capitalist and nothing more. The capitalists are interested only in the exchange-value, and thereby the surplus value, which they will realise once the commodity has been sold. The whole basis of capitalist production is the production of surplus value. Marx therefore concludes that under the profit system: “Only labour which produces surplus value is productive labour.”

Whether workers produce tangible things or not is also unimportant, as long as by their labour they produce surplus value. “A writer is a productive labourer not in so far as he produces ideas, but in so far as he enriches the publisher who publishes his works, or if he is a wage labourer for a capitalist,” explains Marx.

Surplus value can arise from a service of some kind, depending on how it is exploited. A doctor or nurse working for a profit-making private clinic, which does not produce a material thing as such, but a service, nevertheless produces surplus value. The opera singer will produce surplus value for the theatre owner assuming the singer is only paid the value of their labour power. The earnings taken from ticket sales to watch the performance will be greater than the wages to the performers. In this case, the singer will be deemed “productive” by capitalism. It makes no difference whether the product lasts for a few seconds or not.

Money and Credit

With the development of exchange and trade, a special commodity emerges, namely money, to facilitate this process. At any given time, a certain quantity of money is required to circulate the commodities produced. Here we see the importance of money, which Marx calls the “universal equivalent”. Although the value of commodities is determined by their labour-time, we price them in terms of money. Price is simply exchange-value expressed in monetary terms.

Money arises historically and has taken many forms: slaves, cattle, precious metals. Money is clearly far superior to barter, which is a primitive form of exchange. The universal equivalent – money – can easily be used to exchange one commodity for another. In the past, gold and silver were used as money. Of course, gold and silver also have value, which, like all commodities, is determined by the amount of labour socially necessary for their production. Money (or currency) became increasingly expressed in terms of precious metals: copper, bronze, silver and gold. It makes possible the exchange or circulation of commodities. When money was gold coin, the British government issued gold sovereigns with a nominal value of one pound sterling.

Money is a measure of value, where commodities are expressed in terms of a quantity or certain weight of the precious metal. It becomes a universal means of payment. It can be accumulated, an index of the wealth of individuals, as well as being a reserve or store of value. Gold has historically stood out as the universal commodity – far easier to handle, carry and store, as well as being divisible and durable.

In more recent times, money has been represented by paper currencies, namely promises by the central bank to pay the amount stated on its bank notes. “I promise to pay the bearer,” states the currency of the Bank of England, although it has long ceased to do this. This currency is no longer backed by gold in the banks. Today, we have fiat money, which has no intrinsic value but is backed by the authority of the state. These worthless pieces of paper are only valuable as long as the state acts as guarantor. They become legal tender.

These tokens allow the owner a certain share of the wealth of society. If 10 tokens are issued equal to the size of the national cake, then you are entitled to a 10% share. Clearly, if you issue more tokens, but do not increase the size of the cake, you debase the currency.

Paper money becomes a far easier way of manipulating the currency. If two bank notes are placed in circulation where only one existed previously, then (all other things being equal) prices will double. This represents a devaluation. Governments attempted to guard against this by granting a central back the sole authority to print money. The state in the past regulated a fiduciary currency, where circulating bank notes were only covered by a proportion of bank reserves. If this is exceeded, there is a loss of value of the currency. Ultimately, gold remains the only universal equivalent on the world market. After the Second World War, the dollar was used as an international reserve currency, as this was backed by the huge gold reserves in Fort Knox. While still important, it has been undermined by the weakening of the American economy and the “floating” exchange rates introduced after the 1971 financial crisis.

Alongside money came credit. Instead of shipping large quantities of gold from one country to another in payment of goods, a credit system came into being to make such laborious and dangerous transactions unnecessary. As the 18th century economist Richard Cantillon explained: “If England owes France 100,000 ounces of silver for the balance of trade, if France owes 100,000 ounces to Holland, and Holland 100,000 to England, all these three amounts may be set off by bills of exchange between the respective Bankers of these States without any heed of sending silver on either side.”

Credit becomes a very important lubricant for the development of capitalism. Without credit, the capitalists would need to keep a fund of money to fund their transactions; otherwise factories would become idle, waiting for payment at every stage of production, distribution or retail. No capitalist wants their money tied up in stock. The banks provide this credit by charging interest. This process reflects the merger of finance capital with industrial capital.

Banks hold deposits, but lend out in excess of these and only keep enough in the bank to cover normal withdrawals. For them, the less idle money in their vaults, the better it is. Their profits are simply a section of the surplus value, creamed off from production by financiers and bankers. The task of the banks and finance houses is to redistribute the surplus value created in production into their coffers. In many ways, they act like the tollgate owners of old, who were very busy making money by charging for the opening and closing of gates, but who were socially completely unproductive. This was revealed in the financial crash of 2007, when the banks over extended themselves, with lending in some cases reaching 50 times their entire reserves. While banking liquidity is subject to certain rules which require banks to keep a fixed proportion of their cash in reserves, they are able to get around this by “off balance accounting” and other methods. Shadow banking was built up to circumvent these restrictions. But as soon as there is a loss of confidence and a bank run, the whole thing collapsed and banks go bankrupt. The state has to step in to bail them out, as in the recent period.

Money in modern society is not simply notes and coin, but credit card payments and online sales, which has become a book keeping exercise.

Credit allows capitalism to go beyond its limits. This can have colossal benefits, but it can also introduce colossal dangers. Banks do not have to print money physically, but simply allocate more overdrafts. Quantitative Easing is the creation of electronic money by central banks. Speculative bubbles can be created, which produce volatility and eventually collapse. The Tulip Bubble and the South Sea Bubble are examples of such speculation. Today, we have derivatives, SIVs and CDOs and other strange creations, described by Warren Buffet as financial “weapons of mass destruction”. Marx described these things as “fictitious capital”, which have no real value and express no real assets. Fictitious capital nevertheless allows its owner a share of the surplus value produced by society; but unlike a factory, it exists only on paper. Marx simply explained that the capitalists were attempting to make profit less and less from real production, and instead were turning increasingly to speculation, namely the desire to make money from money, without the trouble of producing anything. Speculation, however, does not produce surplus value, but only redistributes the surplus value created in real production.

Competition and Accumulation

The economic categories used by Marx are, of course, rejected wholesale by today’s bourgeois economists, whose role it is to disguise and cover up the exploitation that exists. The concepts of Marx are an anathema to them.

Through competition, the capitalist is forced to invest to produce commodities more cheaply than his rivals. In the hands of capitalists, money is accumulated to beget more money. That is its purpose. Capital is therefore a self-expanding value. Accumulation is a compelling law under capitalism. Capitalism had become “accumulation for accumulation’s sake,” explained Marx. Or put another way, “Production for production’s sake.” Those industries where the productivity of labour lags behind the average are driven out of business by those using the most up-to-date methods. In this way, the introduction of machinery increases the productivity of labour, and reduces the necessary labour-time (thereby increasing surplus labour-time). It allows those who introduce new techniques to sell their products above their individual value (the labour-time it costs to produce them) but less than the average cost, thereby gaining super profits.

The level of industry determines the proportion of the means of production used and the workers employed. In other words, the capital of a firm will correspond to a certain ratio of constant and variable capital. With increased investment, the productivity of labour grows, so that the worker produces more than before in the same space of time. This means more machinery at the elbow of the workers, and hence the more constant capital grows in relation to variable capital. This is an inevitable development of the accumulation of capital. Marx describes this as a rising organic composition of capital, defined as c/v – the ratio between the constant capital and variable capital employed by the capitalist in the productive process.

Through competition, large capitals destroy smaller capitals, leading to a greater concentration and centralisation of wealth and industry. This process results in the development of giant corporations, with the most modern equipment and technique. Whereas in the past the chemical giant ICI would spend £2m for a plant, these days it would pay around £600m. This accumulation of capital constitutes the historic mission of capitalism to develop the productive forces. In the United States, where the process has gone furthest, 500 giant monopolies account for 73.5% of total GDP output in 2010. If these 500 corporations formed an independent country, it would be the world’s second largest economy. In 2011, these 500 firms generated an all-time record of $4,824.5 billion in profits – a 16% jump from 2010. On a world scale, the 2,000 biggest companies had an income of $32 trillion: $2.4 trillion in profits, $138 trillion in assets and $38 trillion in market value, with profits rising an astonishing 67% between 2010 and 2011. The driving force of capitalist production is not the satisfaction of human need but the production of surplus value at an ever-increasing rate, a large part of which must be accumulated and incorporated into new means of production.

This drive to ever-increasing monopolisation leads, however, to a relative decrease in variable capital (labour power) to constant capital (means of production, raw materials, etc.), which results in more investment being placed at the elbow of every worker employed. This has certain adverse consequences.

Ultimately, the amount of surplus value obtained by the capitalists depends upon two things: the rate of surplus value and the number of workers employed. Clearly, the introduction of machinery tends to reduce the number of workers and therefore changes the ratio between variable and constant capital; the relationship between dead and living labour. Machinery serves to expel workers from the factories. This inevitably leads, all things being equal, to a declining rate of profit. “Hence, the application of machinery for the production of surplus value,” explains Marx, “implies a contradiction which is immanent in it.”

The Rate of Profit

As explained, profit comes from the variable part of capital, labour power, as the constant part of capital simply transfers its own value to the end product. With the development of capitalism, the capitalists invest greater and greater amounts of capital. But with increasing technological advance, the greater proportion goes into constant capital, and the proportion going to variable capital decreases. But as it is from the variable capital that profit is made, the result is a falling rate of profit.

While the rate of surplus value measures the ratio between the surplus value created and variable capital paid for, the rate of profit measures the ratio between the capitalist’s profit and the total capital the capitalist has to pay out for production. This is considered the capitalist’s rate of return.

If we take the example of an economy where the total income in a year is £50 million, this is made up of c + v + s (constant capital, variable capital and surplus value). In figure terms, this might be: c = £10 million; v = £20 million; s = £20 million. The rate of exploitation in this economy is therefore s/v or 20/20 = 100%.

However, the rate of profit is the ratio between the surplus value and the entire capital outlay: s/(c + v), 20/30, or just under 67%. This measures profitability of the capitalist’s investment.

If the capitalist invests £10 million in new machines and equipment, it means that constant capital (c) has now doubled to £20 million per year. We take the rate of exploitation as constant. The rate of profit then falls: 20/40 = 50%. There has been an increase in the organic composition of capital, which brings about a fall in the rate of profit. This is a general tendency under capitalism, as the system expands and the productivity of labour grows.

At one point, Marx describes this tendency for the rate of profit to fall as “in every respect the most important law of modern political economy.” He later modified this view to a law of “great importance”. The emphasis clearly changed. In any case, Marx never considered this law or tendency an absolute phenomenon.

Every capitalist is striving to increase the productivity of his workforce, namely the amount produced in a given period of time. If this is so, why is there not a permanent fall in the rate of profit? How was capitalism able to get round this inherent obstacle?

“There must be some counteracting influences at work, which cross and annul the effect of the general law, and which give it merely the characteristic of a tendency, for which reason we have referred to the fall of the general rate of profit as a tendency to fall,” states Marx. (Capital Volume III, p227)

Marx explains that this “double-edged law” is more of a tendency, which produces its own counteracting tendencies, and under certain conditions, can even result in the rate of profit to rise.

He deals with these counteracting factors in Chapter 14 of Volume III of Capital, where he outlines an array of factors which serves to modify this law.

These counteracting factors outlined in Capital include:

  • The increasing intensity of exploitation
  • Depression of wages below the value of labour power
  • Cheapening of the elements of constant capital
  • Relative over-population
  • Foreign trade
  • The increase of stock capital, which theoretically “may be introduced into the calculation”

Marx pointed out that the intensification of exploitation (“relative surplus value”) can restore the rate of profit. We have clearly witnessed this effect in the employers’ offensive over the last three decades, as all workers can testify. The capitalists have sought to increase their profit margins by squeezing every atom of surplus value from the sweat and nervous strain of the working class. Globalisation and the use of migrant labour has also been a means of driving down wage rates, which in many cases are below the value of labour power. This can also be seen in the various sweatshops that exist around the world, which produce all kinds of commodities, from shoe wear to clothing, for multinational companies. Sweated labour has been used where workers have been stripped of all rights, paid below the minimum and treated like cattle. These methods have worked hand in hand with the existence of mass unemployment, which acts as a downward pressure on wage rates.

The opening up of the former Soviet Union and China to capitalism has provided a massive boost to capitalism in the form of ever-cheapening supply of commodities, including machinery. The price of computers and its components has fallen dramatically, as well as mobile phones and other electronic equipment. Their cost of production has fallen due to the less labour-time needed for their production. This cheapening of the different elements of constant capital has again been a feature of the current period, and has helped drive up the rate of profit from historically low levels. This process has benefited from globalisation and the opening up of new markets and the increased exploitation of the old. Privatisation of state companies and utilities has again meant a bonanza for the multinational corporations and the financial giants which stride the world, squeezing out surplus value from every quarter.

Labour’s share in national income has been in decline across the main capitalist economies (OECD) since 1980. The gap has been especially wide in the USA, where productivity rose by 83% between 1973 and 2007, but male median real wages increased by just 5%. The share of the US national income that goes to wages has fallen to its lowest level since records began after the Second World War. The production of relative surplus value is a process of progressively cheapening commodities, with the new commodities containing less value than before. A larger mass of use-values will be expressed in a smaller total value.

Therefore, what we are dealing with in regards to the tendency of the rate of profit to fall is only a tendency which manifests itself over the whole history of capitalist development. “The law operates therefore simply as a tendency, whose effect is decisive only under certain particular circumstances and over long periods,” explains Marx. Thus, there can be long periods, even decades, where the tendency of the rate of profit to fall is cancelled out by the above counteracting tendencies. These can cut across the process and even reverse it, but not indefinitely.

In his book The Current Crisis written in 1987, Mark Glick publishes the following figures for the long-term rate of profit in the United States:

  • 1899 – 22%
  • 1914-18 – 18%
  • 1921 – 12%
  • 1929 – 17%
  • 1932 – 2%
  • 1939 – 7%
  • 1945 – 23%
  • 1948 – 17%
  • 1965 – 18%
  • 1983 – 10%

These figures reveal that from a broad historical point of view, while leaving aside the inevitable cyclical fluctuations, the rate of profit now is lower than it was a hundred years ago. And yet for whole periods this tendency has been reversed.

Eventually, this downward tendency will inevitably reassert itself and act as a further barrier to the development of capitalism. But the crisis of capitalism cannot be explained simply by the tendency of the rate of profit to decline. Attributing the cause of capitalist crisis to a declining rate of profit does not correspond to the theory or the facts. Rosa Luxemburg ridiculed those who believed that capitalism would collapse as soon as the rate of profit fell to zero. She poked fun at how long it would take before capitalism would collapse as a result of a falling rate of profit: “roughly until the sun burns out!”

However, the capitalists can put up with a falling rate of profit for a long time, as we have seen. What they cannot afford is when the mass of profit falls. This took place towards the end of 2008, which precipitated the biggest slump since the 1930s.

Crisis and Overproduction

In this epoch of monopoly capitalism, the laws governing the system become increasingly twisted and distorted. Monopoly does not abolish competition, but twists and mangles it. The power of the monopolies colossally distorts the market by restricting supply, as well through price fixing. While capitalism appears to be chaotic, it is not complete chaos. In fact, as Engels explained, its laws operate in and through the anarchy of production.

The capitalist system experiences periodic crises – booms and slumps. These have always been present under the capitalist system, and such crises are in fact unique to capitalism. The idea that capitalism is a system of equilibrium (and not periodic crisis), first put forward by Jean Baptiste Say (“Say’s Law”) and more recently connected to the “efficient market hypothesis”, has been demonstrated to be utterly false. The idea that “supply creates its own demand” was – and is – simply not true. The market economy is not a self-adjusting system, as once thought. This is evident today with the existence of mass unemployment and deep-seated crisis. All attempts to abolish the boom/slump cycle have utterly failed.

Capitalism’s periodic crises are crises of over-production of both consumer and capital goods for the purposes of capitalist production. This is not simply the over-production of capital, but also the over-production of commodities. One goes hand in hand with the other. Over-production arises from the contradictions of the market economy and the division of society into mutually conflicting classes. In the final analysis, the working class, the producer of all values, cannot buy back the values it produces, which at a certain point becomes a barrier to further economic development and leads to a crisis of over-production.

As Engels explained in Anti-Dühring:

“The enormous expansive force of modern industry, compared with what of gases is mere child’s play, appears to us now as a necessity for expansion, both qualitative and quantitative, that laughs at all resistance. Such resistance is offered by consumption, by sales, by the markets for the products of modern industry. But the capacity for expansion, extensive and intensive, of the markets is primarily governed by quite different laws that work much less energetically. The extension of the markets cannot keep pace with the extension of production. The collision becomes inevitable, and as this cannot produce any real resolution as it does not break in pieces the capitalist mode of production, the collisions become periodic. Capitalist production has begotten another ‘vicious circle’.”

He goes on to describe a crisis, where all the laws of production and circulation are turned upside down. Money, the means of circulation, becomes now a hindrance to circulation. The factors that served to promote the boom now turned into their opposite.

“Commerce is at a standstill, the markets are glutted, products accumulate, as multitudinous as they are unsaleable, hard cash disappears, credit vanishes, factories are closed, the mass of the workers are in want of the means of subsistence, because they have produced too much of the means of subsistence; bankruptcy follows bankruptcy, execution upon execution. The stagnation lasts for years; productive forces and products are wasted and destroyed wholesale, until the accumulated mass of commodities finally filter off, more or less depreciated in value, until production and exchange gradually begin to move again… And over and over again.”

The productive forces have outgrown the narrow limits of private ownership and the nation state.

“And how does the bourgeoisie get over these crisis?” ask the authors of the Communist Manifesto. “On the one hand by enforced destruction of a mass of productive forces; on the other, by the conquest of new markets, and by the more through exploitation of the old ones. That is to say, by paving the way for more extensive and more destructive crises and by diminishing the means whereby crises are prevented.”

These lines are as fresh and relevant today as when they were first written, over 160 years ago. The ultimate cause of capitalist crisis is over-production. The working class can never buy back the total product of its labour.

The capitalists cannot simply increase wages to the level where the surplus value is eliminated, since the justification of capitalism is the maximum extraction of surplus value. Other things being equal, if the wages of the working class increase, the capitalists’ profits will fall and this will cause a fall in investment.

The system, however, is clearly not in a permanent state of crisis, and functions temporarily through the interaction between the two main “departments” of the economy: the production of consumer goods and the production of capital goods (the means of production). The capitalists are able to overcome the contradictions they face through investment, namely by reinvesting the surplus value extracted from the labour of the working class into new means of production and thereby creating new markets. In other words, capitalism creates its own market through investment, temporarily overcoming its contradictions.

However, there are limits to everything. This investment in turn creates greater productive capacity overall and serves to exacerbate the new crisis of over-production when it finally arrives. At a certain point, the market cannot absorb the commodities that are produced and overproduction ensues. Markets become saturated and the surplus value held within commodities cannot be realised. Factories are closed and workers are thrown out of work. There is no escape from this. In other words, this re-investment and expansion of the market only serves to create the conditions for an even deeper slump in the future.

As Marx explained:

“The ultimate reason for all real crises always remains the poverty and restricted consumption of the masses, in the face of the drive of capitalist production to develop the productive forces as if only the absolute consumption capacity of society set a limit to them.”

“The conditions for immediate exploitation and for the realisation of that exploitation are not identical,” explained Marx. “Not only are they separate in time and space, they are also separate in theory. The former is restricted only by the society’s productive forces, the latter by the proportionality between the different branches of production and by the society’s power of consumption.”

We are not taking about peoples’ needs in regards to consumption, but their “ability to pay”. This is determined “by the power of consumption within a given framework of antagonistic conditions of distribution, which reduce the consumption of the vast majority of society to a minimum level,” explains Marx. “But the more productivity develops, the more it comes into conflict with the narrow basis on which the relations of consumption rests.”

Marxism and Keynesianism

Theories of “under-consumption” are often confused with Marx’s ideas. But these are not the same. While under-consumption certainly exists for the masses, as any worker can testify, it is not the direct cause of capitalist crisis. If that was the case, there would be permanent crisis from the first day of capitalism’s existence. Modern “under-consumption” theory is closely identified with John Maynard Keynes, who believed that the problem of the lack of “effective” demand could be resolved by the intervention of the state. The state, through deficit financing, would plug the gap. In effect, the state would pay people to dig holes and fill them in again. These workers would then spend their wages and create new demand further down the line, thus solving the problem. But there is an inherent snag. The theory of under-consumption overlooks the basic fact that capitalist production is production for profit, and not for consumption. If there is no profit, there will be no production. The disparity between the productive capacity in the economy and the purchasing power of the masses will continue so long as there is production for profit.

Marx answered this Keynesian argument long ago.

“It is a sheer tautology to say that crises are caused by the scarcity of effective consumption, or effective consumers. The capitalist system does not know [of] any other modes of consumption than effective ones. That commodities are unsaleable means only that no effective purchasers have been found for them...

“But if one were to attempt to give this tautology the semblance of a profounder justification by saying that the working class receives too small a portion of its own product and the evil would be remedied as soon as it receives a larger share of it and its wages increase in consequence, one could only remark that crises are always prepared by precisely a period in which wages rise generally and the working class actually gets a larger share of that part of the annual product which is intended for consumption. From the point of view of these advocates of sound and ‘simple’ (!) common sense, such a period should rather remove the crisis.”

In other words, wages tend to rise at the peak of a boom, where labour tends to be in short supply, shortly before a slump in the economy. Therefore, the immediate lack of demand, one element, cannot be considered the real cause of the crisis of over-production, as the Keynesians believe.

The whole fallacy of Keynesianism rests on the inability to understand that crisis is not something incidental or external to the workings of capitalism but springs from the inherent contradictions of capitalist production itself. While the capitalists attempt to keep wages as low as possible, they also produce as much as possible for an unknown market. This is especially the case at the height of a boom, just before the crash.

Of course, while we fight for higher wages, the idea that this will solve the crisis of capitalism is utterly false. In fact, on a capitalist basis, increased wages will simply eat into profits and push the capitalists to cut back on investment and production, thereby exacerbating the capitalist crisis. It is impossible to create demand from thin air. The laws of capitalism are based upon a system of commodity production, which includes labour power.

The illusion of “demand” management has of course a grain of truth in it, but it is entirely one-sided. It is clear that the “demand” side of capitalism in a crisis is lacking; but this is only the other side of the fact that the working class receives in wages only a part of the value that it produces. Therefore, as already underlined, it cannot afford to buy back the goods which are produced. As Marx pointed out, the problem is not why there is a crisis, but why this is not a permanent crisis. The answer to this is, as explained above, the division between two sectors: the production of consumer goods and the production of the means of production. So long as the surplus extracted from the labour of the working class is reinvested into industry, machinery and infrastructure, the system can develop, albeit preparing the way for a new, deeper crises in the future. Workers cannot buy back all of the goods they produce, and therefore re-investment of the surplus in society is the key to the continual development of capitalist economy. However, this process cannot last forever, and instead only produces further contradictions.

To call for the state to “create” demand or “reflate” the economy as a solution to capitalist crisis is also utopian. The attempt to use the printing press to “create” money, not backed by the production of more commodities, will only serve to fuel inflation and reduce workers’ income. The only other way for the state to increase spending is to take in more through increased taxation. But taxation can only come from the capitalists or the working class. To tax the capitalists will mean cutting into profits, which will discourage them from investing. To tax the working class will cut into their consumption, thereby reducing demand still further. If the state resorts to borrowing, this will sooner or later need to be paid back – with interest. At the end of the day, such “solutions” simply intensify the contradictions of capitalism, not resolve them. It is a catch 22 situation for capitalism, from which there is no way out and no escape.

The abandonment of Keynesianism and the return to orthodox economics is simply moving from the frying pan into the fire. The capitalists have gone back to “sound” budgets and the unfettered rule of the market, at least in words. This has only prepared an even bigger disaster. The turn towards laissez-faire economics is a product of the impasse of capitalism and is no solution to the contradictions the ruling class faces.

The Marxist theory of crisis is based upon an analysis of insoluble contradictions: the unlimited drive to produce, which is unique to the capitalist mode of production, combined with the limited consumption of the masses arising from their social position. As a consequence, capitalism is like a man sawing away the branch on which he is sitting. Crises are endemic to the capitalist system. It simultaneously creates and destroys the market at the same time, by squeezing more and more surplus-value out of the working class, while attempting to hold down wages to the bare minimum. This in turn becomes a barrier to the expansion of the market and therefore the realisation of surplus value, as we are witnessing in this present period of permanent austerity.

Capitalism and Socialism

Capitalism is a crisis-ridden system, where the law of value asserts itself by way of crises. The contradictions, which have reached their limits, are a product of the capitalist system. Nevertheless, the system will not fall of its own volition. It will need to be overthrown by the conscious movement of the working class, the revolutionary class created in the womb of capitalism.

Capitalism, in developing the productive forces, creates the basis for a new higher form of society. This is the historical justification for class society. Private ownership and the nation state have now become a colossal barrier to the further development of the productive forces. The capitalist system has exhausted itself, as graphically illustrated in the present crisis of deepening austerity and mass unemployment.

Instead of capitalist anarchy, private ownership of the means of production will need to be abolished and replaced by a rationally planned economy. Of course, we are not in favour of taking over the small shops and small businesses, but of the giant economic levers that dominate the economy.

In order to create a unified system of credit and investment, together with the introduction of a rational plan based on our needs, it will be necessary to take over the banks and finance houses and merge them into a national credit and banking system. This is a prerequisite for democratic economic planning. This will not mean the seizure of ordinary people’s bank deposits. On the contrary, a publicly-owned state bank will create much more favourable terms for small depositors than the profit-greedy private banks. In the same way, it will be able to provide cheap credit for small businesses presently crushed by the big monopolies.

The giant companies that dominate the economy will be taken over, without compensation, and run democratically under workers’ control and management. The task is to reorganise the whole system of production and distribution on a more dignified and workable basis. Such resources, bequeathed by capitalism, can then be used to abolish unemployment and drastically reduced the working week. This will be accompanied by a substantial rise in living standards and will provide the means for working people to be involved in the running of society.

Under capitalism, the capitalists plan production within their factories and corporations. They would not dream of allowing blind market forces to operate within their factories. They themselves decide how best to combine workers and machines to generate the optimum results. If they allowed the market to do this, they would be driven out of business. The capitalists devise their own planning arrangements. The conscious control over economic life which will takes place under socialism begins to develop, albeit in a hierarchical and coercive form, in the capitalist factory. How different things are once you leave the factory, where nothing is planned or foreseen and everything is left to the “invisible hand”! What a contrast to the anarchy of production in relation to the capitalist economy as a whole. This alone shows how the market economy is an unnatural way to run our lives and needs to be replaced.

A nationalised economy, run under democratic workers’ control and management, would mean that conscious planning and control, not market forces and the law of value, would decide the most efficient use of resources. Given the technology that now exists, a collective, democratically and rationally planned society is entirely possible. The fact that today the mobile phone and the computer have become ubiquitous opens up possibilities for popular, democratic participation that could not have been dreamed of 50 years ago.

With new technology and automation in production, almost any job that involves sitting in front of a screen and manipulating information is either disappearing, or will do soon. Offshore workers in India are just as vulnerable as their counterparts in the west. Blue collar and white collar workers face the same bleak future under capitalism. China is the fastest growing market for robots. No human can compete with the relentless falling costs of automation. But as labour becomes “uneconomic” relative to machines, purchasing power diminishes. The capitalist system finds itself in a massive contradiction. It cannot utilise the technological, scientific, and productive potential it has brought into being.

A future of prosperity faces the human race, providing it can harness this potential. Soul-destroying work can be abolished. A vast social and cultural transformation is within our grasp. But on a capitalist basis, a nightmare is opening up. It will be a merciless race to the bottom. The task facing us is to sweep away the capitalist system. That is the only alternative.

Towards the end of the nineteenth century, Paul Lafargue, a French Marxist, wrote a pamphlet called The Right to be Lazy. It put forward the virtues of ending the drudgery of work and the need for leisure time. The ruling class have always had a monopoly over art, science, culture and government. It is time that ordinary working people had genuine access to and control over these things.

Socialism would abolish the waste, duplication and inefficiency of capitalism and do away with the anarchic free-for-all of the market. Resources, including the allocation of social labour, will take place rationally and according to social requirements. It would transform our lives and transform world in which we live in the most wondrous ways. Economic value, which is a category that belongs to commodity production, will disappears with this mode of production. As Engels correctly commented, “people will arrange everything very simply without the intervention of the much-famed ‘value’.” For the first time, humanity would control its own destiny.

The Living Thoughts of Karl Marx (extract)

Leon Trotsky

Certain of Marx’s argumentations, especially in the first, the most difficult chapter, may seem to the uninitiated reader far too discursory, hair-splitting, or “metaphysical”. As a matter of fact, this impression arises in consequence of the want of habit to approach overly habitual phenomena scientifically. The commodity has become such an all-pervasive, customary and familiar part of our daily existence that we, lulled to sleep, do not even attempt to consider why men relinquish important objects, needed to sustain life, in exchange for tiny discs of gold or silver that are of no earthly use whatever. The matter is not limited to the commodity. One and all of the categories (the basic concepts) of market economy seem to be accepted without analysis, as self-evident, as if they were the natural basis of human relations. Yet, while the realities of the economic process are human labour, raw materials, tools, machines, division of labour, the necessity to distribute finished products among the participants of the labour process, and the like, such categories as “commodity”, “money”, “wages”, “capital”, “profit”, “tax”, and the like are only semi-mystical reflections in men’s heads of the various aspects of a process of economy which they do not understand and which is not under their control. To decipher them, a thoroughgoing scientific analysis is indispensable.

In the United States, where a man who owns a million is referred to as being “worth” a million, market concepts have sunk in deeper than anywhere else. Until quite recently Americans gave very little thought to the nature of economic relations. In the land of the most powerful economic system economic theory continued to be exceedingly barren. Only the present deep-going crisis of American economy has bluntly confronted public opinion with the fundamental problems of capitalist society. In any event, whoever has not overcome the habit of uncritically accepting the ready-made ideological reflections of economic development, whoever has not reasoned out, in the footsteps of Marx, the essential nature of the commodity as the basic cell of the capitalist organism, will prove to be forever incapable of scientifically comprehending the most important and the most acute manifestations of our epoch.

Marx’s Method

Having established science as cognition of the objective recurrences of nature, man has tried stubbornly and persistently to exclude himself from science, reserving for himself special privileges in the shape of alleged intercourse with supersensory forces (religion), or with timeless moral precepts (idealism). Marx deprived man of these odious privileges definitely and forever, looking upon him as a natural link in the evolutionary process of material nature; upon human society as the organisation of production and distribution; upon capitalism as a stage in the development of human society.

It was not Marx’s aim to discover the “eternal laws” of economy. He denied the existence of such laws. The history of the development of human society is the history of the succession of various systems of economy, each operating in accordance with its own laws. The transition from one system to another was always determined by the growth of the productive forces, i.e., of technique and the organisation of labour. Up to a certain point, social changes are quantitative in character and do not alter the foundations of society, i.e., the prevalent forms of property. But a point is reached when the matured productive forces can no longer contain themselves within the old forms of property; then follows a radical change in the social order, accompanied by shocks. The primitive commune was either superseded or supplemented by slavery; slavery was succeeded by serfdom with its feudal superstructure; the commercial development of cities brought Europe in the sixteenth century to the capitalist order, which thereupon passed through several stages. In his Capital, Marx does not study economy in general, but capitalist economy, which has its own specific laws. Only in passing does he refer to the other economic systems to elucidate the characteristics of capitalism.

The self-sufficient economy of the primitive peasant family has no need of a “political economy”, for it is dominated on the one hand by the forces of nature and on the other by the forces of tradition. The self-contained natural economy of the Greeks or the Romans, founded on slave labour, was ruled by the will of the slave-owner, whose “plan” in turn was directly determined by the laws of nature and routine. The same might also be said about the mediaeval estate with its peasant serfs. In all these instances economic relations were clear and transparent in their primitive crudity. But the case of contemporary society is altogether different. It destroyed the old self-contained connections and the inherited modes of labour. The new economic relations have linked cities and villages, provinces and nations. Division of labour has encompassed the planet, having shattered tradition and routine, these bonds have not composed themselves to some definite plan, but rather apart from human consciousness and foresight, and it would seem as if behind the very backs of men. The interdependence of men, groups, classes, nations, which follows from division of labour, is not directed or managed by anyone. People work for each other without knowing each other, without inquiring about one another’s needs, in the hope, and even with the assurance, that their relations will somehow regulate themselves. And by and large they do, or rather were wont to.

It is utterly impossible to seek the causes for the recurrences of capitalist society in the subjective consciousness – in the intentions or plans – of its members. The objective recurrences of capitalism were formulated before science began to think about them seriously. To this day the preponderant majority of men know nothing about the laws that govern capitalist economy. The whole strength of Marx’s method was in his approach to economic phenomena, not from the subjective point of view of certain persons, but from the objective point of view of society as a whole, just as an experimental natural scientist approaches a beehive or an anthill.

For economic science the decisive significance is what and how people do, not what they themselves think about their actions. At the base of society is not religion and morality, but nature and labour. Marx’s method is materialistic, because it proceeds from existence to consciousness, not the other way around. Marx’s method is dialectic, because it regards both nature and society as they evolve, and evolution itself as the constant struggle of conflicting forces.

Marxism and Official Science

Marx had his predecessors. Classical political economy – Adam Smith, David Ricardo – reached its full bloom before capitalism had grown old, before it began to fear the morrow. Marx paid to both great classicists the perfect tribute of profound gratitude. Nevertheless the basic error of classical economics was its view of capitalism as humanity’s normal existence for all time instead of merely as one historical stage in the development of society. Marx began with a criticism of that political economy, exposed its errors, as well as the contradictions of capitalism itself, and demonstrated the inevitability of its collapse. As Rosa Luxemburg has very aptly observed, Marx’s economic teaching is a child of classical economics, a child whose birth cost its mother her life.

Science does not reach its goal in the hermetically sealed study of the scholar, but in flesh-and-blood society. All the interests and passions that rend society asunder, exert their influence on the development of science – especially of political economy, the science of wealth and poverty. The struggle of workers against capitalists forced the theoreticians of the bourgeoisie to turn their backs upon a scientific analysis of the system of exploitation and to busy themselves with a bare description of economic facts, a study of the economic past and, what is immeasurably worse, a downright falsification of things as they are for the purpose of justifying the capitalist regime. The economic doctrine which is nowadays taught in official institutions of learning and preached in the bourgeois press offers no dearth of important factual material, yet it is utterly incapable of encompassing the economic process as a whole and discovering its laws and perspectives, nor has it any desire to do so. Official political economy is dead. Real knowledge of capitalist society can be obtained only through Marx’s Capital.

The Three Sources and Three Component Parts of Marxism (extract)

V I Lenin

Having recognised that the economic system is the foundation on which the political superstructure is erected, Marx devoted his greatest attention to the study of this economic system. Marx’s principal work, Capital, is devoted to a study of the economic system of modern, i.e., capitalist, society.

Classical political economy, before Marx, evolved in England, the most developed of the capitalist countries. Adam Smith and David Ricardo, by their investigations of the economic system, laid the foundations of the labour theory of value. Marx continued their work; he provided a proof of the theory and developed it consistently. He showed that the value of every commodity is determined by the quantity of socially necessary labour time spent on its production.

Where the bourgeois economists saw a relation between things (the exchange of one commodity for another) Marx revealed a relation between people. The exchange of commodities expresses the connection between individual producers through the market. Money signifies that the connection is becoming closer and closer, inseparably uniting the entire economic life of the individual producers into one whole. Capital signifies a further development of this connection: man’s labour-power becomes a commodity. The wage-worker sells his labour-power to the owner of land, factories and instruments of labour. The worker spends one part of the day covering the cost of maintaining himself and his family (wages), while the other part of the day he works without remuneration, creating for the capitalist surplus-value, the source of profit, the source of the wealth of the capitalist class.

The doctrine of surplus-value is the corner-stone of Marx’s economic theory.

Capital, created by the labour of the worker, crushes the worker, ruining small proprietors and creating an army of unemployed. In industry, the victory of large-scale production is immediately apparent, but the same phenomenon is also to be observed in agriculture, where the superiority of large-scale capitalist agriculture is enhanced, the use of machinery increases and the peasant economy, trapped by money-capital, declines and falls into ruin under the burden of its backward technique. The decline of small-scale production assumes different forms in agriculture, but the decline itself is an indisputable fact.

By destroying small-scale production, capital leads to an increase in productivity of labour and to the creation of a monopoly position for the associations of big capitalists. Production itself becomes more and more social – hundreds of thousands and millions of workers become bound together in a regular economic organism – but the product of this collective labour is appropriated by a handful of capitalists. Anarchy of production, crises, the furious chase after markets and the insecurity of existence of the mass of the population are intensified.

By increasing the dependence of the workers on capital, the capitalist system creates the great power of united labour.

Marx traced the development of capitalism from embryonic commodity economy, from simple exchange, to its highest forms, to large-scale production.

And the experience of all capitalist countries, old and new, year by year demonstrates clearly the truth of this Marxian doctrine to increasing numbers of workers.

Capitalism has triumphed all over the world, but this triumph is only the prelude to the triumph of labour over capital.

Questions on Marxist economics

  1. What is primitive accumulation?
  2. Explain the difference between use-value and exchange-value.
  3. What is a commodity?
  4. Describe the labour theory of value.
  5. How did Marx develop upon it?
  6. What is socially necessary labour time?
  7. What governs the price of commodities?
  8. What is the ‘utility theory of value’ and how is it flawed?
  9. How do labour-power and wages correlate?
  10. How can we define productive and unproductive labour?
  11. What is constant and variable capital?
  12. What is money and what is its function?
  13. What is the tendency of capitalist accumulation?
  14. Why is credit created?
  15. How is ‘under-consumption’ really caused?
  16. Where does surplus value come from, and why can’t it arise from the circulation of capital?
  17. What are absolute and relative surplus value?
  18. What is the fundamental cause of capitalist crisis?
  19. How does the class struggle relate to Marxist economics?
  20. How would a socialist planned economy function?

Suggested reading

  • Wage Labour and Capital, Karl Marx
  • Value, Price and Profit, Karl Marx
  • Capital Volumes I-III, Karl Marx
  • Theories of Surplus Value Volume I-III, Karl Marx
  • Grundrisse, Karl Marx
  • Critique of Political Economy, Karl Marx
  • On Capital, Frederick Engels
  • Anti-Dühring, Frederick Engels
  • The Three Sources and Three Component Parts of Marxism, V I Lenin
  • Will there be a Slump? Ted Grant
  • A Companion to Marx’s Capital Volumes 1-2, David Harvey