Understanding Capitalism Through Marx

Reviewing two of Marx’s earlier economic essays

Marxism has become wrongly interpreted as being synonymous with anti-capitalism. This wrongful interpretation is the result of several factors. First and foremost, is the voluminous works which Marx dedicated to exploring political economy, works which took him away from writing more about the revolutionary and practical aspect of communism.

This was something noted by Engles after the death of Marx where, in a letter, he claims responsibility saying: “Marx and I are ourselves partly to blame for the fact that the younger people sometimes lay more stress on the economic side than is due to it. We had to emphasise the main principle vis-à-vis our adversaries, who denied it, and we had not always the time, the place or the opportunity to give their due to the other elements involved in the interaction.”

Second, is the way in which current writings about Marx in the mainstream present a more sterilized version of Marx. Marx, we are told by them, can teach about the flaws of capitalism, flaws we ought to fix. Marx here is presented as a reformer, not a revolutionary looking to exit from capitalism altogether.

Third, this distilled (and wrong) presentation of Marx, overshadows the philosophical work completed by Marx and Engles and their worldview encompassed in their theory of Historical Materialism. Which shows that capitalism is not to be viewed with disdain, but rather presents capitalism as a necessary and useful stage in historical evolution. Marx goes as far as to credit Capitalism with the productive gains it has been able to achieve in the first chapter of The Communist Manifesto, saying:

The bourgeoisie, during its rule of scarce one hundred years, has created more massive and more colossal productive forces than have all preceding generations together. Subjection of Nature’s forces to man, machinery, application of chemistry to industry and agriculture, steam-navigation, railways, electric telegraphs, clearing of whole continents for cultivation, canalisation of rivers, whole populations conjured out of the ground — what earlier century had even a presentiment that such productive forces slumbered in the lap of social labour?

All this goes to show that Marx is not simply ‘anti-capitalistic’ rather, his philosophy and politics are seeking an evolution beyond capitalism and the contradiction/limitations presented by it. It is these contradictions and limitations, that Marx argues exist within every system, that he sets out to illustrate in his works on political economy.

Two of such works, indispensable to anyone who wants to understand Marxism and does not want to spend too much time going through the three volumes of Das Kapital, are Marx’s Wage Labour and Capital, and, Value, Price and Profit. The first is a small pamphlet published by Marx in 1847, before the publication of The Communist Manifesto. The second is the text of a speech given by Marx at the First International Working Men’s Association in1865.

Both of these essays can be found in The Classics of Marxism, a collection of essays which include three others by Lenin and Trotsky which I would recommend as well.

Capitalism, wages, and its impact on working conditions

The first essay, Wage Labour and Capital focuses on how wages under capitalism are set and investigates the truth behind the claim that employees exchange their labour for wages.

Engles opens Wage Labour and Capital with an apt description of what production under capitalism consists of.

We live today under the regime of capitalist production, under which a large and steadily growing class of the population can live only on the condition that it works for the owners of the means of production — tools, machines, raw materials, and means of subsistence — in return for wages.

The price of this Labour, the physical/mental ability of the working class, is based on its availability in the market. This is true for all the different skills/requirements a producer needs.

It is also in the producers best interest to make sure that there is enough of this labour-power in the market. Thus, the price of labour-power (wages) is first and foremost not set by the value which labour creates, but by how much is necessary to maintain access to that labour i.e. keep labourers alive and ensure a recurring supply of labour by ensuring that the labour force can regenerate.

Engles summarizes by saying:

What the economists had considered as the cost of production of “labour” was really the cost of production, not of “labour,” but of the living labourer himself. And what this labourer sold to the capitalist was not his labour… He hires out or sells his labour-power. But this labour-power has grown up with his person and is inseparable from it. Its cost of production, therefore, coincides with his own cost of production; what the economist called the cost of production of labour is really the cost of production of the labourer, and therewith of his labour-power.

In other words, Engles says that what we refer to as the price of Labour under capitalism is equal to the cost of producing labour itself which:

consists of the sum of the means of subsistence (or their price in money) which on the average are requisite to enable him to work, to maintain in him this capacity for work, and to replace him at his departure, by reason of age, sickness, or death, with another labourer — that is to say, to propagate the working class in required numbers.

Marx goes on to explain how selling this labour-power leads to alienation. Saying that:

the putting of labour-power into action — i.e., the work — is the active expression of the labourer’s own life. And this life activity he sells to another person in order to secure the necessary means of life. His life-activity, therefore, is but a means of securing his own existence. He works that he may keep alive. He does not count the labour itself as a part of his life; it is rather a sacrifice of his life.

This wage relationship not only alienates the labourer, but it is also doubly beneficial for the producer since the labourer does not benefit from the products they are producing but must spend their wages on the products they have themselves produced!

For the one shilling he has bought the labour-power of the day-labourer, which creates products of the soil of twice the value, and out of one shilling makes two. The day-labourer, on the contrary, receives in the place of his productive force, whose results he has just surrendered to the farmer, one shilling, which he exchanges for means of subsistence, which he consumes more or less quickly. The one shilling has therefore been consumed in a double manner — reproductively for the capitalist, for it has been exchanged for labour-power, which brought forth two shillings; unproductively for the worker, for it has been exchanged for means of subsistence which are lost for ever, and whose value he can obtain again only by repeating the same exchange with the farmer.

Marx continues to say that it is true that the growth of Capital can bring a benefit to labourers by increasing the demand on labour-power thus increasing wages. nevertheless, the relative position of the Labourer will continue to fall. He says,

An appreciable rise in wages presupposes a rapid growth of productive capital. Rapid growth of productive capital calls forth just as rapid a growth of wealth, of luxury, of social needs and social pleasures. Therefore, although the pleasures of the labourer have increased, the social gratification which they afford has fallen in comparison with the increased pleasures of the capitalist, which are inaccessible to the worker, in comparison with the stage of development of society in general. Our wants and pleasures have their origin in society; we therefore measure them in relation to society; we do not measure them in relation to the objects which serve for their gratification. Since they are of a social nature, they are of a relative nature… To say that “the worker has an interest in the rapid growth of capital”, means only this: that the more speedily the worker augments the wealth of the capitalist, the larger will be the crumbs which fall to him, the greater will be the number of workers than can be called into existence, the more can the mass of slaves dependent upon capital be increased.

Of course, it is also not in the best interest of producers to maintain high wages. It is this that pushes the ‘innovation’ we constantly hear about under capitalism — the drive to sell more cheaply and minimize their dependence on labour. Through this process, producers increase the labour supply and eventually depress wages. Not only this:

But the productive forces of labour is increased above all by a greater division of labour and by a more general introduction and constant improvement of machinery. The larger the army of workers among whom the labour is subdivided, the more gigantic the scale upon which machinery is introduced, the more in proportion does the cost of production decrease, the more fruitful is the labour. And so there arises among the capitalists a universal rivalry for the increase of the division of labour and of machinery and for their exploitation upon the greatest possible scale… Furthermore, to the same degree in which the division of labour increases, is the labour simplified. The special skill of the labourer becomes worthless. He becomes transformed into a simple monotonous force of production, with neither physical nor mental elasticity. His work becomes accessible to all; therefore competitors press upon him from all sides. Moreover, it must be remembered that the more simple, the more easily learned the work is, so much the less is its cost to production, the expense of its acquisition, and so much the lower must the wages sink — for, like the price of any other commodity, they are determined by the cost of production. Therefore, in the same manner in which labour becomes more unsatisfactory, more repulsive, do competition increase and wages decrease.

The impact of these dynamics are not just felt on the individual or class level, they are felt through the entire economic system. As the wages of employees are only enough to allow for the reproduction of labour, and with ever-increasing levels of productivity, capitalism must continue its quest to break into new markets to find buyers of its products and depend on credit so that those who produce the goods can also afford to buy them. This also means increased competition and the suffocation of smaller businesses as larger more effective producers compete for an ever-shrinking market. The limitations of the market and the availability of circulating cash via wages and credit will lead to “industrial earthquakes, in the midst of which the commercial world can preserve itself only by sacrificing a portion of its wealth, its products, and even its forces of production, to the gods of the lower world — in short, the crises increase. They become more frequent and more violent”

It’s amazing that almost 40 years before the setting in of Taylorism, Marx was able to predict the outcome of labour specialization and pick up on topics of employee satisfaction that have only become the concern of organizational professional in recent decades.

Furthermore, Marx also correctly points out the source of financial crises and their inevitability. It is these points of crises that Marx argues can usher in a communist revolution should the organization of the working class and their education be mature enough when these crises occur. Marx closes Wage Labour and Capital by saying that “capital not only lives upon labour. Like a master, at once distinguished and barbarous, it drags with it into its grave the corpses of its slaves, whole hecatombs of workers, who perish in the crises.”

Where does profit come from?

The second essay Value, Price and Profit sets out to elucidate on one of the key concepts of Marxist economics — Surplus Value.

Surplus Value, according to Marx, is the key through which we can truly understand the functioning of capitalism and profit.

The conversation begins with a discussion on how value and price are determined. Marx engages in a polemic against another economist berating them for saying that the value of a commodity is comprised of the costs associated with making it. Marx reinforces the rule of supply and demand insisting that the price of an item is determined by the market which always tends towards the value of an item and not what it costs to produce it. He says:

Supply and demand regulate nothing but the temporary fluctuations of market prices. They will explain to you why the market price of a commodity rises above or sinks below its value, but they can never account for the value itself. Suppose supply and demand to equilibrate, or, as the economists call it, to cover each other. Why, the very moment these opposite forces become equal they paralyze each other, and cease to work in the one or other direction. At the moment when supply and demand equilibrate each other, and therefore cease to act, the market price of a commodity coincides with its real value, with the standard price round which its market prices oscillate. In inquiring into the nature of that VALUE, we have therefore nothing at all to do with the temporary effects on market prices of supply and demand. The same holds true of wages and of the prices of all other commodities.

Marx goes on to say that since the value of an item is usually calculated, as per the market, as the price it might take us to make it ourselves, then the value of a commodity should be equal to the value of labour invested in it, the effort it takes to create that commodity. Thus, the value of a commodity is equal to the value of the labour required to make it.

But here Marx asks, how do we determine the value of labour? Is something more valuable because it takes more time to make? This, Marx tells us, is wrong. he emphasises that the role of labour is social saying that:

It might seem that if the value of a commodity is determined by the quantity of labour bestowed upon its production, the lazier a man, or the clumsier a man, the more valuable his commodity, because the greater the time of labour required for finishing the commodity. This, however, would be a sad mistake. You will recollect that I used the word “social labour,” and many points are involved in this qualification of “social.” In saying that the value of a commodity is determined by the quantity of labour worked up or crystallized in it, we mean the quantity of labour necessary for its production in a given state of society, under certain social average conditions of production, with a given social average intensity, and average skill of the labour employed.

This brings Marx to the all-important question, if a commodity is sold in the market in accordance to its value, then where does profit come from? It cannot come from the idea of them being sold above their value — since the value is determined by the market.

If then…all descriptions of commodities sell at their respective values, it is nonsense to suppose that profit, not in individual cases; but that the constant and usual profits of different trades spring from the prices of commodities, or selling them at a price over and above their value.

Profit, then, must come from not paying the value of labour that it takes to transform a raw good into a commodity (as prices of machinery etc are relatively fixed). For if the producer was paying labour according to the value they are adding to the production process, then there would be no profit whatsoever as the value of a good in the market is determined by the opportunity cost of not making it ourselves!

How do we fix this paradox?

Marx here embarks on a discussion around the value of labour itself which we have previously defined by the energy invested in transforming a raw material into a good/product. Based on this, Marx claims that there is no such thing as the value of labour. Labour is effort crystalized into a good/service/product etc. He says:

Having now, as far as it could be done in such a cursory manner, analyzed the nature of value, of the value of any commodity whatever, we must turn our attention to the specific value of labour. And here, again, I must startle you by a seeming paradox. All of you feel sure that what they daily sell is their Labour; that, therefore, Labour has a price, and that, the price of a commodity being only the monetary expression of its value, there must certainly exist such a thing as the value of labour. However, there exists no such thing as the value of labour in the common acceptance of the word. We have seen that the amount of necessary labour crystallized in a commodity constitutes its value. Now, applying this notion of value, how could we define, say, the value of a ten hours working day? How much labour is contained in that day? Ten hours’ labour. To say that the value of a ten hours working day is equal to ten hours’ labour, or the quantity of labour contained in it, would be a tautological and, moreover, a nonsensical expression… What the working man sells is not directly his labour, but his labouring power, the temporary disposal of which he makes over to the capitalist.

This labour power is subject to the same function of supply and demand and is determined by, as discussed in the previous essay, the necessary amount to ensure the subsistence and regeneration of labour. Thus, even though a producer (capitalist) is purchasing labour power of their employee for an 8-hour day the labourer/employee is only receiving an amount equal to the value they create in 7, 6, or even 3 hours. This reflects the Price of labour power but not its value. Marx says:

by paying the daily or weekly value of the spinner’s labouring power the capitalist has acquired the right of using that labouring power during the whole day or week. He will, therefore, make him work say, daily, twelve hours. Over and above the six hours required to replace his wages, or the value of his labouring power, he will, therefore, have to work six other hours, which I shall call hours of surplus labour, which surplus labour will realize itself in a surplus value and a surplus produce. If our spinner, for example, by his daily labour of six hours, added three shillings’ value to the cotton, a value forming an exact equivalent to his wages, he will, in twelve hours, add six shillings’ worth to the cotton, and produce a proportional surplus of yarn. As he has sold his labouring power to the capitalist, the whole value of produce created by him belongs to the capitalist, the owner pro tem. of his labouring power. By advancing three shillings, the capitalist will, therefore, realize a value of six shillings, because, advancing a value in which six hours of labour are crystallized, he will receive in return a value in which twelve hours of labour are crystallized.

Marx goes on to say that even the other cost components paid out by the capitalist in order to run his business are but subdivisions of surplus labour.

The surplus value, or that part of the total value of the commodity in which the surplus labour or unpaid labour of the working man is realized, I call profit. The whole of that profit is not pocketed by the employing capitalist. The monopoly of land enables the landlord to take one part of that surplus value, under the name of rent, whether the land is used for agricultural buildings or railways, or for any other productive purpose. On the other hand, the very fact that the possession of the instruments of labour enables the employing capitalist to produce a surplus value, or, what comes to the same, to appropriate to himself a certain amount of unpaid labour, enables the owner of the means of labour, which he lends wholly or partly to the employing capitalist — enables, in one word, the money-lending capitalist to claim for himself under the name of interest another part of that surplus value, so that there remains to the employing capitalist as such only what is called industrial or commercial profit…Rent, interest, and industrial profit are only different names for different parts of the surplus value of the commodity, or the unpaid labour enclosed in it, and they are equally derived from this source and from this source alone.

Marx continues his argument to say that based on this analysis, it is impossible to say that changes in wages will result in higher prices of commodities. They can result in shallower profits, but to argue against increases in wages is ridiculous.

Marx, however, does not confine his argument to that of wages. His goal here is simply to prove the relationship between wages, profit, and value. No matter what happens, and so far as there is profit, a capitalist will continue to benefit more than a labourer due to the surplus value they are pocketing.

Even if wages increase, Marx argues, the relative position of the worker to the capitalist will remain the same. As a matter of fact, with continuous improvements in productivity, it is more likely that the relative position of workers will fall as capitalists can pocket more surplus value/profit (Marx uses the two interchangeably). Thus, it is imperative that, if the worker wants to maintain their relative position they should fight to get a share in the increased productive powers.

Marx, though, also has a word of warning for workers who get stuck in the battle around wages saying that changes to wages, productivity, and profit are “the tendency of things in this system” and, although it is important to fight against it to maintain ones relative standing in social workers should not get caught up in this “unavoidable guerrilla fights”. He ends the essay by saying that workers, instead of fighting for “fair wages” should be fighting for their right to the full value of their labour saying that: