finalexam

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Karl Marx

(1818 – 1883)

While socialist thought had been growing in influence since the late 18th century (aided

by the works of William Godwin, Jean Jacques Rousseau, Count Montesquieu, Robert Owen,

William Thompson, Thomas Hodgskin, and Pierre Joseph Proudhon) Karl Marx, though

sympathetic to these currents, was critical of them because he saw them as providing a utopian

vision of some future world unhinged to existing material conditions and history. For that reason,

he called the work of these socialists utopian, and argued for a way of reasoning about history,

and the possibility of socialism, that was rooted in the evolving material conditions (i.e.

economic conditions) of the human species. He called this method Historical Materialism and

saw it as an antidote to the wishful thinking inherent in the utopian socialist writers.

Marx on Historical Materialism

The basic idea undergirding the theory of historical materialism, which contemporary

Marxists tend to see as a method of analysis rather than a theory of history, was that human

society can be thought of as composed of two very broad components: on the one hand the

economic base of society, consisting of the forces and relations of production; and on the other

hand, the superstructure of ideas making up the dominant ideology, religion, political theory,

science or more appropriately widely accepted “truths” about the universe, human behavior, and

social relationships. Marx referred to this constellation of things (the economic base and the

superstructure) as a mode of production.

The forces of production represented the foundation of any one mode of production

(society) and consisted of the technology that exists to transform nature into the array of goods

needed or desired by that society (or mode of production). This technology is, by its very nature,

inherent in the memory of people (passed on from generation to generation through oral tradition

and/or more formally in the form of written records and formal instruction) and, as such, must be

seen as a feature of the people themselves, rather than a thing that exists outside of human

nature. The social relations of production, the other component of the economic base of any one

society or mode of production, consist of the ways in which humans typically organize

themselves to produce and distribute the goods. It represents the pattern of work and control, the

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class structure of society helping to explain who works, who doesn’t, who organizes work, and

who benefits from the work of others.

The forces of production are always advancing, sometimes slowly, sometimes quickly,

but advancing nevertheless. They advance because humans are creative creatures always trying

to figure out a different or better way of producing or doing something. But as the forces of

production advance, inevitably a new set of social relationships, a new social class, emerges

seeking to organize society along different lines. This new social class will have ideas that come

into conflict with the ideas of the existing ruling class steeped in the traditions and beliefs of the

previous, older, social order. For a period of time society will be in a state of revolution during

which the new social class, and it’s accompanying ideas, will be in conflict with the ideas of the

old ruling class and it’s ways of organizing society. Eventually, the new social class emerges

triumphant and a whole new era of human history emerges, one with a different economic base

and a whole new set of beliefs, the superstructure, that organize politics, government, religion,

sexuality, etc. in the new era.

This is the framework that Marx used to argue that history had evolved from primitive

communism, to slavery, to feudalism and now capitalism. While each of the preceding eras

lasted for thousands of years, capitalism, he believed, was destined to be short lived. This was

due to the fact that under capitalism, the social relations of production are structured in such a

fashion that capitalists, the ruling class under capitalism, are in perpetual competition with one

another for market shares. This economic competition forces capitalists to be attentive to new

technologies and methods of production that can provide them with a market advantage. Each

capitalist is forever seeking ways to increase his/her market share at the expense of other

capitalists. But the search for new technologies and methods of production means that a portion

of the profits (the surplus produced by workers) appropriated by capitalists is always being

invested in new technologies. In other words, under capitalism, the social relations of production

are structured in such a fashion that the forces of production (technology) grow by leaps and

bounds, explaining why the volume and variety of output is so much greater under capitalism

than under any previous mode of production.

In previous eras, the social structure of production was such that the upper classes tended

to consume, rather than invest, most of the surplus on warfare, interesting costumes, temples,

etc., instead of investing in new productive capacity. Of course, the upper classes under

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capitalism also engage in consumption such as warfare, temple building and lavish parties, but

the proportion of the surplus allocated to the creation of new productive capacity is far greater

than anything that went before. As a result, technology grows at exponential rates under

capitalism speeding up the day when the human species will be able to conquer nature and the

economy without being subjected to the imperative of private profitability.

Central to this method of reasoning is the idea that humans are active, creative, creatures

who are forever organizing their lives by reference to imagined possibilities. As a species, we

imagine and then go about creating the things and social relationships needed to make that

imagined possibility a reality. This does not mean, of course, that our creations will correspond

to our initial imagining, or that whatever we dream of can in fact become real; we are, after all,

constrained by existing technology and social relationships, i.e. the material conditions of life.

So, while we do indeed make our own history (we do have free will), we do so in ways that are

constrained by inherited knowledge and existing conditions. “Men make their own history, but

they do not make it just as they please; they do not make it under circumstances chosen by

themselves, but under circumstances directly encountered, given and transmitted from the past.

The tradition of all the dead generations weighs like a nightmare on the brain of the living”

(Marx, 18th Brumaire of Louis Bonaparte).

Marx’s theory of historical materialism (despite emerging from a critique of Hegel’s

theory of history) shared with Adam Smith’s theory of history the idea that it’s human activity,

and specifically, the act of producing and reproducing the material conditions of life, which is

the driving force of history. As such, they shared a theory of human behavior that differed from

the utilitarian conception that had been popularized by Bentham. Smith, of course, saw humans

as driven by the contradictory impulses of sympathy and self-interest. And while Marx would

not have disagreed, he would have instead but focused on the creative, doing, aspect of the

species. Marx saw work as central to the human condition. But not work in the sense of

drudgery, of “I have to go to work”, but rather work in the sense of exerting mental and physical

energy to achieve some end. To be human, according to Marx, is to work, that is, to create

things. What’s more, we are most human, in the sense of feeling empowered and therefore free,

when we control our own work to achieve our own ends. Freedom, from this perspective, has far

less to do with the absence of restraint (a common idea under capitalism) than it does with the

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ability to control one’s own labor and the fruits of that labor. To be free is to be in control of

one’s own capacity to work.

Marx’s Theory of Alienation

It’s in this context that Marx developed one of his most interesting critiques of

capitalism, his theory of alienation. Under capitalism the normal condition for the average

human, the average worker, is to work for a capitalist. The timing of work, the tempo or work, its

organization, and the fruits of that work are not under the control of the worker, but under the

control of the capitalist. As a result, the vast majority of people under capitalism spend most of

their lives (in contemporary U.S. terms, eight hours a day, five days a week for most of their

adult life) engaged in work but in ways that are not under our control. How we work, the tempo

of our work, and the fruits of our work, are not under our control. As a result, we spend most of

our time estranged from our very essence, what it means to be human. As a result, the common

psychological state under capitalism is one of estrangement, or alienation, from our selves. The

reason for this state of affairs is that we are not in control of our own labor.

The working class is intimately familiar with this condition, though they don’t call it

alienation, and are unaware of the theory. Work is seen as drudgery and a robbing of the time

one could spend doing the things one loves. It’s for this reason that the dream of running one’s

own business is such a common fantasy among members of the working class. This fantasy has

far less to do with the possibility of becoming a capitalist than it does with the possibility of

being in control of one’s own labor. The desire to own one’s own business is inevitably

expressed, by members of the working class, as the desire to be in control of one’s own laboring

activity.

But while this is an understandable response to the condition of alienation under

capitalism, Marx saw this is hopelessly naïve, not only because of the fact that the vast majority

of workers do not end up becoming small business owners, let alone capitalists, but more

importantly because it reduces the problem to the individual, forgetting that this is systemic,

social, issue. That is, Marx sees humans as social creatures and, as such, the liberation or

empowerment of any one human cannot be complete in the absence of the liberation or

empowerment of the entire network of social relationships that sustains any one individual. True

freedom, in other words, will only be possible when social production is brought under control of

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social labor, that is, when capitalism as a form of organization is abolished in the form of

socialized production, where every human, both individually and collectively, is in control of the

laboring process. This is what Marx meant by socialism, a state of affairs that provides greater

freedom to humans (by virtue of the fact that it provides workers, both individually and

collectively, control over their own labor).

Marx on Commodity Fetishism and Simple Commodity Production

This brings us to Marx’s theory of commodity fetishism and the critique of capitalist

ideology implicit in that theory. Marx notes that with the rise of capitalism there emerges the

ideology of individualism and, more specifically, the notion that all of economic activity can be

seen as nothing more than a series of exchanges individuals make with one another. It’s a

conception of capitalism that has been around since John Locke and his depiction of a state of

nature. Locke, as you recall, characterizes a state of nature as a situation in which individuals

own varying amounts of property and go about producing things for themselves and exchanging

the surplus of what they produce with others, who are also producing things for themselves. It’s a

vision of society in which each individual confronts the rest of society through acts of exchange.

What’s more, it’s a vision of society in which individuals are seen as equal and free. It’s

acknowledged that some might own more property than others, but despite this possible

disparity, what makes the individuals equal and free is that they each has the right and capacity

to do as they wish with their property and exchange it with whomever they want.

This vision of society blinds the person acculturated to the ideology of capitalism to the

social nature of all production and economic activity in general. The individual imbued with the

capitalist ethic comes to see his/her relationship to society as a series of individual acts and, in

the process, looses sight of the fact that every commodity is ultimately the result of collective,

i.e. social, effort. When buying a commodity, for example, the individual looses sight of the fact

that a commodity is the result of the collective effort of all the workers who labored to produce

and deliver the commodity to the market, and not just those who were directly involved in

producing and delivering the commodity, but as well, those who were involved in producing all

the capital that went into producing the means required to produce the commodity and all the

knowledge and training required of those who labored in its production. In short, under

capitalism, the individual comes to reify commodities as individual things rather than the

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embodiment of collective effort; and, as result, begins to accept the illusion that what he/she

produces is the result of his/her own individual effort. The individual loses sight of the role

played by the rest of society in providing him/her with the skills, tools, and infrastructure needed

for production and the role those same forces play in the production of the things he/she

purchases.

It’s in this context that Marx introduces the idea of a simple commodity producing

society. A commodity producing society is one in which humans go about producing goods with

the explicit purpose of earning a profit from selling those goods on the open market. It differs

from non-commodity producing societies in that, in the later, humans still go about producing

and distributing goods (since they must if they are to survive) but not necessarily because they

intend to sell them for a profit. The goods are produced, distributed, and ultimately consumed so

as to allow the group to survive and perhaps thrive. Feudal society could be seen as one instance

of this, but so too can the economic organizations of many Native American cultures prior to the

conquest. In contrast, in a commodity producing society, goods are produced, distributed and

consumed only if a profit can be generated from doing so. As a result, a commodity producing

society presupposes the existence of private property and the widespread use of markets.

Obviously capitalism is one instance of a commodity producing society. But what

happens under capitalism is that its ideological representation appears in the form of what Marx

called a simple commodity producing society. Such a society is a commodity producing society,

but with the added condition that every household owns enough productive property to produce

for itself. In such a system, every household produces for itself and exchanges the surplus of its

production with other households who are also doing the same. Such a system is inevitably seen

as an arena of free exchange because every household has the option and capacity to refuse any

potential exchange. And each household has the capacity to refuse a potential act of exchange

precisely because it owns enough productive property to produce things for itself. As a result,

every exchange that’s entered into must be one that each household voluntarily agreed to without

coercion.

This is the vision of society undergirding the dominant capitalist ideology. The problem

with this vision, of course, is that it’s not true. The vast majority of households in capitalist

societies do not own enough productive property to produce for themselves. Instead, the vast

majority of households own so little productive property, and frequently no productive property,

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that they have no option but to sell their own labor power so as to obtain the things they need.

That is, they cannot produce things for themselves, and, as a result, do not have the luxury of

refusing a potential act of employment. The unemployed worker will, of course, seek out the best

possible offer, but eventually an offer will have to be accepted because sooner or later (and

inevitably it’s sooner than later) the capacity to sustain oneself dries up and the worker will have

to accept an employment offer so as to survive, even if it’s viewed as inadequate or exploitative.

In short, an unemployed worker does not have the same capacity to refuse an offer of

employment as a capitalist who has the resources to wait until the terms of the exchange are to

his/her liking. The laborer cannot produce the needed goods for himself/herself and, as a result,

is coerced out of economic necessity to accept a rate of exchange that is exploitative. As a result,

rather than being an arena of freedom, as the ideology would have it, capitalism is an arena of

coercion wherein the vast majority of the population is coerced out of economic necessity to

accept exchanges that would not be accepted if the labor market were truly balanced between the

power of the capitalist and the power of the potential employee. Coercion, rather than freedom, is

the reality of capitalism. Yet, the ideology is one of freedom and equality.

It’s telling, in this regard, that the popularity of this ideology is directly related to the

ownership of productive property. The small property owning classes, small business owners, as

well as the capitalist class, are far more likely to view this ideology as a fair rendition of

conditions under capitalism, than is a working class family. Though, even among the latter, one

can find acceptance of this belief. The ideology, in short, is much more in tune with the material

conditions of people who do have the capacity to refuse a potential exchange, precisely because

they do own enough productive property to live off while waiting for the right offer.

Circulation of Commodities

This serves as a nice segue into Marx’s theory of value. Marx develops his theory of

value by adopting, as Smith and Ricardo had done, an extremely competitive view of capitalism.

He’s aware that in the real capitalist world, there are all kinds of market imperfections, such as

monopoly and monopsony, which create exploitation in the market place. In short, it’s not

uncommon to find situations where the buyer ends up paying more for a commodity than what

it’s truly worth, or situations in which the seller (say a worker selling labor power) ends up

receiving less for a commodity than what it’s truly worth. These injustices are ubiquitous under

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capitalism, but Marx does not see them as central to his critique of the system. Not because he’s

unaware of their existence but because they’re not central to his critique. What he wants to do is

demonstrate that even under the most idealized and perfect conditions, capitalism is still

exploitative. And, the most idealized version of capitalism is one that assumes extreme

competition ensuring that, in the very long run, every commodity is selling at a value that

corresponds to its normal or natural price, what Marx calls “prices of production.”

Starting from this premise Marx notes that the circulation of commodities takes on the

following form C-M-C, where C represents the value of a bundle of commodities (it could be

labor power) and M represents the value of money. The idea here is that a very common pattern

of market activity, experienced almost daily by workers, involves selling a set of commodities in

the open market in return for money and then going back to the market to exchange the money

for another bundle of commodities. In a very competitive market, the value of the commodities

offered for sale must be equal to the value of the money that’s obtained in return, the C-M

portion of the above circuit, and when the worker turns around and offers that same money in

return for another bundle of commodities, the value of the money is also equal to the value of the

new commodities, the M-C portion of this circuit. The form of the things change, from

commodities to money and then back to commodities, but the value of the things exchanged

remains the same. The purpose of this kind of activity is not to gain more value but rather to

change the bundle of commodities owned. The individual ends up with a different bundle of

commodities at the end of the cycle than what was owned at the beginning, but the value of both

sets remains unchanged.

Marx draws attention to this feature of market exchange to underscore the idea that under

conditions of extreme competition, the value of something offered must be equal to the value of

the thing purchased. In short, under conditions of extreme competition, there is no market

exploitation taking place. But, in addition, Marx draws attention to this feature of market activity

to argue that the one thing that is common to all sides of the transaction, the exchange of

commodities for money and then for commodities again, is the presence of abstract labor power.

The commodities at the beginning and end of the cycle have use value, that is they are desired by

people. But the rate at which they are exchanged for one another is directly related to the amount

of abstract labor required to produce them. While the transaction is at the level of money and

prices, these magnitudes are the superficial expression of something much more fundamental,

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namely the human effort involved in producing the commodities. Under extreme conditions of

competition, the value of the labor embodied in the first set of commodities must be equal to the

value of the labor embodied in the second set of commodities; and it must also be equal to the

value of the money that’s used as the intermediary in the above set of transactions.

While the above circuit is a common feature of market activity under capitalism it is not

the defining feature, particularly when viewed from the perspective of the capitalist. As can be

seen, there is no surplus that’s captured through such a set of exchanges. The value remains the

same throughout that circuit. The capitalist is much more interested in a series of exchanges that

can instead be represented as M-C-M’, where M’ represents a value that’s greater than the value

inherent in the original M. In this circuit, the capitalist starts out with a bundle of money, M,

offers it in return for a bundle of commodities and then turns around and sells them for a higher

amount of money, M’. While this is clearly the intent of the capitalist, it’s also obvious that in a

very competitive market setting, this would be impossible. The value at the end of this circuit

would have to be equal to the value at the beginning of the circuit, if markets were very

competitive.

So, a more appropriate characterization of what’s taking place is to depict the actions of

the capitalist in the following terms: M-C … C’-M’, where the dots now represent the production

of things over time. From this expanded perspective, the capitalists enters the input market and

offers money, M, in return for a bundle of commodities, C, (the raw materials, capital and labor

power needed for production). At that level, the value of the money that’s offered, M, must be

equal to the value of the commodities purchased, C. So, no market exploitation is taking place in

the input market. Then, the capitalist coordinates the process of production by putting the

laborers to work. The laboring activity is depicted by the three dots. But what happens during

this time period is that more value is being created through the laboring activity of the workers.

At the end of the production cycle the workers have produced a set of commodities whose value

embodies the labor they expended in its production. However, the value they’ve produced, the

abstract labor embodied in this new set of commodities, C’, is now greater than the value of the

commodities, C, initially purchased by the capitalist. The capitalist now enters the output market

and exchanges the newly produced commodities, C’, for an equal value of money, M’. In the

output market, no exploitation is taking place; the value of the money obtained, M’, is equal to

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the value of the commodities, C’ offered in exchange. However, the value of M’ is greater than

the original money, M, offered at the beginning of the process.

The point Marx is making with this example, is that the surpluses that are extracted under

capitalism do not occur as a result of market exchange, they instead occur through the process of

production. The surplus is a result of the way in which labor is organized to produce things for a

profit, the surplus does not arise from market exchange.

Marx’s Theory of Value - Socially Necessary Labor

The value of the commodities being exchanged in the market is equal to what Marx

called abstract labor. To be more specific, it is equal to the socially necessary labor time involved

in producing the commodity. By socially necessary labor time, Marx meant the average amount

of effort it takes to produce the commodity, in the industry that produces that commodity, under

the normal or average conditions of production and technology. It’s important to note that Marx

is not talking about a unique or non-reproducible good or commodity. Like Ricardo he’s

interested in explaining the structure of the reproduction of the system as a whole, not the

production and sale of a unique or non-reproducible good, like a unique work of art or some

“special edition” of a commodity. Thus, when discussing the value of a commodity his focus,

like Ricardo’s, is on those commodities that are continually being produced and reproduced in

the system. The industries that produce these commodities have techniques of production that are

normal to those industries and, as a result, a normal or average usage of labor per unit of the

commodity. It is this normal or average usage that he has in mind when using the phrase

“socially necessary labor time.”

While the value of a commodity is equal to the socially necessary labor time that goes

into its production, what is the value of labor itself? This is where Marx introduces an interesting

idea. Under capitalism, labor itself comes to be seen as a commodity. Except that what is traded

in the labor market isn’t labor per se, but rather the promise of work, what Marx calls labor

power. When the capitalist and laborer confront each other in the labor market, with the capitalist

looking for an employee and the worker looking for an employer, what is exchanged (assuming

both parties agree to the terms of exchange) is labor power, not labor. What this means is that

once the capitalist has hired the worker, he must now place the worker within his/her firm to

extract from him/her the labor he/she is hoping to receive. And this is done by supervising

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laboring activities of the worker, ensuring that he/she work as hard as possible. Of course, the

laborer will have an incentive to reduce the demands of the job and work at a level and pace

that’s consistent with his/her own desires and wants. The point is that, once labor power has been

bought, the process of extracting work from the laborer occurs within the process of production

with management seeking as much effort as possible and labor seeking to keep those demand

within reasonable bounds. The process of production becomes a contested terrain wherein the

interests of capitalists conflicts with the interests of workers, and the firm comes to be seen as an

institution whose purpose is to control workers and extract labor.

Since labor power is a commodity sold in the labor market, its value, like the value of any

other commodity, is equal to the socially necessary labor time that goes into its production. But

in this case there isn’t an industry producing labor power, and to that extent labor power isn’t

truly a commodity, but rather a fictitious commodity, since profits aren’t being generated from

the production and sell of labor power. The socially necessary labor time that goes into the

production of labor power is the laboring activity of the parents, schools, food, clothing, housing,

etc. that’s required to sustain the bring up the worker and sustain him/her.

Let’s now restate the M-C-M’ circuit. The capitalist enters the input markets and

exchanges money for a bundle of commodities. But these commodities now consist of two broad

types: constant capital, C, and variable capital, V. Constant capital refers to the tools and raw

materials needed for production. The value of constant capital, C, is equal to the socially

necessary labor time involved in its production. Variable capital refers to the labor power that’s

purchased in the labor market and its value is equal to the socially necessary labor time required

to reproduce the worker. But unlike constant capital, variable capital is elastic in the sense that

the capitalist can, through the way in which he/she organizes the workplace and manages labor

(and more broadly through the way in which the capitalist class as a whole influences labor laws

and private property), alter the amount of labor exerted by the worker. So, once the capitalist has

hired the worker, he/she goes about extracting as much labor as possible. Any labor time, over

and above the labor time already embodied in variable capital, represents a surplus, S, that is

appropriated by the capitalist.

Given this, we can now write Marx’s equation summarizing the component parts of the

value of a commodity as

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W = C + V + S

where, W represents the worth or value of the commodity, C represents the value of constant

capital, V represents the value of labor power, and S represents surplus value. The work

performed by the worker, in the context of the firm, always consists of two parts: that portion

that goes to reproducing his lifestyle, the value of his labor power, V, and that portion that

exceeds the amount of laboring activity needed to replace his/her own labor, namely S. The

surplus labor performed by the worker is appropriated by the capitalist in the form of profits (or

more broadly, all forms of property income – such as, profits, interest, and rent).

It’s important to underscore the fact that the above equation represents the average or

normal amount of socially necessary labor time that goes into the production of a commodity.

That is, it’s a mapping of the different forms of labor that must ultimately go into the production

of a commodity: the labor that goes into producing the necessary capital goods and raw materials

used in its production, the labor that goes into reproducing labor power, and the labor that

exceeds the amount required to reproduce labor power. In short, every component is measured in

terms of labor. The economy as a whole, and the market exchanges that serve as conduits

through which commodities are circulated throughout the system, is conceived of as an elaborate

network of laboring activity. Production as well as exchange is thought of in terms of units of

labor. So, when Marx is thinking in terms of the value of a commodity, he is literally thinking in

terms of the amount of labor time that is required to produce the commodity.

This is very different from what Smith or Ricardo had in mind. The latter two theorists,

and specifically Ricardo, argued that the natural price of a commodity, what they called the value

of a commodity, was determined by the amount of labor that goes into its production. They never

once suggested that the value of a commodity IS the amount of labor that goes into its

production; they instead argued that there was a predictable relationship between the natural

price of a commodity and the amount of labor that goes into its production. If the amount of

labor that goes into producing a commodity increases, then its natural price will increase; and if

the amount of labor going into the production of a commodity decreases, then its natural price

will fall. But Marx is saying something more exacting. He’s claiming that the amount of labor

that goes into the production of a commodity IS value. If the amount of socially necessary labor

that goes into producing a commodity increases then its value increases by the same amount,

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because it is one and the same thing. Likewise, if the amount of socially necessary labor

decreases.

Marx’s theory of value is thus less concerned with explaining prices as monetary

phenomena than in explaining the underlying social relationships that exist under the veneer of

money exchanges. Marx sees prices, and money exchange, as the epiphenomena of the

underlying social relationships that are at the core of capitalism. While economic activity

(production and distribution) is expressed in terms of money (so many dollars’ worth of capital

or labor, or so many dollars for this or that commodity), this is nothing more than the surface

appearance of the underlying social relationships that structure the use of labor. So, rather than

explain market exchange by reference to monetary relationships, he instead explains market

exchange by reference to the way in which labor is structured in the production and reproduction

of the system.

Rate of profit, surplus value, and organic composition of capital

Given this, let’s now explore three key concepts used by Marx to explain the process of

exploitation and capital accumulation under capitalism: the rate of surplus value, the organic

composition of capital, and the rate of profit.

The Rate of Surplus Value is used by Marx to capture the degree of exploitation under

capitalism. It measures the amount of surplus value generated per unit of variable capital, or

stated differently the amount of surplus labor per unit of necessary labor. It captures the amount

of work, over and above socially necessary work, that laborers expend to generate profits for

capitalists. Letting s represent the rate of surplus value, then s = S/V. This variable can increase

either because the working day is lengthened, causing S to increase, or because the subsistence

items needed to reproduce labor power are cheapened, causing V to decrease, or because labor is

made more productive through technological improvements, causing V to decrease and/or S to

increase. Obviously, the incentive structure under capitalism is to increase the rate of surplus

value through a combination of all three possibilities.

The Organic Composition of Capital is Marx’s way of measuring the relationship

between constant capital and variable capital in the production of things. With a given

technology of production there’s a certain proportion that must exist between the amount of

constant capital and variable capital used in production. Letting q represent the organic

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composition of capital, then q = C/(C+V). It is analogous to the more well-known concept of a

capital-labor ratio, which, in Marxian terms, would be represented as the ratio C/V. Marx argued

that the process of capital accumulation would cause the organic composition of capital to rise as

capitalists compete against each other to gain greater control of the market or segments of the

economy. Thus, competition, from a Marxian perspective, has a tendency to concentrate the

ownership of productive assets in the hands of an increasingly small number of capitalists. The

productive process comes to be centralized, and this manifests itself in a growing organic

composition of capital. From this perspective, Marx did not see competitive markets as

remaining that way over time. Instead, competition for market shares would cause the markets to

evolve into oligopolies and/or monopolies, as a result of the growing concentration of capital in

the hands of an increasingly smaller number of capitalists.

The Rate of Profit measures the surplus value that’s captured by the capitalist as a

fraction of the total invested capital; that is, it’s a ratio of surplus value to the sum of constant

capital and variable capital. In capitalism, the rate of profit is expressed as a ratio of profits to the

value of invested capital. Since Marx is thinking in terms of actual amounts of labor, his

conception of the rate of profit is intended to capture the ratio of surplus labor time (S) to

socially necessary labor time (C and V). Letting p represent the rate of profit, then p = S/(C+V);

and with a little algebraic manipulation, it can be shown that the rate of profit is a function of

both the rate of surplus value and the organic composition of capital. That is, p =s×(1-q). It’s

through this latter relationship that Marx made the famous prediction that the rate of profit would

eventually fall causing the demise of capitalism. It’s important to remember, however, that Marx

was not alone in making this prediction. It was a mode of reasoning that pervaded the classical

era, as noted in Ricardo’s famous prediction that capitalism would arrive at a stationary state as a

result of a fall in the rate of profit. So, in this sense, Marx’s “prediction” of a falling rate of profit

is no more outlandish than Ricardo’s identical prediction. What’s more, both Ricardo and Marx

listed reasons for why this might not occur.

In general Marx argued that, over the very long run, there was a constant downward

pressure on the rate of profit as a result of the growing organic composition of capital brought on

by capitalists competing with each other to dominate the market or the economy. Obviously, if

the rate of surplus value, s, remains unchanged while the organic composition of capital, q,

increases, then the rate of profit, p, must fall. But the problem with this interpretation is that one

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would also expect the rate of surplus value to increase as the organic composition of capital

increases. That is, as the organic composition of capital increases, bringing with it more and

better technology, the rate of surplus value will also increase as a result of labor’s increased

productivity brought on by more and/or better capital. So, what is really taking place is that as

the organic composition of capital increases over time, due to capitalist competition, the rate of

surplus value is also increasing. But the rate at which the rate of surplus value increases might be

faster, slower, or equal to the organic composition of capital, making it difficult to predict the

trajectory of the rate of profit. Indeed, it would not be unreasonable to find the organic

composition of capital, q, growing at roughly the same pace as the rate of surplus value, s,

keeping the rate of profit, p, relatively stable over time. The point is that there is no clear

prediction for the rate of profit over the long term, even by Marx’s own categories.

In volume I of Capital (the only volume that was published during his lifetime; the

remaining volumes were published after Marx’s death by Engles, who edited Marx’s unfinished

manuscripts as best he could), Marx argued that competition among capitalists would cause the

rate of surplus value to equalize across industries. Competition among workers would cause the

price of labor power to equalize throughout the system as workers migrate from low wage to

high wage firms and industries. At the same time, competition among capitalists would induce

them to adopt the most efficient technologies in the various industries, ensuring an equal rate of

exploitation across firms and industries. The combined effect of these two processes would bring

about, he believed, an equal rate of surplus value across the system.

Values and Prices of Production

In volume III Marx (with Frederick Engels’s editorial work) adopted a more realistic

interpretation of capitalist competition by arguing that it’s the rate of profit, rather than the rate

of surplus value, that is equalized throughout the system. But the problem with this more realistic

approach is that the rate of profit will differ from industry to industry depending on the organic

composition of capital in each industry. Or stated differently, the rate of profit will tend toward

equality only if each industry has the same organic composition of capital and rate of surplus

value. But obviously, industries differ with regard to their organic composition of capital, even if

the rate of surplus value is equal (which, in turn, is a dubious proposition).

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Marx’s solution to this problem was to adopt the classic (i.e., Ricardian) idea that

competition among capitalists causes the surplus to be redistributed throughout the system,

bringing about an equal rate of profit across all industries. In the process of developing this

argument, Marx also provided a tighter, though problematic, argument about the relationship

between values and natural prices (what Marx called “prices of production”). Reviewing the way

in which Marx transformed values into prices has the advantage of bringing to the foreground the

relationship between values (the realm within which most of Marx’s theories reside) and prices

of production (i.e., natural prices).

We’ll start by imagining a simple economy consisting of three industries as displayed

below.

C V S W S/V C/(C+V) S/(C+V)

I 250 100 100 450 100.0% 0.71 28.6%

II 100 50 50 200 100.0% 0.67 33.3%

III 250 150 150 550 100.0% 0.63 37.5%

Sum 600 300 300 1200 100.0% 0.67 33.3%

The first thing to note is that this example assumes an equal rate of surplus value in each

industry, to keep it consistent with Marx’s belief that, in the very long run, the rate of surplus

value would equalize across all industries. The second thing to note is that, despite the equality in

the rate of surplus value, the rate of profit differs across industries as a result of differing organic

compositions of capital. What’s more, there’s a specific pattern that exists between rates of profit

and organic compositions of capital. The industries that have a higher-than-average organic

composition of capital (such as I, with a value of 0.71), have a lower than average rate of profit

(28.6%), while the industries that have a lower than average organic composition of capital (such

as III, with a value of 0.63) have a higher than average rate of profit (37.5%). Finally, notice that

the industry with the average organic composition of capital (industry II, with a value of 0.67),

which in turn is equal to the organic composition of capital for the system as a whole (see the

Sum row), has a rate of profit that corresponds to the rate of profit for the system as a whole

(33.3%).

Like Ricardo, Marx claims that, in the long run, the rate of profit will be equal across

industries as a result of capitalist competition. He envisioned this occurring through the market

system, but at the level of prices and money, rather than values. Competition would distribute the

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surplus from high profit industries to low profit industries ensuring, in the long run, an equal rate

of profit throughout the system. The following table shows the outcome of this process.

C V S W S/V C/(C+V) S/(C+V) r r*(C+V) P P-W

I 250 100 100 450 100.0% 0.71 28.6% 33.3% 116.7 466.7 16.7

II 100 50 50 200 100.0% 0.67 33.3% 33.3% 50.0 200.0 0.0

III 250 150 150 550 100.0% 0.63 37.5% 33.3% 133.3 533.3 -16.7

Sum 600 300 300 1200 100.0% 0.67 33.3% 33.3% 300.0 1200.0 0.0

Note that as industries move toward a common rate of profit, in this case 33.3%, the

industries with a high organic composition of capital (industry I) will experience an increase in

the price of their output, compared to their value, allowing their rate of profit to move up toward

the economy-wide average of 33.3%, while industries with a low organic composition of capital

(industry III) will experience a decrease in their price, compared to their value, allowing their

rate of profit to move down toward the economy-wide average.

Marx’s way of explaining the relationship between values and prices of production (or, to

use the language of Smith and Ricardo, between embodied labor and natural prices) has the

advantage of bringing to the forefront a way of conceiving market competition that was common

to the classical economists, but which fell by the way side with the advent of neoclassical

economics. That is, the classicals conceived of market competition as a system wherein

capitalists compete against each other to capture as much of the surplus as possible. That is, from

a classical perspective, market competition has the effect of redistributing the surplus from high

profit regions to low profit regions. That is, as capital moves about the system in search of

profits, by investing in high profit sectors while disinvesting in low profit sectors, prices and

rates of profit will be falling in sectors where capital is flowing in and rising in sectors where

capital is flowing out. The search for the highest rate of profit has the unintended effect of

bringing about an equality in the rate of profit as the surplus gets redistributed from high profit

sectors to low profit sectors.