“The transcripts of the 2006 meetings [of the governors of the Federal Reserve Board and the presidents of the 19 regional banks]… clearly show some of the nation’s pre-eminent economic minds did not fully understand the basic mechanics of the economy that they were charged with sheparding. The problem was not a lack of information; it was a lack of comprehension, born in part of their deep confidence in economic forecasting models that turned out to be broken.” NY Times (January 13, 2012); p. A3.

Chapter 1: Introduction

The world is facing upsetting upheavals, with aspects which are political, military, ecological, cultural, and even spiritual. Clearly this includes a deep economic crisis, overlapping with all other problems. We need to understand the nature of the economic crisis if we are to deal with it.

Of the theories about the economy, the two main schools are bourgeois, in the sense that they advocate capitalism. Both the conservative, monetarist, unrestricted-free-market school and the liberal/social democratic Keynesian school exist to justify capitalism and to advise the government how to manage the capitalist economy.

The only developed alternate economic theory is that of Karl Marx. His theory was thought-out to guide the working class in understanding the capitalist system in order to end it (one reason he called his theory a “critique of political economy”). Other radicals, particularly anarchists, developed certain topics relating to economics, such as the possible nature of a post-capitalist economy. But no one, besides Marx, developed an overall analysis of how capitalism worked as an economic system. Therefore I have focused on Marx’s work, even though I am an anarchist and not a Marxist (nor an economist for that matter). By this I mean I do not accept the total worldview developed by Karl Marx and Friedrich Engels, even though I agree with large parts of it.

I make no claims for originality. At most, when there are differing interpretations of Marx’s theory, I may take a minority position. But I am focusing on the theory of Marx, as expressed in the three main volumes of Capital, the Grundrisse, and a few other works, and in the work of his close collaborator and comrade, Friedrich Engels.

Otherwise I am not covering “Marxist” theory, which includes post-Marx commentators, some of whom disagree with fundamentals of Marx’s views. For example, many self-styled Marxist political economists reject Marx’s labour theory of value. Even more reject his tendency of the rate of profit to fall. Many reject the possibility of state capitalism. Most are de facto advocates of state capitalism! (Most social democratic/reformist Marxists call on the existing state to intervene in the economy, in order to bolster capitalism. Most revolutionary Marxists seek to overturn the existing state and to create a new state which would replace the bourgeoisie with state ownership – while maintaining the capital/labour relationship.) At most, I will have to touch on some post-Marx Marxists, as when discussing imperialism and the epoch of capitalist decay.

There have been many versions of Introductions to Marxist Economics, starting with Marx himself, in his Value, Price, and Profit and Wage-Labour and Capital, not to mention vast numbers of more sophisticated works on the topic. Very rarely has there been anything on this topic by an anarchist, written for anarchists and other libertarian socialists. I suspect it may be useful today.

Can Anarchists Learn from Marx?

Yet how can anarchists learn anything from Marxists? The First International was torn apart in a bitter faction fight between the followers of Marx and those of Michael Bakunin, the founder of anarchism as a movement. The Second (Socialist) International did not let anarchists join. Following the Russian Revolution, the regime of Lenin and Trotsky had anarchists arrested and shot. In the Spanish revolution of the 1930s, the Stalinists betrayed and murdered the anarchists. More generally, the Marxist movement has led, first, to social-democratic reformism and support for Western imperialism, and, second, to mass-murdering, totalitarian, state capitalism (miscalled “Communism”). Finally it collapsed back into traditional capitalism.

But both Marxism and anarchism grew out of the 19th century socialist and working class movements. Both had the same goals of the end of capitalism, of classes, of the state, of war, and of all other oppressions. Both focused on the working class as the agent of revolutionary change, in alliance with other oppressed parts of the population.

Yet anarchists rejected Marx’s concepts of the transitional state (“the dictatorship of the proletariat”), of a nationalised and centralised post-capitalist economy, of the strategy of building electoral parties, and of the tendency toward teleological determinism. Instead, anarchists sought to replace the state with non-state federations of workers’ councils and community assemblies, to replace the military and police with a democratically-organised armed people (a militia), and to replace capitalism with federations of self-managed workplaces, industries, and communes, democratically planned from the bottom-up.

However, many anarchists expressed appreciation for Marx’s economic theory. This began with Bakunin and continues to today. They believed that it was possible to unhook it from Marx’s political strategy. For example, Cindy Milstein, an influential US anarchist, wrote in Anarchism and its Aspirations, “More than anyone, Karl Marx grasped the essential character of what would become a hegemonic social structure – articulated most compellingly in his Capital…” (2010; p. 21).

Some radicals have argued that there was two sides to Marxism (Marx’s Marxism that is) – and I agree. One side was libertarian, democratic, humanistic, and proletarian, and another side was authoritarian, statist, and bureaucratic; one side was scientific and one side was determinist and scientistic (pseudo-scientific). From this viewpoint, Stalinist totalitarians had used both sides of Marx’s Marxism, not only the centralising, authoritarian aspects, but even the positive, libertarian and humanistic aspects, in order to paint an attractive face over their monstrous reality. So they have misled hundreds of millions of workers and peasants in mass movements which thought they were fighting for a better world.

Does that mean that libertarian socialists should reject all of Marx’s work, even those positive aspects? What is the alternative? If we reject Marx’s system, we are essentially left with bourgeois economic theory, rationalisations of a social system which also has a history of bloodshed, mass suffering, tyranny (including racial oppression and Nazi genocide), and two world wars. This is not a superior record to that of Marxism.

There has long been a minority trend within Marxism which has based itself on the humanistic and libertarian-democratic aspects of Marx’s concepts. This goes back to William Morris, the Britisher who worked with Engels while being a friend of Peter Kropotkin. It continues to today’s “autonomist” Marxists. The version of Marxist economics I learned was heavily influenced by the “Johnson-Forrest Tendency” (C.L.R. James and Raya Dunayevskaya) and by Paul Mattick (of the “council communists”).

I am not arguing here whether these libertarian Marxists were “correct” in their understanding of Marxism, as opposed to the authoritarianism of Marxist-Leninists. I am only pointing out, empirically, that it was possible for some to combine Marxist economics with a politics which was essentially the same as anarchism. I draw the conclusion that it is possible for anarchists to learn from Marx’s critique of political economy.

Was Marx a Plagiarist?

There is one other complaint about Marx’s political economy sometimes raised by anarchists. Some argue that Marx did not invent his theory by himself but learned it mostly from other thinkers, including Pierre-Joseph Proudhon, the first person to call himself an “anarchist.” They denounce Marx as a plagiarist.

There is no question but that Marx made a thorough study of thinkers who went before him, including bourgeois political economists and socialist writers. His writings, published and unpublished, often read like dialogues between himself and earlier economists (e.g., his Theories of Surplus Value, the “fourth volume” of Capital). This is another part of what he meant by his “critique of political economy.” He claimed to go beyond them but he never denied that he built on earlier thinkers. Some political economists he respected (particularly those in the line from Adam Smith to David Ricardo). Others he despised (the pure apologists whom he called “prize-fighters”).

When Marx and Engels first read Proudhon, and then met him in France, they were impressed. Coming from the background of a working artisan, Proudhon had developed a critique of capitalism and a concept of socialism. The two young, middle-class, radicals learned from him. In The Holy Family (the first really “Marxist” book), Marx and Engels commented on Proudhon’s 1840 What is Property?:

“Proudhon subjects private property, which is the basis of political economy, to a critical examination… That is the great scientific progress that he has achieved, a progress which revolutionises political economy and which present, for the first time, the possibility of making political economy a true science… Proudhon does not only write in the interest of the proletarians, he is a proletarian himself” (quoted in Jackson, 1962; p. 47).

Later on, Marx and Engels became political and theoretical opponents of Proudhon. Marx attacked his views in The Poverty of Philosophy, as did Engels in The Housing Question. I am not going to get into the theoretical questions raised there; I believe that Marx and Engels learned from Proudhon and then developed past him in certain ways. Bakunin stated:

“There is a good deal of truth in the merciless critique [Marx] directed against Proudhon… Proudhon remained an idealist and a metaphysician. His starting point is the abstract idea of right. From right he proceeds to economic fact, while Marx, by contrast, advanced and proved the incontrovertible truth… that economic fact has always preceded legal and political right. The exposition and demonstration of that truth constitutes one of Marx’s principal contributions to science” (in Leier, 2006: p.230).

Beside immediate economic theory, Proudhon opposed labour unions and strikes, let alone working class revolution. But, Proudhon worked out a concept of decentralised-federalist socialism, which was contrary to Marx’s centralist statism. Proudhon’s concept was important in the development of revolutionary anarchism.

However, the whole discussion is pointless. The key question should be whether or not Marx’s economic theory is a good theory, useful for understanding the capitalist economy, and useful for developing political reactions to it. Whether or how much Marx learned from others is irrelevant. If he got good ideas from Proudhon, then good for him.

Critique of Political Economy?

There is some dispute over whether to refer to “Marx’s economics,” “Marx’s political economy,” or “Marx’s critique of political economy.” As to the first, Marx discussed the production and distribution of commodities and other topics which are typical of subjects covered by texts on “economics.” At the same time, his goals and interests were entirely different from those of bourgeois economists: not to make the system work better but to overthrow it.

As for “political economy,” this was a term taken from Aristotle, who distinguished between “domestic economy” (of the household and the farm) and “political economy” (of the polis – the overall community). Early bourgeois economists picked up the term. They connected their analysis of economics with the role of classes and the state. Modern radicals often like to use the term in order to emphasise that they are integrating production and consumption with the role of the state and the social totality. Yet Marx himself generally used “political economy” as a synonym for bourgeois economics.

Marx preferred to use the phrase, “critique of political economy.” It was the title or subtitle of several of his books (including Capital). The term “critique” meant “a critical analysis,” examining the positive and negative aspects of something, in their interactions. He was the enemy of the political economists, however much he respected a few of them for their insights. He was the opponent of the system he was examining – and exposing. Some Marxists today prefer to say they are furthering the “critique of political economy.” Yet it does seem a lengthy and somewhat awkward phrase.

I use all three terms for Marx’s economic theory. But it is essential to keep in mind that what we are doing is an attack on bourgeois economic theory and on the capitalist economy. In a very real sense, the whole of Marx’s Capital was a justification for what he wrote as the conclusion of the Communist Manifesto, “The proletarians have nothing to lose but their chains. They have a world to win. Workers of all countries unite!” and what he wrote as the first “rule” of the First International, “The emancipation of the working classes must be conquered by the working classes themselves.”

Chapter 2: The Labour Theory of Value

Marx’s Method

Before confronting Marx’s theory, it is important to say something about his method. I am not going to discuss “dialectical materialism.” Instead, I will start with Marx’s belief that what we empirically perceive with our senses is just the surface of reality. The sun truly appears to go from east to west in the sky, over the flat earth, and we rightly guide ourselves by this when we travel for most distances – but there is more to reality.

When I touch the top of a table, it feels hard and solid, and it is (it resists the pressure of my hand). But it is also true that the table is mostly empty space composed of whirling subatomic particles. So too with society. There is surface and there is depth beneath the surface. Both are valid parts of reality.

How do we find out, scientifically, what is behind the obvious surface? We cannot bring the economy into a laboratory, nor can we do controlled experiments (not ethically, anyway). Marx’s method is abstraction. Mentally he abstracts (takes out) aspects of the whole gestalt while temporarily ignoring other aspects of complex reality. The very field of economics is an abstraction, because it separates out (in our minds) processes of production and consumption from other social processes, such as art and culture.

Using abstractions, he built mental models of the economy. For example, he postulated a society with just an industrial capitalist class and the modern working class, but with no landlords, no peasants, no merchant capitalists, no bankers, no middle classes, etc. Creating such a model (of a capitalism which never existed and never will exist), he explored how it might work. He wound it up and saw how it goes. Gradually he added more and more aspects of the actual society to his models (such as other classes). Hopefully this gives insight into how the complex, messy, real whole society works. It is abstraction which has permitted Marx’s critique of economics to remain relevant, after a century and a half. Capitalism still survives and its basic structure is still in operation.

What Marx was looking for is the underlying, recurring, patterns of mass behaviour which are called economic “laws.” But these laws never appear in pure form in the actual society, being interfered with, mediated, and countered by other forces. They show up in the long run, overall, and in modified form. I will show this when I examine the “law of value” and the “falling rate of profit.” Therefore Marx repeatedly said that economic “laws” are more properly seen as “tendencies.” To see how they really work out, each situation must be analyzed in its concreteness.

Three Factors?

In bourgeois economics, production (in every economic system) requires three “factors.” These are land (not just soil but all natural resources), labour (people), and capital (here meaning tools, machines, buildings, etc.). Each factor must be paid for: today this means rent for land, wages for labour, and interest for capital. Since all three factors contribute to production and all are paid for, there is supposedly no exploitation.

Yet, if this three-factor model applies to all societies, it must apply to feudalism, to classical slavery, and to whatever sort of society existed in ancient China. All of which were exploitative societies. A few lived on the labour of the many. A minimum amount of the people’s work went to feed and clothe themselves and a maximum of their work went to support the ruling classes.

Marx claimed that this was also true for the modern working class, the “proletariat” (a term from ancient Rome, where it meant “those who [do nothing but] breed”). Capitalism looked, on the surface, like a society based on equality, but Marx sought to demonstrate (by his critique) that it was as exploitative a system as slavery – that the capitalist class also lived off the surplus labour of the workers.

Alienation and Fetishism

Fundamental to Marx’s views was the concept of alienation (estrangement). As he saw it, what made people human was our capacity to produce, to create what we need out of the environment, using our physical and mental labour. But under capitalism, in particular, workers are forced to labour, not for themselves but for someone else, indeed for something else, namely capital. The harder they work, the stronger and richer becomes capital which rules over them, drains them of their energy, and increases its power, due to their efforts. This is alienated labour. All the institutions of society are alienated, powers ruling over the working class due to what the working class has given them. People are reified (thing-ified) while things are seen as alive.

This is similar to “projective identification” (a social psychological form of alienation). People feel empty, hollow, and weak. They project their actual inner strength into some symbol or institution: the flag, the leader, a nation, a football team, or their version of God. By identifying (joining) with this image, they can re-access their strength and feel whole again, for a while.

Fans feel great when “their team” wins, sad when it loses. Patriotic US workers, suffering in their daily lives, cheer themselves up by chanting in groups, “USA! USA! We’re Number One!”. Religious people feel good when they relate to their version of God, perhaps in opposition to other people’s God. People at the bottom of society look up to leaders (on the left or on the right) who claim to be able to fix things for them. Projective identification may be harmless (when cheering a sports team) or vicious (when worshipping leaders such as Hitler).

The great US socialist, Eugene V. Debs, summed up the problem of this alienated worship of leaders, in 1905, “Too long have the workers of the world waited for some Moses to lead them out of bondage. I would not lead you out if I could; for if you could be led out, you could be led back again. I would have you make up your minds that there is nothing that you cannot do for yourselves.” This is the same as Marx’s “The emancipation of the working class must be won by the workers themselves.”

Focusing on political economy, Marx discussed the “fetishism” of commodities. Early people worshipped idols and special objects (fetishes), regarding them as real, powerful, personalities. So too do people in bourgeois society treat objects as if they were alive and powerful. They treat commodities as active agents which exchange with each other. They treat “land” and “capital” as subjective beings which interact with “labour.” Marx’s critique sees through the alienation to the reality that it is people who are interacting with each other, through their use of machines and objects, and not the other way around.

The Nature of Value

Commodities – objects produced for sale – have two aspects. Each commodity is a specific object. It has its own use, as a baseball or hammer, or whatever, and it was made in a specific way with specific machines and a specific labour process. But also, each commodity is worth a certain amount of money. Numbers can be attached to each object, not referring to its weight, say, but to its value: $1, $10, or $1 million. To coin a word, every commodity is money-fiable. This is important, because the capitalist management of a business does not really care what the use (“use-value” or “utility”) is of the commodities they make. They are not going to play with the baseballs or build with the hammers they produce. They only care that someone else finds the baseball or hammer useful and therefore is willing to buy it. But for themselves, the capitalists only want money. They produce baseballs and hammers in order to end up with more money than they started out with when they hired workers and bought machinery and raw materials. That is, they seek to expand the total value they have, not to increase society’s share of useful goods. This is why capitalists are willing to kill the last whales. When they are done, they could take their profits and invest in something else to make more money, such as cutting down redwoods.

What then is this value which all commodities have, which makes them able to have a monetary value (price)? There is something which is not money in itself but which can be expressed in money. Some claim that it is generalised utility (use-value). But air is the most useful stuff around, and it has no price. Theories have been developed to get around this, mixing utility with scarcity and with satiety (the theory of “marginal utility”). But the use value of any object (aside from air) is very subjective. Even regarding food and drink, which all must have, people vary enormously in their tastes. How then does a society develop a unified set of prices for all objects? And, to repeat, the capitalist producers are not really interested in the utility of their products, once they know that someone else will want them.

Scarcity and utility may make a difference in the short run. Some years ago there was a sudden mass desire for a particular toy for Christmas presents: the Tickle-Me Elmo doll. Unfortunately, the producers had not made enough for the market. So the price shot up. But over time, as producers saw that something was wanted and there were not enough of it, they expanded production of the dolls until they matched demand (or went beyond it). That is, the tendency of capitalist production, over time, is to match supply to demand, overcoming scarcity.

Of course, there are some things which remain scarce, no matter how much money is offered. There will be no more Rembrandts (although market pressure does inspire forgers). Paintings are not a major part of the economy, but other things may be. I will discuss monopoly later (both natural – as in the Rembrandts – and artificial – as in diamonds which are deliberately kept rare). This becomes a serious problem when non-renewable natural resources are treated by the capitalist economy as though they were commodities of which more could be produced at need (like the whales or oil). This is how capitalism operates.

Marx said that what commodities had in common was labour. People worked to produce them. Commodities could be regarded as if they were condensed versions of the work which went into them. This is not the whole of his analysis of value and price, but it is the beginning of it.

Marx did not make an elaborate argument for his labour theory of value or for the “law of value” (that commodities exchange at equal values due to equal amounts of labour-time). At the time, he did not have to. Almost every political economist of note he read already had some version of a labour theory of value. He built on them, with significant modifications. At the time, unlike our automated present, the ratio of human labour to tools and machines was heavy on the labour side. It seemed intuitively obvious that labour was what created wealth. And theories of the centrality of human labour in producing value were used by the bourgeoisie to attack their enemies, the landlord-aristocracy, as unnecessary parasites.

Eventually, the capitalists became established as the ruling class and the labour theory of value had been used (by Marx and others) to attack them as unnecessary parasites. (And the ratio of machinery to labour expanded hugely). So professional (bourgeois) economists abandoned the labour theory of value, first for “marginal utility”. Then they mostly gave up having any sort of value theory. They stuck to the surface level of prices and ignored the issue of underlying value. Practicing business-people had never been interested in value theories anyway.

From Value to Price

Value, then, is the foundation of monetary price. (I am using “value” and “exchange value” interchangeably, although they could be distinguished, with value as pure labour-time, and exchange value as value which also has a use-value). In determining the value of a commodity, what matters to the market is not how much labour actually went into a specific object, but how much socially necessary labour went to make it. Labour is mostly measured in time, the time it takes to make something. A factory with obsolete machinery will take more labour time to make a commodity than will a plant with up-to-date machinery. The commodities made the old-fashioned way, with more labour, will not have higher prices (representing more labour) than those made in the modern way, with less labour. Customers will only buy commodities at the cheaper price, and therefore the goods made the old way will have to sell at the new price too. Most of the commodities will sell according to the average socially necessary labour incorporated into the average product on the market. The extra labour used up by using the old methods of production will be wasted. Further, if more of the commodity is produced than there is a market for, the labour spent in making the extra goods is also wasted and does not count.

It is an observable fact that commodities made with new methods, using less labour, tend to be cheaper than before. This is sometimes hidden by other factors, such as the (temporary) monopoly held by the more advanced producers (which lets them jack up their prices), but which is eventually countered as other producers get the new machinery. Also general inflation raises all prices. Objects made by more efficient, new, methods may increase in price slower than the rate of overall inflation.

The labour that goes into a product has a dual aspect. One is the “concrete labour” that makes the specific object, with its specific uses. The other is better seen as “abstract labour,” a fraction of the total labour used in the whole society, which is translated into exchange value (expressed in money). There is a tendency for all labour to be turned into abstract labour by modern capitalist industry, as it deskills individual jobs. More importantly, the trend of capitalism is for every commodity to be made, not by one craftsperson at a bench, but by the labour of a large number of people, in a sense by the whole society. It is impossible to really say exactly how much each individual worker adds to a product which has gone through a whole factory, beginning with the raw materials which had been worked up by masses of other workers (a point made by Kropotkin). Each commodity really represents a fraction of the total labour of the collective workers of society. What really matters to the capitalists is their firm’s total wage bill and the total amount of time it takes to make their products.

When industrial capitalists invest in what is necessary to produce commodities, for example, baseballs, what they buy can be lumped into two categories. First is the raw materials which will be worked up into the final product and the tools and machines which will be used. Then there is the labour power of the workers who are hired to make the product.

The first category (materials and machinery) already has some value, since it was previously made by labour. When used in production, it passes its value onto the new commodities. The value of the leather or other covering is entirely passed along to the ball. 5 hours (or $10) of leather becomes part of the value of the ball. This is also true of the gasoline which is used up in running the machines; it too passes on its total value to the balls. Machines and tools do not pass on their total value, since they are not used up in making each baseball. But they are partially used up (depreciated) each time they are used, and this value is passed on to the commodity. (The capitalists will add a cost to the price of the balls to create a fund for buying new machines when the old ones are worn out.) However, this passing along of values does not create any new values, and certainly cannot produce any profits. Therefore this part of the investment is called “constant capital,” because it does not create any new capital. The completely used-up raw material and gasoline is called “circulating constant capital.” The machines and tools, which are only used up slowly, are called “fixed constant capital.”

But the labour power of the workers is different. Once engaged, the workers’ labour changes things. As it turns leather and rubber into baseballs, it adds value to the product, value which did not exist before. It lays the basis for profitable production. Therefore it is called “variable capital.” Constant plus variable capital together is called the “cost of production.”

The Most Peculiar Commodity

Before going further in understanding the relation of value and price, I have to discuss the unusual commodity which is at the heart of capitalist production. This is the commodity of “labour power,” which is the ability of the worker to work. “Labour” as such is not a commodity, because it is a process. The workers face the capitalists who buy their commodities, their capacity to work, to use their hands and muscles, their brains and nerves, in the service of capital. Labour power is an unusual commodity in several ways. It is attached, so to speak, to human beings with minds and consciousness, which they must subordinate to the production process. It alone expends human labour, which is the only way of creating new value.

How is it determined what the value of this unusual commodity is? Following the law of value, its worth (expressed in wages or salaries) is determined by the amount of socially necessary labour which goes into producing it. The classical political economists expected capitalism to drive down workers’ wages to a biological minimum: how much is necessary to keep workers alive and to breed a new generation of workers? This is a rock-bottom, minimal, standard.

Marx added that there are also cultural, “moral”, factors which capitalists must take into consideration. On the one hand, modern industry requires a level of education and culture which was unnecessary when capitalism began. On the other, working people in each society are used to a certain level of food, clothing, shelter, medical care, culture, and entertainment. This is based on their country’s history, which includes past struggles to prevent themselves from being driven down to a biological minimum.

Some workers are much more skilled than others, usually workers who have had years of training. This includes skilled blue collar workers but also many white collar “professionals” who, like other workers, labour collectively for bosses who give them orders. Marx says that the economy treats the value of their labour power as worth several times that of the general value of unskilled labour power, due to their years of training. Their labour is worth a multiple of unskilled workers’ labour. In any case, the labour market smoothes out all the differences in wages and salaries, turning them into monetary prices, part of the overall labour costs of capitalist society.

The capitalists may regard the workers’ standard of living as “too high” (that is, too costly in wages and in taxes for public services). The capitalists would like to lower the working class’ standard of living, to redefine the value of the commodity labour power. But the bosses must be careful, not to provoke resistance from the workers if they are attacked too directly. But when the economy hits a crisis, the capitalist class may feel that it is necessary to attack the standard of living of the working class, that is, to lower the value of the commodity labour power – if they can.

This attack on the value of the workers’ labour power has been going on in the US and other industrialised countries for several decades now. If it cannot be done through peaceful, “democratic”, means, the capitalists may turn to fascism in order to attack the workers’ standard of living.

Freedom and Equality under Capitalism

Unlike previous toilers, modern workers are “free” in two ways. First, they are not owned by a master or lord; they are not slaves. They are also “free” in that they do not own land like farmers (nor are they owned with the land like serfs), nor do they own shops and tools, like artisans in pre-industrial times. They are “free” to refuse to work, but in that case they and their families will either starve, or, at least, be driven to the wretched bottom of society. To live they must sell their labour power to the owners of machinery, buildings, and tools. Then they are integrated into a collective labour process which points the way to new forms of struggle and a possible new form of society.

On the surface, in the market, the free workers meet the capitalists as apparent equals. The capitalists sell their commodities of clothing or whatever to the workers, who buy it with money. Similarly, the workers sell their commodity, of labour power, to the capitalists, who pay them money. Therefore profits are not gained through “theft” but by an apparent exchange of equalities. All are equal, as we would expect from bourgeois democracy where each citizen is supposed to be equal to all others, with one vote in elections, regardless of race, religion, country of origin, or gender. This equality is only formal, however. As Anatole France put it, in 1894, “The law, in its majestic equality, forbids the rich as well as the poor to sleep under bridges, to beg in the streets, and to steal bread.”

But once the workers enter the workplace, even the formal equality is gone. Now the capitalists (or their managers) are in charge, giving orders, and the workers are subordinate, following orders. Whether or not workers can vote in government elections every few years, inside the workplace – for most of their waking lives – they live under despotism. Except for the few with unions, they have no rights. They can be fired at any time for almost any reason. (Every year thousands are fired for union organising; this is illegal but difficult to prove.) Here too, Marx’s critique of political economy looks behind the surface of equality to the reality of capitalist despotism.

Surplus Value to Profit

Before continuing the relation of price to underlying value, it is necessary to discuss the nature of profit. Where does profit come from?

One common view is that it comes from the process of selling. Each capitalist tries to buy needed materials cheap and to sell finished commodities dear – at as high a rate as the market will bear. So profits seem to come from selling commodities above their values. While this may happen for individual firms, it is not an explanation for the whole capitalist class. For each capitalist who sells a product at a price above value, there is someone (a consumer or another capitalist) who is losing money by paying extra for it. This includes the same capitalist who buys needed materials to make that final product. Everyone cannot sell commodities at a higher-than-justified level. The ratios between commodities would stay the same. The result would be inflation of prices, but not the creation of profit. Profit must come from the field of production, not circulation.

Another approach is made by both bourgeois economists and non-Marxist radical economists. Their answer seems obvious: profits come by the expansion of production. Combining land, labour, and capital results in producing more commodities than previously existed. That “more” is the profit.

Suppose the workers in a factory produce (arbitrarily) 100 baseballs in five hours, but then new machinery lets them produce 200 baseballs in five hours. Does this create a profit of 100 extra baseballs (a 100% rate of profit)? It does create more use-values in terms of more baseballs. But the capitalist owners are not interested in creating more useful things for people. They want more exchange value (in the form of money). If twice the number of baseballs are now produced in the same time, each baseball will be cheaper than before, perhaps 50% cheaper. Ignoring the costs of the raw material, whereas 100 baseballs used to be worth 5 hours of labour, now 200 baseballs are worth 5 hours of labour. There is more utility but not more exchange value, and therefore no profit.

For Marx, profit, like monetary prices, is based on labour time. The workers toil for an agreed-upon amount of time, let us say 8 hours a day. At a certain point in time, they will have produced commodities with enough value to pay for their wages, that is, the equivalent of their commodity of labour power. After, say, two hours, they have produced enough baseballs (or whatever) which, when sold, would pay for their families’ food, clothing, shelter, education, and cultural needs. (That is, the value of the product they have now produced is equal to the value of their commodity labour power.) But they do not stop working after two hours. They continue to work, with a break for meals, for 8 hours. Those final hours are unpaid. This work is done for free, just as much as slaves or serfs did free work for their lords. The extra labour produces extra value, described as “surplus value” (in Marx’s German, “Mehrwert”).

It is from this surplus value that the capitalists divide out the profits of industrial enterprises, the profits of retail merchants, the interest on bank loans, ground rent to landowners, the costs of advertising, the taxes paid to the government, etc. From this surplus value comes the income of the capitalist class, to be used for buying luxuries and mostly for reinvesting in industry – to expand constant and variable capital for the next cycle of production.

There are two basic ways in which the capitalists can increase the amount of surplus value they pump out of the workers. One way, called “absolute surplus value,” is to increase the length of the working day. Since necessary labour (what is necessary to pay for the value of the commodity labour power) stays the same, the amount of surplus value will increase. This was the method used mostly in the beginning of industrial capitalism. Workers, including child labourers, worked 12 or 14 or more hours a day. One problem with this is that it tended to physically weaken the working class, in effect paying them less than the biological minimum. However, this method is still used, through compulsory overtime in many industries.

The other method produced “relative surplus value”. Without lowering the amount the workers are paid, the amount of time they spend producing this wage-equivalent is decreased. This may be done by speed-up of the assembly line, by time-and-motion studies (Taylorism), by increased productivity through better machinery, or in other ways. There are limits to both methods. The basic one is that the day is limited; even Superman could not work more than 24 hours in a day! Lesser mortals would reach their biological limits, from lengthened days or from speed-up, well before that.

Therefore the value of an individual commodity is the cost of constant capital (previously created by labour, now passed onto the finished product) + variable capital (new value created by labour and paid for) + surplus value (new value created by labour but not paid for). This is true for the individual commodity and for the mass of commodities (one baseball or thousands of baseballs).

From Value to Price of Production

However, this conception creates a problem. The ratio of exploitation is that of surplus value to variable capital. Capitalists care about this; they want to get as much labour out of the workers as possible. But what they are most concerned with is the ratio of surplus value to their total investment, which is constant capital + variable capital. They do not care, nor are they even aware of the fact, that only living labour (variable capital) can create surplus value.

Imagine two factories with the same number of workers working the same hours at the same rate of pay (that is, they have the same rate of exploitation, of surplus value to variable capital). The two factories will produce the same amount of surplus value. Will the capitalist owners get the same profits? Not necessarily. The two factories produce two different commodities, requiring different machinery and raw materials. Therefore each has a different amount of constant capital (dead labour). One has a lot, one has a little. Here “profit” is defined as the surplus value as a proportion of the total investment (cost of production, meaning constant + variable capital). The capitalist with the large amount of constant capital will have a lower total profit than the one with the lesser amount of constant capital, even though the rate of exploitation (surplus value to variable capital) is the same.

However, this is not true. Industrial capitalists do not get smaller profits because they use more efficient, productive, machinery. If they did, it would not pay capitalists to innovate by investing in better, more productive, machinery. The economy would stagnate.

Marx solves this dilemma this way: industrial production which gets high rates of profit (because of extra surplus value produced or any other reason) attracts other capitalists. These new capitalists invest in the profitable industry and expand production of its commodities. This competition drives down prices and therefore drives down profits. Eventually the profits are no longer especially high; they are about the level of the average rate of profit. The same thing, in reverse, happens in industries which have especially low rates of profit (due to needing large amounts of constant capital or for any other reason). Capitalists will withdraw from that industry, or they will just produce less. With fewer commodities being available to the market, the price will go up and so will the rate of profit per item. Eventually its profit rate will also be approximately at the average rate of profit.

The way it works out, it is as though all the surplus value produced is pooled together and each capitalist producer gets to share in it, not according to their number of workers but according to their amount of invested capital (variable + constant capital). Marx calls this “capitalist communism.” There is an average rate of profit, which is the ratio of the total surplus value of a society to the total invested capital of society.

The total value of a commodity is reconceptualised as the “price of production.” This includes variable capital + constant capital + an average profit. Actual prices fluctuate due to the multiple pressures of supply and demand in the market, but they fluctuate around the price of production. Capitalists will not sell commodities for less than they cost to make (constant + variable capital) nor below the average rate of profit (at least not for long!). And selling them above the average rate of profit only attracts others to compete by underselling through lower prices.

One other factor may influence prices. This is monopoly. If one firm dominates an industry, for whatever reason, or if a few firms do, they can set prices and not worry about competitors selling at lower prices (in bourgeois economic terms, they are “price makers” rather than “price takers”). They can sell above the average rate of profit, taking an extra large share of the total capitalist class’ surplus value. There are limits to this also. I will discuss monopoly further in a later chapter.

This, then, is a simplified version of Marx’s concept of how values get to be expressed as prices and how surplus value gets to be expressed as profits. Anti-Marxist economists focus on this topic as a central problem. They call this the “transformation problem,” although Marx does not actually see labour-time values as being “transformed” into monetary prices. Rather he presents price and labour-time as two ways of expressing value. The “price of production” is a reconfiguration of commodities’ labour-time values, not the abolition of their values.

As this is an introductory text, I am not going to review the attacks on Marx’s value theory and the Marxist responses (see references). Marx was not really interested in specific prices. He was not a “micro-economist.” He held that the total of all society’s values, measured by socially-necessary labour time, was equal to the total of society’s prices (a concept similar to the “Gross Domestic Product”). As mentioned, he held that the total of the surplus value was equal to the total of all profits, and that this could be used to find the average rate of profit. These were his key concepts.

For Marx, the essential, defining, concept of capitalism is not competition, private property, nor stocks-and-bonds. It is the capital/labour relationship. On the one hand is capital, self-expanding value, driven (by class conflict and by competition) to expand, and grow, to accumulate ever more value. (If a company does not continually expand, it will eventually be beaten by its competitors and go broke.) Capital is represented by its agents, the bourgeoisie and their managers. On the other is the proletariat, those who have nothing but their ability to labour, by muscle and brain. They sell their labour-power to the agents of capital, who proceed to pump surplus value out of them by working them as hard as possible while paying them as little as possible (at or below the value of their labour power). This is a relationship; without capitalists there are no proletarians; without such modern workers, there are no capitalists.

Money

Of course value, when expressed as price, requires the existence of money. Money is both a measure of value and a store of value. Originally, humans used only valuable things for money: cattle, or belts of shells. After a long history, they settled on gold and silver. These are rare metals which are found and dug up by labour. They had original use-values in that they were used for decorations. They last indefinitely, without rusting. They are easily divided into small units and easily merged back into larger ones. Small units may represent a lot of value. Since gold and silver may be adulterated with other metals, governments produced official coins, guaranteed in weight and degree of purity (then the governments would start cheating on the value of their coins, causing inflation).

In pre-capitalist societies, money was peripheral. Most objects were made for family use or were traded with neighbours. Only a few commodities were sold on a market. But under capitalism, in order to live we rely on acquiring commodities for everything, from everyone, throughout the world. Now money is an essential intermediary, the “universal equivalent,” which holds all of society together in a “cash nexus.”

As capitalism developed, it became inconvenient for merchants to lug around large quantities of metal. There developed banks, which held the gold. They provided banknotes which could be circulated and then turned in for hard money when desired. These notes were “as good as gold.” Today – skipping a long history – the state issues fiat money, that is, unbacked paper money. It is supported by nothing but the confidence people have in the health of the economy. Unlike gold (or cattle), it has only a “fictitious value,” but no intrinsic value.

When money embodied real value (gold coins or gold-backed bankers’ notes), sometimes more money became available than was necessary for the needs of the market, for circulation of money and goods. Then the value of the money would fall to its minimal labour-time value, while the “surplus money” would tend to drop out of circulation into private or collective hoards. But now, all other things being equal, the more fiat money is available in relation to the same number (value) of commodities, the less “value” each unit (dollar, etc.) has.

Chapter 3: Cycles, Recessions, and the Falling Rate of Profit

Classical political economists of Marx’s time and before, denied the inevitability of business cycles and their culminations in crashes. The capitalist market, they held, was so efficient a mechanism that it balanced what came into it and what came out, production and consumption, buying and selling, in a smoothly functioning process. There might be momentary, localised, disharmonies, in one industry of another, but no overall crashes. When things went wrong, it must be due to extra-economic factors: bad weather, wars, or government intervention into the market, which was always a bad idea.

Yet there have always been cycles, as long as capitalism has been in existence. There have been downturns between a third to a half of capitalist history from the early 19th century to the late ‘30s. (These downturns were called “crashes” or “panics” until a nicer term could be found: “depressions.” After the ten-year Great Depression of the 30s, they used the milder-sounding “recession.”) Today’s economists do not have much of a theoretical understanding of them. But they believe that with the use of governmental monetary manipulation, tax changes, and/or government spending, it is possible to modify the cycles, to minimise their downturns into insignificance. Too bad this has not worked out so well.

Cycles go from gradual recovery from the depth of the last downturn, to increased productivity up to a new prosperity, to the beginning of a downturn, and then to the next crash. Then it starts all over again.

Marx was far ahead of his time in recognising the reality of repeated business cycles and their resulting crises. He did not write out a full theory of the business cycle in one place, but his thoughts about it are apparent, especially in his discussion of capital accumulation. However his lack of one concentrated and complete statement has led Marxists to propose various theories of cycles and their crashes.

Marxist Theories of Cycles and Crashes

One of the most widespread misunderstandings of the capitalist cycle is held by people who do not know much Marxist economics. It is “under-consumptionism,” in its simplest form. This points out that the workers produce more than they can buy back. Therefore production is greater than the consumer market can absorb. The capitalists cannot sell all their commodities, which supposedly causes the system to collapse.

However, the workers always, at all times, produce more than they can buy back! Their products embody variable capital + constant capital + profit at the average rate (from surplus value). The workers can only buy the equivalent value of the variable value, which is equal to the sum of their wages. They can never buy back the constant or surplus values. If this was a problem, then capitalism would not merely have downturns, it would not work at all for a single minute. Fortunately, the constant and surplus values of the commodities do find markets, in other capitalists. They sell to each other. Capitalists, who produce more than they had before (surplus value), can sell this extra to other capitalists. These have also wrung surplus value from their workers and therefore have more value than they had before, with which they can buy new commodities.

Capitalists who make machines and materials for production (whom Marx bundles into “Department I”) sell their products to other capitalists to use in their workplaces (or rather to employ more workers to use the machinery). The consumer goods capitalists (in “Department II”) use their constant capital value equivalent to buy machines, etc., to replace old machines, and use surplus value equivalents to buy new machines, etc., in order to expand. The workers in both departments spend their wages on consumer goods (from Department II). The capitalists can expand, using their surplus value to hire more workers (who can now buy more consumer goods). The capitalists and their families also buy luxury consumer goods, a small fraction of Department II products.

Of course, this expansion of production and sales will require an expansion of money. In the early days of capitalism, the owners of gold mines would keep on producing more gold (that is, hiring more workers to dig more gold). These days, the government works with the banks to put out more paper money or credit.

A more sophisticated model of the cycle is called “over-production” (or “over-accumulation”): In their drive to expand, competing capitalists put more money into constant capital than into variable capital. They are constantly seeking to expand labour productivity, which means more machines and materials, and fewer workers in proportion. (That is, the number of workers may increase, but not as fast as the amount of machinery.) Also, the capitalists are driven to increase surplus value, which requires holding down the workers’ pay. Even in times of prosperity, when the capitalists are (relatively) most willing to let the workers increase their pay (due to shortages of labour plus high levels of profit), the bosses are still reluctant to increase wages.

As a result, production of consumer goods (among other goods) tends to expand more and faster than do the wages of the workers. In other words, production of consumer commodities expands more and faster than does the consumer market. And if the consumer goods-producing capitalists (Department II) cannot sell their goods, they will no longer buy from the machinery-producing capitalists (Department I), who now also cannot sell their products. If goods cannot be sold, then their values cannot be “realised.” At least, until the next crisis, when the “extra” goods are either sold off (often below value) or are just destroyed, and the cycle can start again.

Another view incorporates this over-production hypothesis. It is called “disproportionality.” The capitalist system is a very complex system. To work, the different parts have to match up with each other, not only consumer goods production and the consumer market (over-production), but each commodity must match with its need. Raw materials, production of machinery, use of machinery, the right numbers of everything, the right amount of money for the different capitalists to buy the right product at each stage of production, the right workers in the right numbers with the right skills at the right wages, the right distribution of commodities, the right amount of credit, and so on. Each commodity has both a use-value and a value, so each must fit into the complex process at the right time and in the right place, even though there is no overall plan, just a number of competing capitalist firms. While the bourgeois economists speak of the market as a smoothly running mechanism, in fact it lurches forward with herky-jerky motions. Of course, it produces ups and downs, prosperities and recessions.

While there is much truth in the over-production and disproportionality concepts of cycles, as such they leave out what needs to be at the centre of any analysis of capitalism: the production of profit. This is what drives all capitalist production, what it is all about, and it makes all the difference. If the production of profit is very high, then the capitalists will expand, hiring more workers and being (relatively) more willing to raise their salaries. This will expand the consumer market. Meanwhile, in order to expand, they will be more willing to buy materials and machines from each other. Higher profits prevent over-accumulation (and “under-consumption”). Similarly, higher profits counter disproportionalities. It greases the wheels. With more profits, things go smoother and match up better. Conversely, lower profits have the opposite effect, increasing “over-production” and disproportionality. There seems to be “too much” of some commodities only because there is “too little”, namely too little surplus value.

The Tendency of the Rate of Profit to Fall

As mentioned, each capitalist firm seeks to raise its profits by using the most modern technology, the most productive methods. This means investing in more and better machinery, in order to raise their workers’ per-person productivity. They may hire more workers, as they expand, but they buy even more machinery, and materials to go through the machinery.

As a result, the enterprise’s workers will be able to produce more goods in the same amount of time, each good cheaper than the competitors’ version. The owners of the factory will be able to flood the market with their cheaper goods – although they may charge a higher mark-up (profit) than do their competitors. They will win a larger market share and – what is the point – make an extra-large profit. (By these methods, their greater investment will get a larger share of the total surplus value produced by all the capitalist firms.) Eventually the competitors will catch up with them by also installing the new type of machinery. Or the competitors will go bankrupt. Either way, the original initiators will have established a new normal as a level for productivity in the industry.

The individual factory makes a larger profit, but actually it contributes a smaller proportion of surplus value than before. Profit is nothing but the unpaid labour of the workers. The purpose of machinery is to displace labour, to use less labour to make more things. The factory owners may have more surplus value because they hire more workers, but they have bought even more machines, so the ratio of surplus value to the total investment goes down. And when the whole industry adopts the new technology, the whole industry will be producing a lower ratio of surplus value.

When most of an economy has adopted similar new technology, the total ratio of surplus value will have decreased. The total amount invested (included constant capital) will have increased, but the total amount of surplus value, for all society, will not have increased proportionally. The total mass of surplus value may have increased or decreased, according to the number of workers employed, but its ratio to the total invested will not have increased. Which is to say that the profit rate will decrease. (The classical political economists had noticed the falling rate of profit before Marx, but had no good explanation for it.)

The basic ratio of machinery and materials to workers is a “technical composition.” (It is unclear how this can be measured. Perhaps by weight?) If measured by the value of the constant capital to the variable capital (by how much each component costs, in money or labour-time), this is the “value composition.” Put both together and there is what Marx refers to (for some reason) as the “organic composition.” The more machinery, the higher the organic composition – and the lower the rate of profit produced.

The whole point of increasing machinery in production is to decrease the amount of labour used. Higher productivity forces out labour. A pool of unemployed workers is created, a surplus population, which Marx calls “the reserve army of labour.” Some are immediately available for work (members of the “floating” reserve army of labour). Others are busy elsewhere but can be called upon if more workers are needed (referred to as the “latent” reserve army). This includes poor peasants and also women homemakers. Women may be attracted (or forced) into the labour force when there is a shortage of (mostly low-paying) labour. But they can always be pressured back into the families when no longer “needed.” At least that has been the history so far. And some people are simply mired in poverty and long-time unemployment: the “stagnant” reserve army.

Recessions as Healthy

The rate of profit affects the business cycle. As the economy expands again, after the last downturn, the rate of profit first goes up. But once the cycle reaches its peak, the rate goes down. New machinery has increased the organic composition of capital overall, which causes the rate of profit to decline. Meanwhile, the capitalists have been forced to raise the pay of at least part of the working class. This is due to the increasing shortage of workers as production expands, including bottlenecks caused by lack of skilled workers. Workers are more likely to strike for better wages and conditions, and the capitalists are more willing to give in. This too lowers the rate of profit.

To keep their profits coming in, capitalists borrow money from banks and each other. Debts pile up. They speculate, invest in shaky schemes, and buy into “bubbles.” This is made easier by the split in the economy between the actual commodities, the factories, and other things which were made by people, and the pieces of paper which give ownership of the things. The first is called by bourgeois economists the “real economy” and it includes goods and services which embody value. The second is called the “paper economy” or the “virtual economy.” Stock certificates provide capitalists with claims on surplus value. They are bought and sold with little relationship to the actual workplaces and work processes where the value is created. In Marx’s terms, these are “fictitious capital.”

Finally there is a crash. And a good thing too. The recessions are essential for the profitability of the capitalist economy. Weak companies, with old-fashioned technology, will go bankrupt. Their technology will either be junked or bought-up cheaply by better-run companies. Machinery in general will be cheapened during the downturn. So will labour power. There will be more unemployed; workers will be forced to accept lower pay. “Over-produced” goods will be sold off (or destroyed). Debts and speculations will be wiped out in bankruptcies. Stronger companies will buy up resources from weaker ones, creating larger corporations. All these factors clear the way for a more profitable economy.

And so there will be a new upturn, moving toward a new period of prosperity. The collapse of the crisis was essential for clearing out the deadwood and preparing for the new and bigger upturn.

Counter-tendencies to the Falling Rate of Profit

There are counter-tendencies to the tendency of the rate of profit to fall. The business cycle, particularly the downturn, mobilises these counter-acting tendencies and restores profitability.

There are a number of such counter-tendencies. For example, the rate of turnover, from investment to the sale of products to reinvestment, varies from industry to industry. In itself, this may cause disproportionality. But the more rapid the turnover, the higher the rate of profit.

Imperialism, in its various forms, also increases profits. It brings in commodities with lower costs and bigger profits than can be produced at home.

The main counter-acting tendencies are caused by the very expanded productivity which (due to the increased organic composition of capital) causes the rate of profit to fall in the first place. Expanded productivity makes cheaper (less valuable) commodities. If this becomes widespread, then the constant capital bought by the industrial capitalist (the machines and materials) become cheaper. Whether or not the capitalist goes out and buys the cheaper machines, the ones the capitalists keep will lose their value, become cheaper. If the capitalist makes the same profits as before, it is now compared to cheaper investment costs, and therefore the rate of profit goes up.

The same is even more true for the other costs of the industrial capitalist, the wages of the workers. As productivity increases in general, the goods which the workers buy to maintain and reproduce themselves become cheaper. The food, clothing, shelter, entertainment, and education which make up the cost of the workers’ commodity labour power, all cost less labour to make (cost less value). It is now possible to lower the workers’ wages and yet to maintain their standard of living. The use-value of the goods they earn remains the same while the exchange value of their pay goes down. (This lowering of pay may be done by directly cutting it or – less provocative to the workers – by inflation.) The use-values the workers can buy may stay the same – or even increase! – while the proportion they receive of the value they produce decreases. So surplus value increases, without necessarily lowering the standard of living of the workers. (This trend also makes it difficult to tell if the workers in a more industrialised country, with a higher standard of living, are being more or less exploited than workers in a poorer country.)

Further, capitalist firms get larger and larger, more and more concentrated (see below). This does not directly counteract the fall of the rate of profit. But it does produce larger amounts of surplus value in one place. This goes far to counter the immediate effects of the falling rate. (On the other hand, the larger enterprises get, the more capital is needed for investing in them, which a falling rate of profit makes it harder to acquire.)

The tendency of the falling rate of profit is a major factor in the business cycle, behind disproportionality and over-production. Historically it is countered and set right by the downturn phase of the cycle, which restores capitalism to profitability. So the system lurches forward.

Does this mean that the counter-acting effects can so compensate for the falling rate of profit that over the long run it becomes meaningless? No. It is observable that, over time, the organic composition of capital (including the value composition) has increased, despite counter-acting tendencies. John Henry may have used a sledge hammer but he was beaten by the steam drill, which has since been replaced by gigantic automated mining equipment. Shovels have been replaced by earth-moving machines as big as houses. Steel puddling by almost-automated factories. Horses by trucks, railroads, and airplanes. Paper and pencils by computers. True, the difference in value between a pickaxe and an earthmoving machine may be less than their difference in weight. Yet the tractor does cost much more than the shovel. And the number of workers it takes to dig the same size hole has gone way down. This should lead to a long term trend toward a lower rate of profit.

Chapter 4: Primitive Accumulation at the Origins of Capitalism

For Marx, capitalism has a beginning, a middle, and an end. What was that beginning like? To the classical political economists, when they dealt with the question at all, capitalism began with small businesses in the nooks and crannies of feudalism. Gradually they made more money for their owners, until they could afford to hire some employees. The first workers were available to be hired because they had not been as industrious as the original businesspeople. As in the fable of Aesop, the workers had been lazy grasshoppers while the original capitalists had been hand-working ants. Eventually the capitalists became rich enough to displace the feudal lords.

To begin with, this pretty story overlooks the violent upheavals of the Cromwellian British revolution, the US revolution, the French revolution, the South American and Caribbean revolutions, and the 1848 failed European revolution. But some of this story was true, no doubt. There were blacksmiths and artisans who did build up their original capital; there were merchants who carried goods between widely separated markets until they decided to directly invest in production here or there. However, this misses the main dynamic of the beginning of capitalism. “In actual history, it is notorious that conquest, enslavement, robbery, murder, briefly force, play the great part” (Capital I, 1906; p. 785).

The earliest time (which I will call an “epoch” to leave room for several periods within it) was described by Marx, in Capital I, as a “pre-historic stage of capitalism.” Borrowing from Ricardo, Marx called it “primitive accumulation” (in German, “Ursprunglich”). This could just as well be translated as “primary,” “original,” “initial,” or “unspoiled” accumulation. For capitalism to begin on a large scale, even in only one country, it needed two things: the accumulation of masses of wealth in the hands of a few people who could invest it (capital), and secondly, free workers who were available for work in factories and fields under capitalist discipline.

In Europe, these two things were achieved through violence, legally and illegally: driving peasants off the land, replacing them by sheep; taking away the common grazing lands which had been open to all peasants and giving them to the lords; forcing poor people to wander the highways; cutting the benefits to the poor and unemployed, and so on. On a world scale, the European rulers seized continents and subcontinents – in the Americas, India, other parts of Asia, Australia, and Africa. Black people were forced into slavery far from their homes while Native Americans faced genocide. European people were settled on land once owned by others. The Asian-Indian economy was destroyed by foreign imports, even as natural resources (from gold to cotton) were robbed from them.

“The discovery of gold and silver in America, the extirpation, enslavement, and entombment in mines of the aboriginal population, the beginning of the conquest and looting of the East Indies, the turning of Africa into a warren for the commercial hunting of black-skins, signalised the rosy dawn of the era of capitalist production. These idyllic proceedings are the chief moments of primitive accumulation” (Capital I, 1906; p. 823).

Marx was fully aware of the interaction of class, nationality, and race in the origins of capitalism.

Sometimes Marxists, and even Marx himself, criticised anarchists for supposedly under-emphasising the role of economic forces and over-emphasising the power of the state. But when discussing primitive accumulation, Marx was quite clear about the key role played by the state and other forms of organised violence. While capitalism may be said to have created the modern state, the state may also be said to have created capitalism.

In Capital I, Marx wrote of “… the power of the state, the concentrated and organised force of society, to hasten, hothouse fashion, the process of transformation of the feudal mode of production into the capitalist mode… Force is… itself an economic power” (Marx, 1906; pp. 823 – 824).

The anarchist Kropotkin writes of the same period, “The role of the nascent state in the 16th and 17th centuries in relation to the urban centres was to destroy the independence of the cities; to pillage the rich guilds of merchants and artisans; to concentrate in its hands the… administration of the guilds… The same tactic was applied to the villages and the peasants… The state… set about destroying the village commune, ruining the peasants in its clutches and plundering the common lands” (Kropotkin, 1987; p. 41). If not precisely the same as Marx’s concept of primitive accumulation, it describes the same process.

Women under Capitalism

Marx did not directly discuss the effects of primitive capitalist accumulation on gender. However, Marx’s concept of primitive accumulation is directly relevant to understanding the history of women – and the role of women is essential for understanding the origins of capitalism.

Feminist historians, as well as specialists in religious and medieval history, have studied the persecution of “witches” in Europe and North and South America. This was concentrated in the 16th and 17th centuries, and somewhat before and after. Led by the church, but including state authorities, a hue and cry was raised against women who were accused of following a heretical sect, composed almost only of women, which supposedly worshipped the devil. Special tribunals were set up, methods of torture were standardised, and witch hunting manuals were published.

The numbers of women so persecuted is unknown. Some estimates run into the millions, but the best estimate is that, over three centuries, about 200 thousand were accused of witchcraft, of whom 100 thousand were killed (Federici, 2004). It is impossible to know how many of these people were just women whom someone disliked, how many were midwives or herbalists, how many were practitioners of pre-Christian religions, and how many were genuine worshippers of the devil. If any were.

The witch hunt was an attack on half the population, mostly focused on poor women in the cities and countryside. The campaign against supposed witches was part of general misogynist sentiments promoted by the church and state. It whipped up hysteria and misdirected people’s fears and angers from the rich to other poor people (similar to the rise in anti-Semitism of the time). It divided working people, causing men to cling to male privileges even while their general conditions were being undermined. It drove women out of the traditional workforce. It prepared women to become modern “housewives” and part of the working class.

While Marx does not discuss the role of women in the capitalist economy, it is implicit in his theory. Of course, women may work in paid jobs, as do male workers, and Marx describes their actual conditions in the factories and mines. In that case they were paid less than men for the same work, being more vulnerable. Female waged labour, and also child labour, was common in Marx’s time in the 19th century in British industry. Female paid labour is common now. (That women workers are directly exploited does not cancel out that there may be positive effects also, such as increased individual independence.)

But there was another, and more fundamental role for women, which applies to women not as waged workers but as non-waged members of the working class. (The working class – as a class – is broader than those who are immediately employed; it includes children, the unemployed, the retired, and wives and mothers who labour in the home.) The commodity labour-power of the workers (mostly male) included what was necessary to recuperate them, to let them rest-up and be able to work another day. It fell on the women as “homemakers” (or “housewives”) to see to it that the men were recuperated. And the price of the wage (the “family wage”) also covered raising a new generation of workers. The work of doing this also fell on the women. (This included passing on the necessary social psychology and ideology to the children.)

In all this, the women at home were not directly creating surplus value but were producing (reproducing) the necessary labour power commodities of their husbands, children, and themselves. If we define capitalist “productive labour” only as what directly produces surplus value (as Marx did), then this was not “productive” (in this narrow, technical, sense) but it was (is) essential labour for surplus value to be produced – in plain English, highly productive labour!

In Engels’ The Origin of the Family, Private Property, and the State, he described the reproductive work of women as being as much part of the “base” of society as is industrial production (as distinct from the “superstructure”). He speculated that class society grew out of the original oppression of women.

The above is not at all an adequate analysis of how women are oppressed; but it is clear that the oppression of women, in the family and in the workplace, is thoroughly intertwined with capitalist exploitation (as it had previously been with pre-capitalist forms of exploitation).

Primitive Accumulation’s Destruction of the Ecology

Marx and Engels noted the way early capitalism was destroying the biological environment. They saw human labour as the way humans interact with nature, satisfying human needs while maintaining a biological balance. They saw this as a “metabolism” between humans and nature. But through capitalism they believed that there had developed a “rift” in the metabolism.

The most important factor, to them, was the split between city and country, between industry and agriculture, between town and farmland. This concept had been raised by a number of the “utopian socialists” before them, as well as by bourgeois agronomy specialists. Kropotkin and other leading anarchists (several of whom, like him, were professional geologists and geographers) were also to raise this as a problem, well before the modern Green movement.

What Marx and Engels noted was that the farms and the cities were increasingly separated. Agriculture drained the soil of nutrients, which had once been returned to the soil through local consumption of food and the use of animal and human manure. But now the animal and plant nutrients were shipped over increasing distances to cities. Their eventual waste was not returned to the land, but polluted the cities and the rivers and lakes around them. Meanwhile waste products from production – coal dust, dyes, cotton dust, etc., polluted the air, the water, and the food of the workers and others. Engels walked through Manchester, the centre of British industry, and noted the ill-health of the working class, the filthy conditions they lived in, and the diseases which spread through their quarters.

Of course, since then we have learnt a great deal more about the ill effects which capitalist production has on the ecological environment and on general health. But Marx and Engels saw this quite early.

During the epoch of primitive accumulation, the capitalists were able to accumulate wealth by robbing the land of its nutrients and by not paying to keep their cities clean or their working classes healthy. These were not simply matters of indifference or ignorance; they were a way to accumulate riches, to increase values.

Three Epochs

In his Grundrisse, Marx proposed essentially three epochs of capitalism:

“As long as capital is weak, it still itself relies on the crutches of past modes of production… As soon as it feels strong, it throws away the crutches, and moves in accordance with its own laws. As soon as it begins to sense itself as a barrier to development, it seeks refuge in forms which, by restricting free competition, seem to make the rule of capital more perfect, but are at the same time the heralds of its dissolution and of the dissolution of the mode of production resting on it” (quoted in Daum 1990; p. 79).

That is, in the earliest stage, capitalism is weak. It must rely on non-market forces (primitive accumulation) for overall protection, in order to expand. It uses force, the state, religious hysteria, anti-women prejudices, robbery and slavery, “robbery” of the natural environment. This process may be said to have begun as far back as the 14th century, but reached its high point in the 17th to 18th centuries.

In the 19th century capitalism may be said to have really taken off, first in Britain and then as a world system. As this is the height of its well-being as a system, it relied mainly on market forces to batter down all obstacles to expansion. This was the hey-day of capitalism! It was also the time when the working class and socialist movements begin to grow. It was when Marx wrote his books and led the First International, and in which Bakunin started the anarchist movement.

Last is the final epoch, beginning in the early 20th century, when capitalism has reached its limits and its contradictions threaten to tear apart all society. This will be discussed in the next chapter.

There are no sharp divisions among the three epochs. They are just abstractions to help us conceptualise the history of capitalism. They overlap in their traits and tendencies. Primitive (non-market) accumulation, including violence by the state, continued during the height of market capitalism and expanded again during the final epoch of capitalist decline.

For example, in the epoch of primitive accumulation, there was a vast expansion of African enslavement in the Americas. This lasted into the 19th century and was only ended through revolutionary violence in various countries (Haiti, the US, parts of South America, etc.). However, the special oppression of African descendents continued. In the US, Jim Crow segregation laws (not customs, laws) continued through the end of the 19th century and the early 20th century and were not abolished until the late 20th century. Even now, African-Americans remain oppressed, discriminated against, and mostly at the bottom of society. Capitalism does not seem to be able to end its racism.

Chapter 5: The Epoch of Capitalist Decline

Every previous social system had reached an end and the same will be true of capitalism. As previously quoted, Marx held that capitalism will come to a point when “it begins to sense itself as a barrier to development….”

In his Preface to his Critique of Political Economy, Marx wrote:

“At a certain stage of their development, the material productive forces of society come into conflict with the existing relations of production, or – what is but a legal expression of the same thing – with the property relations within which they have been at work hitherto. From forms of development of the productive forces these relations turn into their fetters. Then begins an epoch of social revolution” (quoted in Daum, 1990).

Capital’s powerful technology has become so vastly productive that it does not fit within the confines of a system based on private ownership, class conflict, competition, and national borders – all of which developed to serve an economy of scarcity. Production for value holds back the production of useful goods for all. Capitalism becomes less competitive; it revives older methods of non-market, statist, support; it returns to primitive accumulation. This has been called “the epoch of capitalist decay,” “decline,” or “parasitism;” the epoch of “monopoly capitalism,” of “imperialism,” of “state monopoly capitalism,” of “finance capitalism,” or of “late capitalism.”

Of all the improvements in productivity, including automation, computers, and nanotechnology, the most significant which capitalism has created is the international working class. This class exists in concentrations in cities and in industries, working collectively and co-operatively (unlike peasants who generally work their own farms and usually want to be prosperous businesspeople). This class, with its hands on the highly productive new technology, could lead all the oppressed to create a new society, without classes, or states, or warfare, or ecological destruction. For over a century and a half, this modern working class has repeatedly struggled, under the banner of various sorts of “socialisms,” to overthrow capitalism.

Marx and Engels did not live to see the actual epoch of capitalist decline (beginning about 1900 or so). But, analyses were made by various Marxist theorists, including Hilferding, Lenin, Bukharin, Trotsky, and Luxemburg. All of them had important insights, although only Rosa Luxemburg was influential in the development of libertarian-democratic Marxist trends. However, I am going to stick as close as possible to the actual theories of Marx and Engels.

That Marx had been correct in describing an epoch of capitalist decline was easily believed from 1914 onward. There was the historically unprecedented First World War. This was followed by the shallow prosperity of the twenties and then by the worldwide, decade-long, Great Depression. There were revolutions and near-revolutions throughout Europe, the Russian being the closest to successful. Other revolutions failed in Germany, Italy, and Eastern Europe. There were big labour struggles in Europe and in the United States, as well as national rebellions in China and elsewhere. Eventually all the revolutionary struggles were defeated and replaced by totalitarian regimes. In the Soviet Union Stalinism wiped out the last remnants of the Russian revolution (anarchists believe that it was Lenin and Trotsky who first betrayed the revolution by establishing a one-party police state). Fascism came to power in Italy, Germany, Spain, and other countries. Even slavery was revived, as a state measure, under Nazism and Stalinism. Finally the period ended with the destructiveness of World War II. (I will discuss the post-war boom below.)

“Monopoly Capitalism”

What was the underlying nature of this epoch of capitalist decline? The political economists took for granted the continuing reality of a competitive capitalism, where many firms competed in a market and took the prices and rate of profit which the market enforced. Marx was one of the first to point out the drive of capitalist enterprises to grow larger and larger. He forsaw the growth of gigantic corporations due to “concentration and centralisation.” “Concentration” was the ever increasing scale of accumulation of capital, into larger and larger firms. “Centralisation” was the merger of separate capitals, either by amicable unions or by hostile takeovers of one by another.

“This splitting up of the total social capital into many individual capitals or the repulsion of its fractions one from another, is counteracted by their attraction… [There] is concentration of capitals already formed… expropriation of capitalist by capitalist, transformation of many small into few large capitals… This is… distinct from accumulation and concentration… Competition and credit [are] the two most powerful levers of centralisation” (Capital I, 1906; pp. 686–687).

That this has come to pass is well-known. Just as one example, Frances Moore Lappe writes, “Just four companies control at least three-quarters of the international grain trade; and in the United States, by 2000, just ten corporations-with boards totalling only 138 people – had come to account for half of US food and beverage sales” (2011; p. 11).

The trend was toward merger of all the capital of one country into one, which would lay the basis for state capitalism. In Capital I, Marx wrote, “This limit would not be reached in any particular society until the entire social capital would be united, either in the hands of one single capitalist, or in those of one single corporation.”

However, this tendency was interfered with by counteracting forces (as usual!). If the mergers were not due to technical needs, then the giant capitals would tend to break up into smaller capitals, as they got bigger, due to internal competitive forces – “the repulsion of its fractions one from another.”

Nor did the growth of huge firms end competition. The huge enterprises still competed with each other. Even if they were monopolies in their fields, they competed with other monopolies (for example, even a firm which monopolised aluminium would compete with the steel monopoly). Giant firms often found it useful to use smaller firms (as the auto producers distribute through dealerships). New inventions arise which can force their way into the political economy (as personal computers did). And there are international firms: for decades no US firm could break into the domination of the auto industry by GM, Ford, and Chrysler. Then giant auto makers from Japan, Korea, and Germany (with backing by their states) were able to successfully compete with the former Big Three.

This development was called by Lenin and others “monopoly capitalism.” It would be more accurate to call it “oligopoly capitalism,” meaning the rule of the few. Even if a small number dominates a field, these semi-monopolies distort the forces of the market in a monopolistic manner (bourgeois economists call this “imperfect competition”). This includes distortion of the law of value (the tendency of commodities to exchange according to the amount of socially necessary labour they embody). But even distorted markets are still markets; even distorted value relations are still value relations.

Marx saw the growth of centralised big business as mostly progressive. He was aware that it caused great suffering for the workers, but he believed that it laid the basis for socialism (communism), the end of classes and poverty.

Anarchists had a more critical attitude toward the growth of big business. They agreed that it made possible someday a co-operative, non-profit, system of production: socialism. Yet only some of the economic centralisation was due to technically more efficient methods of production (a point which does not contradict Marx’s premises). Often firms merged solely for financial reasons, or in order to increase their power over the workers, or to have better access to markets. Such weak reasons often caused these semi-monopolies to break apart after a while. “Monopoly capitalism” often caused over-centralisation, which interfered with efficient production and distribution, and which held back inventiveness (new inventions and new job creation are more likely to occur among smaller firms than larger ones). This view was consistent with the anarchists’ goal of an economy which would be socialised and co-operative while also radically-democratic with a decentralised federalism.

Effects of Oligopoly on the Capitalists

It is sometimes stated that Marx predicted that the growth of concentrated capital would end the existence of middle layers between the stock-owning bourgeoisie and the working class. This is not true. Marx did expect that small businesspeople, independent professionals, and small farmers would decline in numbers with the growth of big business. But he also predicted that huge firms would cause a split between the ownership of capital and the job of managing the firm. “An industrial army of workmen, under the command of a capitalist, requires, like a real army, officers (managers), and sergeants (foremen, overlookers)… The work of supervision becomes their established and exclusive function” (Capital I, 1906; p. 364). As capitalist enterprises expand, the capitalists themselves become superfluous, at least to the productive aspects. The managers manage. The capitalists invest in the stockmarket.

This new layer of managers and supervisors has basically two tasks. One is the technical co-ordination of the various work taking place. This is something which would have to be done in any economic system. Under socialist democracy, it might be done by the workers meeting to plan their work, or the workers might elect a co-ordinator, or they might take turns. To the extent that the capitalist managers are doing necessary technical work, they are part of the collective labour that produces the commodities.

On the other hand, they are agents of the capitalists and personifications of capital. Their job is to drive the wage slaves to their labours and make sure the workers do not “goof off.” While the supervisors may have interests which clash with the capitalist owners, as far as the workers are concerned they are part of the class enemy.

For Marx, the replacement of family-owned and managed firms by ever-larger stock companies points to the end of capitalism, its last phase. He summarizes, “This is the abolition of the capitalist mode of production within the capitalist mode of production itself… It establishes a monopoly in certain spheres and therefore requires state interference. It reproduces a new financial aristocracy, a new variety of parasites… a whole system of swindling and cheating by means of corporation promotion, stock issuance, and stock speculation…” (Capital III, 1967; p. 438). He thought that the growth of semi-monopolies would result in more state involvement in the economy as well as the growth of finance and speculation (all of which came true).

Effects of Oligopoly on the Working Class

Another frequent misinterpretation of Marx is his supposed “theory of immiseration” – that the growth of big business would result in increasing poverty among the working class. This is a misrepresentation of his “general law of capitalist accumulation.” (To repeat: all of Marx’s “laws” are “tendencies,” which work their effects despite counteracting tendencies.) He did not think that all workers would be immediately and constantly driven to extreme poverty. He knew that workers could be relatively well-paid, while still being exploited. He expected that workers would earn higher pay during periods of prosperity in the business cycle.

The capitalists constantly push down on the workers’ standard of living and the workers push back. For a time, this evolves into a relatively stable value of the commodity labour power. But the capitalists will continue to press the workers, especially when profit rates decline (discussed further below) and when the bosses feel stronger due to increased centralisation. Increased productivity permits the capitalists to keep or even lower the value of what they pay the workers, while maintaining their standard of living as judged by use-values. This is at least until the crisis gets so bad, the profit rate gets so low, that the capitalists have to attack the workers and drastically cut their wages.

The workers fight back to maintain the standard of living for themselves and their families-and, if possible, to improve it. This is good, but in itself, Marx said, it does not directly challenge capitalist exploitation as such.

“Just as little as better clothing, food and treatment… do away with the exploitation of the slave, so little do they set aside that of the wage worker. A rise in the price of labour… only means, in fact, that the length and weight of the golden chain the wage worker has already forged for himself, allow of a relaxation of the tension of it… The condition of [labour power’s] sale, whether more or less favorable to the labourer, include therefore the necessity of its constant re-selling…” (Capital I, 1906; pp. 677–678).

As capitalist accumulation and centralisation increase, the workers’ wages may get better for a time or may decrease. Nevertheless, their domination by the ever-increasing power of the capitalists worsens. Meanwhile, increasing productivity (the increasing organic composition of capital) continues to decrease the proportion of human labour which is needed in production. People lose jobs, which expands the reserve army of the unemployed, the pool of unemployed workers. Their poverty and misery does get worse over time, and threatens to pull down the standards of even the organised employed workers.

“In proportion as capital accumulates, the lot of the labourer, be his payment high or low, must grow worse… This law rivets the labourer to capital…” (Capital I, 1906; pp. 708–709; my emphasis).

Oligopoly and the Rate of Profit

How is the tendency of the rate of profit to fall affected by the tendency toward oligopoly, monopoly, and even complete unification (state capitalism)? Clearly, productivity continues to increase, which raises the organic composition of capital, which should decrease the rate of profit. But does it?

The immediate effect of monopoly/oligopoly on profit rates is to interfere with the average rate of profit. The giant firms can raise their prices and thereby their profits, without worrying that other capitalists will invest in their field and bring down the prices and profits. Because of their monopoly position, they can keep out other possible competitors (by definition; this is what makes their position a monopoly). Their monopoly (or semi-monopoly) position may be due to ownership of patents or to their huge size. It takes a great deal of capital to break into the US steel or auto industries (which is why it took foreign giants to do it).

Therefore the giant firms may get and keep a disproportionate amount of the surplus value produced in society. Which means that the weaker, smaller, firms are getting proportionately less (the surplus value has to come from somewhere). However, this does not change the total amount of surplus value produced by society’s collective body of workers.

Another effect of concentrated and centralised big businesses is that they produce large amounts of surplus in one place. While the rate of profit may not be high, the lump sum of any one corporation will be large. This does not change the actual rate of profit, but it changes the effects of the declining rate of profit. A large, concentrated, sum of money can be used for further investment in a way that the same sum of money, scattered around in small firms, cannot.

Large firms may also increase profits due to economies of scale in production. However, as anarchists and other decentralists (Borsodi, Schumacher, etc.) have argued, there are also diseconomies of scale which are rarely looked at. For example, a centralised factory which produces all the wickets in the world may produce them much cheaper than would local wicket-making workshops. But the factory would have to import raw materials, machinery, and workers from great distances, and then to ship the finished wickets great distances. This creates costs which local production would not have. These diseconomies of scale may be one factor in the splitting up of overlarge semi-monopolies. Whether the costs of distribution balance the advantages of centralised production has to be determined empirically, but rarely is. (In the 1930s Ralph Borsodi calculated that 2/3 of goods were more cheaply made locally, with small machines, than on a national scale. But technology has changed a great deal since then, and he did not calculate for regional production.)

Also, monopolies and semi-monopolies are under less competitive pressure and therefore may be less inventive and productive. Monopolies tend to stagnation. On the one hand this produces less surplus value. On the other hand, by slowing down growth in productivity, it slows down the growth of the organic composition of capital and therefore of the fall in the rate of profit. How this balances out is an empirical matter. But in the long run, the fall in the rate of profit cannot really be counteracted by other causes of stagnation.

However, the most important effect of the growth of large concentrated firms on profit rates is its effect on the business cycle. If the cycle goes all the way through to the final crash (as it did in 1929), under oligopolistic capitalism the crash will be very bad indeed. The businesses are huge so their fall will be huge. They owe huge debts, to other companies and to the banks. They employ large numbers. They buy and sell from each other as well as from many smaller firms. Their boards of directors overlap. So if any of them fall, the effect on the whole of the economy is enormous. The problem of getting an oligopolistic economy back up on its feet is also enormous. While classical bourgeois economists claim that an 