Getting to the conclusion of this volume and his entire work, Marx discussed the idea first formulated by Adam Smith, and endorsed by his followers, that the sales price of a commodity was made up of the incomes of those who had produced it, and that those incomes could be divided into rent on land, profit (or interest) on capital, and wages of labor. Marx described this idea as “the Trinitarian form, which encompasses all the secrets of the social process of production.” The secrets that Marx had uncovered in his investigation were that these forms of income were not independent but were, ultimately, the products of labor in the capitalist system of production. The best classical economists, Marx asserted, had penetrated the semblance of the three forms of income, but remained, as a result of their advocacy of the capitalist system of production, “imprisoned in the world of semblance they themselves had critically dissolved.”6 It was only by engaging in the Hegelian labor of conceptual development that Marx was able to show how the semblance of the system depended on the connected logic of its inner workings.
Marx’s methodology might be compared with two other common forms of social science investigations of empirical reality. In one, stemming from the nineteenth-century positivists, social scientists posit the various terms of their model (today, in a more mathematical mode, they say their “independent variables”) and use it to explain empirical findings. In Capital, Marx certainly developed a model of a capitalist economy, a model that, even by the end of the first volume, to say nothing of all three, had many terms and concepts. But these were all developed out of the initial conditions of goods produced and exchanged. Each step of the development followed from the inadequacy of the previous one to explain different, empirically evident aspects of capitalism. That procedure would reveal the inner logic of the system, as more positivist forms of modeling, beginning with a large number of terms, would not.7
A second version of modeling is one used by economists, both in Marx’s time and today. This version employs a reduced number of terms to produce a deliberately simplified model of economic reality, in that way revealing the effects of what the economists regard as crucial factors. In a further step, economists are supposed to bring back in the neglected factors, but they have been known not to do so, and to apply their simplified model directly in making policy recommendations. This is not unlike Marx’s procedure, only the terms Marx brought back in were not so much modifications of his initial premises as consequences of their conceptual development, a distinctly dialectical aspect of Marx’s mode of investigation.
MARX’S ECONOMIC THEORY WAS framed by five conceptual distinctions: between use value and exchange value; between the use of money to exchange commodities and the use of money to accumulate capital; between labor and labor power; between constant and variable capital; and between the rate of surplus value and the rate of profit. Only after making these distinctions, which, as might be expected from Marx’s methods, emerged from one another, could Marx develop his analysis of capitalism and his diagnosis of capitalism’s future, and distinguish these from the versions offered by contemporary political economists.8
The distinction between use value and exchange value was conceptually straightforward. Use value was the subjective benefit an individual received from the consumption of a good or service; exchange value the price paid for that good or service in the market. Exchange required a common measure of value, or money. The producer of a commodity sold it, turning its use value over to the purchaser, received the good’s exchange value in the form of money, and then purchasing another commodity with that money. Marx used the example of a farmer who sold the wheat he had grown and employed the proceeds to buy linen cloth from a handloom weaver, while the weaver used the money he received from the sale of the cloth to buy a Bible. The mention of the purchase of the Bible and the spiritual use value it possessed was meant ironically, but the point was to illustrate the relationship between exchange and the division of labor.9
This simple exchange, for Marx, was not capitalism. Rather, capitalism involved a different version of the process of exchange. In this version, money was used to purchase a commodity, and then that commodity was sold at a profit, so that more money existed at the end of the chain of transactions than at the beginning. This use of money to increase value, Marx asserted, turned money into capital. But, as he noted, how could this happen if goods sold for their exchange value? Where did the extra value—the “surplus value,” as Marx said—come from?
The answer to this question involved Marx’s intervention in a long-running debate among political economists concerning the labor theory of value. First advanced by Adam Smith, elaborately formulated by David Ricardo, and endorsed in the standard economics text of Marx’s time, John Stuart Mill’s Principles of Political Economy (1848), this theory stated that the value of a good was given by the amount of labor needed to produce it.10 “Socially necessary labor time” was the phrase Marx used. The problem, as Ricardo’s critics pointed out (and Marx, unusually well read on political economy, was well aware of this problem), was that using such a measure of value failed when applied to the value of labor itself. It was conceptually unclear how labor could be both valued and the measure of value. If one tried to overcome this objection by stating that the value of labor was labor itself, then both the value of the good produced and the value of the labor needed to produce it were the same. Such an equality of value implied that capitalists could not make any money, unless—as some socialists, including Marx’s old rival Proudhon, suggested—they were systematically cheating the workers, and paying them less than the value of their labor. Marx rejected this idea, and in his 1859 pamphlet explained that future publications would provide the solution to this fundamental problem of the labor theory of value.11
In the Grundrisse, Marx went over the problem a number of times, before formulating the solution he would adopt in his economic writings. Workers, he asserted, did not sell capitalists their labor; rather, they sold them what Marx first called “ability to labor” and “capacity to labor,” before settling on the phrase “labor power.” The exchange value of the labor power was the labor time needed to produce that labor power—that is, to keep workers and their families alive and working, maintaining their standard of living. The use value of the labor power, on the other hand, was the labor itself, which had the unique property of increasing value. Formulated in terms of labor time, the standard contemporary measure of value, Marx’s argument was that workers in a textile mill, to take a typical industrial establishment of the 1860s, worked a twelve-hour day transforming raw cotton into cotton yarn. The yarn the workers produced in six hours, half the workday, when sold, sufficed to pay their wages, to compensate them for their labor power, as well as half the other costs of their employer for raw cotton, fuel for the machinery, heat and light for the factory building, and depreciation of the productive facilities. But they continued to work the remaining six hours, and the product of that time, when sold, both replaced the other half of the material costs of their employer and added a surplus value, the profit of the capitalists.
In a famous passage, laden with sarcasm, yet also expressing his historical philosophy, Marx described this sale of labor power as “liberty, equality, property and Bentham.”12 Capitalists and workers, two freely contracting parties, made an equal trade, the workers receiving the fair exchange value of their labor power, in return for which the capitalists got to consume the use value of this labor power. Each side was trading what it had to sell, the workers their labor power, the capitalists their money for wages, and each, as the utilitarian philosopher Jeremy Bentham proposed, was acting in self-interest.
Marx added one final feature to his basic concepts: the distinction between different kinds of capital. Contemporary economists distinguished between “fixed” and “circulating” capital, the former including structures and production facilities, the latter raw materials and finished goods. Marx endorsed that distinction and discussed it at some length in the posthumously p
ublished Volume Two, but also lumped together fixed and circulating capital under the heading of “constant capital.” Against this constant capital, he counterposed “variable capital,” the cost of workers’ wages, an idea developed in the Grundrisse from a concept of Ricardo’s political economy, the “wages fund”: the proportion of national income available to pay workers’ wages. Marx gave the concept a Hegelian twist, defining wages as capital, uniting seemingly opposite conceptions, and also pointing to the central role of labor in creating capital.13
Marx’s counterposing of constant and variable capital served another crucial purpose of his economic theory, particularly relevant to the central proposition of the falling rate of profit. He asserted that the constant capital contained in any given good for sale did not increase its value; the price of raw materials, machinery, structures, fuel, etc., was just passed on in the finished goods. Only variable capital, human labor power, could increase the value of commodities.14 Marx distinguished between the rate of surplus value, the ratio of capitalists’ profit to their labor costs, and the rate of profit, the ratio of capitalists’ profit to their costs for both labor and materials and machinery, or for living and dead labor, as he sometimes described these two forms of capital. Although the rate of profit corresponded to the way capitalists themselves calculated returns on their investments, it was a semblance, for it was the rate of surplus value that determined capitalists’ profit.
With these conceptual distinctions in place, Marx was ready to begin articulating his theory. Capitalists, driven by competition in the market, were fighting to increase or at least maintain their profits; and given the origin of profit in surplus value, Marx perceived two ways they could do so. One he called “the extraction of absolute surplus value,” by which he meant the lengthening of the working day, so that workers would devote a greater proportion of their labor time to producing profits for their capitalist employer and a lesser proportion to producing goods that, when sold, would pay their wages. In this discussion of the extraction of surplus value, which began about a third of the way into Volume One, Marx dropped the form of abstract reasoning he had used previously, and began to cite empirical material. Using as his chief source the Blue Books, reports of British parliamentary commissions of inquiries, Marx painted a dark picture of misery and exploitation, of exhausted and ill workers, even young children, laboring day and night. He told the story of the washerwoman Mary Anne Walkley in London, who, while toiling on cleaning the dresses for ladies preparing for the ball of the Princess of Wales in 1863, was literally worked to death.15
At the same time, this capitalist exploitation generated working-class resistance, in the form of campaigns for a legally guaranteed shorter working day, and in the demands of trade unions for shorter hours.16 Marx’s theory of surplus value helps explain his support of the International Working Men’s Association and the trade unionism it sponsored. Unions’ advocacy of shorter working hours was central to the class struggle, for it involved the workers seizing back from the capitalists a portion of the value they created, decreasing the capitalists’ surplus value and hence their profit. It was a reformist action, but one that struck at the root of the source of capitalists’ profits, and led toward the end of the capitalist system.
Marx understood that extending the working day, even if there were no working-class opposition, ran into physical limitations, unless all the workers were going to join Mary Anne Walkley in the grave. The greater part of his analysis was focused on the extraction of what he called “relative surplus value,” generated by making labor more productive. Even if such more productive workers devoted the same proportion of their working day to replacing the capitalists’ equipment and raw materials costs and generating a profit for them, they would produce more goods during those hours and so generate more profits. Marx thought it was “the immanent drive and constant tendency of capital to raise the productive power of labor. . . .”17 Capitalism was all about producing more and producing more productively.
The increase in labor productivity was the result of the expanded use of machinery. Marx’s many illustrations of this point came from England in the first two thirds of the nineteenth century, the land of steam engines, mule jennies, and power looms. As Marx saw it, this trend was not just ongoing but intensifying. Machinery, the fuel needed to run it, and the raw materials processed by it made up a steadily increasing proportion of capitalists’ expenditures, as compared to the money they spent on workers’ wages. To use Marx’s phrase, the “organic composition of capital,” the ratio of constant to variable capital, was steadily rising.18
The consequences of this trend were both varied and far-reaching. The greater expenses needed for ever more machinery put smaller firms out of business and encouraged the formation of steadily larger capitalist enterprises. Larger firms and greater output required larger markets—an entire world market. Craft producers, such as the Indian handloom weavers, were driven out of business, and their countries turned into sources of raw materials. Emigrants from industrial countries settled in Australia or North America, and created still more markets for industrial goods and still more sources of raw materials.19
Yet the very same process leading to the production of ever greater societal wealth was producing ever greater immiseration. As production became steadily more mechanized, capitalists’ demand for labor decreased, driving down wages for regularly employed workers, and creating a growing number of workers who were irregularly employed or completely unemployed. If they did not join the waves of emigrants, they became, in Marx’s celebrated phrase, members of an “industrial reserve army.” In this way, capitalism created a constant condition of overpopulation for the working class. But the introduction of steadily more expensive machinery required that it be run for longer hours to amortize its costs, so that the expansion of mechanization produced simultaneously unemployment and a longer workday for those workers who were still employed.20
Marx also suggested that the fluctuations in the size of this reserve army were the cause of the business cycle and of regularly recurring commercial crises. The causation on this point was not entirely clear, and it seems more logical to turn cause and effect around, to see the business cycle as determining the size of the industrial reserve army: in boom times, the unemployed would have been more likely to find jobs, and the size of the industrial reserve army would have declined, while in recessions, with growing unemployment, its ranks would have increased. In any event, Volume One of Capital lacked an explicit theory of business cycles and commercial crises. There was more on the topic in the posthumously published Volume Three, which noticeably differed from the assertions in Volume One. After the disappointment of his hopes of revolution to follow in the wake of the global recession of 1857, Marx rather downplayed the importance of crises for the end of capitalism.21
What he did see as leading to the end of capitalism was the contrast between the wealth created by the growing productivity of labor, resulting from the increasing organic composition of capital, and the misery these same trends caused for the workers. In a chapter entitled “The Universal Law of Capitalist Accumulation,” Marx summed up, in angry tones, the general direction of the process driven by the increasing organic composition of capital:
The law, which . . . constantly keeps relative overpopulation or the industrial reserve army in equilibrium with the extent and energy of accumulation, binds the worker more firmly to capital than the fetters of Hephaestus bound Prometheus to the rocks. The law determines an accumulation of misery corresponding to the accumulation of capital. The accumulation of wealth at one pole is thus simultaneously the accumulation of poverty, tormented labor, slavery, ignorance, brutalization and moral degradation at the opposite pole, i.e., on the side of the class that produces its own product as capital.22
Following this drastic statement, Marx set out to offer empirical evidence of it, using (as with almost all the material in his book) developments in Great Britain from the mid-1840s to t
he mid-1860s. He related the enormous expansion of exports, from £58.8 million in 1847 to £188.9 million in 1866, the steady increase in high incomes according to the income-tax statistics, and the growth of production in coal and iron. This evidence of increasing capitalist production and accumulation was familiar to Marx, as he had been reporting on it for the New York Tribune since the early 1850s, and had made it a practice to carry around notebooks in which he wrote down economic statistics.23
Against this backdrop of increasing bourgeois affluence, Marx deployed a wealth of evidence about the misery and poverty of the working class. The Blue Books he cited revealed badly undernourished shoemakers or Londoners who could not afford the high rents of the metropolis and were thrown out on the street. They reported on overfilled poorhouses, on farm workers who toiled in labor gangs in which women and children kept down adult male workers’ wages, but paid for it with frequent teenage pregnancies. The diet of those abused farm laborers was worse than that of prisoners in jail.
Marx’s accounts were disturbing documents of exploitation, oppression, and poverty; they make for uncomfortable reading even today. But they were, quite in contrast to the discussion of the growing industrial output and wealth of the upper classes, static, snapshots of the 1860s, with no indication of whether conditions then were worse or better than in past years. Marx knew that circumstances had changed in England since the early years of the industrial revolution at the beginning of the nineteenth century. Writing about the initial phases of industrialization in Russia during the 1860s, he stated that in the czar’s empire, “so fruitful in all infamies, the old atrocities from the childhood period of English factories stand in full bloom.”24 This denunciation of Russia was a tacit admission that such atrocities were no longer occurring in England, that conditions had improved over the previous forty to sixty years.
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