Goals and Objectives:
In this chapter, we will do the following:
- Explore the early history of Marxian economics
- Describe a Marxian circular flow model
- Identify the characteristics of commodities and money within the Marxian framework
- Explain how to represent the circulation of commodities in Marxian economics
- Define the concept of capital within Marxian economics
- Examine the commodity labor-power and the determination of its value
- Illustrate the division of the working day and the production of surplus value
The Early History of Marxian Economics
In this chapter, we will explore Marxian economics. As we learned in the last chapter, the neoclassical contribution to the discourse of economics places heavy emphasis on the roles of supply and demand in the marketplace as determinants of product and resource prices. Neoclassical economists also emphasize that free and competitive markets lead to economic efficiency. In contrast, Marxian economists place primary emphasis on human labor as the source of commodity value and assert that competitive capitalism leads to class exploitation. Before we explore the Marxian perspective in greater detail, we should briefly consider its origins.
In Chapter 1, we discussed the decline of feudalism and the transition to capitalism as it occurred in England and Europe during the eighteenth and nineteenth centuries. Indeed, the distinct discourse of political economy was born due to this transition. Classical political economists generally viewed the rise of capitalism as a positive development, but many critics of the new economic system also arose.
The most famous of these critics was Karl Marx (1818-1883). Marx was a man of many hats. He was a philosopher by training but was also an historian, an economist, a radical journalist, and a revolutionary political activist. At times, he even fancied himself a mathematician and a poet! He was born and raised in Germany, obtained his doctorate in philosophy, and participated in the revolutions of 1848 in Europe, during which time he wrote The Communist Manifesto with his collaborator and friend Frederick Engels. The Manifesto was essentially a call to workers throughout the world to resist the changes that were taking place in the global economy, which Marx considered to be detrimental to the well-being of workers. Despite his emphasis on the exploitation of workers, Marx did recognize that the economic transition was contributing to rapid economic development like nothing the world had ever seen. Marx was driven into exile due to his political activities. He moved to France and then Belgium, before settling with his family in England.
Once he settled in London, Marx began to concentrate on intellectual work, but political resistance was always a part of his life. In the late 1850s, Marx completed a work titled, Grundrisse, which means “Foundations.” This work served as a rough draft for Marx’s most famous intellectual work, Das Kapital or Capital. This three-volume work contains Marx’s theory of how capitalism functions as well as his detailed critique of classical political economy. The first volume of Capital, published in 1867 and subtitled The Process of Production of Capital, is the only one that was published during Marx’s lifetime. The second and third volumes, titled The Process of Circulation of Capital and The Process of Capitalist Production as a Whole, were published posthumously by Engels in 1885 and 1894, respectively. Another work titled Theories of Surplus Value was also published after Marx’s death. It contains Marx’s critical analysis of the history of economic thought and is sometimes regarded as the fourth volume of Capital. Because the foundation of Marx’s theory of capitalism is developed in volume 1, it is our exclusive focus in this chapter.
Marx’s theory of capitalism represents the merger of several complex bodies of thought. Marx was inspired by the German philosopher G.W.F. Hegel. Hegel’s theory of history was based on a kind of logic referred to as dialectical idealism. According to this manner of reasoning, all historical change is driven by the conflict between mutually antagonistic opposites. Marx transformed this logic into one that emphasized material relations as the driving force in history rather than ideas as Hegel had done. It was later dubbed dialectical materialism for this reason. At the same time, Marx also borrowed the emphasis on the conflict between the bourgeoisie (capitalist class) and the proletariat (working class) from French political theorists. Finally, he incorporated the theory that labor is the sole source of the value of commodities into his theory of capitalism. Marx’s theory of capitalism is somewhat unique in that it is an impressive blend of descriptive analysis and normative critique. Marx’s concepts allow him to describe the workings of capitalism in detail, but the concepts inevitably lead to normative criticism. In this respect, his theory is sharply different from neoclassical theory, which aims to separate positive and normative analysis.
A Marxian Circular Flow Model
In the last chapter, we analyzed the neoclassical circular flow model, which shows how businesses and households interact through voluntary exchange in the product and factor markets. That model presents market relationships as harmonious, efficient, and consistent with Adam Smith’s Invisible Hand of the market. We will now consider a Marxian circular flow model of a market capitalist economy that assigns a central place to the class struggle, which Marxian economists claim is the defining feature of market capitalism. A Marxian circular flow model, developed by Prof. Ed Nell, is shown in Figure 4.1.The major difference between the Marxian circular flow model and the neoclassical circular flow model from Chapter 3 is that the Marxian model includes a well-defined social class hierarchy. That is, most of the members of this society are workers. A minority of the population consists of owners of the means of production, and this group has a higher place in the social hierarchy than workers. Beneath the workers is another large group of unemployed workers that does not contribute to the circular flow of the economy. In Marxian economics, this last group is referred to as the reserve army of the unemployed. The reader should recall that in the neoclassical model, all resource owners are lumped together in the household sector. Neoclassical economists do not find it necessary to distinguish between the owners of capital, labor, and land in their model.
Another major difference between the neoclassical and Marxian models is that in the Marxian model, the working class contributes to industry something that is fundamentally different from the capitalist class. That is, the working class contributes work to industry and the capitalist class contributes investment funds (or money capital), which are used to purchase new capital goods (i.e., means of production) to be used in industry. Each receives a different kind of income based on these different contributions to industry. Workers receive wages in return for their work, and capitalists receive profits as a return on their investments.
Another important difference between the two models is that in the Marxian model, capitalists and workers consume two different classes of goods and services. That is, the working class enters the retail markets to purchase necessities whereas the capitalist class enters the retail markets to purchase relatively more expensive luxuries. Because owners receive profit income, they can afford luxuries, like mansions, yachts, rare artwork, fine clothes, fancy automobiles, pricey jewelry, and catered meals. Because their wage incomes do not allow them to purchase luxuries, workers must be content with necessities, such as rental units, cheap clothing, used automobiles, inexpensive jewelry, and microwave dinners. It should also be noted that the sales of these goods and services generate monetary receipts for industry, which are used in the payment of wages and profits. In addition, only the net social product is sold in the wholesale and retail markets because a part of the product of industry is consumed during the production process. That is, industry uses up some of the means of production in the production of products and services.
Now that we have analyzed the neoclassical and Marxian circular flow models and considered the similarities and differences between the two models, the reader might like to know which of the two models is correct. That is, which model should the reader accept as the true representation of how market capitalist economies work? The answer is that we cannot settle this question for the reader. The reader must choose the model that he or she finds to be most convincing. The reader may even reject both models because neither model emphasizes those features of market economies that the reader finds to be most central. Remember that economics is a discourse with many competing opinions and viewpoints. If we identify one of these two models as containing the “Truth” about economics, then we have abandoned the notion that economics is a discourse and have returned to the conventional view that economics is a science that can provide final answers to descriptive questions.
To make the point in another way, we can see that neoclassical economists do not incorporate the potential for conflict between resource owners in their model. We can also see that Marxian economists do not incorporate the possibility of class mobility in their model. That is, can’t a worker save enough money to join the class of capitalists? Each type of economist might be willing to admit these possibilities if asked, but the point is that they have excluded these possibilities because of all the infinite material that could be included in the models, they have chosen to include only those features that they consider to be the most important for understanding market capitalism. Consequently, their efforts to describe the functioning of economies have led them to evaluate that functioning from a normative standpoint at the same time. This inability to separate descriptive analysis from normative analysis is what makes economics a discourse at its core.
Commodities and Money
We can now begin to explore the theory of capital that Marx developed in volume 1 of Capital. Just like neoclassical economics, Marxian economics has its own language. Therefore, we will spend a great deal of time on its foundational concepts in this chapter just as we did when we explored the neoclassical theory of supply and demand. Once we have a solid grasp of the different components of Marxian theory, we can bring them together in a manner that provides a different conception of market capitalism than the one that neoclassical economists have developed.
Marx begins volume 1 of Capital by considering the form that wealth takes within the capitalist mode of production. He argues that wealth takes the form of an “immense collection of commodities.” Because Marx regarded the commodity as the basic cell of capitalist wealth, it served as the starting point of his analysis. Marx next defines the commodity as consisting of two essential components. First, a commodity is a use value. That is, a commodity has a value in use. It serves some useful purpose for the user. We are surrounded by use values in our daily lives. For example, a chair allows one to sit rather than stand; a cell phone allows one to call or text one’s friends; an automobile allows one to transfer one’s self and one’s belongings over long distances relatively quickly. This characteristic of a commodity is entirely qualitative in nature. To be a commodity, however, a thing must also be an exchange value. That is, the thing must also have a value in exchange. In other words, it must be possible to exchange the thing in the marketplace for so much of another commodity. This property of a commodity is entirely quantitative in nature. If a thing has both properties, it is a commodity. If it has neither property, or only has one of these properties, then it is not a commodity.
In capitalist societies, commodities are everywhere. All the use values mentioned above are commodities because they are also exchange values. It should be noted that a thing need not be a material object to qualify as a commodity. For example, a haircut is something bought and sold in a marketplace. It is also useful to the person consuming it because that person walks away with a nice, neat haircut. Still, it is not a material object but because it is a use value and an exchange value, it is a commodity. All services sold to consumers may be regarded as commodities for this same reason. It should also be pointed out that some things do not qualify as commodities. In the United States, for example, it is illegal to own slaves. Although slaves have a use value, they do not have an exchange value due to the absence of an organized market. People are, therefore, not commodities in the United States, except where the practice continues as criminal activity. On the other hand, millions of people continue to live as slaves in parts of Africa and Asia. Where slaves are still bought and sold, people continue to exist as commodities.
Marx next turns to the question of what determines the exchange value of a commodity. Marx encounters two related questions when trying to explain the exchange value of a commodity:
- How is it possible to equate two qualitatively different commodities through market exchange? Isn’t this like saying apples and oranges are equal when apples are traded for oranges in the marketplace even though they are clearly different things?
- What determines the rate at which two commodities exchange? Why does 1 desk exchange for 5 books rather than 4 books or 6 books?
Marx solves this problem and answers these questions by arguing that a common element must exist within each commodity to make the equation of exchange possible. This common element, he argues, is human labor. That is, even though the books and the desk are qualitatively different items, they both require human labor for their production. As a result, it is this hidden element that is equated in the process of exchange. Marx recognized, however, that the labor embodied in commodities has a dual character. On the one hand, the books and the desk each require a different type of labor for their production. The act of producing books is obviously very different from the act of producing a desk. These specific forms of labor Marx referred to as concrete, private labor. Because of the qualitative differences between these kinds of labor, we do not appear to have solved the problem of how qualitatively different commodities may be equated in exchange. On the other hand, Marx argues that the different production processes do have something in common. Each production process involves the generalized expenditure of human brains, muscles, nerves, hands, and so on. It is this homogenous human labor that is embodied in commodities and which is revealed when the exchange of two commodities takes place. Marx referred to this generalized human labor as abstract, social labor. It is the common element that makes it possible to equate the books and the desk in the process of exchange. Furthermore, because labor time is a measurable concept, we also may use it to answer the second question above. That is, 5 books exchange for 1 desk because the 5 books and the 1 desk require the same amount of abstract, social labor for their production.
Marx’s solution, therefore, suggests that a commodity will be more valuable when it requires more abstract, social labor for its production. A commodity will be considered less valuable when it requires less abstract, social labor for its production. Marx did recognize one potential problem with this explanation of exchange value. The solution appears to suggest that producers that are lazy and take longer to produce will produce commodities that are more valuable than efficient producers who complete production in a much shorter period. To resolve this problem with his theory, Marx concludes that only socially necessary labor contributes to the production of value. That is, the only labor that counts in exchange is the labor that is required under the conditions that are normal for a given society and that uses the average degree of skill and intensity prevalent in that society at a point in time. According to Marx’s theory then, the value of a commodity depends directly on the amount of socially necessary abstract labor time (SNALT) required for its production. It follows that if only 10 hours of SNALT are required to produce a desk, then a producer that spends 15 hours of concrete, private labor on the production of a desk will have wasted 5 hours of labor time and only the 10 hours of SNALT will be realized in exchange. Similarly, a highly efficient producer that produces a desk with only 5 hours of concrete, private labor will be able to realize 10 hours of SNALT in exchange and so enjoys an extra bonus for this efficiency. Socially necessary abstract labor is, therefore, the substance of commodity value, and SNALT is its measure. The claim that a commodity’s value depends upon the SNALT required for its production, we will refer to as the law of value.
Another issue arises when we consider the concept of money. After all, when we go to the store to purchase a pair of shoes, we do not see on the price tag a specific amount of SNALT. The prices of commodities are stated in terms of money, not SNALT. As a result, Marx’s next step is to explain why it is that commodity values are expressed in terms of money.
When Marx considers primitive economies in which commodity exchange only occurs sporadically and peripherally, he explains that value expressions can be represented with what he calls the simple form of value as shown in Figure 4.2.
In this example, 20 yards of linen has its value expressed in the form of 1 coat because each requires 20 hours of SNALT for its production. This example is like the ones we have already considered.
As commodity exchange became a more widely adopted practice, generalized barter exchange economies developed. In these situations, value expressions may be represented with what Marx calls the expanded form of value as shown in Figure 4.3.
In this case, each individual commodity has its value expressed in the form of every other individual commodity. Each commodity is taken in the appropriate quantity such that all quantities represent the same amount of SNALT. This form creates difficulties because value does not find its expression in a single form.
Due to the difficulties inherent in the expanded form of value, Marx explains that a single commodity is eventually set apart from all other commodities to serve as the universal equivalent for the expression of value. The general form of value represents value expressions for this case as shown in Figure 4.4.
In this case, linen is set apart from all other commodities and serves to express their individual values. All commodity values are now expressed in the form of linen. Again, the SNALT embodied in each commodity and the linen makes the equality between them and the linen possible.
Finally, Marx recognized that not just any commodity has served as the universal equivalent throughout history. Certain commodities have been more widely used due to their physical properties that make them likely choices for the universal equivalent. Precious metals, like gold and silver, are durable and easily divisible and so they are natural choices for the money commodity. In volume 1 of Capital, Marx assumes that gold obtains a social monopoly of the expression of value, which was generally the case in the nineteenth century. The money form of value thus represents value expressions for this case as shown in Figure 4.5.
In this case, each commodity finds its value expression in the form of an amount of gold containing the same amount of SNALT for its production.
It is now possible to represent a commodity’s value (or price) in terms of money as shown in Figure 4.6.
We have now reached the gold price of the commodity. Of course, for Marx this appearance hides the fact that it is the quantity of SNALT that renders commodities valuable.
Of course, in modern capitalist societies, the prices of commodities are stated in terms of units of paper money (e.g., so many dollars), not in terms of ounces of gold. For that reason, an explanation of paper money prices is required. During the nineteenth century, banks issued notes and governments issued paper bills in exchange for gold deposits. Depositors could deposit gold and then use the banknotes and paper bills to purchase commodities. When exchanges between commodities and paper occurred, the commodities were equated with the underlying money commodity, gold, rather than the paper itself. The paper simply served as a symbol or representative of the underlying money commodity. We can represent the paper expression of value as shown in Figure 4.7.
Although the $70 requires virtually no SNALT for its production, it represents a claim to 2 ounces of gold in this example, which requires 20 hours of SNALT for its production. Therefore, the 20 yards of linen have a value of $70, and we have an explanation for the paper prices of commodities. Of course, the careful reader might object that paper money in modern capitalist economies is not directly convertible into gold. In fact, it is true that paper money today is fiat money, supported by nothing but the government’s assurance that it has the legal title of money and the fact that people generally recognize its value. Although Marxian economists have an explanation for the value of fiat money that is consistent with Marx’s theory of value, we will postpone this explanation until we reach the subject of monetary theory in Chapter 17.
The reader might ask at this stage what has happened to the laws of supply and demand. In Chapter 3, we learned of the important role these laws play in the determination of market prices within neoclassical economics. By explaining a commodity’s value entirely in terms of the SNALT required for its production, was Marx denying the laws of supply and demand? Rather than denying these laws, Marx argues that these laws are secondary to the law of value. In other words, the laws of supply and demand can influence the market price of a commodity, but the value of the commodity depends on SNALT alone. For example, if the SNALT required for the production of the linen remains the same over time, the value of the linen will remain unchanged at $70, as shown in Figure 4.8.
Notice that the market price fluctuates considerably, however, in response to changes in the supply and demand for linen. The value of the linen represents the center of gravity around which the market price fluctuates and represents an average price over relatively long periods of time. It is here that we observe an important distinction between neoclassical and Marxian theory. Neoclassical economists only refer to market prices and the concept of value does not exist for them. Marxian economists recognize both concepts and consider the concept of value to be the more important object of analysis. As Marx wrote:
“[I]t is not the exchange of commodities which regulates the magnitude of their values, but rather the reverse, the magnitude of the value of commodities which regulates the proportion in which they exchange.”
Throughout this chapter, we will follow Marx’s assumption throughout volume 1 of Capital in assuming that market prices are equal to values. That is, supply and demand do not force any significant deviations of price from value.
The Circulation of Commodities and the Meaning of Capital
In commodity exchange societies, commodities are constantly being bought and sold for money, which serves as the universal equivalent for the expression of value. Each sale and subsequent purchase can be represented as a commodity circuit through which the socially necessary labor of one commodity owner is equated with the socially necessary labor of another commodity owner. Indeed, Marx argued that all exchange within a commodity exchange society can be represented with a vast collection of interlocking commodity circuits. Marx chose to represent an individual commodity circuit symbolically as in Figure 4.9.
In Figure 4.9 a specific commodity (C) is transformed into its equivalent in money (M) when it is sold. The money is then used to buy a qualitatively different commodity (C’). The owner of the original commodity is able, in a sense, to transform the commodity into the new commodity through exchange. The hyphens connecting the symbols in the circuit indicate that a transformation is occurring. For example, the owner of five books might sell those books for $100. That money then purchases one desk. Throughout the process, the owner of the books equates the SNALT embodied in the books with the SNALT that the $100 represents and that the desk embodies. Let us suppose that each of these commodities represents 10 hours of SNALT. An exchange of equivalent values takes place then and the owner of books obtains something she wants in exchange (i.e., a desk) more than the thing she gives up (i.e., the books). It is a perfectly rational process for a commodity owner. This sphere of commodity circulation represents the realization of Adam Smith’s Invisible Hand. Each commodity owner pursues her own self-interest by participating in these even swaps, and in the end, she obtains something that she desires more than the thing she loses.
Alongside these commodity circuits, Marx discovers another movement that exists within the capitalist mode of production. It is easy to miss, but Marx argues that this movement involves the purchase of commodities and their subsequent sale. Marx represents this movement symbolically as shown in Figure 4.10.
The problem that arises with this formula is that it appears to be a pointless exercise if equivalent values are exchanged. For example, if owners exchange equivalent values, then $100 representing 10 hours of SNALT might purchase a desk, which required 10 hours of SNALT for its production. If the owner then sells the desk for $100 representing 10 hours of SNALT, then owners have exchanged equivalent values but no expansion of the initial money has taken place. The owner of the initial money has no reason to risk the loss of her money by purchasing the desk only to sell it again. It makes more sense for her to keep her money out of circulation than to risk losing it. Notice that this problem does not arise in the case of a commodity circuit. Commodity owners exchange equivalent values and at the end of the circuit, the individual obtains a qualitatively different commodity from the one with which she began.
Because we have been assuming the exchange of equivalent values, the movement represented as M-C-M’ makes little sense. That is, the starting point and the endpoint are qualitatively identical. The commodity owner begins with money and ends up with money. The only rational basis for engaging in such an exchange is to obtain a quantitatively different value (i.e., more money). Looking at Figure 4.10, the reader should note that the initial sum of money (M) purchases a commodity (C), which the commodity owner then sells for a different sum of money (M’). Because we will assume that M’ is larger than M, we can write the following equation for M’:
That is, M’ is larger than the original sum (M) by the amount ∆M. This increment (∆M) is what Marx calls surplus value. When one uses money in this manner, Marx writes that money is transformed into capital. What then is capital? Capital in Marxian theory is money and it is commodities, but only when they take part in this specific movement. More generally, we can say that money is value in search of a greater value. Because capitalists are constantly striving to expand their capital in the endless search for surplus value, this movement never ceases in capitalist societies. The reader should notice how different this definition of capital is from the neoclassical definition of capital. For neoclassical economists, capital is only physical goods used to produce other goods. For Marxian economists, capital is the movement represented by M – C – M’.
Of course, if the person who advances the initial money capital ends up with a larger sum of money capital at the end of this process, then it might seem that we no longer can assume the exchange of equivalent values. For example, assume again that $100 representing 10 hours of SNALT buys a desk that requires 10 hours of SNALT for its production. This time, however, we will assume that when the desk is resold, it is sold for $120 representing 12 hours of SNALT. The surplus value in this case is $20, but the desk sells for more than it is worth. Commodity owners no longer exchange equivalent values.
It might seem that the exchange of unequal values must be the source of surplus value in capitalist societies. Marx, however, strongly rejects this explanation. According to Marx, if a seller of a commodity manages to sell a commodity at a price that exceeds its value (e.g., a $100 desk is sold for $120), then that individual seller manages to obtain a surplus value. The problem is that the buyer experiences a loss of value. What occurs then is a redistribution of value throughout society. The total value produced has not changed at all. As a result, Marx concludes that the answer to the question of where surplus value originates must lie outside the sphere of circulation.
To find his answer, Marx looks to the sphere of production to unlock the mystery of surplus value creation. Specifically, what if production makes it possible to enhance the value of the desk before the owner sells it? Once again, suppose that $100 representing 10 hours of SNALT buys the desk, which requires 10 hours of SNALT for its production. If the value of the desk somehow increases from 10 hours of SNALT to 12 hours of SNALT during the production process, then the owner can sell it for its equivalent value of $120. This example suggests that owners can exchange equivalent values in the sphere of circulation even as one owner realizes surplus value in exchange. The circulation of capital can now be represented in a slightly expanded form as follows:
In this expanded formula for capital, a change occurs to the original commodity (C) to transform it into a new commodity (C’). The question that we must ask is how this increase in the value of the commodity is possible.
The Commodity Labor-Power and the Determination of its Value
Marx explains that this expansion of the value of the commodity in the production process is possible because a very peculiar commodity is available in the marketplace that has a unique property. This commodity Marx calls labor-power. Labor-power is the capacity to perform work during a specific period (e.g., one hour, one day). Like any commodity, it has a use value and an exchange value. Even though it is not a tangible commodity, like a desk, a worker can sell it to a capitalist for a sum of money (i.e., a wage) and so it has exchange value. Its use value, however, is what is truly unique. It is unlike any other commodity that exists in a capitalist society because when it is used, it creates new value. Think about it for a moment. When a person buys a desk and consumes it over time, its value does not increase. If anything, when the person tries to sell it as a used item later, the price that it fetches will likely be below its initial value. When a capitalist buys labor-power and consumes it, however, she orders the worker to complete a specific type of work. As the worker performs this work, the worker performs socially necessary abstract labor. The SNALT performed adds value to the materials that the worker uses in production. It was this key insight that allowed Marx to explain the origin of surplus value.
Before we delve deeper into the details of how capitalists use labor-power to produce surplus value, we need to discuss the historical roots of this peculiar commodity. Labor-power is not a commodity that has always existed in human societies. In fact, it is specific to the capitalist mode of production. In ancient slave societies, for example, the enslaved people themselves were commodities. The slaves did not sell their ability to work for a specific period. Slaves possess no ownership rights themselves. Similarly, in feudal Europe, the serfs did not sell their labor-power to feudal lords in exchange for a wage. Serfs were bound to specific lands by tradition and custom. They handed a portion of their produce to the lords in exchange for protection and a place to live and work. It was only with the decline of feudalism and the spread of private ownership in land that landowners separated the serfs from the means of production and transformed them into wage laborers. For this reason, Marx identifies two key historical conditions that were required before labor-power became widely available as a commodity. First, workers needed to be free to enter into voluntary labor contracts and for that to happen, the legal system needed to recognize them as the rightful owners of their labor-power. Second, workers needed to be forced to have this freedom in the sense that if they did not sell their labor-power to capitalists, they would not be able to survive. In fact, as the serfs were forced from the land with the decline of feudalism in Europe, they had little choice but to migrate to the cities in search of wage work. Marx thus asserts that workers became free in a double sense. Even though we take this socioeconomic relationship between workers and employers for granted as a natural and eternal relation, Marx insists that this socioeconomic relationship is historically specific. In Marx’s words:
“[N]ature does not produce on the one hand owners of money or commodities, and on the other hand men possessing nothing but their own labor-power.”
The widespread availability of labor-power is the defining feature of the capitalist mode of production. As we will see, capital cannot survive without it.
Because labor-power is a commodity with a use value and an exchange value, the quantity of SNALT required for its production must determine its value. It is clear what we mean when we state that a desk requires 10 hours of SNALT for its production, but what does it mean to state that one day’s worth of labor-power requires 10 hours of SNALT for its production? Because labor-power is an intangible commodity, it is more difficult to imagine that it requires 10 hours of SNALT to produce it. What then determines the value of labor-power?
Marx explains that for a worker to perform work during the working day, he must have access to some essential commodities. For example, the worker requires food, clothing, housing, fuel, medical care, and possibly additional commodities each day. Each of these commodities requires SNALT for its production. Therefore, the value of the commodities that the worker requires each day to produce and reproduce her labor-power is what determines the value of labor-power. In other words, the value of labor-power depends on the value of the means of subsistence that are necessary to maintain the worker in her normal state as a working person.
Marx argues that the value of labor-power must also account for the dependents of the owner of labor-power because without such an allowance, future labor-power will not exist. He is also careful to point out that the value of labor-power contains an “historical and moral element,” which means that the specific commodities that are regarded as the necessary means of subsistence are specific to time and place. In the United States in the twenty-first century, the necessary means of subsistence might include an automobile, cell phone service, and a health insurance policy. In the U.S. during the nineteenth century or in many parts of the developing world in the present day, none of these elements would be included.
Marx provides a precise formula for the value of one day’s labor-power as follows:
In this formula, A represents the value of the commodities that the worker requires daily, B represents the value of the commodities that the worker requires weekly, and C represents the value of the commodities that the worker requires quarterly. We multiply each value by the number of periods within a year. The numerator, therefore, represents the annual value of labor-power. If we divide the annual value of labor-power by the number of days in the working year (assumed to be 365 days), then we obtain the daily value of labor-power. We could further divide this amount by the number of working hours in the workday to obtain the hourly value of labor-power.
For example, suppose that A represents the value of food required daily, B represents the value of fuel required weekly, and C represents the value of the rent for housing required quarterly. We may express these values in terms of SNALT or in dollar terms. If we assume that A equals $10 of food per day, B equals $73 of fuel per week, and C equals $3,650 of housing per quarter, then we have the following results assuming an 8-hour workday:
We will continue to assume that prices equal values at this stage. That is, we assume that the price of labor-power equals the value of labor-power. In other words, we are ruling out the possibility at this stage that fluctuations in the supply and demand for labor-power might cause the price of labor-power to rise above or fall below its value.
The Length of the Working Day and the Production of Surplus Value
Before we can unlock the secret of surplus value production, we must introduce a few more concepts. Labor-power has taken its place within the world of commodities that are available in the marketplace. Despite its peculiar characteristic, its value is determined like that of all the other commodities. Figure 4.11 shows one day’s labor-power as a single commodity among many other commodities.
In this example, we assume that 6 hours of SNALT are required to produce and reproduce a day’s worth of labor-power. It sells for $90, which represents an equivalent amount of SNALT. Therefore, if labor-power sells at its full value of $90, then a capitalist fully compensates a worker for the commodity she sells. This point is important. If we make this assumption, we cannot draw the conclusion that the worker is exploited in the realm of commodity circulation. An additional important assumption is that $90 represents 6 hours of SNALT. This ratio allows us to represent any amount of SNALT in monetary terms. In the equation below, we simplify this ratio, which Marxian economists refer to as the monetary expression of labor time (MELT).
The reader should be aware that the MELT is not the same as the hourly value of labor-power (i.e., the wage). The MELT only tells us that $15 represents 1 hour of SNALT because the amount of gold that $15 represents (under the gold standard) requires 1 hour of SNALT for its production.
We only have a few more concepts to introduce and then we can bring together our concepts in an example to reveal how capitalist production produces surplus value. When a capitalist advances a specific amount of money capital (M), the capitalist advances a portion of it for the purchase of the means of production. The means of production in a specific production process include the instruments of labor (e.g., tools, machinery, and specialized equipment) and the objects of labor (e.g., raw materials, ingredients, component parts). Neoclassical economists refer to all these means of production simply as capital. The portion of the money capital that capitalists advance for the purchase of means of production, Marxian economists refer to as constant capital (c). The other part of the money capital that is advanced purchases labor-power. This part of the capital, Marxian economists refer to as variable capital (v). The reason for these labels will become clearer after we have worked through an example in which capitalist production produces surplus value. The money capital (M) may then be expressed as follows:
As in neoclassical theory, we will make certain assumptions, and then analyze the situation given the restrictions that we have defined. We will assume that a capitalist hires one worker to work a 10-hour workday. The capitalist advances $300 of constant capital for means of production and $90 of variable capital for labor-power. That is:
We will also assume that the MELT is $15 per hour of SNALT as above and that the worker will produce a total product (TP) of 225 lbs. of sugar during the workday. With this information, we can uncover the origin of surplus value.
Figure 4.12 shows a timeline representing the length of the working day for this example.
As each hour passes, the worker creates more new value for the capitalist in the form of commodities (i.e., finished sugar). By the end of the sixth hour, the worker has created enough new value to equal the variable capital advanced. Since $15 is the monetary equivalent of an hour of SNALT, $90 (= $15 per hour times 6 hours) is the new value created in these 6 hours. The key point to notice, however, is that the worker has agreed to work for the entire 10 hours. As a result, the worker performs 4 hours of additional labor. Surplus value is possible because of the performance of this extra labor.
Of course, the 10 hours of SNALT that the worker performs during the workday to produce the finished sugar is not the only labor time embodied in the product. The labor process transfers the SNALT embodied in the means of production to the final product as well. Figure 4.13 breaks down the total value of the sugar produced in the day into its constant capital, variable capital, and surplus value components.
Each of these monetary amounts corresponds to an equivalent value in terms of labor time. For example, the SNALT embodied in the means of production is referred to as dead labor (DL). The SNALT required to produce a value equivalent to the variable capital we call necessary labor (NL). We call this labor necessary labor because it is the amount of SNALT necessary to produce a value equivalent to the required means of subsistence, and we should not confuse it with the concept of socially necessary labor. Finally, the SNALT that the worker performs over and above the necessary labor, we refer to as surplus labor (SL). The entire amount of labor that the worker performs during the workday is called living labor (LL). It follows that:
Because the MELT makes it possible to convert between monetary values and labor time equivalents, we can work through this problem as follows:
Determine the amount of necessary labor time.
Determine the amount of surplus labor time.
Determine the amount of surplus value (s) produced.
Determine the amount of dead labor time embodied in the means of production.
We can now see that the total value (TV) of the sugar produced in the day and the total labor (TL) embodied in the final product for the day are calculated as follows:
It should be noted that $450/30 hours equals $15 per hour, which is also the MELT.
We can also calculate the monetary value or price (p) of one pound of sugar by dividing the total value of the sugar by the total product as follows:
Just like the constant capital, the variable capital, and the surplus value correspond to the dead labor, necessary labor, and surplus labor, respectively, they also correspond to the specific parts of the total product. That is, the constant capital corresponds to what we can call the dead product (DP), the variable capital corresponds to the necessary product (NP), and the surplus value corresponds to the surplus product (SP), as shown in Figure 4.14.
To calculate each of the components of the total product, it is only necessary to divide each of the monetary magnitudes by the price of sugar as follows:
The total product should be simply the sum of these component parts. That is:
We now have a complete picture of the process by which surplus value is created. We can also expand the circuit of capital to gain a clearer picture of the entire process as shown in Figure 4.15.
This expanded version of the circuit of capital shows that the commodities (C) that are purchased using the initial money capital at the beginning of the circuit include means of production (mop) and labor-power (Lp). The circulation process is then interrupted with the production phase (P). Once production is complete, a new commodity (C’) emerges that contains surplus value. It then sells for an amount of money (M’), and the capitalist realizes the surplus value. The capital has expanded. Marx’s theory suggests that surplus value exists because the capitalist exploits the worker in the production phase of the circuit. Even though the worker is responsible for the entire new value created, the capitalist owns the final product and decides how the proceeds from its sale are used. Therefore, exploitation within the capitalist mode of production refers to the production of surplus value by workers and its appropriation and distribution by capitalists. It is here that we see why Marx’s theory is an impressive blend of positive and normative analysis. The reference to this process as one involving exploitation indicates Marx’s condemnation of it. At the same time, it has a technical meaning that describes how a worker produces more value then she receives in the form of a wage.
The reader should be able to understand more clearly now why the labels constant capital and variable capital have been used. The reason for this distinction is that labor-power has the peculiar property that it creates new value when consumed. It alone is responsible for the expansion of the capital value, and so Marxian economists regard the capital advanced for the purchase of labor-power as variable in nature. By contrast, the value of the means of production is only preserved and transferred to the final product. As a result, their value does not expand and so this part of the capital Marxian economists regard as constant in nature.
The reader might object to this entire analysis because capitalists do not pay workers one lump sum for the day but rather pay workers for each hour worked. It should be noted, however, that in this case, the hourly wage would be $9 per hour (= $90 per day/10 hours per day) so even though it looks like the worker is compensated for every hour she works, this appearance is a false one. The worker works only part of the hour for herself and the other part for the capitalist. Remember, each hour worked creates the value equivalent of $15, according to the MELT. Hence, $9 of value created in an hour corresponds to necessary labor whereas the other $6 of value created in an hour corresponds to surplus labor when we view the problem in this manner. Hourly wages rather than daily wages do nothing to change the fact that the capitalist appropriates a part of the value that the worker produces.
The Rate of Surplus Value and the Rate of Profit
Marx also introduces two important measures that correspond to this analysis. The first measure he calls the rate of surplus value or the degree of exploitation of labor-power. This measure is of great importance to the worker because it measures the extent to which the capitalist exploits the worker in the production process. Marx defines it as follows:
The rate of surplus value measures the degree to which the worker works for the capitalist rather than for herself. The higher is the rate of surplus value, the higher is the degree of exploitation.
A second measure of importance is the rate of profit. The rate of profit measures the rate at which the capital value has expanded during the production process. It is of greatest interest to the capitalist because it is how the capitalist measures the profitability of her investment. Marx defines it as follows:
The higher is the rate of profit, the more profitable is the investment. That is, a higher rate of profit indicates a more rapid expansion of the capital value.
The Production of Absolute Surplus Value and Relative Surplus Value
Because the capitalist is interested in extracting as much surplus value as possible from the worker, it is important to consider which measures the capitalist can take to increase the amount of surplus value produced. One way to increase the amount of surplus value produced is through an extension of the length of the working day. Marx refers to an increase in the production of surplus value due to an extension of the workday as an increase in absolute surplus value. Figure 4.16 shows the modifications to our example that stem from a lengthening of the workday.
In this example, the working day has been extended by 3 hours. As a result, the worker performs 3 hours of additional surplus labor (∆SL). Multiplying this amount of additional surplus labor by the MELT, we obtain the additional surplus value (∆s) produced of $45. It should be noted that because the constant capital and the variable capital have not changed, this increase in the surplus value will increase both the rate of surplus value and the rate of profit. The rate of surplus value rises to 116.67% (= $105/$90), and the rate of profit rises to 26.92% (= $105/$390). That is, the worker is exploited to a greater degree, and the capital expands more quickly as a result.
The second way in which the amount of surplus value may increase is through a new division of the working day due to a change in the value of labor-power. For example, suppose that productivity increases in the sectors that produce the means of subsistence for the worker. In that case, the values of these necessities will decline because less SNALT is required for their production. It will now be cheaper for the worker to purchase those commodities deemed necessary to keep her in a condition that is normal for a working person and that are required for her to perform her work at an average level. The value of labor-power, therefore, declines. As a result, the capitalist will not need to advance as much variable capital as previously. Because the necessary labor decreases with this reduction in the variable capital advanced, a larger portion of the workday is left over for the performance of surplus labor. Marx refers to an increase in the surplus value produced arising from a new division of the working day as an increase in the production of relative surplus value. Figure 4.17 shows how the original example is modified due to a cheapening of the value of labor-power.
In this case, the variable capital has declined from $90 per day to $75 per day due to the reduction in the value of labor-power. The necessary labor time falls to only 5 hours (= $75/$15 per hour). Due to the reduction in the necessary labor time to 5 hours and the fact that the workday is fixed at 10 hours, the surplus labor time performed rises from 4 hours to 5 hours. The surplus value also rises then to $75. In this example, the rate of surplus value rises to 100% (= $75/$75) for the twofold reason that more surplus value is produced and less variable capital is advanced. In addition, the rate of profit increases in this example to 20% (= $75/$375). The increase in the rate of profit is due to the increase in surplus value, but it is also due to the reduction in the amount of capital that must be advanced.
Of course, changes do not always work in the favor of capitalists. If workers form a union and demand shorter working hours, then the rates of surplus value and profit will decline. In addition, if the means of subsistence rise in value, then the capitalist will appropriate less surplus value because she must pay the worker a higher wage. As a result, the rates of surplus value and profit will fall. In this case, the worker is no better off despite the higher wage, however, because the higher wage is paid solely to allow the worker to buy the same quantity of the means of subsistence as before.
As we conclude this chapter, we should place special emphasis on the uniqueness of the capitalist process of production. In all human societies, the production of use values is essential. Indeed, in Marxian economics, the labor process refers to any purposeful activity aimed at the production of use values. In addition to purposeful productive activity, Marx explains that the labor process includes the object of labor and the instruments of labor. The labor process is an important element within the capitalist mode of production as well, but within capitalism it overlaps with another process that Marx calls the valorization process. The valorization process refers to the process by which surplus value is created. As we have seen, the capitalist owns labor-power, the means of production, and the commodity that is ultimately produced. The goal of the capitalist then is not to produce use values but rather commodities containing surplus value. As this chapter has demonstrated, the origin of surplus value rests in the productive consumption of labor-power, which leads to the creation of new value that exceeds its own value. It is this valorization process that gives the capitalist production process its uniqueness and that is the defining characteristic of the capitalist mode of production.
Following the Economic News
Marxian economists argue that wage workers in general are exploited in capitalist societies. At the same time, specific circumstances can render some workers more vulnerable to exploitation than others. For example, natural disasters have created the conditions for heightened degrees of exploitation in the United States. For example, Jessica Kutz describes the aftermath of the fire that destroyed most of the town of Paradise in Northern California in November 2018. In addition to long working hours and low pay, immigrant workers are often hired to perform dangerous and hazardous work in the aftermath of a natural disaster. For example, workers performing cleanup operations might be subjected to “asbestos and mold, toxins that can have long-term health effects.” She reports that although laws are in place to protect workers, a lack of government resources devoted to the task leads to improper enforcement, and businesses would rather skimp on protective gear and training programs to keep costs down. Kutz also explains that the undocumented status of many immigrant workers discourages workers from reporting workplace safety violations. These circumstances suggest that these disaster workers experience an additional negative aspect of exploitation that goes beyond the discussion in this chapter. That is, they are performing surplus labor that capitalist firms appropriate, but they are also being subjected to harsh conditions that may lead to illness or even death. Furthermore, undocumented workers are more likely to have their wages stolen from them. Kutz explains that sometimes they are not paid their final wages, they are given bad checks, or they are given debit cards that turn out to be scams. According to one research study, “over a quarter of immigrant day laborers … were victims of wage theft after Hurricane Harvey.” In these situations, the rate of exploitation of labor-power (s/v) becomes infinite as the variable capital falls to zero.
Summary of Key Points
- Marx’s theory of capitalism represents a merger of Hegelian philosophy, French political theory, and British political economy.
- The Marxian circular flow model is different from the neoclassical circular flow model in that the Marxian model emphasizes a social class hierarchy, persistent unemployment, inequality in consumption, and the distinctive nature of work as a factor contributed to industry.
- For a thing to be considered a commodity, it must be both a use value and an exchange value.
- The value of a commodity depends directly on the amount of socially necessary abstract labor time (SNALT) required for its production.
- Commodities exchange for units of paper money in Marxian economics because the units of paper represent definite quantities of gold that require equivalent amounts of SNALT for their production.
- Commodity circuits are represented as C-M-C’ whereas the circuit of capital is represented as M-C-M’.
- Labor-power is a special commodity that can create more value than it is worth when it is consumed.
- The value of labor-power depends on the SNALT required for its production and reproduction (i.e., the SNALT embodied in the means of subsistence).
- The monetary expression of labor time (MELT) makes possible the conversion of any amount of SNALT into its equivalent in money.
- The exploitation of labor-power may be increased either through an extension of the working day or through a cheapening of the value of labor-power.
List of Key Terms
Marxian circular flow model
Reserve army of the unemployed
Net social product
Concrete, private labor
Abstract, social labor
Socially necessary abstract labor time (SNALT)
Law of value
Simple form of value
Expanded form of value
General form of value
Money form of value
Free in a double sense
Value of labor-power
Annual value of labor-power
Daily value of labor-power
Hourly value of labor-power
Monetary expression of labor time (MELT)
Instruments of labor
Objects of labor
Constant capital (c)
Variable capital (v)
Dead labor (DL)
Necessary labor (NL)
Surplus labor (SL)
Living labor (LL)
Total value (TV)
Total labor (TL)
Dead product (DP)
Necessary product (NP)
Surplus product (SP)
Rate of surplus value (or degree of exploitation)
Rate of profit
Absolute surplus value
Relative surplus value
Problems for Review
Assume the following initial conditions for problems 1-7. Be sure to include the proper units in each of your answers.
- The working day is fixed at 11 hours.
- The capitalist hires one worker for the day for which the worker is paid $63.
- The capitalist buys the means of production (tools, raw materials) for $189.
- The worker produces 950 lbs. of sugar during the working day.
- The worker consumes (i.e., uses up) all the means of production.
- The monetary expression of labor time is $7 per 1 hour of SNALT. That is, it takes one hour to produce the gold that the $7 represents under the gold standard.
Complete the following problems:
- Draw a timeline representing the length of the working day in this example.
- Identify the necessary labor, the surplus labor, and the dead labor.
- Identify the constant capital, the variable capital, and the surplus value.
- What is the total (monetary) value of the day’s product? What is the (monetary) value (or price) of each pound of sugar?
- What is the rate of surplus value? What is the rate of profit?
- If the working day increases to 12 hours, calculate the new rate of surplus value and the new rate of profit? What happened to each (increased, decreased, constant)?
- Returning to the initial conditions when the working day is set at 11 hours (that is, disregarding the change that occurs in problem 6), calculate the new rate of surplus value and the new rate of profit when the wage paid to the worker rises to $70 for the day. What happened to each (increased, decreased, constant)?
- If a worker requires $12 worth of food per day, $28 worth of clothing per week, and $985 of rent per month, calculate the following:
- The annual value of labor power
- The daily value of labor power (assuming a 365-day working year)
- The hourly value of labor power (assuming an 8-hour working day)
- For a helpful overview of the way in which Marx’s thought represents a synthesis of three major bodies of European thought, see Rosser and Rosser (2004), p. 56-59. ↵
- Ibid. p. 56. ↵
- Ibid. p. 57. ↵
- Ibid. p. 58. ↵
- Figure 4.1 is a slightly modified version of Prof. Nell's original figure. ↵
- Marx reasoned that because the concept of use value is entirely qualitative in nature, it cannot explain the quantitative relationship of a commodity to other commodities (i.e., exchange value). ↵
- See Marx (1990), p. 131. ↵
- Marx (1990), p. 156. ↵
- Marx (1990), p. 272. ↵
- Ibid. p. 273. ↵
- Marx (1990), p. 276. ↵
- Marx offers a cautionary note to this effect. See Marx (1990), p. 325, footnote 5. ↵
- Kutz, Jessica. “After natural disasters, workers face exploitation.” High Country News. Paonia, CO. 21 Jan. 2019: 5,7. ↵