Marxist Economics: A Primer
What follows is taken almost whole-cloth from a public talk I recently gave on the subject. It’s not meant as an authoritative take on Marxist economics – it’s nowhere near long enough – but rather as a quick and loose intro with an eye to drumming up interest in a possible reading-group, that can more intricately examine the subject matter. A portion of the contents came about from my own research, but I owe a heavy debt to the English translation of Michael Heinrich’s An Introduction to the Three Volumes of Karl Marx’s Capital – the quotation in the section on Crisis is indeed lifted in full from there. I’ve broken the material into several different sections, starting with the classical economic genesis of Marx’s thought and carrying on to a contrast with modern theories, in order that the content be rendered more easily understood. Finally, there is a conclusion, which summarises some of the key points of each portion.
Without further ado:
Labour Theory of Value
Marxist economics is an example of what is known as the “Labour Theory of Value.” This theory was first formulated by the likes of Adam Smith and David Ricardo, and during the time in which Marx himself was writing, the latter half of the 1800’s, formed the mainstream thought of political economic theory. The crux of the theory is that it is human labour, the application of human effort, that creates the value which we find in certain objects in the world. It should be stated here that the term “value” holds a special meaning, divorced from the way we commonly use it: “value” here is something very different from “price.” For example, we can say that undeveloped land, or diamonds, or things of this nature have a “price” but not a “value.” This is because they have not been worked on by human beings – the money that you pay when you buy a diamond ring is not tied to the “value” of the object, but rather determined by scarcity – more on this later.
The specialised concept of “value” is further subdivided in this theory – into what are called “Use Values” and “Exchange Values.” When we confront objects in the world with an eye to making use of them – sitting on a chair, typing on a keyboard – we interact with their “Use values.” However, when we begin to approach objects as commodities, as an abstract collection of goods meant to be traded, we don’t really care about their individual “Use Values.” Here, we are more interested in their “Exchange Values.” Only objects treated as commodities have both a “use value” and an “exchange value.” “Use values” naturally inhere in the object – they are determined by the physical make-up, whereas “Exchange values” are the product of a societal relation – the act of being associated with trade.
So, how do we get to the heart of what we mean by “value”? How do we figure out what things are worth? We see fairly quickly when we enter the level of exchange that commodities stand in relation to one another in more or less fixed ratios – it is possible for objects to be exchanged above their value, or below it, but this price does not affect their value. Marx, given the time he was writing, talks a great deal about textiles. He posits that you can take one coat, and exchange it for, say 3 sheets of linen. Further, you can take three sheets of linen, and trade them for several dozen yards of yarn. By the same logic then, you should be able to trade that much yarn for one coat. What is being measured here, in the comparison? The answer that the Labour Theory of Value puts forward is that it is what is known as “socially necessary labour time.”
“Socially necessary labour time” is just that amount of labour, within a society during a particular epoch, that is required to create the commodity. It is qualified by “socially necessary” because, as we see in practice, simply because someone should take longer at creating a particular commodity does not give it more value – no, this is tied to the average time across the whole society that it would take to do so. For example, just because it would take you, an unskilled labourer, a long time to make, say, a chair, that chair isn’t therefore “worth” more than one built by a skilled carpenter.
The way commodities stand in relation to one another we mentioned a moment ago sheds light on another aspect of the economy, that of money. Money, in this understanding, can be considered the abstracted relation between all commodities. I’ll speak to what are known as Bourgeois economic theories, those that we call “Mainstream,” a bit later, but it is worth noting that no other theory aside from Marxist economics can account for the money form in this way, and that, for this reason, all other economic theories are “pre-money theories.” Getting back to the subject at hand, Marx believed that the money form had to be tied to a particular money commodity, historically usually that of gold or silver. Of course, we know that that is no longer the case – money’s representative “worth” hasn’t been tied to gold since the end of the Bretton Woods system in ’71 – but this in no way complicates Marx’s position. We see money acting in several different ways – namely, as a hoard, where it is taken out of circulation, as payment, where it is exchanged in lieu of a commodity, or as the general abstraction – the “Universal Money.” Without the money form, Capitalism as a system would not be possible.
The Capitalist Economy
Things have been traded since the dawn of civilization, if not even before that. However, it is only under a properly Capitalist system that almost all objects are treated as commodities, able to be exchanged for others.
It is important to note the over-arching nature of Capital in its status as a system. As noted, we’ll look in more detail at Bourgeois systems later, but this is another failing of theirs, to not treat economics in a wide enough systematic manner. What is meant by that is, there are three main portions of the Capitalist economy: the realm of production, where commodities are created, that of circulation, where they are traded, and finally the realm of consumption, where they are converted back to use values and, for a time, drop out of economic consideration. It is necessary to take all three levels in view when approaching the subject of political economy.
In the Marxist approach, human beings are called Capitalists when they take up the role of Capital personified. Capital is more than just a large amount of money or wealth, it is what is known as “self-valorising value.” Its sole interest is in increasing itself. Thus, Industrialists, Bankers, etc., are only Capitalists when they act this out. This is why, for example, Thomas Piketty’s recent book, while it presents a wealth of useful stats, doesn’t actually address Capitalism as a system. Unlike the model we mentioned earlier, where a person heads to the market with their own commodity, exchanges it for a certain amount of money, and then either sits on it or exchanges that amount for another, different commodity, the Capitalist process starts with money. Capitalists advance a certain amount of money in the knowledge that they will get a larger return on it. It’s important to note that, though this advance generally takes the form of wages “purchasing” labour-power, and that this is described by both Capitalist and the worker as a form of payment for work done, this is untrue. It is a hallmark of Marxist Economics that the true workings of the system remain obscured to most actors, operating underneath the surface of apparent relationships. Though both Capitalists and the working class remain ignorant of the actual operations of the economy, this is no way impedes the process as a whole.
What is “self-valorising value?” For this, we have to look at the other side of the divide, the working class, also known as the proletariat. Unlike other commodities, which are mere carriers for use values and exchange values, labour-power has within itself the ability to create value. It is able to do this because of the particular way it is valued itself. Like other commodities, labour-power derives its “value” by the “socially necessary labour time” for its (re)creation. In this instance, that takes the form of the daily necessities for the continuation of life for the labourer, eg, the food, the clothing, the shelter, etc. Further to this, it also contains the cost of reproducing the labour, and so, alongside those more mundane commodities, carries with it those necessary to supply for the labourers’ offspring. The queer element of labour-power, however, is that it can achieve these things and more within one “working day.” Now, the concept of the “working day” is an important one, and one that we’ll return to later, but, for now, suffice it to say that a labourer produces what he or she needs for themselves, as well as an excess of value on top of that, within the working period.
Here we reach another term with special meaning – that of exploitation. As discussed above, the money advanced by the Capitalist in the form of wages, wherein they bought the labour-power of a worker for an agreed-upon portion of time, was reflective of the value of that labour-power. This, coupled with the fact that the application of labour-power, ie., labouring, produces value in excess of this, gets us to Marx’s conception of “exploitation.” The labourer is given money for the recreation of their daily labour, but the Capitalist takes the excess value, the “surplus value,” in the form of the commodity created with that labour. The time required to reproduce the labour potential is referred to as paid labour, while surplus-value creating labour is unpaid. Hence “exploitation,” for Marx, is a purely logistical affair, and doesn’t speak to a moral component. I think it’s worthwhile to hold a moment here, as the concept of exploitation is a central one. The idea of “unpaid labour” hearkens back to what we were discussing a moment ago, the reality that most of what transpires in Capitalist economics happens underneath the surface. It’s not as if labourers are forced to work without compensation, like we see in unpaid internships or work-fare or the like. No, it’s just that the wages that are given to the worker, while they appear to correspond to the hours worked, are actually tied to the necessary labour time to reproduce the labour-ability. The time after that, which we refer to, technically, as unpaid labour, creates surplus value, on top of the value of the labour-power itself.
Now that we have to acquired the concept of “surplus value,” we can better explain how commodities gain their value. Earlier we said that value is generated by “socially necessary labour time” – while this remains true, under the Capitalist system, it is further divided into a composite of the surplus value and the value transferred by the earlier advanced capital. This “earlier advanced capital” itself is an aggregate, which divides into what is known as “constant capital” and “variable capital.” Variable capital is the name for those commodities which are used up in the production process, namely, the paid-labour and the raw materials. Constant capital, by contrast, only partially transfers its value to the finished commodity. Constant capital takes the form of the machinery used to facilitate the process – as one can see, from this perspective, machinery on the factory floor can be used to create many commodities, and only gives up it’s own value in increments. Thus, the value of the finished commodity is a combination of three entities, the value of the consumed variable capital, a portion of the constant capital, and the surplus value created by the application of labour-power.
Understanding the nature of value in commodities sheds light on the nature of profit, which we will further explore in a moment, but also clarifies the nature of the working day and the process of Capitalistic production itself. Clearly, Capitalists are driven to maximize surplus value, as this is the ultimate source of profit. There are two different methods of looking at surplus value, one, the absolute surplus value, is tied to the length of the working day, while the second, relative surplus value, is connected with driving down the value of labour-power itself. The first, absolute surplus value, is increased when the working day is lengthened, allowing more time for what we called “unpaid” labour. This also includes more effective use of labour-time, both by intensification of the labour process and also by more efficient factory lay-out and the like. Of course, there are only so many hours in a day, which is why we arrive at the second method, driving down the value of labour power itself. While, on the face of it, this might seem counterintuitive, reducing the cost of labour-power, ie., those commodities necessary to reproduce labour-power, leaves more time in the day for “unpaid labour.” Some of the ways this is done include the adoption of machinery, in the sense of automating commodity creation, as well as the division of labour within the factory.
This process is part of the antagonism between the labouring class and the Capitalist class – the purchaser of labour-power, the Capitalist, like any good consumer, wants to get their monies’ worth. The proletariat, meanwhile, wants to sell their labour-power as dearly as possible, as one would do. Unchecked by regulating laws or the will of a united working class, the drive to increase surplus value leads to the immiseration of the workers, exposing them to bodily danger and stultifying the mind.
Now, turning to profit itself. If the rate of surplus value is determined by its relation to variable capital, the rate of profit is determined by the surplus value in relation to the combination of constant and variable capital. In that sense, it would make sense to refer to the combination of constant and variable capitals as the “cost price” of the commodity. For Capitalists looking to increase their profit, once they’ve done their best to increase surplus value over all, the obvious lever to pull is that of the constant capital – variable capital of course transferring all of its value immediately already. An increase in the proportion of constant capital can be achieved in three separate ways – the more effective use of it, the more effective use in the creation of it, and what is known as the acceleration in the turnover of capital, which refers to the heightened work pace.
These three methods grant access to the frenetic and unrelenting nature of life for the Capitalist – in order to remain a Capitalist, they must constantly reinvest their Capital. Because they are, by definition, driven towards valorisation, they must seek out the highest profit they can, lest they be outdone by their competing Capitalist brethren, and lose out on the expected return of their advance. The push towards innovation in the realm of constant capital, eg., the means of production, is undying, and comes out of a hope to better the ratio of surplus value to cost price. Coupled to this, however, is the attendant worry that some other Capitalist will innovate before them, rendering their own constant capital, their own machinery, outmoded and slower than the “socially necessary labour time.” Given the massive investments machinery represent, it is a perpetual worry that it will be outmoded before it can fully transfer its value to created commodities. From this comes the desire to never let it sit idle – so long as the rate of profit will allow for it, more shifts of work are tacked on, in the hope of constantly using the machinery.
In passing, it is worth noting that there isn’t a difference in kind between talk of value and talk of production price and rate of profit. Rather than some temporal difference, as if there were a transition from one stage to another, it is simply a matter of transitioning between levels of description.
Merchant Capital, Finance Capital
Of course, as we well know, the work done in creating commodities, whether it be done in factories creating textiles, on a farm rearing cattle, or in an auditorium with a concert orchestra, is only one portion of the Capitalist economy. The creation of commodities takes place under what is termed Industrial Capital, as does the sole creation of surplus value, which underwrites the whole system. The other two branches, at least for the Capitalist, are known as Merchant Capital and Finance Capital.
If surplus value is only created during the Industrial Capital stage, why would the Industrial Capitalist want to share it around with the others? Why share a portion of the profit they have “earned” through the advancement of their capital? Because the creation of surplus value is only one stage of the valorisation process, of course. The Industrial Capitalist, now that they have converted their initially advanced money into a valorised commodity must now exchanged this commodity for a second sum of money, larger than the first, to complete the process. Rather than sell directly to consumers at the market price, an Industrial Capitalist will often sell to a Merchant Capitalist below the market price, but still above the cost price, in order to get the finished commodity out of their hands and to advance the newly gained surplus value. This reduces the risk for the Industrial Capitalist of finding themselves sitting on too many commodities and not being able to get access to the fruits of their earlier advancement.
The Merchant Capitalist, for their part, finds the process worthwhile due to the margin between the price they acquired the commodity for and its ultimate market price. Those workers that labour to get the commodity to market, whether it be as truckers, sailors, or clerks, off-set the cost of their employment by way of the unpaid labour they do – but the money for the paid labour, the labour-power that goes into reproducing themselves, comes directly from the surplus value created earlier in the Industrial Capital stage. Unlike their Industrial colleagues, the Merchant proletariat’s unpaid labour is unproductive when it comes to surplus value.
The benefits to the Industrial Capitalist of Merchant Capital are fairly clear. What then of Finance Capital? Unlike pre-capitalist economies, Finance Capital, in the form of interest-bearing capital, does not occur as a crushing burden on the debtor. In pre-Capitalist eras, interest, or, as it was called, usury, would occur in such staggering rates that a loan was often a sentence to bankruptcy. It was this state of affairs that developed the moralistic distaste for lending money, that we see codified in the Bible and as a hold-over in our own times. Contrary to this, though, interest rates nowadays are much more manageable. Furthermore, much like the necessity of the money form, Capitalism could not operate as a system without the lubrication of Finance Capital.
Without going into too much detail, Finance Capital allows for liquidity within the Capitalist economy, in that it allows for the raising of funds to be applied in areas of high expected returns with alacrity, as well as providing a sort of force-multiplier for the Industrial Capitalist. Much like the relationship between the Industrial and Merchant Capitalist described a moment ago, the Financier receives their profit as a slice of the surplus value created earlier in the system. Just as the Industrial Capitalist strikes a favourable balance between the cost price and the market price, here they look for a reasonable balance between the average rate of profit and the rate of interest on the loan, which is in turn determined by the levels of supply and demand within the system as a whole. Access to large amounts of finance capital can act as a what was termed a force multiplier because it allows the Industrial Capitalist to advance greater sums into their own affairs, whether it be in the form of improved constant capital, which in turn benefits their rate of profit, or as the means to benefit from a temporarily high demand for certain commodities unmet by other market forces.
As well as benefit to individual Capitalists, Finance Capital, under the Capitalist system, is used by the working class. Some use it to set themselves up as Capitalists in their own right, while, on a systemic level, it provides some extra room for the consumption of commodities. For example, the end of stagflation in the 1980’s and the economic growth up until 2008 was due in large part to this extension of cheap credit to the working classes, who’s buying power over that time otherwise stalled. A clear indication of this is the widespread reliance on credit cards to maintain an accustomed style of living.
So, why oppose Capitalism? It seems like it has it’s good points – it is massively more efficient than any previous economic form we’ve seen, and it looks like it has the mechanisms to allow the working class, through savvy investment and thrift, to better their own situations.
We have, however, already numbered some of the internal antagonisms within the system – the way it pits Capitalists against the proletariat, the manner in which Capitalists necessarily compete amongst themselves. The greatest pitfall has yet to be mentioned – the constant, cyclical event of Crisis.
Under Capitalism, a Crisis occurs when a large percentage of the commodities produced are no longer saleable. This occurs not because there is no demand for them, but because there is no longer the “buying power” with which to do so. The interconnectedness of the system allows for a chain reaction when this happens:
“Commodity capital can no longer be completely transformed into money capital, so that the advanced capital is poorly valorized and accumulation decreases. The demand on the part of capitalist enterprises for the elements of productive capital—means of production and labor-power—also decreases. Mass unemployment and a decline in the consumption of the working class are the consequences, thus leading to a further decline in demand that further intensifies the crisis.”
During Marx’s own time, these periodic Crises of Capitalism would happen with more or less regularity every decade. During the Post-War years, however, it looked as if this had been overcome. Unfortunately, this was simply a product of the benefits of the modern industrial process: division of labour, mass production and the like. This became apparent during the previously mentioned period of stagflation during the 1970’s. It was no longer possible to drive down the relative surplus value by way of automation. This lead to the political choice to dismantle the gains made by the working class, undercutting the social-welfare state and destroying the power of labour unions, in order to make a reasonable gain in productivity. Of course, as mentioned earlier, this lead to the extension of cheap credit without increasing buying power, which has sense caught up with us. Unlike other efforts at understanding economics, Marx points to the internal workings of Capitalism itself as the creator of Crises. You cannot have Capitalism without them.
And what about those Bourgeois economists? Where do they go wrong? Quickly, I’ll take a brief look at two important schools of non-Marxist economics.
The first school is that which is commonly referred to as Mainstream Economics. It’s a combination of a few different styles, but mostly holds to the work set out by the Austrian School and the economist Hayek, and holds true to the affirmations of marginal utility theory. Roughly, this position assumes that the true focus of economics is the rationally acting individual who seeks their own benefit. Furthermore, they hold that markets should be left unfettered and that, given enough time, the storied “Invisible hand,” emerging from the individual actions of rational entities, will guide the greater bulk of commerce to the benefit of society.
Of course, as we have just argued, this is an entirely wrong-headed approach – Capitalism is fraught with internal contradictions which drive the creation of Crises, and, furthermore, it simply doesn’t make sense to approach political economy from anything less than a systematic view: the rationally self-interested individual is not the proper subject of economics, society is. If you cast your mind back to the tri-partite division of Capitalist economy we discussed earlier, the separate realms of production, circulation and consumption, it would be appropriate to think of Mainstream economics as solely focused on the middle portion, that of circulation, to the detriment of the other two. For this reason, they can say that all agents, in the market, are equal, and there is no imbalance of power between them. Of course, the inherent imbalances, the way that wealth tips the scale and monopoly over the means of production sets actors on different levels, only becomes apparent when you take the system as a whole, which they refuse to do!
Another approach to economics which has regained traction, in light of the Great Recession of 2008, is that of John Maynard Keynes. Keynes himself laid the basis of his economic thought during the Great Depression, and, unlike other Bourgeois economists, took note of the friction between the working class and the Capitalists. For Keynes, however, the problem of Capitalist Crisis lay in what is known as effective demand – rather than try to flatten out the market the way the laissez-faire Mainstream economists would do, Keynes argued that the solution was to halt the vicious circle of unemployment breeding decreasing demand by way of an injection of purchasing power back into the system, usually taking the form of Government stimulus.
However, this is to mistake the source of Government finances and the nature of value– the Governments of modern nation states do not create wealth ex nihilo – they acquire it through taxation. In a point of crisis, the working classes cannot afford an increase in taxation, and the Capitalists are mobile enough to avoid it. Of course, Governments can dip into the World Financial markets, but this is a short term solution, and one that we have seen to lead to disaster just within the last few years, what with the rather distastefully-named PIGS.
Thus, we have laid out a sketch of Marxist Economics, as well as some rough comparisons with other, Bourgeois, modes.
In quick summary, Marxist Economics rests on the Labour Theory of Value, which posits that value is created by application of human labour-power. Capitalist Production is the process of self-valorising value, which is derived from harnessing human labour-power and the creation of value-bearing commodities. Capitalists advance money, which is the abstract relation between all commodities, in the expectation that it will return a profit. The rate of profit is derived from the ratio of surplus value, created by the labourer, to the combination of constant capital and variable capital, where constant capital is the means of production, transferring its value in slices, and variable capital is that which is consumed in the productive process, the raw materials and the wages. Merchant Capital and Finance Capital, while necessary for the liquidity and flexibility of the system as a whole, derive their profit from the surplus value created under Industrial Capital. Because of its internal contradictions, Capitalism is not only prone to, but actively creates, periods of Crisis, which no Bourgeois theory can properly account for.
Posted on January 20, 2015, in Maunderings and tagged Bourgeois Economics, Capitalism, Classical Economics, Communism, Crisis, Das Kapital, Hayek, Keynes, Labour Power, Labour Theory of Value, Marginal Utility Theory, Marx, Marxism, Marxist Economics, Michael Heinrich, the Left. Bookmark the permalink. Leave a comment.