The Nature Of Capitalism

The Nature Of Capitalism

The purpose of much of the foregoing has been to establish that by the time Marx was ready to write Capital, he had certain clear-cut objectives in mind— objectives that were consistent with his dialectical view of history. Specifi­cally, Marx had to show (1) how the commodity form of market exchange leads to class conflict and exploitation of the labor force, (2) how the commod­ity system will eventually fail to operate because of its own inherent contra­dictions, and (3) why the class conflict under capitalism, unlike class conflicts under earlier economic systems, should ultimately result in rule by the for­merly exploited class rather than by a new ruling class.

Marx understood capitalism to be an economic system in which people make a living by buying and selling things (i.e., commodities). According to Marx, four properties distinguish commodities. Commodities are (1) useful, (2) produced by human labor, (3) offered for sale in the market, and (4) separable from the individual who produced them. In Capital, Marx set out to analyze the production and distribution of commodities. Such an explanation would in­deed be empty without a theory of value, and Marx, who was well grounded in classical economics, turned to Smith and Ricardo on this point.

The Labor Theory of Value

After a careful review of classical economic literature and an intellectual pro­cess of logical exclusion, Marx arrived at labor as the essence of all value. To him, value was an objective property of each and every commodity. It therefore had to be rooted in something more substantial than the "superficial" market forces of supply and demand. In fact, Marx could not have been im­pressed by purely subjective valuations (by utility comparisons, for example), since philosophically he was a materialist and therefore held that material re­lations alone determine value. He also believed that these relations determine value prior to the determination of price, so that price reflects merely a value caused by the purely objective element common to all commodities—labor.

Contradiction in Classical Value Theory?

We have seen that classical eco­nomics contained not one but two theories of exchange value: the short-run determination of price by supply and demand and the long-run theory of "natural price," or cost of production. Marx sensed the contradiction in this. The theory of natural price holds that price is invariant in the long run, whereas even casual observation reveals that market prices fluctuate con­stantly. Now if such fluctuations are the result of mere chance, then so too are economic crises, and Marx's theory of dialectical materialism collapses. Marx, of course, saw things differently. In Wage Labour and Capital he wrote: "It is solely in the course of these fluctuations that prices are determined by the cost of production. The total movement of this disorder is its order" {The Marx-Engels Reader, p. 175).

Such statements are characteristic of Marx's dialectic, but they are puzzling to the uninitiated reader. "What does he mean?" we ask. The answer is that Marx recognized, as did the classical economists, that under competition mar­ket prices do not fluctuate at random but must revolve around a definite point. If the selling price of a commodity falls below its cost of production, its pro­ducer is forced out of business. If the selling price exceeds the cost of produc­tion, excess profits arise, which attract competitors and lead temporarily to overproduction, so that price falls. Consequently, the point around which competitive market price fluctuates is cost of production, which to Marx meant labor costs. Thus he saw value as being determined not by the "laws of the market" but by production itself.

The matter has been summed up effectively in another way by Murray Wolfson, a prominent Marxian scholar. Wolfson notes that market prices are ideal (i.e., subjective) estimates of the ratios of exchange by potential buyers and sellers. But competition forces these ideal estimates to conform to the ma­terial reality of the labor consumed in their production. One might, of course, explain prices directly by the interaction of these ideal estimates until the sub­jective valuations are in equilibrium. However, Marx's materialism requires a different explanation. The direction of causation cannot be from the ideal val­uation to the objective exchange ratio. A scientific explanation must go from material to ideal. Marx's labor theory of value is consequently distinguished from earlier labor theories because it is firmly rooted in materialist philosophy.

Wages and Capital

Having settled on an objective labor theory of value, Marx had to face the same kind of problems that Ricardo faced: (1) If labor is the essence of exchange value, what is the exchange value of labor, and (2) how is the value of goods produced by machinery determined? The answer to the first problem entails a theory of wages; the answer to the second entails a theory of capital.

Marx unfolded the first problem this way. The value of labor power may be divided into an amount necessary for the subsistence of labor and an amount over and above that. The former, which Marx called "socially necessary labor," determines the exchange value of labor itself—its wage. The latter, termed "surplus value," is appropriated by the capitalist. Marx made it clear that capitalism could not exist unless the worker produced a value greater than his or her own subsistence requirements:
If a day's labor was required in order to keep a worker alive for a day, capital could not exist, for the day's labor would be exchanged for its own product, and capital would not be able to function as capital and consequently could not survive— If, however, a mere half-day's labor is enough to keep a worker alive during a whole day's labor, then surplus value results automatically.. .(Grundrisse, p. 230).

v This surplus value does not arise in exchange, but in production. Thus the aim of production, from the capitalist's standpoint, is to get surplus value out of each worker. This is what Marx meant by the "exploitation of labor." Ex­ploitation exists because the extra value contributed by labor is expropriated by the capitalist. Surplus value arises not because the worker is paid less than he is worth but because he produces more than he is worth. Since this extra amount is expropriated by the owners of land and capital, surplus value may be regarded as the sum of the nonlabor shares of income (i.e., rent, interest, and profit).

Marx considered the principle of surplus value to be his main achievement. Certainly it is an integral part of the central theme of class conflict and revo­lution. Under capitalism, two classes emerge, with one class being forced to sell its labor power to the other in order to earn a living. This contractual ar­rangement transforms labor into a commodity alien to the worker. Without the difference between labor's exchange value (subsistence) and its use value (value of labor's output), the capitalist would have no interest in buying labor power, and hence it would not be salable. So the ingredients for social conflict are inherent in capitalism—alienation and polarization of classes.

Ricardo had proffered labor as the best measure of value, though not nec­essarily as the sole cause of value. Marx went further than Ricardo in this re­spect; he saw labor as both the measure and the cause of value. Moreover, he held that only labor—not machines—can produce surplus value. How, then, does one value machinery? Marx's answer is that machines are "congealed labor" and therefore equal in value to the cost of the labor that produced them. This answer denies the fact that machines are productive in themselves and should therefore be valued in excess of the labor that has gone into their production. Nevertheless, Marx was so committed to the labor theory of value that he either ignored this objection or relegated it to minor importance.

The "Great Contradiction"

A more serious objection to the labor theory arose from Marx's critics in the form of what has since become known as the "great contradiction." The contradiction is posed as follows: If the exchange value of commodities is determined by the labor time they contain, how can this be reconciled with the empirically observed fact that the market prices of these commodities frequently differ from their labor values? Or to put it an­other way: We know that competition guarantees a uniform rate of profit throughout the economy. Yet even in a competitive economy the ratio of cap­ital to labor differs among industries. With a Marxian theory of value (i.e., la­bor alone creates surplus value), profits should be higher in labor-intensive in­dustries, but empirically this is not the case. Thus, since capital/labor ratios differ while the rate of profit remains uniform, it cannot be true (Marx's critics argued) that value is determined by payments to labor alone.

Although the evidence is that Marx anticipated this problem early in his writings, the celebrated answer to his critics is contained in the third volume of Capital, published posthumously. Marx maintained that the problem is re­solved by the theory of the competition of capitals, which asserts that compe­tition between firms and industries will tend to establish a uniform rate of profit for all firms engaged in production. When this average profit is added to the (different) costs of production in different industries, the individual devia­tions of market prices from true (labor) values tend to cancel out (in the ag­gregate).