Thursday, April 19, 2012

Marx on Capitalism


Copyright © 1996 R.J. Kilcullen

A society is capitalist if most production is carried on by employees working with means of production (equipment and materials) belonging to their employer, producing commodities which belong to the employer. (Employees: those whose services are treated as commodities. 'Labour is a commodity like any other', 'an article of trade' - Edmund Burke, Thoughts on Scarcity, 1795.)
By a commodity Marx means something produced for the purpose of being exchanged. Things produced for the producer's use are sometimes later exchanged, but that does not make them commodities, since they were not produced precisely for that purpose. In modern society most production is of commodities. (Note that these days 'commodity' means something traded as raw material. This is different from the usage of Marx's English translators.)
When commodities are exchanged the ratio in which they exchange is their exchange value - e.g. one pear may exchange for two apples, and the exchange value of a pear in terms of apples is two. Exchange value is different from use value: some things which are very useful have no exchange value, and are normally free - e.g. the air we breathe. No-one will give anything in exchange for it, despite its usefulness. On the average and in the long run, the various exchange values of commodities reflect, according to Marx, the various amounts of labour, measured in time, that their production and marketing requires. That is, commodities exchange in the ratio of the time taken to produce one item of each kind. One pear is worth two apples if producers have to work twice as many hours to bring a pear to the market. This is true of average long term rates of exchange; there may be fluctuations due to seasonal factors, frost, etc.
More precisely: the exchange value of a commodity reflects the amount of 'socially necessary' labour, i.e. the labour needed if the producer works at the normal level of intensity, with normal skill, using normal methods - normal in that society, normal in relation to that market. Otherwise a thing made by an incompetent producer using obsolete methods would exchange for more because it took longer to make - which is obviously not true.
In calculating the value of a product of skilled labour we must add a fraction of the time taken to acquire the skill - by the normal trainee under the normal methods of training. The fraction is calculated by the number of units normally produced during their working life by those with that skill. If the total number produced is 3,000, then the value of each is the time normally taken by the skilled producer to make it, plus one three-thousandth of the time normally taken to acquire the skill.
Value is not the same as price: it is one of the determinants of price, the cause responsible for the long-run average price. In the short term the price may be pushed above the value by shortage or exceptional demand. Also, the price of a commodity that requires more capital investment for its production is normally, even in the long term, above the level corresponding to its relative value (for reasons to be explained later).
This theory of value, the labour theory, was not invented by Marx. It was commonplace among economists at the time. It was given currency by Adam Smith: 'The real price of everything, what everything really costs to the man who wants to acquire it, is the toil and trouble of acquiring it. What everything is really worth to the man who has acquired it, and who wants to dispose of it or exchange it for something else, is the toil and trouble which it can save to himself, and which it can impose upon other people. What is bought with money or with goods is purchased by labour'; Wealth of Nations, Bk.1, ch.5.
This theory of value uses a notion of common, general, abstract, undifferentiated human labour. In a society in which there is little division of labour there would not be much meaning to the notion of human labour as such, in the abstract: there would be the kind of work needed for one task, the different kind of work needed for another. But as the division of labour progresses, the work is homogenized. This may not seem true, since some tasks require specialized skill. But no-one is expected to do a specialized task without training, and training is divided into stages so that anyone can master the first stage just by spending time paying ordinary attention, and anyone who masters the first can then master the second - again by spending time paying ordinary attention; and anyone who has gone through all stages of training can do the job by spending time with ordinary attention. If this is not true, then the task will be changed: further division of labour will take place, or machinery will be introduced. If this process were carried right through (which it has not been, and never will be) then all work would be merely giving ordinary attention for the required time. The essence of work would be the time it takes. This seems to be the sort of reasoning behind the labour theory of value. If so, then it is applicable insofar as there is division of labour. See Heilbroner, Marxism, for and against (HB/197/.5/.H37), pp.99-100.

How explain the possibility of Capitalism?

Capital is money used to make money - by buying commodities which are then to be sold to get an increased amount of money. How can money be used in this way? One answer is: by buying cheap and selling dear as prices fluctuate. This may explain how this or that individual makes money for a while, but since every gain made this way is someone else's loss, if those who gain that way now have an even chance of losing later, then it cannot explain the existence of a definite class of people who regularly make money. The explanation for the existence of such a class (capitalists) is that a limited set of people are in a position to buy a commodity which regularly yields an increase when they sell. This commodity is the service of the worker, which may produce commodities which exceed that service in exchange value (and only when when it does will the worker's services be bought).
The service of a worker is a commodity which has the special use of producing other commodities, which may have more exchange value than it has itself. There are other commodities (e.g. machines) which produce commodities, but (on the labour theory of value, which makes human labour the sole source of value) the exchange value contributed by a machine is simply a fraction of the cost in labour terms of making and working the machine. If over its whole working life it costs $3,000 and produces 3000 items, then it adds $1 to the value of each item. But the amount of labour a worker puts into what he produces over a lifetime may exceed the amount of labour needed to produce and maintain that worker. If some employer buys the worker's services at their value - i.e. for the equivalent of the labour needed to produce the worker - then, since the worker's product belongs to the employer, there will be an excess or 'surplus' value, additional to the value of the wage, that the employer appropriates.
Marx does not think that in the real world full value is always paid. But he conducts his argument on the hypothesis that full value is paid, for several reasons. First, he wants to make it clear that his analysis of capitalism does not rest on the assumptions that capitalists defraud the worker. Even if there were no cheating, capitalism could still exist. Second, he wants to show that even an idealized capitalism would be doomed to destruction (the argumentative strategy of proving the point for the hardest case: a fortiori it holds for other cases). Third, he wants to make it clear that it is in production itself, and not merely in the distribution of the product, that the capitalists' profits originate; it is not accidental that most (though not all) capitals are used to finance production (not, e.g., for buying non-human commodities and selling them unmodified).
Let us consider more carefully the notion of the value of the worker's services for a day - not the price, which may be forced down by competition for a time, but the value, in terms of the labour theory of value. It is the total quantity of labour necessary to bring that worker into the labour market, and keep him fit for work during a normal working life, divided by the number of days in the normal working life. The total includes the amount of labour necessary to produce his food, clothing, shelter, general education, job training, medical care, necessary recreation, and so on. These are the 'wages goods', the goods that have first call on the labourer's wage; or the 'necessities of life'. The necessity is not merely biological; there is a social or conventional or cultural element (e.g. in the standard of general education, the sort of food and shelter regarded as necessary, the sort of recreation needed, and so on).
The quotient, today's share of the total, Marx calls the 'necessary' labour. He pictures the working day as divided into two segments, in the first of which the worker produces for the employer the equivalent of the necessities of life to be purchased by his wage - this is the 'necessary' labour time; the product of the rest of the day is the source of the employer's profit, the 'surplus' labour. It is not 'surplus' in the sense of unnecessary, to the employer - for him it is in fact the whole point of the employment contract. But it is labour 'in excess of' or 'surplus to' the labour needed to produce the equivalent of the necessities of life. The individual employer's profit is not simply identical with this surplus; but in general surplus labour is the source of employers' profits, and also of rent and interest.
So even if the employer pays full value for the hire of the labourer for the day, the labour the worker does during that day will normally exceed the labour equivalent to the value of his hire. The day's share of the labour socially necessary to bring the worker into the workforce and maintain him in working order for a normal working life is less than the whole of the working day. Marx says that it is not labour that the employer buys, because the equivalent in value of a day's labour would seem to be the product of a day's labour, and there would be no profit (if full value were paid). The employer buys labour power, Marx says: more accurately, I think, he buys the right to use the worker's powers for a day. Just as the value of the right to use a machine for a day is one day's share of what it costs to produce the machine and maintain it for its working life, so the value of the right to use a worker for a day is the day's share of what it costs to produce and maintain the worker, which will be less than the value of what that worker can produce in a day (or the hire will not take place). Sometimes Marx says that the 'necessary' part of the day is paid labour, and the surplus 'unpaid': but in fact, in this theory, what is paid for is not labour. What is paid for is the right to use the labourer's powers for the day, for the whole day. The capitalist is supposed in justice to pay the equivalent to the whole value of that.
This is not the full explanation of the possibility of the existence of a class of capitalists, people who can regularly use their money to make money. We need to know why the worker will work for an employer, instead of working the whole day on his own account and keeping the 'surplus' for himself. This is the point that distinguishes Capitalism from what Marx calls 'simple commodity production'. There were (perhaps) some societies which were characterised by commodity production - i.e. most of what was produced was intended for exchange. But the production was by independent farmers and artisans working on their own land and with their own equipment. The village blacksmith, cobbler, tailor, etc. were not employees. The capitalist system is one in which producers are employees, and do not themselves own, or have the means to buy, their own equipment and materials. Marxists often say that capitalism presupposes that the workers have been 'separated' from the means of production. This suggests coercion, and there have in fact been many examples (e.g. the enclosures in England), and continue to be (e.g. in less developed countries) of forcible dispossession of peasants, who then must offer themselves as wage workers. But there is another aspect not to be overlooked: 'separation' in the sense that the labourer's own equipment and resources have become insufficient to compete with the capitalist firm's. And another: the productivity and associated lifestyle of modern industry may make wage work an attractive alternative to workers who could still work in the old way if they were satisfied with the old life. In most historical examples we should probably find coercion mixed in with these other causes. But however it happened, the fact is that in capitalist societies most producers do not have the means of production, and this is what makes capitalism possible. All the worker has to enter the market with is his labour power, which he hires out for a wage. The 'wages system' is another, and perhaps more revealing, name for Capitalism.
(The question 'How is Capitalism possible?' seems to allude to Kant's questions about the possibility of various kinds of knowledge - a reminiscence of Marx's days as a student of philosophy.)

The laws of motion

Now let us consider the dynamic of capitalism, its 'laws of motion', the trends arising from its nature. First, there is what Schumpeter calls a 'gale of innovation'. But if human labour is the sole source of value, and machinery adds nothing but the labour equivalent of its cost of production and maintenance (yields no 'surplus'), why does the capitalist invest in labour-saving machinery? Shouldn't he maximise the amount of labour embodied in each item produced? But remember that value is the quantity of socially necessary labour, the labour needed by the normal worker using normal methods. If a worker uses a method that needs more than the normal amount of labour, that does not enhance the value of the product. Conversely, if he uses a method that needs less than the normal amount of labour, that does not diminish the value of the product. This is why each individual capitalist has reason to introduce labour-saving machinery. If he can introduce a method that uses less labour, then he can still sell the product at the ordinary price (its value is undiminished), though his labour costs will be less, and his surplus will therefore be greater. He has diverted to himself what would normally go in wages to workers the machinery has displaced. Of course his competitors will have to copy the new method or go out of business, so the new method will soon become the normal method. Then the amount of labour 'normally' required will be less, and the value of the product will be less, the price will fall, and the surplus will be reduced to a lower level. But while the innovator is still ahead of his competitors he makes greater profits, and will work his plant and workforce overtime to make the most of his advantage. Thus, although human labour is the sole source of value, capitalists will introduce a continual series of labour-saving innovations, and compel one another to do so by competition. The gale of innovation is also a gale of unemployment, and in the end the increasing capital investment needed because of continued technical development will reduce profits: the displacement of human labour reduces the possibility of profit, but the individual capitalist does best by innovating.
(2). Also, capitalism tends to spread from country to country. At the beginning of the capitalist era there were national or local economies in which different methods of production were normal, in which the 'necessities of life' were defined differently. The value of a commodity is the quantity of labour needed by methods normal for the market in which it is to be exchanged, the value of labour as a commodity reflects the value of the necessities of life. Just as an English capitalist, let us suppose, could make more profit if he adopted a more productive method than was normal in England, so he could take advantage of the superiority of English methods to those of another country by exporting to that country, where his products will have the value corresponding to the amount of labour normally needed there to make such things. Or he could set up a factory there using English methods, and pay local workers the value there of their hire, a value which reflects the local definition of what is needed to sustain life (and if cheaply-produced wages goods begin to be imported labour may become even cheaper, until the standard of subsistence rises). Competition from other English capitalists, imitation by local producers, reduction of English standards of subsistence (because of migration of English capital to other countries and competition from factories in low-wage countries), and changes in the standards of subsistence assumed in other countries, will result in standardization. All countries tend to be drawn into the one world-economy, in which there is a continual search for new products, new methods, new markets, new work-forces, and so on, a world in which all producers become 'separated' from the means of production, and in which employers must innovate constantly to stay afloat.
(3). There is a long-term trend for rates of profit to fall. Capital is money spent to make more money; it is spent partly on machinery and materials and other non-human means of production (this part yields no surplus), and partly on wages; the second part is the source of the surplus. Only the wages part of capital increases or 'varies' in the course of the transactions the capitalist engages in; so the two parts can be called respectively the 'constant' and 'variable' parts of capital. Now if we assume that the inevitable result of the gale of innovation is an increase in the amount of capital tied up in machinery, then the rate of profit must fall. The rate depends (though not simply) on the ratio between surplus and total capital. If we think of all the capitals as if they formed one, we can say that the rate of profit is the ratio surplus/ (variable plus constant) capital. As innovation goes on, the numerator of this fraction, the surplus, will increase to some extent, because of increased productivity in wages-goods industries - it does not take so much of the day to produce the equivalent of the value of the necessities of life, because their value falls as the industries producing them become more productive. Provided subsistence standards do not rise (remember these are to some extent conventionally defined), and provided the working day is not shortened, reduction in the 'necessary' labour time will increase the surplus. But there is a limit: the day has only 24 hours, so there is an upper limit to the possible surplus. Meanwhile, however, the denominator of the fraction (variable plus constant capital) steadily increases without limit, as the constant capital increases. If by the displacement of labour the total surplus falls, and there is a limit to the extent to which this can be countered by taking more surplus from each worker still employed, and if constant capital is increasing as a result of constant introduction of labour-saving machinery, then eventually the rate of profit must fall.
This argument has nothing to do with the idea of 'diminishing returns' (double the inputs and you will get less than double the output): that assumes constant technology. Marx's argument is precisely that as technology changes the rate of profit must fall - assuming that technological change ties up more and more capital in machinery or other equipment.
It might be thought that the fall in the rate of profit might check the introduction of more machinery. But each individual capitalist will still benefit by introducing more machinery because this has a favourable effect on his own profit. So no matter how much the rate of profit falls innovation will continue.
Notice the assumption that innovation leads to an increase in the capital tied up in machinery and equipment. It does not always do so. Electricity, radio and electronics have probably had the opposite effect. Some innovations make it possible to reduce fixed investment. It therefore cannot be predicted that the rate of profit will fall, but Marx expected that it would. Cf. Mill, Principles of Political Economy IV.4.
(4). Another trend is the centralization of capital. The greater the amount of capital investment required to set up a factory capable of competing with those already in existence, the harder it is to become an independent capitalist. Also, smaller capitalist are continually eliminated. If one firm manages to introduce a new process and undersell competitors, the smaller capitalists go bankrupt sooner. They are less likely to win the race to innovate. They are more vulnerable to market fluctuations, because they find it harder to get credit. So smaller capitalists are eliminated, or merge in self-defence, and new capitalists seldomer break in because of the increasing investment needed to start off. Ownership and control are steadily centralized. (This argument overlooks the possibility that new fields are being found into which small firms may enter.)
(5). Another trend is the 'immiseration' of the working classes. In the 19th century the standard explanation of poverty came from Malthus's Essay on Population (1798). Malthus believed that population grows faster than production. Increasing poverty is therefore inevitable; any increase in the standard of living of the poorest classes simply leads to increased birthrate or lower deathrate, and population again 'presses on' food supply. J.S. Mill and other liberal writers drew the conclusion that the standard of living of the working classes could rise only if they practiced birth control.
Marx held the Malthusian theory in great contempt. Population does not tend to grow faster than production. Under capitalism, production grows very rapidly because of continual innovation (Malthus assumed constant technology). The 'surplus' population - a pool of unemployed, living in destitution - is not the result of natural population increase, but of the displacement of workers by labour-saving machinery. The surplus population could all be put to work if the length of the working day were reduced. But employers don't want this, for various reasons. The reason Marx stresses is that if the working class is divided into a group of employed and a group of unemployed (the 'industrial reserve army'), then the employed must submit to reduction of their wages below the true value of their hire, to the extension of the working day (they've been hired for the day - but how long is that?), and to stricter discipline, because they are afraid of being sacked and replaced by someone from the pool of unemployed. Thus it benefits employers to divide the proletariat into a section that is idle and destitute, and another section that is being worked to the utmost: this yields the maximum of surplus value. (And employees can be taxed to support the unemployed.) Not that any employer need see it that way or plan it: competition among capitalists compels each to maximise profit or go out of business, and it is often more profitable to pay overtime than to take on more workers.
Earlier Marxists expected that the working class would simply become poorer and poorer. This does not seem to have happened. Perhaps it has, if we take proper account of the condition of workers in all parts of the world. Maybe the workers in Britain are better off than they were in Marx's time, but not in 'third world' countries (especially those who have died of starvation or in war). Some Marxists say Marx did not mean poorer absolutely, but relatively to members of the capitalist class. Others say he did not mean to make a definite prophecy, but just to point to trends inherent in the system, which might be countered by other factors. Others say that it is too early to know - the time-scale of the prediction is unclear.
(6). Also, there will be depressions and crises. One of the leading features of the modern economy is the fluctuation of prosperity, the alternation of booms and busts, growth and recession (the terminology changes all the time because of reluctance to admit that another 'downturn' is occurring). The Great Depression of the 1930s is the best-known 'crisis'. Some economists have believed that there is a regular 'trade cycle' (with perhaps an 11 year period). According to Marx, competition compels capitalists to introduce labour-saving machinery; as they do the rate of profit falls, which increases the pressure to innovate, and so on. Eventually there will come a point where production is no longer profitable, and where so much labour has been displaced that the working class does not have enough income to buy what is produced. So there is a crisis of 'overproduction'. There are several other kinds, but this is interesting because of the paradox (the 'contradiction', Marxists would say), that to make a profit in a competitive world the capitalist must put out of work the people who must have incomes to spend if capitalists are to make a profit.
To get out of a depression, capitalism (no matter how idealized - or rather, at this point idealization is impossible) must temporarily abandon the principle that things are to exchange at their true relative values. In a depression workers must accept wages lower than value (furthering their 'immiseration'), and the strongest capitalists can buy up firms going bankrupt, paying less than the true value of their assets (furthering 'centralization'). This destruction of values (sometimes literal destruction of commodities) makes it possible for the economy to begin moving again. (Cf. Mill, Principles IV.4.v-viii.) But the underlying trend that produced this crisis will after a while produce another. Increased immiseration and centralization amount to increased social polarization; and the organization and discipline of the workplace makes the workers a strong force that can be turned to other purposes than the capitalists intend. 'Centralization of the means of production and socialization of labour at last reach a point where they become incompatible with their capitalist integument. This integument is burst asunder. The knell of capitalist private property sounds. The expropriators are expropriated.' (Capital Bk 1 ch 32).
About the kind of society that would follow the revolution Marx had little to say. It would be one in which the means of production would not be anyone's private property. But beyond that it will be up to those who bring about or experience these events to construct the new society.
See also
Reading guide to Marx, Capital
Return to POL167, POL264

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