What follows is an introduction, in very broad brush strokes, to some basic aspects of Marx’s approach to economic analysis. It is on a similar introductory level to an earlier treatment of classical political economy. The present post serves both as a follow up to that earlier one as well as background for future posts on Marx and Marxist economics.
Marx in relation to the classical political economists
Marx was both influenced by the classical political economists, especially Smith and Ricardo, and a critic of them. Marx compared classical analysis favorably with what he regarded as the approach of the ‘vulgar economists’. The vulgar economists argued that value was determined by ‘supply and demand’ rather than costs of production. For Marx, this was superficial. If supply was temporarily unequal to demand, this could obviously cause the market price to change. But what effect could supply and demand have once they were equal, so that the market price ceased to change? At that point, supply and demand are mute. Marx praised the classical political economists for considering what determines price at the point where supply equals demand, and criticized the vulgar economists for focusing merely on the surface phenomena of supply and demand, which caused price fluctuations but could reveal nothing about the price to which these fluctuating market prices converged. Following Ricardo, Marx developed a theory of value based on labor time, although his version of the theory differed significantly from Ricardo’s. As mentioned already, I will defer an explanation of Marx’s theory of value to a later post.
Marx also approved of the centrality of class in the classical theory as a useful way of characterizing the key antagonisms within the capitalist system. For Marx, conflict between the classes was fundamental both to the dynamism of capitalism, which gave rise to high rates of accumulation and growth, but also to its susceptibility to periodic crises and recessions.
The central class antagonism for Marx was the conflict between capitalists and workers. By his day, the conflict between landlords and capitalists was decreasing in importance. Capitalists had gained the ascendancy and were turning their attention to the battle with the working class. Substantial improvements in productivity had been enabled through mechanization, dramatically expanding the manufacturing sector and reducing the relative importance of agriculture, and hence the class of landlords.
The source of ‘surplus value’
Marx criticized the classical economists for not perceiving the common origin and nature of profit, rent and interest. For Marx, all these categories were simply different forms of a more general category: ‘surplus value’.
Marx identified the origins of surplus value in the treatment, under capitalism, of ‘labor power’ as a commodity. Labor power is the human capacity to perform labor (or work). Under capitalism, the distinguishing feature of the working class was that its members owned no means of production. For instance, those workers who had been peasants had previously had access to land, which they were permitted to work, partly for their own subsistence and partly for the benefit of the feudal lord. Once their access to land had been denied, they were forced into the cities in search of a livelihood. Since they possessed no means of production, they could do little else than offer to work for a capitalist, who owned the means of production and dictated its use. In this way, workers could sell their labor power as a commodity, in exchange for a wage – the so-called ‘free labor exchange’, which still exists today, of course, for essentially the same reason (i.e. a large class of people exists for which survival requires selling labor power in exchange for a wage or salary).
Marx maintained that a fundamental principle of capitalism, or in fact any exchange system, is the notion of ‘equal exchange’, or exchange of equivalents. For instance, when a consumer buys a commodity from a seller with a $10 note, it is implicit that both seller and buyer regard the commodity as in some sense equivalent to $10. As Marx saw it, his task was to explain how surplus value could arise out of equal exchange. That is, if workers exchange labor power that, in some sense, is equivalent to the wage they receive, how can a surplus remain for the capitalist?
Marx derived his answer from a starting point that was basically shared with the classical economists: namely, the value of any commodity – i.e. anything that is produced for the purpose of exchange in a market – is determined by the cost of its reproduction. Marx did not intend to suggest that this notion of ‘value’ is the only possible definition, or even necessarily a good way of assessing the value of something. The argument, rather, was that this is the way things get valued under capitalism, to the extent production is commodity production. That is, the measure of value that matters to capitalists – whose purpose is not first and foremost to create beautiful objects, or extremely useful things, but instead to make profit and expand capital – is the cost of reproduction.
In relation to the origin of surplus value, Marx’s major step was to apply this notion of (capitalist) value to the commodity labor power. If the value of any commodity is its cost of reproduction, then the value of labor power, Marx reasoned, would have to be the cost of reproducing the worker’s labor power. Thus, ‘equal exchange’ would entail workers being paid the wage that is necessary to reproduce themselves (and their dependents), and hence their labor power. So, according to Marx, a culturally determined subsistence wage constitutes the value of labor power. Under capitalism, competition will tend to ensure that this is the amount capitalists have to pay for this commodity.
Having paid the value of labor power, what a capitalist receives in return is a worker’s exertion of labor power for the duration of the working day. If it turns out that the worker can produce more value in this time than is necessary to reproduce the worker (and the worker’s dependents), a surplus is left over for the capitalist. Put simply, the source of surplus value, for Marx, derives from the fact that:
Workers produce more than it costs to reproduce themselves
Or expressed differently:
Workers produce more than the value of their own labor power
What Marx stressed was that this result strictly obeys the capitalist principle of ‘equal exchange’. The capitalist pays the ‘value’ of labor power; workers sell their labor power. It is an ‘equal’ exchange. However, it is an exchange that takes place within a particular social system and pattern of property ownership: namely, one that gives the capitalist the (socially sanctioned) right to work employees for longer than is necessary for their own reproduction. Workers ‘freely’ enter such a (contractual) arrangement. They are free, if they prefer, not to work … and not to be reproduced.
Some basic implications of Marx’s analysis of surplus value
From Marx’s conception of the origin of surplus value – i.e. that workers can produce more than is required for their own reproduction – numerous antagonisms logically follow:
1. Capitalists will want to reduce real wages as much as they can, which, for Marx, is possible once the subsistence wage has been raised above mere physical subsistence as a result of workers’ collective efforts to win wage increases. A reduction in the culturally determined real wage – i.e. a reduction in the value of labor power – will increase the amount of surplus value, since it will take less of a working day for workers to reproduce their own existence and leave more of the working day devoted to building up the capitalist’s profit, which can then be reinvested to accumulate more capital.
Conflict over the real wage, then, is a central part of Marx’s conception of capitalism. Unless workers deliberately and collectively fight against capitalists’ interests, there will always be a tendency for the real wage to fall towards the strict physical subsistence level. On the other hand, by acting collectively (either industrially through unions or politically through liberal-democratic institutions), workers can hope to achieve substantial improvements in the real wage.
Even holding real wages constant, Marx pointed to various other antagonisms:
2. Capitalists will wish to extend the working day as much as they can. The more workers can be made to work beyond the time needed for their own social reproduction as a class, the more surplus value will accrue to capitalists. The same reasoning concerning the working day applies to the working life, as we are seeing today with attempts to raise the retirement age in some countries.
3. Capitalists will strive to raise labor productivity – e.g. through mechanization, intensification of the labor process (harder and faster work), superior organization of production, etc. These measures reduce the amount of labor time needed to reproduce the working class. At the same time, productivity improvements make it possible for real wages to rise, but only if workers win such increases through collective struggle.
4. ‘Fixed capital’ – e.g. plant, machines, equipment – grows as the result of past surplus value being reinvested by capitalists. These machines appear as the result of past labor (‘dead labor’). That is, ‘dead labor’ appears as the adversary of ‘living labor’ (newly expended labor power). For Marx, fixed capital becomes the adversary of living labor in a double sense: first, machines and other means of production, which are adopted at the discretion of capitalists, not workers, dictate the way in which work is carried out; second, by raising productivity, increased mechanization is a chief means of periodically creating temporary technological unemployment, which weakens workers’ bargaining power in disputes over wages.
Which brings us to …
Marx’s view of unemployment
There is an important dynamic dimension to Marx’s analysis. In relation to unemployment, mechanization acts to slow the rate of growth of labor demand relative to the growth in labor supply. Labor supply tends to rise over time due to immigration or increased labor-force participation. The labor-force participation rate increases, for instance, when wage labor is drawn from previously non-capitalistic spheres of the economy. As a result of the mechanization process, some workers are constantly being expelled from their current employment and left standing ready (as a ‘reserve army’) to step back into the fray as required by capitalists when further expansion calls for more labor.
Marx’s rejection of Say’s Law
Also relevant to unemployment is Marx’s rejection of Say’s Law, which in some respects anticipated the later arguments of Keynes and Kalecki. According to most classical economists (with some exceptions, e.g. Malthus), supply was always supposed to create its own demand. The supplier of a commodity would receive income in exchange for its sale which could then be used to purchase another commodity. For Marx, supply would only tend to create its own demand to the extent that production was for the purposes of consumption. This is the case, for instance, when workers sell their labor power (a commodity) in exchange for a wage income with which they can obtain consumption items. But under capitalism a significant amount of activity – specifically, investment activity – is for the purposes of accumulating profit, not for consumption per se.
Marx analyzed this distinction in terms of two circuits. In one circuit, a commodity is sold for money in order to be able to purchase a different commodity of the same monetary value. Marx denoted this circuit C-M-C (meaning Commodity-Money-Commodity). In this circuit, the purpose of production and exchange is consumption, and supply does create its own demand, except to the extent that there are interruptions in the process, due for instance to temporary shortages or mismatches of supply and demand patterns.
However, under capitalism, Marx maintained that much activity follows a different circuit M-C-M’. The aim in this case is to use money to purchase commodities for the purposes of production in order to obtain more money (M’ > M) at the end of the process. This is a depiction of the activity of capitalists, who invest in production in the hope of making a profit in exchange at the end of the process.
For activities involving this latter circuit to succeed, in which a sum of money is turned into a larger sum (adjusting for inflation), a surplus must be produced in production and then realized as a monetary profit through exchange. Since there is no certainty that the capitalist will be able to sell the output at the end of the production process at a price sufficient to realize the surplus in monetary form, the level of investment and production is sensitive to past profitability and current profit expectations.
Marx’s analysis suggests that when profitability is strong, investment demand will also be strong and the probability of a generalized demand deficiency low. In contrast, when profitability fails, due to disappointed expectations, investment levels are likely to collapse resulting in falling production levels and therefore also falling consumption levels. The likely outcome is then a generalized demand deficiency or ‘general glut’.
Disproportions or ‘anarchy of production’
Another element of Marx’s theory is relevant to his understanding of unemployment: that of disproportions between sectors. At any point in time there may be a mismatch between the goods and services supplied and those demanded. Marx paid particular attention to the balance between consumption-goods production and capital-goods production:
(A) If production of capital goods is too great relative to the production of consumption goods, productive capacity will tend to outstrip actual output.
(B) Conversely, if consumption-goods production and demand outstrips capital-goods production, a limit to the growth of actual output will emerge.
Problem (A) will tend to give rise to unemployment due to excess capacity (now often referred to as ‘Keynesian unemployment’). Problem (B) will tend to cause unemployment due to productive capacity being too small to employ the entire labor force (sometimes called ‘classical unemployment’).
Summary of Marx’s perspective
1. Capitalism is adversarial, exploitative and undemocratic. Workers are, in practical terms, compelled to accept employment conditions that involve working a large part of the day to produce surplus value (exploitative) and have little say in how it is invested (undemocratic).
2. This adversarial nature of capitalism makes it conducive to economic growth and innovation because of the pressure for capitalists to press for productivity improvements, mechanization, etc., that temporarily aid them in their class struggle with workers.
3. Capitalism is prone to recurring unemployment and crises stemming from technical innovation, demand deficiency and disproportions in production and consumption.