September 23, 1999
Marx's Labour Theory of Value
As Marx critiqued idealist notions and came into contact with the experiences of the French socialist movement and the conditions of life in industrial Britain, he found a political economic approach useful. He studied the writings of political economists and by 1857, Marx outlined his economic thought in a series of notes. He called these the Grundrisse, and most of these notes were not available in English until the 1970s. These notes formed the basis for Capital, the first volume of which was published in 1867. Volume 2 was published in 1885 and Volume 3 in 1894 (completed by Engels after Marx's death). In addition, Marx wrote extensive notes on the study of political economy, published as Theories of Surplus Value in the early part of this century. Again, these were not available in English until the 1960s and 1970s. These latter volumes are sometimes referred to as volume 4 of Capital.
In Capital, Marx lays out his model of capitalist economic development. This is primarily an economic work, but one influenced by the earlier strands of thought of Marx, and with implications for understanding the dynamics of capitalist development. The last part of Volume 1 provides a broad historical view of the development of capitalism. Volume 2 tends to be more technically economic, and Volume 3 provides a more detailed analysis of specific features of capitalist development. It is the first part of Volume 1 that lays out Marx's analysis of the commodity and exchange, the labour theory of value and surplus value, the development of money, and a fully developed capitalist economy.
2. Earlier Political Economic Theories
Before examining Marx's labour theory of value, some ideas of Adam Smith and David Ricardo, the two major political economists who wrote before Marx, and strongly influenced him, are briefly examined.
a. Adam Smith
Adam Smith (1723-1790) was a Scottish philosopher and political economist who wrote The Wealth of Nations, published in 1776. He is regarded as the father of political economy and Marx found several important ideas in his writings.
i. Surplus comes from Production. Smith argued that a surplus emerges from production, not from exchange. Earlier writers had often been confused concerning this issue. The French physiocrats had argued that agricultural production alone creates wealth, whereas Smith argued that both agriculture and industry create wealth.
ii. Social Labour creates Wealth. This wealth is the "necessaries and conveniences of life" that are produced, that is, the commodities made available in production. (Marx may have used this idea to help develop the notion of the importance of the commodity). But this wealth is produced by the annual labour of the nation. This can be interpreted as social labour in the sense that it is useful labour, with skill and dexterity, applied in agriculture and industry. It is not isolated, but is exercised within the division of labour. For Smith, wealth is not produced by trade or amassing gold and silver, but by social labour.
iii. Division of Labour. For Smith, the development and expansion of the division of labour is key to the creation and accumulation of wealth. The level of wealth is increased by expanding the division of labour within society as a whole, and within specific industries. Society's labour as a whole is exercised within this division of labour, and each worker's claim on society's wealth is in proportion to that worker's position within the division of labour. The view that the division of labour is a cooperative aspect of the structure and development of socity may have inspired Durkheim, whose first major work was The Division of Labour.
Smith did not have what Marx considered to be a systematic labour theory of value that would explain exchange in modern capitalism. For earlier societies, Smith claimed that products exchanged more or less in proportion to the amount of labour embodied in them. However, in capitalism, each of land, capital and labour had a return to them, so that the labour theory of value no longer explained prices.
While Marx was quite critical of Smith, he did adopt some of his ideas, although he changed or developed them in a somewhat different way than Smith. The notion of value emerging in production, and on the basis of labour, became a key aspect of Marx's model of society. The notion of the division of labour is also important for Marx and other sociologists. Marx thought Smith too uncritical in his acceptance of the division of labour. While Marx recognized the cooperative character of the division of labour under capitalism, and on the other hand he viewed it as a source of alienation and argued that a social system eliminating much of the division of labour would ultimately develop. Marx was also critical of Smith's invisible hand, the unseen force that Smith claims guides individual self interest to promote the general good of society. (The invisible hand might be considered an economic counterpart of Durkheim's solidarity and order).
David Ricardo (1772-1823) was an English stockbroker who made a fortune in the stock market as a young man, and then became a political economist. His Principles of Political Economy and Taxation was published in 1817, and it became the model for much of the abstract economic theorizing which has followed. While Ricardo was interested in current economic issues, his main contribution was his incisive analytical ability.
Ricardo developed a more complete labour theory of value than did Smith, so that some writers consider Marx's political economic writings as merely a minor development of Ricardo's ideas. Ricardo's economic analysis did not the use value of a commodity, but was concerned with its exchange value. Further, he was mostly interested in commodities which can be produced in large numbers in agriculture or industry (reproducible commodities -- as opposed to works of art, specialized talents, etc.) For Ricardo, the value of these commodities, in exchange, was the amount of labour embodied in them. This was the current labour required to produce them, plus the past labour embodied in tools, building, implements, and equipment (i.e. in the capital stock required to produce the commodity).
For Ricardo, profit emerged based on the amount of capital employed. While Smith also had this view, Ricardo stated this more clearly, and removed any confusion concerning where profit came from, that is, in production, by employing (living) labour along with capital (past labour).
Ricardo had a dismal view of the future, looking on the supply of land as very limited. He argued that there were limited prospects for technical improvements to expand employment. Ricardo noted a declining rate of profit, and predicted future declines as well. Some have called economics the dismal science because of his grim outlook.
Ricardo's labour theory of value began to be used by trade unionists and early socialists, the "Ricardian socialists," who said that labour deserved all the product of its own labour. In addition, Marx took over Ricardo's labour theory, solving some of the problems raised by Ricardo, but putting the theory to new uses as well. Perhaps because of these radical implications, political economy generally abandoned the labour theory of value after Ricardo, preferring to adopt some cost of production theory.
3. The Commodity
Marx begins Capital by analyzing the commodity, the relationship of commodities with each other, and the implications of this for social relationships. From the analysis of the commodity, Marx builds a labour theory of value which he uses to explain not only exchange relationships in capitalism, but the economic and social structures of capitalism, and their development.
a. Use-Value. A commodity is an object or service that is exchanged (for other commodities or money) and which has a use-value or utility. Hadden notes that "people produce things which satisfy their wants and needs" but these things are "not commodities unless they get exchanged" (p. 55). That is, the commodity is something that has some usefulness for the individual who purchases it, either utility for oneself for what we would call consumption purposes, or utility within the production process, e.g. a tool, machine, building, or structure .
Marx is not concerned with analysis of the use value of the commodity, but examines the source of the exchange value of the commodity. The use value is a given, but does have importance as (i) the basis of the wealth of society -- "wealth presents itself in a particular form, commodities" (Hadden, p. 55); (ii) the material depository of exchange value; and (iii) becomes real only in individual or productive consumption.
b. Exchange-Value. Hadden notes that "people in a capitalist society live by exchange" (p. 55) and "as soon as a good is exchanged … it acquires … exchange-value" (p. 56). In order for a commodity to have exchange value, the object or service must be exchanged for another commodity in a market. Thus the commodity has a dual aspect (Hadden, p. 60), on the one hand it has a usefulness or use-value, and on the other it has a value in exchange that is demonstrated by a sum of money or set of goods that are equivalent in value to the commodity.
For exchange-value to become established on a consistent and ongoing basis, there must be some form of regular, well established market exchange. Such exchange is not natural, it is not just haphazard or irregular, nor is it distribution or redistribution of objects in a cooperative society. Marx argues that political economists looked on exchange value as either inherent in the commodity, or arising in the very early stages of a barter economy. For Marx, for exchange values to be established, there has to be a reasonably well developed division of labour, so that people are not self sufficient and need to obtain use values or commodities from others.
c. Method. Marx's method here is both historical and theoretical. He begins by focussing on the commodity as the theoretical concept that leads to an understanding of the nature of surplus value, capital, and capitalism. Marx's analysis is also historical in that the institutional prerequisites for reaching this stage also have to be present. For exchange-value to exist, markets and exchange must reach the stage whereby the exchange is regularized, and where it appears as if there are only two economic actors meeting. Hadden notes that "it appears as though exchange-value might be a natural property of the commodity" (p. 62), when in fact this emerges only with particular historical conditions (p. 61). In fact, there are particular social relationships which stand behind this, but may not be apparent.
Such a system has been called simple commodity production, and need not have capitalists, but could be a barter system where each person or family has a position within the division of labour and enters the market to sell their produce and purchase what they need. But a certain development of the division of labour and regular market exchange would have to develop in order for this to occur.
d. Critique. A feminist critique of Marx could begin from this point. Marx analyzes exchange-value and ignores use-value, other than to note that to become a commodity (with exchange-value), a product must have use-value. But use-values that do not find their way into exchange are ignored in any further analysis. Marx's explanation of surplus value and exploitation are built on the the concepts of the commodity, exchange-value, and labour power becoming a commodity. His analysis of social class is built on the relationship of people to the means of production (used for and in exchange), and the labour process associated with markets and exchange. All the use-values that are produced in the household, but not exchanged on the market, are ignored in this analysis. Since these latter use-values have been disproportionately produced by women, at least over the last 200-300 years as markets have expanded, this analysis ignores many of the contributions of women.
4. Labour as Source of Value
The exchange value of a commodity is not necessarily its price on any given day, but constitutes the average rate at which commodities exchange for each other in reasonably well developed market exchange. Hadden's example is that 25 loaves of bread consistently exchange for 2 pairs of shoes (p. 57). Marx asks what constitutes this common value, for if two different commodities are equal in value, there must be some common measure of this value. At the minimum, there must be a unit of measure that allows the two commodities to be compared in quantitative terms.
Hadden notes that "the commodity's property of being exchangeable for other commodities has nothing to do with its natural properties" (p. 57). Rather, if 25 loaves of bread exchange for 2 pairs of shoes, there must be something equal between these two quantities. This could be the "cost of production of each" and this can generally be reduced to the labour time necessary to produce each (Hadden, p. 57). That is, if it takes the baker the same amount of labour time to produce 25 loaves of bread as it takes the shoemaker to produce 2 shoes, then these are equivalent in exchange. Marx notes (see quote 15) "If we then disregard the use-value of commodities, only one property remains, that of being products of labour." (Capital, p. 128).
Now this exchange value is not based on just any labour, but "are all together reduced to the same kind of labour, human labour in the abstract. ... they are merely congealed quantities of homogeneous human labour-power expended without regard to the form of its expenditure. ... As crystals of this social substance, which is common to them all, they are values -- commodity values." (Capital, p. 128). While it is concrete labour -- that of the baker or shoemaker -- that is used to produce the respective goods, what is equal here is not the concrete labour, but the labour time involved in producing the goods.
Thus the value of a commodity is the amount of homogeneous human labour or socially necessary labour embodied in the commodity. Marx refers to this as abstract labour, a theoretical concept, but one that exists in a particular historical setting whereby the products of concrete labour have exchange-values. By entering into exchange, this abstract labour loses its character as the particular form of labour that produced the object, and becomes simply human labour. This is the portion of society's total labour required to produce the object. It is the labour that is socially necessary, representing the amount of labour time required to produce the object under normal conditions of production, and with an average degree of skill and intensity of work.
If the conditions of production develop, and the productivity of labour increases, the value of the commodity declines. This occurs because less socially necessary labour is embodied in the commodity, and the commodity cannot command other commodities with the same labour content. Over time, skills, technology, the state and application of science, and physical conditions vary, thereby altering the value of commodities.
The labour value that is embodied in the commodity is simple, average, human labour, or unskilled labour of average intensity. If the labour is skilled, then Marx argues that this amounts to simple labour intensified. As different types of human labour are embodied in commodities, they become comparable in that these commodities are exchanged. All represent a portion of society's total social labour. This aspect of Marx's approach may be similar to Durkheim's view of the division of labour holding society together.
Value is considered by Marx to be a social relation, and not merely an economic one. If exchange did not occur, social relationships would differ. Through exchange of commodities produced by labour, labour acquires a social character in that people are working for each other. The nature of this changes as the division of labour and the type of exchange and markets develop. As commodity exchange becomes highly developed, the expenditure of labour is no longer that of a particular type, but becomes abstract labour, the expenditure of human muscle, brain and nerves.
Recall, that commodities have a two fold character for Marx – they are both use values and exchange values. Similarly, once markets develop, labour is both useful labour and abstract labour. Note the connection with alienated labour in that the exercise of concrete labour creates objects which are exchanged for other commodites, thus alienating the labour of the worker.
5. Commodity Fetishism
Commodity fetishism is the attachment of certain powers or characteristics to commodities, thereby giving commodity exchange a degree of control over people. "The world of commodities is one in which the relations between things appear to determine the fate of persons; this fate seems also to have something to do with the natural properties of those things" (Hadden, p. 63). When we examine markets, we see only the exchange relations between commodities, and this appears to be a natural relationship. But behind these is a social relationship, one between buyers and sellers, between owners and non-owners, and one that has developed over time to take a particular form at each stage of historical development. When market exchange fully develops so that commodity exchange dominates economic life, the commodity seems to acquire properties of its own. As an economic system, capitalism derives a life of its own, dominating its creators. In particular, when labour power becomes a commodity, behind this is an exploitative social relationship. While Hadden does not connect this with alienation, note the similarity between some aspects of alienation and commodity fetishism.
In the first part of Capital, Marx outlines several different stages of exchange and exchange value. Theoretically and historically, the simple, isolated or accidental form is the initial form of exchange, but as markets develop, exchange-values acquire a total and then a general form. In this development, exchange values become regularized, and one commodity takes on the role of universal equivalent. Once this becomes even further developed, so that this universal equivalent becomes generally acceptable, this equivalent is called money. Conceptually then, exchange is first associated with barter, then as development of markets and exchange occurs, there is some use of money, until the value of all commodities are stated in money terms, and the monetary form of exchange begins to dominate. Behind all this, value continues to be created by labour, and the money form merely hides this.
6. Forms of Commodity Production
In order to understand the different forms of commodity production and the emergence of surplus value, as a fully developed capitalism develops from occasional market exchange, Marx outlines various stages to commodity production. These are historical stages that developed in Western Europe: beginnings of markets in towns and cities of Europe, merchant capitalism or mercantilism, the putting-out system, factory production, and industrial capitalism (see Hadden, pp. 65-66).
a. Simple Commodity Production
In order to illustrate the theoretical difference between these stages of commodity exchange, Marx sometimes used diagrams involving C (commodities) and M (money). Marx does this beginning in Chapter 4 of Capital. Hadden uses these only on p. 69.
Simple commodity production "is a condition where many people are independent, samll producers who own the products of their labour and sell these products for the other things they need" (Hadden, p. 66). In simple commodity production the circuit of exchange can be characterized as
C — C
where commodities exchange for commodities. This could be a fairly well established system of barter, redistribution, or exchange, where exchange values are well known, but money had not yet entered the system. Since money does not dominate at this stage, production tends to be closely related to use – with overproduction not an economic problem and no accumulation of capital. If profits are made by one of the parties in exchange, this would be a result of cheating or unequal exchange. Social inequalities can occur, but these inequalities may not emerge from commodity exchange and markets, rather, the latter are more likely to be the result of the former.
Human labour is used to produce the commodities entering exchange, and those commodities exchanged are used for consumption, that is to satisfy human needs. Thus labour and consumption enter simple commodity production as follows:
As commodity exchange becomes more regular, one of the commodities tends to become generally acceptable in exchange, and takes on the characteristic of money. Historically, objects that are valued but scarce, such as cattle, tobacco, silver, or gold, have become money. Once money (M) does develop, then the situation may initially change little and can be characterized as C - M - C.
That is, an object produced by a producer is sold for money, and in return, the money received is used to purchase another commodity. At both ends of the exchange are commodities, and these exchanges characterize a system of production that is fairly closely connected to use. So long as money is not hoarded for a long time, the circuit is complete, and exchange continues. In this case, money merely makes the exchanges a little easier, ensuring that each seller need not come directly or immediately into contact with the producer. So long as the value of commodities at each end of the exchange is equal, accumulation does not occur and simple commodity production is characterized by a rough equality of producers. But once money is introduced into this system, the possibility of the development of surplus value and capital accumulation develops.
b. Capital Accumulation. As a money economy develops, money forms part of the superstructure of the economy, in that its value and movement acquires a life of its own. Banking, credit, and financial crises all begin to develop. This results because there is a a qualitative change in the form of exchange from
C - M - C to M - C - M'
where money becomes capital. So long as the aim of exchange was to fairly directly meet the needs of people (C-M-C), there is simple commodity production. But as soon as the money form becomes reasonably well established, and some who begin to have more money seek to expand the quantity of money they have. This is a different form of exchange, where the beginning and the end of exchange is characterized by exchange value. In this case, the aim of purchase and sale is completely different in nature than C - M - C, where production is closely related to meeting human needs.
In Western Europe, the beginnings of the M - C - M' form of exchange came as feudalism declined and towns grew. Merchants began to sell the products of artisans over long distances and began to gain control of the production of goods through the putting-out system. Later the merchants began to organize the production into workshops or small factories, thus beginning the development of an industrial form of capitalism. (See Hadden, pp. 65-66).
M - C - M' constitutes the beginnings of a system of capitalism, or at least of self-expansion of capital, and capital accumulation. This set of transactions expands the amount of money in the possession of the original holder of money. In this circuit of capital there may be little direct connection of commodity production with human needs being met. This is because the original sum of money, transformed into commodities and then sold for money, is being used to create a larger sum of money at the end. So long as M' > M, this can be considered capital accumulation, and there would appear no reason to end this after one circuit. Rather, there would be reasons why it continues on and on, in ever repeated circuits. This cycle of capital accumulation can become quite detached from production for use.
The difference between M' and M, that is M' - M is surplus or surplus value. Since Marx is attempting to show that equivalents always exchange for equivalents, this leaves the origin of surplus value to be explained. Marx argues that there must be some systematic source of this surplus value, it is not merely the result of cheating, theft, trickery, or speculation. Marx finds the source of the increase in value to be labour and labour power.
With respect to the circuit M - C - M', several points can be noted concerning the qualitative changes that occur with this type of circuit.
i. Money becomes Capital. The essential difference is that money becomes capital, and this circuit represents the capitalist and the capitalist's activity. While there seems to be an exchange of equivalents for equivalents, and no one seems cheated, in some form a relationship of exploitation has crept in.
ii. Self-expanding. This form of exchange signifies a self-expanding form. This means that capital will continually attempt to expand, looking for new geographic areas to conquer economically, new products to produce and sell, and new ways of organizing production. In contrast to earlier economic and social systems, where change was slow and there was not a strong compulsion to change, capital is active and self-expanding.
iii. Crises and Overproduction. With the M - C - M' form of exchange, the possibility of economic crisis emerges. So long as money circulates in rough relationship with societal needs in simple commodity production, and the aim of production and trade is to produce and distribute use values for consumption, there is unlikely to be an economic crisis caused by exchange. Crises may occur due to famines or natural disasters but production is more or less directly matched with consumption, so there should be not drastic over or under supply. With the M - C - M' form, several financial problems can develop. If those with money decide not to return it to another circuit, this can cause a quick depression. Further, the financial sector acquires a life of its own, and commercial and financial disturbances can create bankruptcies, commercial crises, etc. Marx develops these more fully in Capital, showing how crises of this sort are a feature unique to capitalism, and how these are part of the irrationality of capitalism, causing needless human suffering.
6. Source of Surplus Value
Marx showed how surplus value can emerge in the exchange of equivalent values. Marx argues in quote 16:
Capital cannot therefore arise from circulation, and it is equally impossible for it to arise apart from circulation. It must have its origin both in circulation and not in circulation. ... The transformation of money into capital has to be developed on the basis of the immanent laws of the exchange of commodities, in such a way that the starting-point is the exchange of equivalents. The money-owner, who is as yet only a capitalist in larval form, must buy his commodities at their value, sell than at their value, and yet at the end of the process withdraw more value from circulation than he threw into it at the beginning. His emergence as a butterfly must, and yet must not, take place in the sphere of circulation. (Capital, pp. 268-269).
The answer to this is to find such a commodity, and Marx finds this commodity in labour and labour power (quote 17):
In order to extract value out of the consumption of a commodity, our friend the money-owner must be lucky enough to find within the sphere of circulation, on the market, a commodity whose use-value possesses the peculiar property of being a source of value, whose actual consumption is therefore an objectification ... of labour, hence a creation of value. The possessor of money does find such a special commodity on the market: the capacity for labour ... in other words labour-power. (Capital, p. 270).
Marx thus finds the source of the surplus value created in M - C - M' to be the exercise of human labour. While this surplus value may ultimately end up being paid to to landlords as rent, or to financiers as interest, the source of surplus value is the surplus labour extracted from workers by capitalists in the process of production.
7. Labour and Labour Power
In order to clarify the manner in which labour is exercised in capitalism, Marx distinguished between labour and labour power. Labour is an activity, the exercise of the worker's abilities and the expenditure of muscle and intellectual power. Labour and the worker are not commodities, in that they cannot be bought and sold. While the labourer can be bought and sold in a slave system, the slave owner still has the problem of obtaining the labour from the slave. In capitalism though, workers cannot be bought and sold, and the exchange takes place on a "free" labour market.
What is bought and sold is the capacity for labour or the ability to labour. This is the commodity which Marx calls labour power. The capitalist buys labour power, agreeing to pay a price to the seller of labour power. This is the wage (or value of labour power), and the seller is the worker who agrees to work for a certain time period for the capitalist for the agreed upon wage. Labour power, as any commodity, has a use value. In this case, the use value of labour power is its ability to create value. The use or exercise of labour power is labour.
What is unique about labour power as a commodity is that the value which labour power is capable of producing can exceed the value of labour power itself. The value of labour power is determined in the same way as the value of any other commodity, that is, the amount of socially necessary labour required to produce it. The capitalist pays this to the worker in exchange for his or her labour power. But the value that can be created by labour power can be much greater, depending on factors such as the intensity of work, the level of productivity and technique, and the length of the working day.
There are certain theoretical conditions which must be met in order for any product to appear as a commodity (i.e. a certain development of the division of labour). In this case, there are preconditions for the purchase and sale of labour power. The potential buyer of labour power must have a sum of money, or capital, with which to purchase labour power. Then there have to be individuals who have labour power to sell, and who wish to sell it. The sale is not one of slavery, so the sale is only for a limited period of time. Marx also notes that those who sell labour power are likely to lack capital, for if they had capital, or other resources on which they could survive, they would not sell their labour power.
In addition to these theoretical conditions, the historical conditions have to be created which lead to a market in labour power (Hadden, p. 66). This is what Marx calls the primitive accumulation of capital (Part 8 of Capital, I). This is the process by which the direct producers of products become separated from ownership or possession of the means of production, and this ownership becomes concentrated, as capital, in the hands of a few. That is, it is simultaneously two aspects of the same process. First, it is the process whereby the means of support and independence is taken away from direct producers, and these producers become workers, with no means of support other than the possibility of sale of their own labour power. Producers become free labourers. Second, this is the process whereby the means of production become capital, that is, the land, equipment, building, tools, etc. become owned by a few. Their aim is not to produce useful commodities, but rather to expand the value of this capital. Some ways in which this has occurred is through piracy, enclosures, creation of colonies, etc.
Once this has happened, then Marx shows how the process of capital accumulation occurs, through the continued creation of surplus value. This is invested and reinvested, continually recreating the conditions for the expansion of capital.
8. Value of Labour Power
Marx argued that the value of labour power is determined in the same way as the value of other commodities, by the amount of socially necessary labour required to produce it. This is the cost of subsistence, or a subsistence level wage, for the worker. This must not only be sufficient to enable the worker to survive on a daily basis, but it must also be sufficient for the labour power to be reproduced on a generational basis. This means that the value of labour power includes sufficient commodities to support the worker and at least part of the requirements for supporting the family of the worker.
On a daily basis, this is the cost of the food, clothing and housing for the worker, sufficient to replace the muscle, nerve and brain expended in a day's exercise of labour. Physical peculiarities of the country and climate would also need to be considered. Over generations or the longer term, the value of labour power must include the cost of reproduction of workers as a whole – there would have to be sufficient to support the raising of children, support for the family, the cost of some basic education, and a fund for retirement.
For a time, the wage paid for labour could decline below the value of labour power, especially in a period of recession or depression. It is also possible that capitalists may be able to pay immigrant workers, or contract labourers below the value of subsistence. Any time there is an excess supply of labour, above that required by employers, wages can be depressed below the value of labour power.
If capitalism is to survive as an economic and social system, then the wage must either equal or exceed the value of labour power. Marx regarded some of the reform legislation as necessary to improve wages. Working and living conditions had to improve so workers did not become too exhausted or did not die prematurely, and so the supply of labour could be maintained. In addition, some capitalists found that there could be greater profits by increasing relative rather than absolute surplus value.
On the other side, it is possible for wages to rise above the value of labour power for a time, especially when labour is in insufficient supply. Further, over time, there is a moral and historical element to the value of labour power. "the number and extent of ... so-called necessary requirements, as also the manner in which they are satisfied, are themselves products of history, and depend therefore to a great extent on the level of civilization attained by a country; in particular they depend on the conditions in which, and consequently on the habits and expectations with which, the class of free workers has been formed." (Capital, p. 275). This means that labour power is a unique commodity in the sense that human needs and the means of meeting these needs become part of the determination of the value of the commodity labour power.
This recognition of the moral and historical element of the value of labour power raises several problems concerning the nature of needs, how needs are formed, how these change over time, and what element of surplus value may be captured by workers, or at least by some workers. Lenin later referred to the aristocracy of labour, and certainly a segment of well paid workers would sometimes seem to be able to obtain a share of surplus value.
The value of labour power may also be high for some workers because they are skilled workers, whose training may take considerable time and resources. Marx considers the value of labour power for these workers to be a multiple of the value of labour power of unskilled labour, or like simple labour intensified. This amounts to being similar to the human capital model of economics.
One further problem associated with the value of labour power is that unlike commodities produced by industry, labour power as a commodity is not freely reproducible by capitalist production processes. In fact, its production is outside the capitalist system, instead being produced by families, where competition and the direct rule and organization of capital is not present. It is thus questionable whether its value can be determined in the same way as that of other commodities. Labour power could be either over or under supplied, and there would appear to be no mechanism to adjust the supply of and demand for labour, as there is with other commodities.
A feminist critique of Marx's view of the value of labour power is that considerable unpaid labour of women (and children and other household members) may go into production of labour power. This is not regulated by the market, so is highly variable in quantity and quality. It is not recognized socially, at least not through the market. In addition, this labour may be exercised within a patriarchal system – that of the family.
For Marx, the regulating mechanism, to equate supply and demand, and keep the wage at the value of labour power was the industrial reserve army of labour. Marx noted that capitalism creates a large supply of unemployed workers, ready and willing to work, but without jobs. This labour reserve expands as unemployment increases due to bankruptcies and economic crises, and as there is greater natural population growth and immigration. It would contract if the birth rate fell, if there was emigration, or as business picked up in the expansion phase of the economic cycle.
The industrial reserve army of labour is always created and recreated through the economic cycle. As economic expansion occurs, the reserves of good quality workers begin to be depleted, and wages rise. This rise of wages may threaten profits, thus helping to trigger an economic downturn. As profits decline and bankruptcies increase, the reserves of unemployed labour are replenished, driving down wages. This helps recreate the conditions for profitable economic expansion, and a new cycle occurs.
Further, technological change and competition create unemployment, as more efficient methods are found to carry on production. Some employers use less labour power and this is a factor which helps maintain a large and continually growing industrial reserve army of labour. Marx's outlook for capitalism was of gradually declining wages and growing unemployment.
There are several problems with Marx's analysis of the value of labour power, as noted above. The major problem is that Marx is attempting to apply an economic model of the value of labour power to a commodity which is produced in non-capitalist conditions. It might make more sense to build a separate model of the family and household. In any case, while the family and household are strongly affected by capitalist economic and social relationships, Marx does not provide an adequate analysis of this sector.
9. Surplus Value
Once capital develops to a certain stage, M - C - M' on the basis of trade and exchange alone is no longer sufficient. That is, merchants may purchase commodities at low prices and sell them in separate markets at higher price. They are able to pocket the difference because the markets are separated. But as trade and competition develop, these possibilities are reduced and capitalists seek new ways to develop surplus value.
The limits on merchant or trading capital leads capital to begin looking to production and the labour process involved in production as a possible source of surplus value or profit. To this stage, capitalists themselves may pay little attention to C in M - C - M'. Within this circuit though, labour (L) is involved and this could be pictured as
M - C - M'
That is, labour in involved in production, but it is not really part of the circuit of capital, rather it occurs outside this circuit, and capitalists merely purchase the products of labour. This could be characteristic of a system of merchant capitalism.
Once capital begins to become concerned with production itself, the circuit of capital can be pictured :
M -- C C' -- M'
This is industrial capital, that is, capital and capitalists pay more attention to conditions of production than to exchange of finished commodities, and capital begins to alter these so that profit can be expanded. This is where Marx finds the origin of surplus value.
Marx had already made the distinction between labour and labour power. In the production process, capital is used to purchase a certain amount of labour power, and this is set to work. The end result is to employ the worker for a longer period than what is required to produce the worker's subsistence. This is the source of surplus value or profit.
10. Sources of Surplus Value
a. The Production Process. In this production or labour process Marx makes a couple further definitions. MP stands for the means of production, and this is turn is composed of the objects of labour and the instruments of labour. The objects of labour are comprised of the objects or materials that labour works on, transforming into commodities. These might be called raw materials today, and are the land and other products of nature. These are the inputs to the labour process, and they may be materials directly from nature, or they may be inputs that have previously been worked on by human labour to transform them into inputs suitable for the labour process in question. The instruments of labour are the things which the worker uses or places between the worker and the objects of labour in order to direct the worker's activity onto the objects. These are the tools, machinery, buildings, etc.
All of the means of production are composed of past human labour, perhaps built up over a period of many years. Marx refers to the cost of these as constant capital, and this constant capital is productively consumed in the process of production. This constant capital can also be considered to be stored up or dead labour. The value of this constant capital is the amount of past human labour which went into producing these means of production. For Marx, this dead labour or constant capital could not create new value in the production process. Rather, it merely passed on to the commodities produced an amount of stored up labour equivalent to the amount of constant capital used up in the production process. That is, a new use value is created as the old use value is used up or consumed in the production process.
That the amount of value passed on to the commodity by constant capital in the production process could not exceed the value of the constant capital that was used, is an important point in Marx's labour theory of value. Smith and Ricardo had argued that capital created value, and that capital deserved profit in relation to the amount of capital employed. Economists generally have considered capital to be productive in the same sense. But Marx argued that all the new value created in the production process was created by labour, by the purchase and use of labour power. No extra or new value is created in the production process by constant capital. All surplus value is created by the use of this labour power. Marx considered labour as the source of surplus value, capital merely reproduces itself in production, but accumulating by appropriating the surplus value created by labour.
The capitalist production process begins with a sum of money, or capital which is used by the capitalist to purchase commodities. These commodities are (i) the means of production, the tools, machinery, buildings, raw materials, or constant capital, the total value of which is c; (ii) labour power, or variable capital, or v. The amount spent on variable capital is the total wage bill to the capitalist. The production process takes place as the workers' labour power is used to transform the constant capital and variable capital into commodities. The value of the commodities produced exceeds the value of the commodities (means of production and labour power) purchased by the capitalist. The manner in which this original value is expanded is by obtaining more labour from the worker than the amount expended on wages.
6 hours 6 hours
Necessary labour Surplus labour
Cost = v Surplus value = s
Rate of surplus value = s/v = 6/6 = 1
In this model, workers are employed for 12 hours, giving the capitalist the use of their labour power for 12 hours. But it takes only 6 hours labour for a worker to produce an amount of commodities of value sufficient to pay for the wage, or the value of labour power purchased. The other 6 hours are spent working and producing commodities of value, but these remain the property of the capitalist. The workers have no choice but to do this because they have no capital of their own, and because of the threat of being tossed back into the industrial reserve army of labour if they do not keep their employment.
b. Absolute Surplus Value
Given this situation, the rate of surplus value is s/v, and the only way that capitalists can increase this is to increase the amount of surplus labour time. If the industrial reserve army of labour is large, capitalists may be able to extend the length of the working day, but this is the only real way to expand surplus value, the source of profit. Marx calls this absolute surplus value. However, there are obvious limits to this. Alternatively, the capitalist might try to find labour power of lower value, such as the labour of children, or prison labour. Population growth or immigration might also help. Finally, enlarging the scale of operation might not increase the rate of surplus value for any one worker, or the profit rate, but it will help expand the total amount of profits that accrues to the owner of capital (concentration of capital).
c. Relative Surplus Value
As capitalism develops though, the preferred method becomes one of shortening the period of necessary labour, and using this to increase the ratio s/v. If this can be done, it may even be possible to shorten the surplus labour time as well, and still increase s/v. Marx calls this relative surplus value.
4 hours 8 hours
Necessary labour Surplus labour
Cost = v Surplus value = s
Rate of surplus value = s/v = 8/4 = 2
As can be seen, the rate of surplus value can be doubled if there is a small decline in the cost of variable capital. In this example, even if surplus labour were to be cut to 6 hours, there would still be a rate of surplus value of s/v = 6/4 = 1.5.
Two major methods of accomplishing this can be considered, (a) means which lower the cost of subsistence, and (b) reorganization of work within the circuit of capital itself.
a. Cheapening v. If food, shelter and clothing can be produced with less labour, then the cost of workers' subsistence declines and capitalists need not devote spend as much capital to variable capital. The wage bill declines. The development of agriculture, cheaper food imports, free trade, the development of mass textile production, the breaking of the monopoly power of the gilds and trading companies, and improvements in transportation all played a role in Britain's efforts to cheapen the cost of workers' subsistence. Colonialism, the use of force and slavery also played an important role in providing cheap food or cheap inputs to British industry.
b. Changing Conditions of Production. This method has a more direct impact on the conditions of work, and has more direct relevance for class structures and class struggles. There are many ways of reorganizing work, and each reorganization by capitalists is an attempt to increase the rate of surplus value, s/v.
The amount of idle time can be reduced, or the intensity of the work can be increased by running machines faster or forcing workers to do more operations per unit of time. The use of machines themselves may make workers more productive, in that they are using more past labour. The setup and organization of the work may be changed so that less labour time is involved in producing the object. The division of labour and technical change may proceed to do the same.
In Capital, Marx traces these developments occurred in early British capitalism. The development of machinery and large scale industry resulted in relative surplus value developing to a high stage.
In terms of the theory of value, Marx completed this in volumes II and III of Capital. Values are transformed into prices, so that prices and values, while connected, can also diverge considerably, especially under non-competitive conditions . The value of labour power is transformed into wages, with the latter depending not only on the value of labour power, but also on the class struggle, and also on the moral and historical element. Surplus value becomes the property of capital, and forms the basis for profits. However, it also is the ultimate basis for interest and rent as well, especially as financial capital develops, and as landed property increasingly becomes treated as capital.
a. Struggle over Surplus Value. Since the labour-capital relation is a contradictory one, there are inevitably struggles over how much surplus value is produced, and who obtains the surplus value.
i. The Working Day. The fights over the length of the working day, the intensity of work, how work is organized, all affect the amount and division of surplus value. Workers resist attempts to carry out speedup, make work more intensive, or remove control over conditions of work. Employers and capitalists attempt to make such changes.
ii. Trade Unions may be able to bargain back some of the surplus value that would otherwise be extracted from workers. By combining together, workers may be able to prevent some surplus from being created (limiting hours of work) or bargain higher wages. Those workers that are able to do this may reduce the surplus going to capital. On the other hand, capitalists may be able to reorganize production so that these workers are more productive, and capitalists continue to make profits while workers are more highly paid. In fact, the rate of exploitation could be greater for the more highly paid workers.
b. Transformation. Capital, Volume 1 examines simple commodity production, the expansion of markets, the development of a monetary system, the growth of manufacturing and the development of a full blown system of capitalism. Marx shows how exchange value and surplus value are created and expanded.
In Volume 3, Marx shows how values are transformed into prices. Exchange takes place at the value of the product under a system of simple commodity production. But once markets and competition develop, capital goes to the most profitable endeavours. Labour is mobile, people must move to different types of jobs, with unskilled jobs growing in number. In addition, technical progress takes place, with machine production and more use of capital replacing human labour. Finally, monopolies may develop in some areas.
For these reasons, products may no longer exchange at their values, but at their price of production. Volume 3 examines this transformation of values into prices, and surplus value into profits, interest and rent. Marx attempts to show how the labour theory of value can be made to explain prices. This transformation of values to prices had been analyzed by many economists, and remains a controversial feature of Marx's economics.
The essential point concerning the transformation issue and fully developed capitalism is that it is still labour that creates value, and the exploitation of labour that produces surplus value. Underlying prices and exchange are the values created by human labour. Capitalists, landlords and financiers may expropriate this surplus value as profit, rent and interest, respectively, but the value is ultimately created by human labour. One of the main aspects of history is the struggle concerning control over this surplus value.
c. Contradictions This system produces various contradictions. Some of these are as follows.
i. Profit not Human Needs. While the system may expand, use values created may be only very distantly related to wants. More recent critics have talked about "wants" and "needs" that are created by capital through marketing, product obsolescence, etc. The main critique Marx had of capitalism as an economic system is that it has the productive potential to meet human needs, but it is driven by the search for profits with human needs not being met.
ii. Falling Rate of Profit. There is a tendency for the rate of profit to fall as capitalism develops. Ricardo had noticed this earlier. As a result, there are tendencies toward stagnation in the economic system. This was evident in the 1930s and may be the case over the last 15-20 years. To find a way out, capitalism attempts to increase the productivity of labour, find cheaper raw materials, increase the rate of exploitation (reduce the value of labour power), promote technological advance, start wars, etc. These may overcome the tendency for a period of time, but the tendency for the rate of profit to decline will then reassert itself.
iii. Periodic Crises. Overproduction can easily result in the M - C - M' system, where capital accumulation occurs. This can produce periodic recession, depression, expansion, boom, etc. While these are a regulating mechanism, bringing prices back in line with values and restoring some equilibrium, they are inevitable, occur regularly, and are irrational, destroying capital and people.
iv. Pauperization. A large reserve army of unemployed workers is necessary for capitalism to operate. In addition, capitalism uses up people and discards them. This results in a growing class of poor people, as well as helping to keep down the wage level of the working class.
v. Concentration and Centralization. Concentration refers to the accumulation of capital within a particular sphere, turning more of the productive apparatus into a capitalist form, and expanding the size of the capital. As a system, capitalism expands and incorporates more and more of the world into its orbit. Centralization refers to the increased oligopoly and monopoly that result from takeovers, mergers and bankruptcies. Increased proportions of the total capital come under the control of a few capitalists.
vi. Socialism. The ultimate contradiction is that the system is unstable, producing its own gravediggers, the workers. The accumulation of capital and the expansion of the capitalist form of organization produces a working class that can abolish the system. The proletariat is the means by which private property will be abolished, and a new system that can socialize the means of production, be created. This will help create the conditions where communism can be developed.
Last edited on September 23, 1999.
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