ECON essay 800 words

88

Land and Economic Surplus

Is land economically important?

Is the rent of land a drain on economic progress?

Should land rent be taxed?

The analysis of land has a rather shadowy presence in modern economics. In agricultural

economics and natural resource economics it cannot, of course, be ignored. Elsewhere it tends

to be treated either as a factor of production-on a par with labour and capital-or as part of the

backdrop to the real economic action of production, distribution, and exchange. In classical

political economy, however, the analysis of land was a central concern.

Why the change? To some extent the neglect of land in recent economic theorising

reflects changed material economic conditions. Economic modernisation, particularly over

the last century, has caused proportionately fewer people to be directly engaged in farming .

Modern technologies have also made more and more industries 'footloose'; that is, not tied

to particular geographical locations. AU economic and social activities involve the use of

land in some way, but the modern economy in general seems less place bound. Neglect of the

role that land plays in the economy also has an ideological dimension. Attention is diverted

from the economic and social consequences of private land ownership, now seemingly so

normal as not to require analysis. Therein lies a significant bias. Its redress requires some

reconsideration of what the leading classical political economists had to say about land. It

also requires attention be given to the radical variation on the theme of land ownership in

the writings and teaching of Henry George. As we will see, these ideas are directly relevant to

modern political economy.

CHAPTER 11: LAND AND ECONOMIC SURPLUS 89

The significance of land in different economic systems

From an ecological perspective, it is particularly important that the use of land be carefully

considered. Land is fundamentally different from labour and capital because its supply

is inherently limited. It is part of our natural resource endowment. Even from a narrowly

economic perspective, it is clear that the availability, use, and productivity of land (both

in rural and urban contexts) has a major bearing on the capacity for economic growth. From

a broader social perspective, land is also special. Some of us enjoy roaming over publicly

accessible tracts of land, while others enjoy exclusive use of small parcels of it. Managing the

tension between these public and private aspects ofland is a key issue for public policy.

There are enormous differences in the ways in which land is allocated and used. Consider,

first, the role of land in traditional Aboriginal societies, such as the Aboriginal peoples of

Australia or the Native American peoples of North America. Land is integral to subsistence and

to community: indeed, it is usually not seen as something separate from life itself. People exist

through being in, and of, nature. The land provides the sustenance that makes life possible.

The people may be regarded as its custodians, but it makes little sense to think of them

individually or collectively owning the land. They no more own the land than it owns them.

Land is simultaneously history, geography, and spirituality; it is not a marketable economic

asset.

Under feudalism, land also has a crucial, but quite different, role. Command over the

disposition ofland is a defining feature of the economic and social order. A person's relationship

to the land significantly defines his or her social standing. The privileged position of the ruling

class depends on control of the large areas ofland that its members possess. They call the shots

because they control the key resource that enables them to capture the lion's share of the

economic surplus. The mass of the people, on the other hand, are in a position of economic

dependency and social subordination because their livelihood depends on their access to land

that they do not own.

For the classical political economists, the emergence of capitalism from this feudal order

needed to be understood. The transition involved a significant change in the distribution of

economic power. It saw a switch from landowners being the dominant element in the ruling

class to capitalists being the ascendant element-economically, if not socially and politically.

The landowners still dominated parliament in Great Britain, for example. Then, as now, changes

in the composition of the ruling class tended to lag behind the economic changes.

So it was natural that, in order to understand the economic conditions of their era,

the classical political economists should pay particular attention to questions about

land: its ownership, how income is derived from it, and the size of that income relative to

90 PART Ill: BAC K TO BAS I CS

other incomes derived from labour and capital. Indeed, even before the age of classical

political economy, the land question had been central to economic discourse. The French

physiocrats, a group of Enlightenment thinkers of the 1760s, argued that land-a gift of

nature-was the only real source of wealth, because it enabled agriculture to generate a net

product in excess of production costs. 1

Rent as a brake on economic progress? Of the classical political economists, David Ricardo made the most well-developed analysis

of the role of land in economic progress. Himself a landowner, Ricardo was nevertheless no

apologist for the interests of the landowning class. On the contrary, he saw the capacity

of landowners to obtain a major share in the economic surplus as an obstacle to economic

development. According to Ricardo, the income that landowners derive in the form of rent

comes from the incomes that would otherwise go to capitalists and workers. Insofar as it

comes from the profit share, rent impedes the process of capital accumulation and thus limits

economic growth. It is an argument that is of continuing significance, notwithstanding the

greater interpenetration ofland and capital ownership in modern capitalism.

Rent has to be carefully defined. We are used to thinking of it as a payment for the use

of housing. We commonly talk of 'renting ' a house or a flat (or, generally, any commodity

for hire , such as a car or a floor-sanding machine). In that popular sense, we are talking of a

payment for temporary access to, or use of, the property. It is important to emphasise that,

in this chapter, rent is being used in a more specific sense. It refers only to a payment for

land: in other words, it is a site rent. What we normally call the rent for a house can be seen as

having two components: the site rent for the land and the payment for hiring the house that

stands on the land. Only the first of these two components can properly be called rent for the

purposes of the current analysis. Defining rent in this way immediately draws attention to its

class character: its association with the wealth and power of landowners.

According to Ricardo, 'the interest of the landlord is always opposed to the interest of

every other class in the community'. 2 Why is this so? The Ricardian theory is based on two key

assumptions. The first is that land differs in its fertility-so all lands can be ranked from the

most fertile to the least fertile. The second is that competition equalises the profit rate among

farmers who hire land from landowners. Box 11.1 shows how the revenue generated by the

economic use of land has to be shared between landowners, capitalists (the tenant farmers

in this model), and workers (the farm employees). The general tendency is for profits to be

squeezed because landowners capture a share of the economic surplus generated. Indeed,

as more land is brought under cultivation (that is , previously submarginal land becomes

marginal), the proportion of the total value of production captured by landowners increases.

So, even if wages remain at subsistence level, the profit share declines.

Therein lies a deeply troubling paradox. According to this analysis, profits are the source of

capital accumulation, the driving force in the capitalist system, but they are increasingly hard

CHAPTER 11: LAND AND ECONOMIC SURPLUS 91

to sustain as economic expansion occurs. Growth is stymied by the diversion of the economic

surplus into rent payments. 'Do away with the landowners' is an understandable response. As

a member of parliament in the midst of other members who represented landowners' interests,

Ricardo took a more reformist stance. He thought the problem could be significantly reduced

by the removal of the impediments to trade that led to farmers cultivating land of low fertility.

He argued forcefully that the repeal of the Corn Laws, which protected local agriculture from

competition from imports, would counter the tendency for rents to rise at the expense of

profits.

Whether free trade is the appropriate antidote to the power and wealth of landowners

remains a contentious point. Restrictions on agricultural trade are still commonly justified by

those wanting to protect the interests of rural landholders and regional communities whose

economic prosperity depends on such protection. The Japanese government, for example,

imposes restrictions on rice imports, seeking to maintain the viability of the local farming

sector, whose importance is social and cultural as well as economic. Although the case for such

policies is not normally couched in terms of safeguarding landowners' interests at the expense

of capital and labour, that is the usual economic effect. It runs counter to the Ricardian

argument for squeezing rents by breaking down the impediments to agricultural trade.

The Ricardian view can be considered part of the general case, considered in the preceding

chapter, for trade liberalisation based on the principle of comparative advantage. Restrictions

such as the Corn Laws impeded the process of specialisation, which free trade is held to

encourage. On this reasoning, it is free trade that is the antidote to the power oflandowners

to capture the economic surplus as rent. It is a chain of reasoning thoroughly in keeping with

the classical political economists' view of the extension of markets as a progressive force for

economic change.

BOX 11.1 R E N T, WAGES, PROFIT: A RICARDIAN VIEW

Figure 11.1, on the next page, depicts how the value of the produce from land is shared

between landowners, capitalists , and workers. The vertical axis measures the monetary

values of the land and its produce, while the horizontal axis measures the amount of land

used (the number of hectares, for instance).

The line showing the value of the additional product (for example, wheat) from each

success ive unit of land slopes down to the right as less fertile land is brought under

cultivation. In other words, the marg inal product of land declines as more is used.

The rent is the difference between the value of product generated by each unit of land

and the value generated by the marginal unit; that is, the last piece of land brought under

culti vation. This is the differential rent. It is the upper limit of what landowners can charge

farmers for using their superior quality land (the land that is more fertile than the marginal

land). If OA units of land are used, the total rent is the shaded triangular area XYZ.

92 PART Ill: BACK TO BASICS

FIGURE 11.1 INCOMES FROM THE USE OF LAND

X

$ z Marginal product of land

0 A c Units of land

How is the rest of the value (that is, the area OAYZ) shared among farmers and those

who work for the farmers as employees? If, as the preceding chapter argued, employees'

wages are kept at subsistence level (OW in the graph), then the total wage share is shown

by the area OAVW, leaving VWZY as the profit share to go to the farmers as a return on their

investment of capital and effort.

Now visualise the situation in which the economy has expanded and more land has been

brought under cultivation. The share of rent in the total value produced increases. In the

extreme, the profit share disappears (when OC land is used). This illustrates the general

tendency for profits to be squeezed out between rents and wages. If wages are raised as

more land is brought under cultivation, the squeeze is yet tighter. This may occur when

food becomes more expensive, because inferior land has to be used and the subsistence

wage is consequently increased. In that case, the line showing the wage rate would slope

upwards to the right, which would mean that profits would be eliminated even more quickly

as additional units of land were cultivated. Under capita li sm this would bode ill for the future

of economic growth.

A general assault on land rent The argument so far has been couched mainly in terms of agricultural land. However, similar

principles apply if we consider the use ofland in an urban context. Instead of thinking of the

land as having a capacity to earn differential rent according to its fertility, we can now visualise

its capacity to earn differential rent according to its accessibility (to centres of commercial

activity). As a city grows, more land is brought into urban use (for housing, industrial purposes,

water storage, waste disposal, and so forth). As in the agricultural model, that more extensive

land use raises the capacity of existing urban land to earn even higher levels of rent. So, as

towns grow, the landowners are the primary beneficiaries, at the expense of capitalists and

workers. Some claim that this process is operating in modern cities, with dramatically adverse

economic and social consequences. 3 The ideas of the nineteenth-century social reformer Henry

George, as well as those of David Ricardo, are pertinent to understanding these contemporary

processes.

CHAPTER 11: LAND AND ECONOMIC SURPLUS 93

As George emphasised, land is essentially a gift of nature . Problems start to arise when it

becomes privately owned. As more of nature's gift is used for income-generating purposes, a

greater share of the society's total income goes to those who have acquired property rights in

land. In the development of the USA, for example, the westward movement of the settlers, and

their capture of the land from the Indigenous peoples, vastly increased the material wealth

of the settler society. With economic growth in generat the increased value of the land is

captured for private rather than public purposes. Coupled with the unequal distribution of its

ownership, this exacerbates socioeconomic inequalities. Land may often be held idle because

it is bought and sold for speculative gain. That speculation then fuels further socioeconomic

inequality, as well as diverting funds from productive purposes.

Henry George's analysis of land as a source of these continuing socioeconomic problems

deserves careful consideration. As with other political economic doctrines, it is useful to

interpret the arguments and their influence in historical context.

BOX 11.2 HENRY GEORGE (1839-97)

Henry George was the founder of a social movement that, in

its time, rivalled Marxism as a major force for radical political

economic change. George's focus on the inefficiencies and

inequities associated with the private ownership of land,

and on the simple remedy of land taxation, inspired many

social activists. The ideas he pioneered are still of significant

contemporary relevance.

Unlike most of the other intellectual giants in the history of

political economy, George had no academic credentials. As a

young man in the USA, he had various jobs, eventually turning

to journalism, running a struggling little newspaper in San

Francisco. He visited New York in 1869 to set up a telegraphic

news bureau for the paper (unsuccessfully, as it turned out,

because of opposition from larger and more powerful press and

telegraph monopolies) While in New York-then the epitome

of the modern capitalist city-he was dismayed by the gross inequalities that he witnessed

between rich and poor. He asked himself why, in a country so blessed by nature, with more

than enough resources for all, there should be such maldistribution. By all accounts, the

answer-and the remedy-came to him in a blinding flash.

He began writing his analysis of how rents appropriated by landowners were at the root

of all such economic and social problems, and how a single tax on land rent could provide

the remedy. From a Georgist perspective, the capture of the economic surplus in the

form of rent is at the expense of ordinary working people. As George said, The increase

in land val ues is always at the expense of labour: 4 In the Ricardian view, rent is usually at

the expense of profits (since wages are destined to remain at a subsistence level anyway).

94 PART Ill: BACK TO BASICS

The Georgist view had more political appeal because most people, it seems, wou ld benefit from redressing this source of social injustice.

George's work appeared in a series of pamphlets, and then in his major book, Progress

and Poverty, which was published in 1879. Progress and Poverty was translated into 15 languages and so ld millions of copies. George travelled internationally, preaching his distinctive gospe l. In Australia, his public meetings enjoyed massive attendances. George's

diagnosis of the injustices associated with the 'land question' had widespread appeal in a frontier economy like Austral ia, comparable in this respect to the USA.

The strong social movement that Henry George started is no longer the force it once was. Sadly, it seems more people today are concerned with claiming a stake in the land racket than they are with the reform of public policy regarding land . As a consequence, our cities become more expens ive to live in and more socially divided, and most of the economic

surplus goes into higher land values that yie ld private rather than public benefits.

The obvious solution to the economic inefficiencies and social injustices arising from

private land ownership is public ownership. The collective land resources could then be used

according to whatever development plan the society establishes. However, Henry George did

not consider this necessary, because he shared the classical political economists' aversion to

an extensive role for the state in the direct management of economic resources. He favoured a

market-orientated approach, but with a uniform land tax. Other classical political economists,

including David Ricardo, favoured substantial land taxes, but George was unique in thinking

that a general tax on the site rent ofland would be sufficientto finance all the necessary public

expenditures of government. A land tax is the best sort of tax, Georgists have consistently

argued, because it creates an incentive to use all land for its most productive purpose in

order to generate the revenue to pay the tax. By contrast, taxes on labour and capital create

disincentives to productive effort. A single tax on land that would replace aU personal income

taxes, business taxes, inheritance taxes, and taxes on goods and services, is held to be more

economically efficient.

Whether a single tax on site rents today could generate sufficient revenue to finance all

government expenditures is debatable, given the growth in the array of such expenditures

since George's time. 5 But the case for land taxes remains strong. Indeed, local property

taxation is widely used as a means of taxing land ownership and generating revenue for local

governments. As a matter of political pragmatism, some balance between taxation of land,

other assets, income, and expenditure seems inescapable. It also addresses contemporary

concerns about the diversion of the economic surplus into the hands of people who make no

directly productive economic contribution. 6

Conclusion Land is an important topic in political economic analysis. In the era of classical political

economy, the central focus was on agricultural land. In the modern economy, urban land

CHAPTER 11 : LAN D AND ECONOM IC SURPL U S 95

warrants comparable attention. Henry George anticipated this over a century ago, when he

noted that the contrast between affluence and poverty was most striking in 'the great cities

where the ownership of a little patch of ground is a fortune '. 7 That tendency has been multiplied

many times over in the intervening period as cities have grown and land prices escalated.

Those land prices are a major element in creating divided cities. In conjunction with housing

markets, land markets have led to a spatial segmentation of cities into affluent suburbs and

poorer areas, the latter sometimes forming ghettos where socioeconomic disadvantage is

perpetuated in a vicious circle. As David Harvey, a leading urban geographer, has argued, the

rich command space while the poor are trapped in it. 8

Land, and the intergenerational transmission of its ownership, is a major source of

economic and social inequality. This is not a problem of transition between feudalism and

capitalism, as it may have been perceived during the age of classical political economy. It is,

rather, an enduring feature of a society in which income from property ownership commonly

outstrips income from productive effort. However, as the ownership of land has become ever

more intertwined with the ownership of capital, there is a need for an analysis of unearned

incomes in general (from capital as well as land). In this context the study of Marxist economics

is essential.

KEY POINTS

"""" • Although neglected in subsequent economic orthodoxy, the analysis of land and rent was

central to classical political economy.

• The capacity of landowners to capture a substantial share of the economic surplus may retard economic progress while also accentuating inequality in the distribution of wealth.

• Land taxation is a means of diverting the economic surplus from landowners to government so that it can then be used to finance social infrastructure and services.

•. 11

12 Contesting Capitalism .............................. 098

13 The Mode of Production .............. ............ . 107

14 Labour, Value, Exploitation ......... ............. 115

15 Capital Accumulation ............................. . . 126

16 Reproduction, Growth, Change ................ 133

17 Economic Crises ················· · ····· · ······ · · · · · ···· 141

98

Contesting Capitalism

Are Marxist ideas relevant today?

What are the origins of the Marxist critique of capitalism?

What is distinctive about the Marxist method of analysis?

Many different structures have been built on the foundations laid by classical political

economy. The neoclassical economists developed their analysis in a conservative direction,

maintaining the focus on the beneficial effects of markets, but narrowing the range of social

concerns and purging the theory of its explicitly ethical aspects. We look at their work and

its influence a little later. Chronologically prior is the contribution of Karl Marx, providing

a thorough critique of the capitalist system. It needs careful consideration because of its

controversial character and continuing challenges.

Why study Marx? There is a common view that Marx is dead-notjust the man, but his ideas and their relevance

to our lives today. It is a view based largely on the problem of constructing a viable alternative

to capitalism in practice. 1 The problem with this negative view is that it ignores Marx's central

concerns: interpreting the workings of a capitalist economy, understanding economic

change, and considering the principles on which alternatives to capitalism might be based.

These aspects of Marxism are neither negligible nor passe: they are central to political

economy.

There are three reasons to study Marxist political economy. First, it has a key place in

the history of economic thought. Marx developed his ideas from classical political economy.

The development of subsequent schools of thought in the economics discipline can be

interpreted, in large measure, as either extensions of Marx's analysis or reactions against it.

Orthodox economist Paul Samuelson once denigrated Marx as a 'minor post-Ricardian'. 2 It is

more sensible to see Marx standing centre stage, with the other actors in the drama either

CHAPTER 12: CONTESTING CAPITALISM 99

challenging him or tiptoeing around pretending he is not there. An understanding of the

development of economic ideas would be markedly deficient without some introduction to

Marx and Marxism.

Second, Marxist political economy provides a framework for understanding capitalism

today. The institutional features of the economy are different in various ways from the economy

Marx analysed in the nineteenth century. Yet modern Marxists contend that there are elements

of continuity in the fundamental nature of the system: the relationship between capital and

labour, the process of capital accumulation, and the contradictions that periodically cause

economic crises. These claims warrant careful consideration. 3 Does Marxism indeed have the

capacity to explain the persistence of poverty amid affluence and the continuing problems of

economic inequality, underdevelopment, and recessions? How can the basic Marxist tenets be

updated and revised for this purpose?

Third, Marxism demands attention because it has had such a great influence in the world.

It has inspired numerous liberation struggles. Marx's insistence that it is people who make

history-albeit in circumstances not of their choosing-has given this current of political

economic thought an essentially activist element. This is where many of the problems with

interpreting socialism and communism in practice begin, for all sorts of political acts have

been carried out in the name of Marxism. Our concern here is with the Marxist analysis of

capitalism and, for this purpose, we can largely set aside the experience of trying to construct

non-capitalist economies . By concentrating on the analysis of capitalism, we can situate Marx's

analysis in relation to the classical political economy that preceded it and the developments in

orthodox economics since.

Marx sought to understand capitalism in its entirety: its emergence from feudalism, its

internal dynamics and contradictions, and the type of economic system that might follow it.

He developed a view of the political economic process as restless, evolutionary, and potentially

revolutionary. Marx, in effect, tried to emulate Charles Darwin, whose ideas about biological

evolution were so influential. He was looking for the forces that drove economic, social, and

political change. He was doing so at a time when dramatic changes were taking place in Britain

and Europe, when capitalism was evolving and reshaping society in its own image.

BOX 12.1 KARL MARX (1818-83)

Karl Marx is surely the most controversial figure in the history of political economy. His

analysis of capitalism, and his advocacy of a socialist alternative, has had enormous

influence.

Marx was born in Trier, in what is now Germany. At university he studied law and mixed

with a group of radical inte ll ectuals called the Young Hegelians, who were followers of the

philosophy of G. W F. Heg el (1770-1831) Marx's increasing ly critical social and politica l

100 PART IV: THE CRITIQUE OF CAPITALISM

views found expression in articles he wrote for newspapers.

His growing reputation as a dissident eventually led to the

closure of the journal he edited.

He took refuge in France and then Belgium, where the

authorities also found his presence unwelcome. In Galbraith's

words, 'Germany, France and Belgium would all unite in the

view that Marx was an excellent resident of some other

country' Marx eventually settled in London with his wife and

family. They lived poorly, dependent on the small income

generated by Marx's writing for newspapers and on the

financial support of friends, particularly Friedrich Engels,

with whom he wrote The Communist Manifesto.

Marx spent a great deal of time in the reading room of

the British Museum, immersing himself in the works of the

classical political economists. His radical reinterpretation

of their ideas contributed to his analysis of the capitalist

economy, which he developed in his own three-volume work

Capital and in numerous other books and pamphlets. These

works stand as the most powerful critique of the capitalist

system ever written.

Marx was also concerned with practical matters. He

sought to organise the working classes so that they could

challenge capitalism. He founded the International Working

Men's Association in 1864 and convened its first meeting, known as the First International,

in 1866. He did not see the capitalist system overthrown in his own lifetime, although the

1848 uprising in Paris seemed to herald that possibility before it was brutally crushed.

Marx died in 1883 and was buried at Highgate cemetery in North London . The cemetery

continues to be visited by his followers and by those who are merely curious about this

person who has had so much influence on the world. Entrance to the cemetery was once

free; visitors now have to pay to get in.

The historical context In the first half of the nineteenth century, the Industrial Revolution transformed Great Britain,

then Europe and the USA. It was in Great Britain, particularly in rapidly growing industrial

towns, that the face of capitalism was most clearly evident. Marx and his collaborator Friedrich

Engels did not think it a pretty sight. The views of the classical political economists seemed out

of kilter with observable reality. Capitalism in practice seemed to be a dynamic but rapacious

system based on the alienation and exploitation of labour. It produced glaring economic

inequalities and periodic economic crises.

CHAPTER 12 : CON T ES T ING CAPITA LI SM 101

What were the major changes then taking place? Most obvious was the growth of the

factory system, replacing the putting-out system. Instead of workers making products in

their own homes and selling them to merchants, they now increasingly went to work at the

premises of their employer. They worked in factories, mines, shops, and warehouses for wage

payments-usually paid by the hour. Wage labour was not new, of course, but it had now become

the norm. It was an arrangement that suited capitalist employers. It gave them more direct

control over the workers' time, and more direct control over the quality of the products, than

they had under the putting-out system. However, it also raised complex problems, such as the

management oflarger groups of workers. It created an identifiable industrial working class.

Many businesses continued to be small-scale operations, owned and managed by

individuals and families. However, joint stock companies (businesses that were owned by

their shareholders) became increasingly common. So a class of absentee owners was able to

derive unearned income from business enterprises . The disposition of this income from the

ownership of capital became crucial for the growth of the economy. Would it be ploughed back

into investment to expand productive capacity or used for luxury consumption purposes? The

accumulation of wealth created some significant tensions for capitalist development.

There is debate about whether the material conditions of working people improved during

the period of the Industrial Revolution. When compared with the debilitating rural poverty

they had previously experienced, living in conditions of urban poverty may have been a small

step up for some people. But the general conditions of the labouring masses in the towns

were deplorable: child labour was common, as were working days of between 14 and 18 hours;

terrible industrial accidents were frequent; and housing conditions were horrendous. There

was chronic overcrowding, poor sanitation, and widespread incidence of disease. Life was

short and mean.

Capitalism did not seem to be delivering the ordered and progressive outcomes its

champions had promised. Here was a situation crying out for a thorough critique. And of critics

there was no shortage. The disruptive social consequences of rapid economic change were

the target of both conservatives and socialists. Some of the latter sought to design utopian

alternatives:

Frenchman Henri de Saint-Simon argued that government should actively intervene in

production, distribution, and commerce in order to promote the welfare of the masses

Englishman William Godwin, critical of both capitalism and government, emphasised

education and reason as the means of ushering in a socialist alternative

Welsh humanitarian Robert Owen blended visionary utopian thinking with practical

measures to improve the living conditions of the workers at his factory in Scotland and in

other model communities, such as 'New Harmony' in the USA

Frenchman Charles Fourier promoted the idea of cooperatives as an alternative to the

wastes of capitalism. 5

102 PART IV : THE CRITIQUE OF CAPITALISM

Karl Marx thought 'utopian socialism' inadequate because such schemes did not

comprehensively address the root causes of class inequality and exploitation. Working in

conjunction with Engels, he sought to develop a more comprehensive political economic

critique of capitalism that blended analysis of the current economic situation with a political

program for systemic change. The analysis pioneered by Marx and Engels was, and is, distinctive

in at least three respects: the scope of enquiry, the method of analysis, and the key political

economic concepts.

BOX 12.2 FRIEDRICH ENGELS (1820-95)

Engels is mainly remembered for his working partnership with Karl

Marx . It was a remarkable partnership, not least because Engels was a

capitalist. He managed his German family's substantial textile business

in Manchester, England.

Three aspects of his relationship with Marx are noteworthy. First,

as a relatively wealthy person, Engels was able to give financial

assistance to the impecunious Marx. Therein lies an irony. The profits

from the Engels family business, extracted through the exploitation

of labour, helped to finance the production of books and pamphlets

exposing the system of exploitation and to organise its overthrow.

Engels shared Marx's revolutionary socialist views, and both knew that

the system would not be changed by individual employers turning their

backs on the process of capitalist commodity production. Better to use

some of the profits to foster the development of progressive ideas and

political activities.

Second, Engels was a creative thinker and a powerful writer in his

own right. He documented the terrible living conditions of the working

class in Manchester, which was the epitome of a rapidly industrialising

capitalist city. He wrote about the housing question, exploring what was at the root of the

appa lling housing problems. 6 He also wrote about the role of the fami ly in re lation to private

property, looking at nuclear family and marriage as institutions that can be oppressive to

the individuals within them. Many regard Engels as a clearer writer than the brilliant, but

sometimes obscure and disorganised, Marx. The Manifesto of the Communist Party is

the best known and most polemic of their joint works, but many of their other works also

benefited enormously from Engels's clarity of expression.

Third, Engels outlived Marx by 12 years. During that time he assembled many of Marx's

unfinished notes and manuscripts and put them into a form suitable for publication. Only

the first volume of Capital had been published before Marx's death. Engels arranged for the

publication of the other two vo lumes, and thereby contributed mighti ly to the foundation of

the Marxist tradition of radical scholarship.

CHAPTER 12: CONTES T ING CA PITA LI SM 103

The remainder of this chapter briefly considers the wide range of concerns addressed by

Marxism and the distinctive method used in analysing them. The following five chapters then

examine key concepts, such as the mode of production, surplus value, the circuit of capital

accumulation, imperialism, and economic crises. In this way we develop a view of what is

distinctive about the Marxist approach to political economic analysis.

The scope of Marxism The following nine themes illustrate the broad range of concerns.

The study of social classes The emphasis is on people, how the economy structures their interests, and how their conflicting

interests are expressed. Marxists deride the tendency for other currents of economic analysis

to focus on things , rather than people, as commodity fetishism.

The analysis of exploitation The relationship between classes under capitalism is not symmetrical. Because capital hires

labour, and not vice versa, there is the possibility-indeed, the inevitability-of exploitation.

Marxist analysis treats this as a systemic feature, dependent not on the rapacious inclinations

of individual employers, but rather on the structural imperatives of the capitalist economy.

The growth of monopoly power Competitive markets are sometimes held to be the essence of capitalism, but Marxists

emphasise the tendency for them to be supplanted by monopolistic enterprises. This further

accentuates the disparities of economic power as 'the big fish eat the little fish'.

The expansionary nature of capitalism Marxist analysis focuses on the reproduction and growth of the economy, emphasising

the dynamism of the capital accumulation process. This directs attention to the process of

imperialism and, in modern capitalism, to the role of transnational corporations in driving the

globalisation of capital.

Uneven development Capitalism has always been characterised by great variability-spatially and temporally.

Its uneven development over space is manifest in the contrast between rapidly expanding

cities and economically stagnant regions . Its uneven development over time is manifest in

alternating periods of boom and slump . These, too, are focal points of Marxist analysis.

104 PART IV: T HE CRI T IQU E O F CAP ITA LI SM

The commodification of social life It is important to understand how economic forces shape and reshape our social activities .

According to Marxists, the expansionary character of capitalism tends, little by little, to

transform social pursuits into marketable commodities. Sport, popular music, and education

are pertinent contemporary examples.

Alienation Here, too, is a tendency that Marxists see embedded in the economic structures of capitalism.

Alienation arises because workers have no control over their own labour or the products of

their labour. However, alienation is not limited to the workplace. According to radical political

economists, it extends into other forms: economic, social, political, and environmental.

The role of the state As stressed in Chapter 6, capitalism is not, in practice, a purely free-market economy. The state

plays a major role in relation to competing class interests. In general, Marxists take the view

that the state serves capitalist class interests, although there are many variations on that

theme.

Social change The Marxian approach emphasises the processes causing economic and social transformation,

sometimes evolutionary and sometimes revolutionary in nature. Capitalism followed other

systems of economic organisation, and can be expected, eventually, to be replaced by other

arrangements.

The Marxist method In general, what you see depends on how you look. As just noted, the Marxian perspective

is very broad, looking at the interconnections between economic, social, and political

issues. In seeking to systematically analyse this broad array of issues, the Marxist method is

simultaneously historical, materialist, and dialectical.

To say that the method of Marxism is historical means that the principal focus is on

historical processes, on change over time. The obvious point of contrast is with the focus in

orthodox economic theory on equilibrium conditions at a particular point in time, as we will

see in Part V of this book. The Marxian focus on history follows from the concern to study the

evolution of economic systems.

To say that the method of Marxism is materialist requires a rather fuller explanation. In

the philosophical context, materialist is the opposite of idealist. It denotes a primary focus

on material conditions, such as the prevailing economic structure, as the key factor shaping

society. The German philosopher Hegel, whose ideas strongly influenced Marx in his youth,

propounded an idealist philosophy that saw the 'totality of natural, historical, and spiritual

CHAPTER 12: CONTEST ING CAPITALISM 105

aspects of the world represented as a process of constant transformation'.8 Marx is said to

have 'stood Hegel on his head' by emphasising the primary importance of material conditions

rather than ideas. 9 In his own words, 'It is not the consciousness of men that determines their

existence, on the contrary, their social existence determines their consciousness'. 10 That

material and ideological conditions interact is widely accepted. The distinctive feature of the

materialist position is to regard the material conditions as the leading factor driving social

change.

Putting the historical and materialist aspects of Marxist methodology together produces

historical materialism; this is the view that material factors, especially economic conditions,

drive social change. This is what is sometimes known as the materialist conception of history.

When Marx hit on this concept he knew he was on to something really big. It is the claim that

the broad sweep of history is not a series of random or independent events , but rather a process

that has a structure shaped by economic conditions. This is one of the most controversial

claims in the whole of social science.

The third element in the Marxist method-integrated with the historical materialist

perspective-is dialectics . To say that the method of Marxism is dialectical means that the focus

is on the conflicts and contradictions, internal to the economic system, that propel change.

As Marx and Engels wrote at the very beginning of the Manifesto of the Communist Party, 'The

history of all hitherto existing society is the history of class struggles.' 11 This puts the focus

on the conflict of interests; for example, conflict between employers and employees over the

organisation of work and its remuneration . It emphasises that it is the contradictory elements

within an economic system that create progress. It thereby emphasises the progressive

character of class struggle. It has given participants in countless anti-capitalist political

activities and liberation movements the dignity of representing a historical imperative.

The activist element brings in the final element of the Marxist method: praxis. Marxism

claims to be not merely a method for the analysis of capitalism; it also claims to be simultaneously

a tool for transforming it into socialism. This integration of theory and political practice

differentiates Marxism from more detached scholarly activities. Marx himself was a scholar,

studying the work of the classical political economists and developing detailed critiques, but

always with a political purpose. Praxis requires that scholarship be blended with activism.

There are some interesting tensions in all this . If it is material conditions, rather than

ideas, that propel social and political change, why bother with the construction of a theory

about capitalism? Is not theorising inherently idealist? And, if the structural conflicts and

contradictions within capitalism are destined to usher in socialism, why bother to organise

a revolutionary movement? Why not just await the inevitable? These seem to be paradoxical

aspects of historical and dialectical materialism, considered in the context of Marxist politics.

The notion of praxis provides the reconciliation. By emphasising the importance of material

interests and ideas-the unity of action and theory-it indicates the holistic character of the

Marxist method. As the inscription on Marx's tombstone reads, 'The philosophers have only

interpreted the world in various ways: the point however is to change it'.

106 PART IV: THE CR ITIQUE OF CAPITALISM

Conclusion Marxism provides the basis for a comprehensive critique of capitalism. In his own time, Karl

Marx addressed the problems of a rapidly industrialising society in which exploitation and

class conflict were increasingly blatant. The scope of the analysis he and Engels developed was

similar to classical political economy in its breadth, although quite different in its political

implications. The method of analysis emphasised the study of contradictory elements in

historical change.

Marxist political economy has always been highly controversial, and continues to be so

today. Its emphasis on capitalism's tendencies to inequality, instability, and insecurity gives

it a distinctively radical character. For more than a century it has been a rallying point for

anti-capitalist sentiments. In studying Marxism, it is important to keep an open mind about

the extent to which the analysis needs to be developed, modified, or rejected in the light of

changes to capitalism since the time Marx wrote. That requires careful study of one ofthe most

influential thinkers of the last two centuries and an assessment of the relevance of his ideas

today.

KEY POINTS

• Marxist economics builds on foundations in classical political economy to develop a comprehensive critique of capitalism.

• Its breath of scope is exceptional, in that it focuses on social classes, exploitation, monopoly power, capitalist expansion and uneven development, commodification and alienation, the state and social change.

• Its method of analysis is historical, materialist, and dialectical. It also emphasises the integration of analysis and activism.

The Mode of Production

Does the economy shape the society?

What is distinctive about capitalism as a mode of production?

How are class relationships structured in such an economy?

In grappling with a broad array of social, economic, and political concerns, a systematic

and sequential approach is needed. The Marxian inclination is to begin with the study of

how production is organised and how wealth is thereby generated. Understanding the

characteristics of society as a whole, including its political institutions, then follows.

The analysis thereby moves from the study of the economic base to the study of the social

superstructure. In a famous passage, Marx said: 'The economic structure of society [is] the real

foundation on which rise legal and political superstructures and to which correspond definite

forms of social consciousness.'! Thus Marx began, as Russian revolutionary Lenin put it, 'by

selecting from all the social relations the production relations as being the basic and prime

relations that determine all other relations'. 2

BOX 13.1 BASE AND SUPERSTRUCTURE

Does the economic base shape the soc ial superstructure? A direct link of this kind is not

hard to visua lise. Take educational institutions, for example. Schools, technical colleges,

and uni versities are an important aspect of the modern soc ial superstructure. The ir form

is, to a considerable extent, shaped by the needs of the economy. These needs are partly

ideological-for a workforce inculcated with values conducive to the acceptance of

authority structures in the wo rk place. The needs are also practical-for a certa in number

of skilled technicians, for a certain number of semiskilled process workers, labourers,

and so on. Schools, technical colleges, and universiti es are structured in such a way that

they produce these 'outputs' in more or less the required proportions. Indeed, in recent

years there have been many cal ls from political leaders for this link to be an even more

107

108 PART IV: THE CRITIQUE OF CAPITALISM

emphat ic policy objective. Rhetoric about the need for the education system to play a

more direct role in fostering the development of a 'clever country' or a 'knowledge nation:

for example, has a clearly instrumental character. It implies that the education system

should be reshaped to meet national economic needs, first and foremost, rather than cater

for the personal development or cultural enrichment of the people involved. The greater

emphasis on university courses in business and management, relative to more traditional

areas of study in arts and sciences, is symptomat ic. The applicat ion of economic criter ia

in eva luating the effectiveness of the education system is also more pervasive. The

educational institutions themselves have become more entrepreneurial in their own

behaviour, espec ially as the po liticians' calls for better economic outputs have not been

matched by the necessary public funding 3 Overall, these superstructural institutions

are being shaped and remoulded to serve the economic requirements of contemporary

capitalism.

If that were the whole of the story, the base-superstructure model would fit neatly.

However, other tensions and contradictions exist. Within educational institutions are

strong traditions emphasising the pursuit of the truth and the deve lopm ent of critical

reasoning. Such traditions may not sit comfortably with short-run capitalist interests-

although they are surely important in fostering innovation and social progress in the longer

term. So it makes more sense to think of the base-superstructure relationship as a two-

way relationship. In other words, the character of the superstructure affects the base as

well as vice versa. Indeed, if that were not so, changes in the economic base would always

be quickly followed by corresponding changes in the social superstructure. Changing the

economic system from one based on private ownership to one based on public ownership,

for example, would necessarily produce a corresponding change in social institutions

and dominant ideology. Things are not so simple in practice. The characteristics of the

superstructure, including the prevailing ideologies, are shaped by historical and cultural

influences, as well as by the prevailing economic arrangements. Political economic

transitions are invariab ly messy.

Production as the primary concern All societies must produce in order to survive. Food, clothing, and shelter are the basic

necessities: once their supply is ensured we can consider producing other luxury goods and

services. How these productive activities are organised, however, can vary quite significantly.

Some societies organise production through highly mechanised processes; others use more

labour-intensive methods of production. Land is sometimes used extensively, sometimes

intensively, for productive purposes. Decisions about production may be made through

institutional processes that are haphazard or coherent, centralised or decentralised,

authoritarian or democratic.

This focus on the organisation of production is a distinctive feature of Marxist political

economy. As we shall see in later chapters, the neoclassical economists do not start here:

their analytical focus is on exchange rather than production relationships, and on choices

CHAPTER 13: THE MODE OF PRODU CT ION 109

between technically feasible combinations of the factors of production, rather than on the

socioeconomic processes by which commodities are actually made. The Keynesian focus is also

different. putting more emphasis on the determinants of the overall demand for goods and

services, rather than on the processes of production. Institutional economists, studying how

technology influences and is influenced by economic institutions, come closer to the Marxian

orientation. However, taking the mode of production as the central analytical concept is

uniquely Marxist.

What is the mode of production? It is the character of the technical and social

processes by which goods and services are made. Figure 13.1 provides the simplest depiction

of its interrelated components.

FIGURE 13.1 THE MODE OF PRODUCTION

Mode of production

Forces of production Relations of production

I

Means of production Labour power Technology Organisation of work Class relationships

The forces of production are the most tangible elements. These are the means of

production, the labour power, and the technology involved in making goods and services.

The means of production include raw materials: those useful things such as minerals, coat

petroleum, wood, and water, that come from natural sources. They also include capital goods:

the instruments, machines, and tools that are used for extracting or harvesting natural

materials, transporting them, and industrially transforming them. Labour power is the

human effort: using muscle and brain. How the labour power is combined with the means of

production influences the productivity of the processes by which goods and services are made.

It depends significantly on the nature oftechnology: the cumulative contributions of scientific

and technological innovation. Technology governs the connection between the inputs and

the outputs of the production process. In other words, it sets limits on the goods and services

that can be produced with the land , labour, and capital available in the economy; it comes to

be embodied in the form of the capital goods and it shapes the form of the production process

itself.

The relations of production are the social and organisational aspects of that production

process. Whereas the forces of production are tangible and technical. the relations of

production concern how people are organised for the purpose of making the goods and

services. Relations of production can take various forms. They can be collective and democratic

or they can be hierarchical and authoritarian. Imagine a small, isolated community of people,

110 PART IV: THE CR ITI QU E OF CAP ITA LI SM

on an island perhaps, deciding how they will cater for their own material needs. They may

collectively take stock of their resources (human, natural, and manufactured) and decide how

they will allocate them between different types of production (food, housing, clothing, and

so on). Who does what, when, and how is likely to be determined by a process of collective

choices. These may be democratic decision-making and the application of egalitarian

principles, such as the rotation of the less pleasant as well as the pleasant tasks. However, if

one person is able to dictate the tasks to the others-perhaps because she or he has acquired

monopoly control over the means of production-the nature of interpersonal relationships

in the production process is likely to be significantly different. Authoritarian practices will

prevail; and egalitarian principles will be less likely to have much influence on who does what,

when, and how. Whether the situation is stable will depend on whether the owner of the means

of production is able to ensure compliance by his or her underlings, and whether the system

works reasonably well in providing for their material needs.

How the forces of production and the relations of production interact shapes the overall

character of the mode of production. Here is the interface ofthetechnical and social elements-

of technology and class. According to Marx, a historically significant connection between the

development of the two aspects is identifiable. A slave mode of production, for example, uses

characteristically rudimentary forces of production. The labour performed by slaves, using

basic means of production, is the principal input into the production process. The relations of

production are correspondingly crude, based on a coercive relationship between slave owners

and slaves. The simple threat, 'Work harder or I will punish you', provides the incentive.

Under feudalism, the forces of production are usually a little better developed. The means

of production comprise crude agricultural implements, and labour is performed by serfs who

work on the land of the feudal lords in exchange for social protection. Elements of physical

coercion are sometimes present, but the social aspects of production process are based on

mutual obligation between the feudal lords and the lower orders of society. The relations of

production exhibit more sophistication than under slavery.

The connection between the forces and relations of production becomes yet more evident

with the development of capitalism. The means of production, the quality oflabour power, and

the nature of technology become increasingly complex. The relations of production centre on

the wage relationship, based on buying and selling in the market. This pecuniary orientation

then shapes aU aspects of capitalist society, leading to an increasingly commercialised and

commodified world.

Under socialism, and then communism, Marx anticipated that a new conjunction of the

forces and relations of production would prevail. The forces of production, developed under

capitalism to the level that makes a materially affluent society possible (but unrealisable for

most members of that society because of the problems arising from conflicting class interests),

would be carried over and further developed under socialism. Importantly, according to this

reasoning, they can then be married to more egalitarian relations of production. Production

and distribution can be organised on the principle 'From each according to his ability, to each

according to his needs'. 4 A society that is both affluent and democratic becomes achievable

CHAPTER 13: THE MOD E OF PROD U CTION 111

for the first time in human history. Affluence is possible because there is no dominant class

controlling the economic surplus for its own purposes , while democracy can be extended to

the economy (for example, through workers' control of the enterprises in which they work)

and need not remain restricted to the sphere of parliamentary elections, as it is under modern

capitalism.

This, in bare outline, is how the forces and relations of production can be visualised as

interacting through different modes of production. It is a story of the forces and relations

of production working in tandem, the development of one making possible the further

development of the other. It is a powerful story, providing a strong basis for optimism about

economic and social progress. In the extreme, it is the view of history as a sequence of

increasingly more sophisticated, and ultimately more liberating, modes of production .

However, Marxism (in its more careful constructions, at least) sees nothing inevitable

aboutthe movement through successive modes of production. Yes, the process of technological

change and the social tensions in the relations of production do tend to drive change, so

modes of production seemingly well established at a point in time (as capitalism is early in the

twenty-first century) have no claim to permanency. But the form that sequential changes take

is open-ended. Reversals in the sequence may occur. So, too, may jumps between different

modes of production. Obvious examples are Russia and China, which were still predominantly

feudal societies with only partial and incomplete elements of capitalist development at the

time of their socialist revolutions in the twentieth century. Both made radical breaks in

seeking to build a socialist mode of production, but leapfrogging capitalism proved profoundly

problematic for the achievement of that socialist goal. Both have subsequently shifted

towards capitalism, albeit in a corrupted form in Russia and under the auspices of an

authoritarian state in China.

A second qualification to the theory of successive modes of production concerns their

impurity. Modes of production may coexist. Indeed, different modes of production are normally

present in any one country at any one time. Modern societies that we usually think of as

capitalist, such as the USA, the UK, or Australia, have vestigial feudal elements and embryonic

socialist elements alongside the dominant capitalist mode of production. The organisation of

labour in the home, for example, is not characteristically capitalist: some domestic tasks may

be done for wages (by hiring a gardener, cleaner, or childcarer, for example), but most are

done by household members themselves (usually disproportionately by women). Transfers of

income may be involved (between 'breadwinners' and other members of the household), but

this is not synonymous with wage labour, the hallmark of capitalism.

Outwork is a second example of the impurity of modes of production in modern economies.

It is common in industries such as the clothing industry, where production involves paying

for the products of the workers' (typically female) labour rather than for the labour time

spent. Such an arrangement is historically more characteristic of the putting-out system that

developed under feudalism before capitalism became established.

Alongside vestigal feudal arrangements may be embryonic socialist arrangements , too.

For example, business cooperatives commonly exist in the advanced industrial nations, but

112 PART IV: THE CR ITIQU E OF CAPITA L ISM

they do not operate according to purely capitalist principles. Counterculture communities of

various sorts also commonly seek to practise collectivist forms of production and distribution,

presaging forms of economy and society not yet fully developed but perhaps capable ultimately

of transcending capitalism. 5 Whether such aspirations are achievable is debatable, of course.

The point here is an analytical one-that what we commonly call capitalist economies are not

necessarily capitalist in aU respects. Different modes of production may coexist in any given

society; so, when we talk of a particular society being capitalist we are referring only to the

dominant mode of production in that place at that time.

The effect of these qualifications is to scale down the boldness of the claims made for

Marx's analysis of the modes of production. It is not a simple stages theory of historical

evolution. Rather, it offers a means of interpreting the interactions between economic and

social change. As such, it is an analytic framework rather than a specific prediction about the

direction of economic development. Perhaps its greatest value is in drawing attention to the

characteristics of capitalism as a mode of production that differentiate it from other modes of

production.

Capitalism as a mode of production The significance of defining capitalism as a mode of production can be brought into sharper

focus by comparing it with other ways of defining capitalism, as Maurice Dobb did in his book

Studies in the Development of Capitalism. 6 Five possibilities are considered. First, capitalism may be defined as a system based on roundabout, or time-using, methods

of production. This emphasises the technological aspect of the economy. According to this

view, what makes an economy capitalistic is the use of capital in complex production processes.

The problem is that, beyond the most primitive, aU economies have been capitalistic in this

sense, varying only in degree.

Second, capitalism may be defined as a system based on the unfettered operation of

the competitive market mechanism. While this fits in with commonly held notions about

capitalism as the 'free-market economy', it interprets capitalism so narrowly as to make it

almost nonexistent. In few places, other than the UK and the USA in the nineteenth century,

have economies conformed closely to such a freely competitive regime, and even the UK and

the USA passed quickly into an age of corporate enterprise and monopoly power. The state has

always been a significant presence in capitalist development-indeed, usually establishing the

preconditions for capitalist development.

Third, capitalism can be defined as a system in which production occurs for distant markets.

This emphasises trade as the distinctive feature. It locates the origins of capitalism in the

encroachment of commercial dealings on the localised economic system characteristic of the

medieval era. It emphasises the breakdown of the craft guilds, which restricted craftspeople

to selling their products only in the local town market. Indeed, the opening up of regional,

national, and international trade was an important element in the transition from feudalism to

CHAPTER 13 : THE MODE OF PRODUCTION 113

capitalism, as noted in Chapter 8. However, production for distant markets was not unknown

in the pre capitalist period. It has been characteristic of socialist-based economies, too .

Fourth, we may approach the issue rather differently by emphasising the nature of

capitalist ideology. Perhaps capitalism can be defined as the economic system resulting

from the entrepreneurial spirit, for instance. The role of ideology in shaping society had

been emphasised by Hegel who, as previously noted, was a strong influence on Marx. Hegel

envisaged the history of civilisation as a succession of epochs marked by the dominance of

successive national cultures . But is ideology more an effect than a cause of such historical

changes? If it is, it seems inappropriate to define economic systems in terms of the ideologies

to which they give rise. That is why Marx 'inverted' Hegel by emphasising the driving force of

material economic conditions. What people think, especially about political economic issues,

is important, but does not define the economic system itself.

It is the definition of capitalism as a mode of production that most clearly identifies the

particular epoch in which capitalism developed and became readily distinguishable from other

economic systems. In his own day, witnessing the establishment, expansion, and evolution of

the capitalist system, Marx emphasised its three key characteristics:

the separation of labour from the ownership of the means of production

the concentration of the ownership of the means of production in the hands of a single

class: the bourgeoisie, or capitalist class

the appearance of a social class dependent for its subsistence on the sale of its labour

power: the proletariat, or working class.

The economic and social transformation wrought by capitalism reverberates to this day.

Although capitalist institutions have become characteristically larger, using increasingly

sophisticated technologies and interacting with the state in complex ways, the essential

feature of capitalism as a mode of production exhibits considerable continuity. The system

is distinguishable from others largely because of the class relationships associated with

how production is organised. Putting the spotlight first and foremost on class, rather than

on technology, market structures, trade, or ideology, is the hallmark of this identification of

capitalism as a mode of production.

Conclusion Defining capitalism as a mode of production puts the focus on the relationship between capital

and labour. This relationship has a technical economic dimension: capital and labour as inputs

into the production of goods and services. It also has a social dimension: capital and labour

as classes, as groups of people with potentially conflicting interests. According to Marxist

economics, this latter tension is the essential dynamic in capitalism as an economic system.

Rather schematically, we can say that capitalism has been a progressive system in

facilitating the development of the forces of production. Industrialisation, mechanisation, and

114 PART IV: THE CRITIQUE OF CAPITALISM

the increased complexity of capital goods have made possible ever greater levels of material

productivity (at least until ecological constraints begin to bite). Concurrently, capitalism has

a reactionary character, retarding social progress because its relations of production prevent

the achievement of a genuinely affluent society in which the wealth is shared by all. Conflicts

arising from the relations of production-manifest in worker alienation, industrial disputes,

and periodic economic crises-impair the achievement in practice of the prosperity and

progress that the forces of production would otherwise make possible.

Understanding these two faces of capitalism is central to Marxist political economy.

Capital and labour must cooperate for production to occur and for the system to be reproduced.

However, as social classes, capital and labour have conflicting interests. The conflicts concern

economic power (who should make the production decisions, for example) and the distribution

of the fruits of cooperation (the extent of inequality in the distribution of income and wealth,

for example). The need for cooperation sits uneasily with these recurrent tendencies towards

conflict. It is rather like a marriage that is on a permanent knife edge, where the husband and

wife can neither live apart nor live comfortablytogether. Coping with conflict and contradiction

is the name of the game.

KEY POINTS

• Marxism is concerned with understanding society in its entirety, but focuses on the economy as the starting point for that enquiry.

• The mode of production embodies technical and social relationships that affect how goods and services are produced.

• Because the capitalist mode of production is based on a class relationship between capital and labour, the system is fraught with conflicts related to the organisation of work and the distribution of income.

Labour, Value, Exploitation

What is the labour theory of value?

How does this theory explain the values of different commodities?

How does it explain the exploitation of labour?

Having defined capitalism as a mode of production, the task now is to understand how it works.

How does the relationship between labour and capital affect the functioning of the economy?

What determines the value of the products that are made? Where do profits come from? These

are the questions that Marx sought to answer by adapting the labour theory of value from the

classical political economists. Marx gave this theory a radical twist, turning it into a means of

understanding the exploitation oflabour by capital. To this day, the labour theory of value has

been one of the most contentious currents of political economic analysis. It requires careful

consideration, both as a means of explaining commodity prices and class conflicts.

Commodities and values Marxist analysis, like classical political economy, makes an initial distinction between use

values and exchange values. Of course, the production of useful things must occur in every

society if it is to sustain itself, let alone prosper economically. Such items range from food,

housing, and clothing to a vast array of non-essential goods and services. Each has its own use

value, but that use value depends on who consumes it. (You may like hamburgers; I don't. You

may not want a surfboard; I do.) Use values are inherently subjective. They vary from person to

person, and a common unit of comparison is hard to find.

The problem of comparing the usefulness of one thing with another would not matter

much in the simplest society where individuals produce items for their own use. People would

allocate their working time according to their own preferences for the things they can hunt,

grow, or make. Production would be directly for consumption, not for exchange. But few

societies now work like that. Even the simplest division of labour makes it possible for people

115

116 PART IV: THE CRITIQUE OF CAPITA L ISM

to produce more of some items than they need for their own consumption, and then exchange

them in the market for items that they want. This entails the production of commodities;

that is, goods and services made for exchange rather than for personal consumption. When

commodity production exists an explanation of exchange values is needed.

What determines how much of one commoditywill be exchanged for another in the market?

Why are surfboards more expensive than hamburgers? Why is a silk shirt more expensive than a

cotton one? What determines the price of the countless commodities available for sale? As we

have seen, the classical political economists reasoned that relative prices generally reflect the

cost of production of each commodity. The greater the labour needed to make the commodity,

the higher the value of that commodity. Marx extended this basic insight into a comprehensive

explanation of commodity production and markets.

The labour theory of value Formally, the labour theory of value asserts that the value of a commodity is determined by the

amount oflabour needed for its production. This deceptively simple proposition requires three

supplementary points of explanation. The first concerns the efficiency of the labour process.

It is not the amount of labour actually performed that determines the value of a commodity.

A chair made in three hours by an efficient carpenter is not worth less than a chair made in

five hours by a less efficient carpenter. If both chairs have the same characteristics, they can

be expected to sell in the market at the same price. The labour that determines the value is

only the socially necessary labour. This socially necessary labour reflects the general standards

of productivity and the state of technology prevailing in the economy at any particular time.

Second, account must be taken of the variations in the skill of the workers . Some

occupations require many years of training; others do not. A skilled worker or tradesperson

usually produces more value in one hour of work than does an unskilled labourer. The concept

of abstract labour takes this into account. It gives us a common unit of the value-creating

capacity of labour. Thus, we can express the value created by a skilled worker in terms of

abstract labour as a multiple of that created by an unskilled worker. The size of this multiple will

normally depend on the time taken to acquire the extra skills. If a quarter of a tradesperson's

working life is taken up in the acquisition of skills, for example, we might regard his or her

work as contributing 1.25 times as much abstract labour per hour as an unskilled worker's.

In this way, the existence of diversity of skills among the workforce can be reconciled with a

single labour theory of value.

Third is the issue of unproductive workers-not those who are inefficient or relatively

unskilled, but those who do not directly produce commodities at all. There are many such

workers in a capitalist economy. Supervisors, for example, may be necessary to ensure that

other workers work hard, but they do not themselves produce the commodities. According to a

strict interpretation of the labour theory of value, their labour time should not be counted as

CHAPTER 14 : LABOUR, VA L UE, EX PL O ITAT IO N 117

contributing to the value of the products. This does not imply that such jobs are unnecessary.

Indeed, supervisors are normally essential in a capitalist economy because employees work

for wages rather than directly for the products of their own labour. Supervisors are necessary,

but they are not productive, because their labour does not directly add to the value of the

products. No judgment about social worth is implied here, but difficult decisions need to be

made about the range of jobs that are unproductive in this sense.

Having made these qualifications to the labour theory of value, a workable basis exists for

calculating the value of different commodities. One can calculate how much socially necessary

labour time goes into making them, measuring the contribution of workers of different skill

levels in terms of abstract labour and excluding the time expended by unproductive workers.

Still, a basic question remains: Why should only labour add to value? Drawing on the reasoning

of Ernest Mandel, three possible proofs of the labour theory of value can be considered. 1

First is the demonstration by disaggregation. This rests on the proposition that everything

that goes into making a commodity can ultimately be traced back to the contribution oflabour.

Take the example of a wooden chair. What determines its value is not only the time spent

by the carpenter in making it, but also the time spent by the timber worker in felling the tree,

by the sawmiller in cutting the tree into useable planks , and by the truck driver in transporting

the planks to the carpenter's workplace. The workers who made the screws the carpenter uses

also have imparted some value to the product, as have , indirectly, the coal and iron ore miners

and the foundry workers whose labour made the steel from which the screws were made. And

the carpenter's tools-the saw, screwdriver, and chisel-were made by toolmakers using raw

materials extracted and transformed by yet other workers. Those tools would not be fully used

up in making the chair, but some part of the value embodied in them, which would depend on

the degree of wear and tear on them, could be regarded as having been transferred to the chair.

According to this chain of reasoning, everything that adds to the value of the commodity is

ultimately traceable to labour.

It is a powerful argument. It recognises that capital goods are important in commodity

production-indeed, increasingly important in an era of sophisticated mechanisation-but

it also emphasises that these capital goods are the products of labour. Similarly, it indicates

that, although natural resources are used in the production process, those resources acquire

economic value only through the application of labour to their extraction and processing as

inputs into the production process. Environmentalists should be reassured that this is not to

deny that nature has intrinsic value. The argument is simply that, under capitalism, natural

resources only acquire market value when labour is applied to their conversion for commodity

production.

A second attempt to justify the labour theory of value involves more abstract reasoning.

This is the so-called logical proof. The claim here is that, while commodities may have many

common properties (molecular structure, size, weight, and colour, for example), the only

common property that provides a basis for their exchange is that they are products of labour.

Weight, for example, cannot be the basis for determining value. If it were, a kilogram of

118 PART IV: T HE CRITIQUE OF CA PITA LI SM

butter would have equal value to a kilogram of gold, which would be a patent absurdity. Only

their common property as being products of labour can serve as a systematic basis for the

determination of their relative value.

A third chain of reasoning rests on imagining an extreme case: a wholly mechanised

society in which no labour is used. Machines produce machines, which produce all the goods

and services that everybody needs. In such a society, it is argued, there would be no role

for market arrangements since scarcity would have been abolished. It is a world of complete

abundance . The elimination oflabour has eradicat ed exchange value. There could be no wages

system in such an economy either, since nobody would need to work. There would have to

be some other means of distributing the goods and services produced, such as their direct

allocation by the state. In other words, it would not be a capitalist economy, and the value

basis of the capitalist system would no longer exist.

Whether these proofs of the labour theory of value are persuasive is a matter of judgment.

The ultimate test of a theory is whether it actually helps in understanding the world around

us. So, the practical question is whether the labour theory of value helps to explain the basis

of commodity exchange in real market economies.

Values and prices Marx certainly thought that the relative prices of commodities could be explained by reference

to the labourtheoryofvalue. In his own words, 'The determination of price by cost ofproduction

is equivalent to the determination of price by the labour-time requisite to the production of a

commodity.' 2 However, using the labour theory of value to explain prices requires dealing with

some tricky problems.

First, actual market prices may be influenced by fluctuations in consumer demand . A

commodity will not have a high market value unless it is in demand, irrespective of how much

labour goes into making it. But producers will not make it if it is not in demand, you may say.

Indeed, but producers do make mistakes, and anticipating changes in demand is seldom easy.

Market prices may fluctuate independently of the amount of labour that goes into making the

products. A fruitseller may reduce her prices just before packing up for the day, not because of

any variation in the amount of labour going into the production of the fruit but because she

judges that the fruit might spoil overnight and become unsalable .

Second, by similar reasoning, the state of market competition can have a bearing on

actual market prices. Where competition is vigorous, prices will tend to conform more closely

to labour values than where elements of monopoly are present. Monopolists can drive up prices

by creating artificial scarcity, irrespective of the amount of labour embodied in the products

they sell.

Third, where different branches of industry have an unequal degree of mechanisation,

there may also be a tendency for relative market prices to deviate from relative labour values

CHAPTER 14: LA BOU R, VAL U E, E X PL OITATI ON 119

for the products concerned. Firms in the technologically advanced sectors will normally be

able to secure higher profit margins than firms in the less technologically advanced sectors.

If the rate of profit is not the same in all branches of industry, then the relationship between

labour values and market prices will not be uniform . This is the essence of the transformation

problem, which is the analytical problem of transforming values into prices. 3

These three considerations cast doubt on the adequacy of the labour theory of value as a

means of explaining relative commodity prices in practice. It is on these grounds that many

economists reject the theory. However, there is a possible rescue, emphasising its usefulness

in explaining long-run price trends. Indeed, over long periods of time, prices of different

commodities do broadly reflect the labour that goes into making them, even though the

market prices may deviate from labour values in the short run.

Consider a simple illustration comparing the prices of haircuts and watches. Forty years

ago, in countries such as the USA, the UK, and Australia, the price of a simple, cheap watch

was many times more (perhaps ten in round terms) than the price of a basic haircut for a man.

There has been prodigious technological advance in watch production since then, partly as a

result of the microelectronic revolution, so that much less labour, direct and indirect, is now

needed to make a watch. By contrast, there has been no significant advance in hairdressing

technologies: a haircut is still largely a matter of one worker standing beside a person's head

with a pair of scissors. Lo and behold-cheap watches now cost less than a professional haircut.

Of course, one can spend much more on a watch made with more labour-intensive methods

and/or more valuable materials. One can also spend more on a haircut if more complex and

time-consuming treatments are required. But the differential rate of technological change in

watchmaking and hairdressing have clearly influenced the general pattern of relative prices.

One example like this does not prove the labour theory of value , of course. Nor would a longer

list of examples (which would not be difficult to construct). What it does suggest, if our concern

is with understanding long-term trends in commodity prices, is that a labour theory of value

can be a helpful starting point.

According to Marxists , though, the labour theory of value has a more important role than

explaining relative prices: it is the key to understanding the class relationships underpinning

the production of commodities. It explains the pervasive character of exploitation.

Value and surplus value There are people in this country who work hard every day;

Not for fame and fortune do they strive;

And the fruits of their labour are worth more than their pay.

This was the jingle in an Australian television beer commercial that showed sweaty workers

enjoying a drink or two after their daily efforts. The advertiser's aim was to present ordinary

120 PART IV: THE CRITIQUE OF CAPITALISM

citizens contributing to the advancement of the nation over and above what they are rewarded

in wages (and, hopefully, spending some of those wages on the advertised product as well).

Ironically, and no doubt unintentionally, the last line of the jingle also summarises the Marxist

theory of surplus value: that workers produce value over and above what is returned to them

as wages.

Let us build up this theory more systematically. The starting point is the distinction

between labour power and labour. Labour power is a person's potential to work. In Marx's

words, it is 'the aggregate of those mental and physical capabilities existing in a human being

which he exercises whenever he produces a use-value of any description'. 4 Labour, on the

other hand, is work actually undertaken. So, the one is a capacity, the other an actual activity.

It is rather like the distinction between the power to digest food and the actual process of

digestion, or between nuclear strike capacity and nuclear war.

When an employer hires workers (by the hour, week, or year), it is labour power that is

being purchased. Labour power is a commodity and, according to Marx, will normally exchange

in the market at its value, like any other commodity. That value-the prevailing wage rate-

varies from place to place and from time to time, determined historically through processes of

class struggle. The average wage rate in Australia for adult workers, for example, is currently

around $250 a day for a seven-hour day. Given that prevailing wage rate, employers have to

decide whether it is in their interests to hire workers; that is, to purchase labour power in the

market. The answer is that it is worth them doing so only when the value of the commodities

produced by workers exceeds the wages that must be paid. The capitalist employer does not

employ workers because of altruism: the goal is profit. Workers will be hired only when it is

expected that they will contribute to the profit of the enterprise by producing more value than

they are paid in wages. Formally, this means that the condition for employment is that the

value of the commodities produced by labour exceeds the value of labour power.

A division of the working day is implied. For the first part of the working day, the employee

is producing just enough commodities to cover his or her own wage. This is called the necessary

labour, which is the labour required for producing value equivalent to the wage the worker

receives. The rest of the day involves surplus labour. This is the labour expended by the worker

that directly benefits the employer. In value terms, this contribution by the worker to the

income of the employer is surplus value, the amount of value created by the worker that is not

returned as wages.

Surplus value as the source of profits Who gets the surplus value? The profits of capitalist business enterprises are the most direct

manifestation of surplus value in monetary form. In this regard, Marxist economics is in

accord with conventional accounting practices. It treats profits as an economic surplus, just as

accountants calculate profits as the surplus of revenues over costs. How these profits are then

shared between the shareholders (whose interests are in dividend payments and increasing

CHAPTER 14 : LABOUR, VALU E, E XP LOITATI ON 121

their share prices) and the managers of the capitalist enterprises (whose interests are in

their own remuneration packages and the growth of the firms they manage) is a matter of

contention. Both have a common interest in maximising the flow of surplus value into profits,

however.

There are other claimants to surplus value. Supervisory workers have to be paid their

wages and, since they do not themselves directly produce value, their wages must come from

the surplus value generated by other workers . It is profitable to employ such supervisors to

the extent that they help to ensure that surplus value is extracted from productive workers.

So, although they are formally unproductive workers, their employment is not uneconomic .

Within the logic of the capitalist economy, they have a claim on surplus value. The size of their

share depends, like other workers', on their strength in bargaining over their wage levels with

their employers .

Other claimants to surplus value include banks and other financial institutions, who

commonly lend money to capitalist businesses. The businesses pay interest payments and

other charges that are associated with those loans. These payments are deducted from the

surplus value that would otherwise be retained as profits by industrial enterprises. Banks

themselves are capitalist businesses and seek profit; but the peculiarity of their position is

that their profit involves the transfer of surplus value produced in productive enterprises.

Similarly, landowners obtain part of the surplus value. In situations where businesses do not

own the property from which their business is conducted, rent has to be paid to landlords.

Governments may also capture part of the surplus value through taxation. Taxes on

businesses reduce corporate post-tax profits. In return, governments usually provide services

that are useful for business, such as building the basic infrastructure necessary to make

commerce possible. So it is not all one-way traffic . Indeed, governments may well expand the

scope for capitalist business activity over time. However, at any particular time, the revenues

generated by governments from business taxation (usually a small minority oftotal tax revenue

sources) is a claim on surplus value .

It should be evident that many sections of society have an interest, more or less directly,

in surplus value. These include capitalist firms, their shareholders and managers, supervisors,

financial institutions, landowners, and governments. They have divergent interests in how

the surplus value is shared.5 However, they have a common interest in there being a large

total pool of surplus value. In Marxist terms, this means a common interest in the process of

exploitation.

Exploitation and class struggle In Marxist political economy, the term 'exploitation' refers to any situation where one class

of people derives income from the labour of another class. It is a pervasive process . Indeed,

Marx noted that exploitation, in this sense, existed in all preceding societies. Under slavery,

slave owners live off the work done by slaves. Under feudalism, the standard of living of the

122 PART IV: T HE CR ITI QU E OF CAP ITAL I SM

manorial lords depends on the labour contributed by serfs. What is novel about capitalism is

the persistence of exploitation, despite labour becoming 'free'. Indeed , the freedom of workers

under capitalism is historically unprecedented. Workers are not tied to a master but are free

to work for whomever is willing to hire them. Hence the great puzzle: how can labour be both

free and exploited at the same time? The characteristically Marxist response emphasises the

constrained character of that freedom: it is the freedom to work for employers who are seeking

to extract surplus value.

Not surprisingly, there is a conflict of interests. The employers want the highest possible

ratio of surplus labour to necessary labour, or (what amounts to the same thing) the highest

possible ratio of surplus value to wages. The employees want the reverse : the highest possible

ratio of wages to total value produced. This conflict of interests is structurally embedded. Both

sides, predicably, organise to seek the upper hand, employers forming employer associations

and workers forming trade unions to give themselves more collective bargaining power.

Struggles over absolute surplus value and relative surplus value ensue. Increases in

absolute surplus value arise when workers work longer to produce more value without a

corresponding increase in wages. Increases in relative surplus value arise whenever employers

are able to capture a larger proportion of the total value produced during a given period

of time.

Struggles over the length of the working day put the focus on absolute surplus value. Such

class struggles have been of great historical significance in capitalist development: working

hours were lengthened; in the early nineteenth century, for instance, fourteen-hour workdays

were common. Since then, workers, largely through their organisation into trade unions , have

been successful in shortening the length of the normal working day, first to twelve hours,

then to ten hours, and eventually to eight hours. By the early twentieth century, the eight-

hour workday had become the norm in countries such as the UK and Australia. The push for

shorter working hours has stalled significantly over the past half-century and there has been

evidence of some reversals, as shown by the growing trend to unpaid overtime. However, a

strong push for further reductions in the length of the working week has resumed in recent

years. Proponents of 'work-life balance' have given a modern edge to this traditional focus of

workers' struggles. 6

Facing these setbacks in respect of their capacity to generate absolute surplus value ,

capitalist employers have sought to raise relative surplus value. They have usually done so

by increasing the productivity and/or intensity of labour. Raising the productivity of labour

can be achieved through enhancing the skills of the workforce, equipping the workers with

superior tools or machinery, or eliminating waste from the production process . If workers

produce more value during a given time period, and if their wages do not rise correspondingly,

surplus value is increased.

Raising the intensity oflabour has a yet more direct effect. It means that workers produce

more value during a given time period because they are working harder. How to make workers

work harder is, of course, the great challenge for capitalist management. What employers

CHAPTER 14: LABOUR, VALUE, EXPLOITATION 123

buy is labour power-the capacity to work-but their task is to make sure that the maximum

amount of labour-actual work-is undertaken. Box 14.1 below summarises some managerial

strategies employed for this purpose.

From a Marxist perspective, exploitation is not something imposed by particularly nasty

employers, but rather a condition for the normal functioning of the capitalist economy. It is

a systemic characteristic, not an aberration. Part of the value produced by workers is taken

by capitalist employers-indeed, there would be no point, from an employer's perspective, in

employing the workers otherwise. Capitalism needs exploitation for its normal functioning.

Some political economists argue that positing this connection between profits, surplus

labour, and exploitation does not require a formal basis in value theory. 7 The use of the labour

theory of value reflects the influence on Marx of the classical political economists. What is

of continuing interest, though, is the link that the theory provides between the analysis of

production and the analysis of distribution. This link concerns the class relations involved in

producing commodities and the different incomes that those classes receive.

BOX 14.1 MANAGERIAL STRATEGIES FOR INCREASING THE INTENSITY OF LABOUR

Many workers take pride in their jobs and their own productivity. Some voluntarily perform

unpaid overtime. The belief in doing 'a fair day's work for a fa ir day's pay' is widespread.

In various ways, these personal, ethical, and social commitments influence how work

is performed. But the basic fact remains: under capitalism, work is done for wages, so

the material benefits of harder or faster work usually accrue, in the first instance, to the

employer rather than the employee.

In his influential book, Labor and Monopoly Capital, Harry Braverman described how

employers in the twentieth century sought to raise the intensity of labour by using 'scientific

management: Scientific management is also known as Taylorism, after its pioneer Frederick

Taylor (1856-1917). This approach to management, which emphasised managerial control

over each and every stage of workers' productive activities, changed the nature of work in

many industries and occupations .a

Other political economists have pointed out more diverse means by which employers

have increased the intensity of labour in practice. Richard Edwards, for example,

distinguishes between three strategies: simple control, technical control, and bureaucratic

control 9 Simple control occurs when bosses directly exert their personal authority over

workers. 'Work harder or you'll be fired' is the characteristic message . Technical control

involves the use of technology as a means of increasing the intensity of labour. Setting

the pace of work by setting the pace of machinery is commonplace in many routine

factory jobs. Bureaucratic control is the more sophisticated alternative, embedding work

incentives in the social-organisational aspects of the enterprise. Its hallmarks are career

ladders, bonus payments, and the encouragement of each worker's personal identification

with corporate goals.

124 PART IV: THE CRITIQUE OF CAPITALISM

Political economists also distinguish between 'lean production' and 'team production ' in

the organisation of work w The former, as a modern form of Taylorism, requires centralised

control over the workforce, usually with an eye to cutting out unnecessary labour. The latter

entails more decentralised decision-making, giving some degree of autonomy to groups of

workers. Team production is often more conducive to productivity, but managers tend to

be cautious about its introduction, fearing that the empowerment of workers may threaten

managerial prerogatives.

Modern managers also tend to be coy about explicitly admitting to their primary concern

of extracting more work from the workers. Human resources management (HRM) is the more

acceptable face of capitalist businesses today. It comprehensively extends the process of

bureaucratic control throughout the workplace while encouraging worker compliance. The

central economic goal remains a higher intensity of labour and a corresponding increase in

surplus value.

Conclusion The twists and turns in the development of Marxist value theory have a dual purpose: to

explain the market prices of commodities and to explain the relationship between labour

and capital. There is an obvious connection. Because labour power is itself a commodity,

its price is determined in the market. The difference between that price and the total value

of commodities produced shapes the overall amount of profit that capitalist firms make.

Employers and employees have a conflict of interest over the relative size of these wage and

profit shares (and a more fundamental conflict of interest about a system that generates such

pervasive conflict). This theory explains both the origin of profits in the exploitation oflabour

and the economic drivers of class struggle.

Marxist political economy also draws attention to the struggle over the economic surplus.

All economic systems need some sort of surplus. That surplus is the excess of the value of

what the workers produce over what is returned to them in the form of wages. That surplus is

needed to replace wornout machinery, to pay for new infrastructure, and to fund innovation.

What is distinctive about capitalism-by comparison with the socialist system that Marxists

have always advocated-is not the existence of a surplus, but the control of that surplus by a

particular class. In this respect, capitalism does indeed have some continuity with slave and

feudal modes of production. The size and disposition of the surplus reflect the exercise of the

power of the dominant class in each case. Under socialism, Marx anticipated, the size and

disposition of the surplus would be a matter for collective determination by the society as a

whole.

CHAPTER 14: LABOUR, VALUE, EXPLOITATION 125

KEY POINTS

• According to the labour theory of value, the value of a commodity depends on the amount of labour necessary for its production.

• Part of the value produced by labour is captured by employers. This surplus value is the source of capitalist profits, but it also flows to many other sections of the economy and society.

• Conflict over the relative shares of wages and surplus value pervades capitalist economies and gives rises to diverse trade union and managerial practices.

126

Capital Accumulation

What drives the capitalist economy?

Is economic growth inexorable?

How does the economic system change as it grows?

Previous chapters have shown how capitalism can be understood as a mode of production, and

how its functioning depends crucially on the character of the relationship between capital

and labour. But the economy does not stand still while it is being studied. It reproduces itself.

It grows. It changes as it grows. A central concern of Marxist analysis is to understand the

process of capital accumulation that shapes these dynamics.

Economic growth and capital accumulation The great historical achievement of capitalism is the increase in productive capacity: the ability

to produce vast quantities of goods and services. As noted in Chapter 5, it would be simplistic

to assume a necessary connection between this achievement and the increase of human

happiness. Some of the things produced are of dubious merit. Some are destructive. And the

distribution of the goods and services has commonly been so inequitable that more than two

centuries of economic growth has not eradicated poverty, even within affluent nations. Still.

notwithstanding these reservations, the overall expansion of production and consumption

under capitalism has been spectacular in comparison with anything that came before it. The

process continues, as new production technologies and new products are developed, and

consumerism becomes an ever more deeply entrenched culture.

The driving force of growth in a capitalist economy is the accumulation of capital.

Business enterprises seek profit and, if successful. they usually invest at least some of it in

expanding their output and market share. It is by increasing the amount of capital under their

control that individual businesses grow. So it is for the economy as a whole: the overall rate of

economic growth depends on the rapidity of the capital accumulation process.

CH A PTER 15 : CAPITA L ACCUMULATION 127

What conditions are conducive to the accumulation of capital? The classical political

economists pondered this question, as noted in Chapter 10 . Marxist political economy develops

a rather different two-pronged response. One involves the use of a formal analysis of the

process of reproduction and growth, based on a two-sector model of the economy. ' The other

involves an examination of the capital accumulation process, emphasising how the system

changes as it grows over time. We emphasise the latter here.

The capital accumulation process involves quantitative change, increasing in the volume

of productive capacity and the size of the economic surplus. It also involves qualitative

change, processes of institutional adaptation that make further economic growth possible.

From a Marxian perspective, three aspects of qualitative change are particularly significant:

the changing form oflabour's reserve army

the concentration and centralisation of capital

the process of imperialism.

Labour and its reserve army Capital accumulation typically generates an increase in the demand for labour. Larger outputs

of goods and services usually require more workers to make them. Whether the rate of

increase in the demand for labour is equivalent to the increase in output, or proportionately

less , depends on whether production is labour intensive or capital intensive. Either way, any

increase in the demand for labour may cause rising wage rates . From a capitalist perspective,

any such wage rise creates the unwelcome possibility that it will cut into surplus value and

thereby reduce profits .

What can prevent this from happening? Malthus famously claimed that population

growth would do so. The growth in the supply of labour, he thought, would continually

outstrip the demand for labour, forcing the prevailing wage rate back to a mere subsistence

level. The 'insatiable lusts of the masses' would thereby prevent wages encroaching on the

economic surplus. Marx called this a libel on the human race .2 What keeps wages in check,

he argued, is something internal to capitalism itself: the continual recreation of a reserve

army oflabour.

In general terms, this reserve army of labour comprises those members of the working

class who are unemployed or intermittently employed. 3 The existence of this relative surplus

population, Marx claimed, keeps wages at subsistence level. If the members of the reserve

army are willing to work for rock-bottom wages, employed workers cannot easily gain

significant wage rises because capitalist employers can always draw from the reserve army

to replace their existing employees. So, the existence of the reserve army keeps wages down

and profits up.

Herein lies a paradox. Leaving people unemployed is not an altogether rational state

of affairs for capitalists: unlike people at work, unemployed people are not creating surplus

value for their employers. The Marxist argument is that the unemployed may make an equally

128 PART IV: THE CR ITI QU E OF CAPITALISM

important contribution to capitalist interests-by keeping the brake on other workers' wage

rises. No permanent balance exists. A rapid burst of capital accumulation may result from a

new technological innovation or from the opening up of a new market . On those occasions,

the reserve army is diminished, and wages may indeed rise at the expense of surplus value.

However, as Marx pointed out, 'As soon as this diminution touches the point at which the

surplus labour that nourishes capital is no longer supplied in normal quantity, a reaction sets

in: a smaller part of the revenue is capitalised, accumulation lags and the movement of rise

in wages receives a check.' 4 Capitalists in general would prefer this not to happen , because it

means that the reserve army is replenished at the expense of economic growth. They would

prefer the reduction in the number of unemployed people because of economic growth to be

offset by new sources of potential workers replenishing the reserve army.

In Marx's own time, the principal sources of the reserve army were peasants displaced

from their traditional livelihood on the land and artisans displaced by mechanisation. These

people-victims of what we would now rather politely call structural economic change-swelled

the growing ranks of the potential working class. Desperate for employment, they usually

moved from rural areas to the growing industrial towns.

Such social upheavals continue in the poorer developing nations today, as people move

from rural areas to the burgeoning cities in quest of whatever work they can find. However, in

the more advanced capitalist nations, the potential sources of a reserve army have changed

over the last half century. Women, previously excluded from many areas of employment and told

that their 'proper place' was in the home , have increasingly participated in paid work. Indeed,

paid work has become the norm, although women's employment remains disproportionately

concentrated in casual and part-time jobs, often without employment security. These are

distinctive reserve army characteristics.

The spectacular growth in the numbers of immigrant workers can be interpreted in similar

terms. In Europe, millions of 'guest workers' have swelled the workforce, while in the USA,

millions of illegal immigrants from Central America work for much lower wages than those paid

to American citizens. The internationalisation of capital has been accompanied by a significant

internationalisation of labour supply, notwithstanding the border controls that individual

nation states seek to enforce. As a consequence, the reserve army function has been displaced

significantly to immigrants. 5

The employment experiences of many young people today also have significant 'reserve

army' characteristics . Working on casual contracts-or sometimes directly for cash-in-hand

payments-in businesses like fast-food outlets, cafes, and bars gives little continuity nor

security of tenure. The boss calls you in, sometimes at quite short notice, when your labour is

needed but provides no guarantee ofregularwork in the longer term. It is a flexible employment

arrangement, with flexibility usually on the employer's terms. Young people, seldom backed

by membership of a trade union and with little bargaining power, are offered this work on a

'take it or leave it' basis by employers who know that there are often plenty of alternative

candidates. For students expecting eventually to move on to more secure employment

CHAPTER 15 : CA PITAL ACC U MU LATION 129

situations, this may well be a tolerable, if sometimes stressful, phase in their working lives;

but for those who have no other long-term options, it is a consignment to an ongoing reserve

army oflabour.

So, while its character and composition have changed over time, the reserve army oflabour

has enduring relevance in modern capitalism. The emphasis on workforce flexibility in modern

capitalist businesses accentuates economic insecurity for many workers. In order to maintain

continued employment in an increasingly insecure economic environment, they are effectively

forced into competition. The resulting downward pressure on wages helps businesses keep

their production costs down.

Concentration and centralisation of capital The accumulation of capital is also accompanied by changes in the organisation of capital.

Individual capitalist businesses generally grow larger and seek to increase their scale of

production, a process that Marx called the concentration of capital. Concurrently, firms often

combine through mergers and takeovers, a process that Marx termed the centralisation of

capital. These are important qualitative changes that accompany the quantitative growth

process. They have significant consequences for the nature of work, the rate of technological

change, and the growth of monopoly power.

The consequential changes in the nature of work are partly a matter of scale. Being

employed in big factories rather than small workshops, or in big rather than small offices,

often significantly changes working conditions. Big business does not necessarily mean big

workforces in big workplaces: many capitalist enterprises divide their operations between

multiple sites and some continue to have only a handful of employees. The fundamental point

is the rationalisation of the labour process itself. This is not simply a matter of having a more

complex division oflabour, as in Adam Smith's famous example of the pin factory. It is, in Marx's

own words, 'the progressive transformation of isolated processes of production carried on in

accustomed ways into socially combined and scientifically managed processes of production'. 6

The adoption of scientific management and of systems of technical and bureaucratic control

(as noted in Box 14.1) are twentieth-century examples. These practices have tended to change

the nature of employment experiences and to enhance the capacity of employers to extract

surplus value.

The concentration and centralisation of capital also tends to accelerate technological

change. To quote Marx again, 'Centralisation, by thus accelerating and intensifying the

effects of accumulation, extends at the same time the revolution in the technical composition

of capital which increases its constant part at the expense of its variable part and thereby

reduces the relative demand for labour.' 7 This process is not inexorable; experience shows

that smaller firms are sometimes more technologically progressive than larger ones. However,

the centralisation of capital does generate the resources that make major investments in

innovation possible . Historically, the trends towards rapid technological change and the

concentration and centralisation of capital have run in tandem.

130 PART IV: THE CRITIQUE OF CAPITALISM

The growth of monopoly power has been a predictable accompaniment. The larger firms

usually have more control over the prices of their products because the size of their market

share makes them less vulnerable to competitive pressures. Sometimes the larger firms collude

with one another for these purposes. Their economic power can also be used politically to

pressure governments to change business regulations or tax rates in order to give an advantage

to particular corporate interests. Thus, the concentration and centralisation of capital has

enormous political economic significance. It tends to change the balance of power between

capitalist business enterprises answerable to their financial backers and the institutions of

government supposedly embodying democratic principles.

Some Marxists use the term 'monopoly capitalism' to draw attention to these trends. 8 They

contend that the process of capital accumulation has fundamentally transformed capitalism

from an economic system based on competition to one in which the use and abuse of monopoly

power is its most pervasive and distinctive characteristic. Others argue the contrary, that

global expansion has been associated with the breakdown of local monopolies, leading to

greater competition between capitalist enterprises on a world scale. 9 It is a fascinating debate

in which Marxist scholars enjoin with other contemporary analysts arguing from different

political economic positions. All agree that the capital accumulation process has wrought

qualitative change in the institutional character of the capitalist economy.

Imperialism The process of capital accumulation significantly shapes the nature of the international

economy too. Capital accumulation can take place within a locality or within a nation, but in

practice it tends to break down those spatial constraints on economic activity. In that sense it

is a globalising process. Capitalist businesses now search the world for the cheapest available

labour or raw materials. They look for new markets in other regions or nations to provide

outlets for their growing production of goods and services. They may also seek to minimise

the taxes on their profits by finding the countries with the lowest tax rates so that they can

locate their activities there-or at least make it appear that their profits are generated there.

Shopping around for the locations with the least restrictive environmental regulations has a

similar corporate logic. Having a global reach thereby increases the range of business options.

Not surprisingly, a tendency towards geographical expansion is one of the inherent features of

the capitalist economy.

Historically, this process of international expansion has been associated with imperialism.

Relationships of domination and dependency have been imposed by the ruling classes in the

stronger nations on the poorer people of the periphery. Territorial conquest and colonial

exploitation have been the historical hallmarks of imperialism. Interestingly, the empire

builders themselves were sometimes not at all coy about this. Cecil Rhodes, for example, a

pioneer of British imperialism in Africa during the nineteenth century, stated the goals of

imperialism as clearly as any Marxist might. In his own words:

We must find new lands from which we can easily obtain raw materials and at the same time exploit

the cheap slave labour that is available from the natives in the colonies; the colonies would also

CHAPTER 15 : CAP ITAL ACCUMULATI ON 131

provide a dumping ground for the surplus goods produced in our factories ; the Empire , as I have

always said, is a bread and butter question . If we want to avoid class struggle in the UK, we must

become imperialists. 10

Lenin, the father of the Russian revolution, wrote of imperialism as 'the highest stage of

capitalism'. 11 He saw it as a process shaped by a number of interconnected features:

several advanced capitalist nations competing for world markets

monopoly capital being the dominant organisational form of capital

considerable exporting of capital. not just trading in goods and services

severe rivalry occurring in world markets, leading alternately to cut-throat competition

and the development of international monopoly combines

the world economy being territorially divided.

This last feature was particularly pronounced at the time Lenin was writing. By t h e st art

of the twentieth century, the British, French, Dutch, Spaniards, Portuguese, and Belgians had

carved up much of the world among themselves . Africa, less than 10 per cent of which had

been under external domination in 1875, was almost completely partitioned by the European

nations over the next quarter of a century. Such imperialist processes were accompanied by

ruthless forms of oppression and militarism. It was this situation about which Lenin wrote.

There are continuities and discontinuities between the situation then and now. The

USA effectively took over from the European states as the leading imperialist power in

the second half of the twentieth century, but the USA has usually based its dominance,

particularly in Latin America, on having compliant satellite states rather than on colonies. 12

There are also significant differences between the classical form of imperialism described by

Lenin and its charact eristic modern forms. Instead of the poorer nations being dominated

by individual advanced capitalist nations, the contemporary face of imperialism is of

transnationalised domination by global institutions. Transnational corporations, supported

by international agencies such as the IMF and the World Bank, play a dominant role in the

economies of the poorer nations in particular, strongly influencing their possibilities of

economic development. So, here too we can see that the accumulation of capital has given rise

to qualitative change-from classical imperialism to its modern form as 'imperialism witho ut

colonies'. 13

Conclusion Marxist economic analysis emphasises that growth is integral to capitalism. It is not simply

a matter of the economy becoming quantitatively larger: the capital accumulation process

also drives qualitative change. Some of the most important of these historical changes have

been in the reserve army of labour, the concentration and centralisation of capital. and t h e

character of imperialism.

The growth process opens up more and more opportunities for profit. As Australian

historian Humphrey McQueen puts it. 'The essence of capitalism is capital's need to expand'. 14

132 PART IV : THE CRITIQUE OF CAP ITALISM

However, capital accumulation is not unproblematic for capitalist businesses. The necessary

conditions for the achievement of coordinated expansion can be quite elusive. There is a

permanent tension between capitalists' desire for immediate enjoyment and the drive for

long-term self-enrichment-manifest in the choice that they have to make between luxury

consumption and productive investment. 15 Whether the economic system rides out such

problems depends substantially on its capacity to meet the requirements for the continued

circulation of capital. It is with these matters that the next chapter is concerned.

KEY POINTS

..... • Capital accumulation, the driver of growth in capitalist economies, depends on particular

structural conditions.

• Historically, capital accumulation has gone hand in hand with the reproduction of a reserve army of labour, the concentration and centralisation of capital, and the process of imperialism.

• The continuing expansion of capitalism, nationally and internationally, generates new sources of labour for the reserve army, new patterns of monopoly capitalism, and imperialism without colonies.

Reproduction, Growth, Change

What is the circuit of capital?

What political economic conditions underpin this circuit of capital?

How has capitalism adapted in practice to meet these conditions?

The task of understanding the economy requires looking beyond surface appearances in order

to discern the broader forces shaping its development. We need to see how the various parts

of the capitalist economic system fit together and how they relate to the social and political

institutions. A Marxian theory of the circuit of capital can be adapted for this purpose. This

chapter presents a simple version of this model to show how capitalism works in its entirety as

an integrated system.

The circuit of capital Think of a young person setting up a small firm (to make surfboards, glove puppets, or

jewellery, for example). This person would normally begin with capital in money form (perhaps

the result of past savings, or a loan from family or a bank). That money can be used to rent

business premises, buy raw materials, and hire labour. Production can then be undertaken,

at which stage the capital takes the form of some as yet unsold commodities. If all goes well,

those commodities are then sold, thereby transforming the capital back into a monetary form

as sales revenue. If that final amount of capital is greater than the initial capital, the business

has made a profit.

Successfully completing this sequence makes it possible for the business to undertake

another round of production. Indeed, the next round of production can be on a larger scale,

if the person is able to hire the necessary additional means of production and labour power,

manage the expanded production process, and find markets for the increased number of

commodities produced. That being so, the business has reproduced itself and created the

potential for further growth. The circuit of capital has been completed and capital accumulation

can proceed.

133

134 PA RT IV: THE CRITIQUE OF CAPITALISM

Looking at the capitalist economy as a whole, as if it were a single firm writ large ,

we can observe a similar process . The st eps involved in the circuit of capital are formally

represented in Box 16 .1 below. This way of setting up the issue enables us to see how the

necessary conditions for capital accumulation are met in practice. 1 It is a means of drawing

together various themes from preceding chapters in order to illuminate the working of the

economy as an integ rated system.

BOX 16.1 THE CIRCUIT OF CAPITAL

Cap ita list business activity can be represe nted as a seq uence, as fo ll ows:

M denot es the init ial cap ital in a monetary form.

C denotes ca pital in the form of commod ities used for produc ing commoditi es.

LP is labour power. MP is the means of product ion.

Pi s production.

C1 denotes cap ita l in the fo rm of the produced commod ities.

M1 denot es ca pita l in a moneta ry form after t he sa le of t he produced commod ities.

The dashes represe nt t he move ment of capita l: they are not minus signs.

The point of this model is to show how capita l expands as a resul t of the successfu l

com pl etion of the var ious stages in the production process. The amount of expansion

(M1 > M) is equiva lent to the surp lus value generated during production, as described in the

precedi ng chapter. The process becomes a 'circuit' when the expa nded capita l (M1 ) fee ds

back into a new seque nce, on a bigger scale: more cap ita l, more output, more sa les, more

profits.

This model can be used to identify the five n eces sary conditions for capital accumulation ,

as follows :

minimising costs (in the M-C stage of the sequ ence above )

producing surplus value (in the M ... [P] ... C1 stage )

realising surplus value (in the C1- M1 stag e)

rapid circulation of capital (the dashes between M, C, C\ and M1 above)

economic and social reproduction (underpinning the whole process of capital

accumulation).

We consider each in turn .

CHAPTER 16: REPRODUCTION, GROWTH, CHANGE 135

Minimising production costs As every business manager knows, it is important to keep costs of production down. This is

best done by finding the cheapest labour, raw materials, and equipment appropriate for the

particular task at hand. The last phrase here is an important reminder that minimising costs

is always relative to a given quality and quantity of output. So, it is not necessarily a matter

of buying cheap at the expense of product quality (although this is common) but of avoiding

unnecessary costs and waste. How is this to be done?

Extending the geographical area from which resources are drawn is one means. If firms

can shop around the globe for labour, machinery, and raw materials, this can help them to

minimise their costs (although it may simultaneously impose other costs on the community).

Their capacity to shop around may also intensify the competitive character of the economic

environment, causing suppliers to drive their prices downward. The cost of transportation

limits this process to some extent, as there may be a trade-off between lower resource costs and

higher transport costs. However, in general, internationalisation of production is conducive to

minimising the overall costs of production for capitalist businesses.

Firms may also reduce the costs of labour through hiring people from particular social

groups at lower wage rates. If women can be employed more cheaply than men to do similar

work, if black people can be employed more cheaply than white, or if young workers can be

hired at lower wages than adults, it is in the immediate interest of the firms to exploit those

inequalities. Historically, racial and sexual discrimination in labour markets has been a

significant means of keeping wage costs down, although, in more recent decades, governments

have increasingly implemented regulations to limit such practices.

The presence of unemployment is also conducive to keeping costs to a minimum. In the

absence of strong trade unions or government regulations, competition among workers for jobs

tends to drive wage levels downwards. Where there are significant levels of unemployment,

this tendency may be accentuated. In this respect, as noted in the preceding chapter, the

interests of capitalist employers are served by having a reserve army of labour. Therein lies a

significant social and economic waste .

Generating surplus value Firms need to organise their production processes to create propitious conditions for

extracting surplus value. Surplus value is the source of profit. How are firms to ensure it is

kept at a high level? Pushing production costs down helps . Businesses are, understandably,

concerned to ensure that not all the value created by producing goods and services is returned

to their workers as wages. It is equally important for capitalist firms to ensure a high volume

and value of goods and services produced. The rate of surplus value-the total surplus

value divided by total wages-is the indicator of their success in this aspect of the capital

accumulation process.

136 PART IV: TH E CRITI QUE OF CA PITA LI S M

Raising the productivity oflabour is one means by which capitalist businesses can ensure

a high rate of surplus value, so long as the labour productivity gains are not matched by

corresponding wage rises. Employers have a collective interest in training workers with this

goal in mind . However, because there is always the possibility of workers moving to other

employers, this collective interest is not always perceived and acted on by individual employers.

They may prefer to poach skilled workers from elsewhere rather than undertake the long-term

commitment of training. As a result, governments often act on behalf of the collective interests

of capitalist employers, providing the education and training facilities from which capitalists

as well as workers collectively benefit.

Policies to raise the intensity of labour have an even more direct effect on the rate of

surplus value. Prevailing upon workers to work harder, faster, or smarter is a key concern for

capitalist employers. It may be achieved through various types of management strategies, as

summarised in Box 14.1.

Mechanisation of the production process may also contribute to a higher surplus value.

Equipping workers with more technologically advanced means of production usually raises the

volume and/ or value of output. Whether it actually raises the rate of surplus value depends

on the cost of the machinery and on whether higher wage rates have to be paid to ease the

acceptance of the more mechanised production. Mechanisation tends to reduce the relative

importance of direct labour in the production process. Therein lies a potential contradiction

because, from a Marxian perspective, labour is the source of value from which surplus value

derives. So what is rational for one capitalist enterprise may not be in the interests of capital

as a whole.

Realising surplus value Capitalist businesses also have to sell the goods and services they produce. Surplus value is

not realised in a monetary form as profit unless the products are actually sold. Not surprisingly,

then, much individual capitalist business activity goes into marketing products as well as

making them. The capitalist economy as a whole works best when economic conditions are

conducive to the effectiveness of such marketing efforts. This means that there must be a high

overall demand for goods and services to match the growing volume of the goods and services

produced. How is this requirement met?

Fundamentally, markets must be created. Capitalism as an economic system has,

historically, done this through the commercialisation of social life. Education and health

services, for instance, have been made into salable items. Music and sport have become focal

points for commercial enterprise, not purely means of personal fulfilment . New avenues for

profit making and capital accumulation are thereby created.

Meanwhile, the sales effort by capitalist businesses seeks to ensure that consumers'

demand grows in both new and existing markets. For the individual firm, this is usually a matter

of trying to maintain or expand its market share. When all firms are simultaneously engaged

in such practices, the effect is to intensify the culture of consumerism, in which commodity

CHAPTER 16: REPRODUC T ION, G ROW TH , C H A NG E 137

consumption is glamorised and represented as the means to personal satisfaction. The sales

effort by individual firms generates, in effect, a want-creation industry. Advertising becomes

increasingly sophisticated, sometimes playing on fears (of lack of personal freshness, of social

rejection, of sexual failure, for example) and then showing the product that will remove that

anxiety. Luxury consumption, often involving products that have built-in obsolescence or

are based on consciously engineered, short-term waves of fashion, is vigorously promoted

as markets for basic necessities become saturated. The process is extended internationally.

Tobacco companies, for example, have sought new territories as their principal existing

markets have come to be constrained by health regulations, while companies producing

baby food s have, for decades, sought to persuade women in the poorer nations to switch

from breastfeeding to the more 'modern' formula feeding . The quest to realise surplus value

evidently has enormous social implications.

So does the extension of credit facilities that has occurred alongside these marketing

efforts. The capacity to consume, as well as the willingness to consume, determines the level of

demand. That is why credit is so important: it enables people to consume in excess, or at least

in advance, of their income . The market for houses, for example, depends overwhelmingly

on such credit facilities, without which few people would ever have the savings to buy such

an expensive item outright. Demand for a wide range of consumer durables is also based on

ready access to loan finance. Commercial institutions relentlessly seek further avenues for the

proliferation of credit facilities. Importantly, while this facilitates the realisation of surplus

value, it also adds to the potential instability of the economy.

The rapid circulation of capital The annual rate of return on capital is higher if investments quickly generate profits that can

then be reinvested. The rapid circulation of capital is therefore in the interests of those who

own and control productive capitalist businesses. What this means, in terms of Box 16.1, is that

the movements of capital between its successive stages (M, C, C1, and M1 ) should be, as far as

possible, unimpeded . Blockages on the road to capital accumulation must be removed.

The image of the road is particularly apt in this context because improvements in transport

technologies have made a major contribution to the rapid circulation of capital in its physical

forms-as raw materials, machinery, labour power, and outputs of finished products . It is not

simply a matter of more and better roads to permit faster movement of goods and people.

Historically, the construction of canals and railways was crucial to capitalist development;

more recently, larger freighters, container ships, and air cargo have also made significant

contributions. The common element is the role of transport technology in extending the

terrain of capital. Improvements in information technology are currently further overcoming

the constraints of distance. Urbanisation can also speed the circulation of capital. As such, urbanisation is

functional for capitalism . It brings different elements in the production and consumption

process into greater spatial proximity. On the other hand, as cities grow and become more

138 PART IV: THE CR IT IQU E OF CAP ITA LI SM

congested, impediments to rapid circulation may reassert themselves. So, there are potential

cont radictions h ere: overcoming some impediments to the circulation of capital can create

new ones. Banks and oth er financial institutions also provide means whereby the rapid circulation

of capital is achieved . Their activities facilitate the movement of capital between its physical

and monetary forms. Think, for example, of a small manufacturer of, say, bicycles . A protracted

period of bad weather may temporarily undermine the demand for her product. This will cause

a crisis because the cash flow is inadequate to meet the ongoing costs of rent, wages, and so

forth . So, she requests a loan from a bank to tide her over. The bank manager, noting that

the manufacturer has a warehouse full of bicycles that can be expected to sell again when

the weather improves, accedes to the request. The manufacturer stays in business, pays the

interest on the loan, and eventually repays it in full when the stock of bicycles is sold. The bank

has helped the firm bypass a bottleneck that might otherwise have caused business failure.

Not all relationships between productive and financial institutions are as harmonious as

this. Indeed, as noted in Chapter 4, some political economists regard financial capital as partly

undermining productive capital, channelling funds into speculative activities and adding to

the instability of the system. However, for better or worse, finance is a key element in the

capital accumulation process. According to Marxist analysis, financial institutions do not

themselves create value, but are crucial for the capacity of modern capitalism to reproduce the

conditions for capital accumulation.

Economic and social reproduction Yet more fundamental are those social institutions that underpin and legitimise the capitalist

system. Like any economic system, capitalism depends on the capacity and willingness of people

to make it work. In other words, it has systemic requirements for its own reproduction. The

workforce must be continually regenerated, the underlying class relationships between capital

and labour must be seen as acceptable (or there must be mechanisms for their enforcement),

and the people as a whole must regard the economic arrangements as tolerable, if not the best

of all possible worlds. Herein lie complex interconnections between the capitalist economy

and the institutions of modern capitalist society.

Consider the family, for example. The simple biological reproduction of the workforce does

not require any particular family structure but, as Marxist feminists have frequently pointed

out, the gendered division of labour within households tends to serve the needs of capital.

Children are reproduced, nursed, and educated mainly by women, usually at no direct cost to

the capitalist employers. Yet the employers eventually benefit from those domestic processes

by having a healthy and appropriately disciplined workforce. The structure of the household,

ostensibly standing outside the marketed production processes of the capitalist economy, may

be crucial for the economy's reproduction.

CHAPTER 16 : REPRODUCTION, GROW T H, C H ANG E 139

Similar considerations apply to the state. Do the institutions of the modern state constitute

a non-capitalist sphere of society? At first, it might seem so . Their presence is commonly justified

by the need to have institutions concerned with social goals broader than the ones capitalist

businesses normally address. Their organisation need not be directly geared to the accumulation

of capital. However, as Marxists have often emphasised, the state in a capitalist society operates

within the constraints of that economic system and may be interpreted as directly serving it.

The 'ideological state apparatus' is a term sometimes used in this context. This term draws

attention to the role of the state in the dissemination of ideologies that reinforce the existing

economic and social order-ideologies about the importance of private property rights, for

example. The ideological state apparatus may be defined very widely to include not only the

institutions of government but also the churches, the media, and the education system. Within

such institutions, there are sometimes dissident, even anti-capitalist, voices, but the actions of

such institutions are usually supportive of the prevailing economic and social order; were they

not, political destabilisation would be recurrent.

If the ideological state apparatus does not work effectively, the repressive state

apparatus may be mobilised. Every society, other than an anarchist society based on voluntary

cooperation, has some sort of backup system of a coercive nature . The legal system, the

police, the armed forces, the prison system, and the intelligence agencies are its usual key

elements. According to Marxist reasoning, what is distinctive about capitalism is the way in

which these institutions serve the dominant class interests. The legal system may help in the

settlement of interpersonal disputes, while the police may facilitate traffic flows , but their

broader socioeconomic function is the enforcement of property rights. Is this repressive? This

role of the state apparatus is usually relatively uncontentious in liberal capitalist societies,

except at times when coercion is used for particular class purposes, such as when police or

defence force personnel are used as strike breakers. However, many capitalist nations have

more authoritarian traditions and structures; imprisoning political dissidents and deploying

the military against civilians have been commonplace in many nations in the Americas,

Asia, and Africa. Therein lies an obvious tension: insofar as the political economic system

manifestly depends on its forced imposition, its legitimacy is undermined.

Conclusion Capitalism is an adaptable economic system. It has its own systemic needs, which can be

understood in terms of a Marxist model of the circuit of capital. These needs are fivefold:

minimising costs, managing production, marketing products, rapidly circulating capital, and

reproducing the economic and social order. Capitalism has been remarkably successful in

meeting these systemic requirements. It has adapted diverse institutions for these purposes,

wreaking massive transformations in technology and the organisation ofwork, social structure,

and ideology.

140 PART IV: T HE CR ITIQUE OF CAP ITALISM

These adaptations have not generally been the product of a master plan. No assertions

about conspiracy are necessary either. The adaptations have largely been the product of

decisions by the owners and managers of capitalist enterprises pursuing their own self-

interest. Politicians and bureaucrats have played supportive roles, but generally fallen short of

providing coherent, long-term economic planning. The adaptations of the capitalist system, as

described in this chapter, have occurred in response to changed historical circumstances and

been driven mainly by the imperative of profit seeking. It is somewhat ironic that we can use a

Marxist model to understand the success of capitalism in making these adaptations.

It is not a success story in aU respects. As noted throughout, the systemic requirements

and the adaptations involve numerous tensions. Generating unemployment to restrict the

power oflabour constitutes a significant economic waste. Reducing wages to lower production

costs tends to undermine the demand for the commodities produced. Developing financial

institutions to facilitate the circulation of capital may lead to speculation that steers capital

away from productive uses. And heavyhanded measures by the state to ensure social control

can undermine the perceived legitimacy of the system. These tensions inhibit the achievement

of any comfortable equilibrium outcome. Indeed, the picture painted here is one of an

economy beset with internal contradictions . The resulting stresses are manifest in uneven

development-both spatially and temporally. Some areas prosper while others decay, and

periods of rapid capital accumulation and economic expansion are interrupted by periods of

economic crisis.

KEY POINTS

• The circuit of capital functions most effectively when there are propitious conditions for businesses to minimise costs, produce a high rate of surplus value, and expand the markets for their products. There must also be no major impediments to a rapid circulation of capital and to economic and social reproduction.

• Much effort goes into ensuring that these conditions are met: businesses shop around for cheap resources, use technology that raises productivity, market an increasingly diverse array of goods and services, speed the movement of capital, and reproduce the workforce with the required skills and attitudes.

• Notwithstanding these efforts, fundamental contradictions arise in the capital accumulation process.

Economic Crises

Why is economic growth periodically interrupted by economic crises?

What contradictions are embedded in the system of production for profit?

Do these problems imply the eventual breakdown of the system?

Why should there ever be problems in an economic system in which capitalists put so much

effort into pursuing profits, capital accumulation, and economic growth? Adam Smith

expected that such commercially motivated behaviour would produce generally positive

economic outcomes. Marx disagreed, emphasising the flaws in the system that would lead

to deepening crises and, eventually, capitalism's demise. Marx thought capitalism was

progressive in comparison to what had preceded it, in that it helped to eradicate 'the idiocy

of rural life' 1 and facilitated the development of the forces of production. So why might it

be only a transient phase in human history, eventually yielding to a yet more progressive

socioeconomic system?

The most remarkable of all Marxist claims is that capitalism will eventually be replaced

by socialism. The claim rests on distinctive views about the combination of structural forces

and purposeful political activity capable of effecting that transformation. Elements of both

structure and agency are integral to the process.

The structural aspect concerns economic crises. These are periods during which capital

accumulation slows, the production of goods and services falls, and unemployment rises.

'Economic crisis', 'slump', 'depression', and 'recession' all describe essentially the same

objective phenomenon: economic downturn. Marx thought that capitalism would be afflicted

with such periodic downturns and, indeed, that the crises would likely deepen over time. Why?

His reasoning rests on three distinct theories: the theory of disproportionalities, the theory of

the tendency of the rate of profit to fall, and the theory of underconsumption. 2 It is useful to

look at each of these explanations of economic crisis first, before asking how they interrelate,

whether they do indeed explain economic crises in practice, and, if they do, what political

responses might follow.

141

142 PART IV : THE CRITIQUE OF CAPITALISM

The anarchy of capitalist production There is a recurrent possibility in a capitalist economy that the production decisions of

firms in different industries will not be synchronised. Steel producers usually have to decide

how much steel to produce before they know how much steel will be bought from them by

car manufacturers, engineering firms, and their other customers. Car manufacturers, in

turn, have to decide how many vehicles to produce without knowing (unless they engage in

illegal industrial espionage) how many vehicles their competitors are planning to make.

They cannot know for sure what their market share will be. Even the total market demand is

uncertain. An unexpected event, such as a sharp rise in petrol prices, may cause consumer

demand for cars to deviate from projections based on past trends. So, firms' production

decisions, in the absence of industry-wide planning , do not necessarily produce a balance

between supply and demand.

Why describe this situation as the 'anarchy of capitalist production'? Anarchy in this

context denotes an unplanned, quite likely chaotic, situation (not to be confused with

anarchism, which is a coherent political philosophy emphasising the desirability of basing

society on voluntary cooperation rather than state-sponsored coercion). The absence of a

centralised planning mechanism in a capitalist economy is the source of the uncertainty, if

not chaos. Such central planning mechanisms have their own problems, if only because of

the sheer size and complexity of the task of coordination. Further, markets are not altogether

chaotic, because the price mechanism plays a coordinating role. If a steel producer makes too

much steel, for example, the market price will fall, which will help sell the surplus steel and

also signal the need to scale back production. The price system thereby restores some balance

between output and demand. The problem is that it operates after the decisions about steel

production for the coming period have been made . In the interim, the imbalance may spiral

into a generalised economic crisis.

Why might this occur? Consider the steel industry example further. If the steel producer

makes too much steel, workers at the steel plant are likely to be laid off. Without income, these

workers will not be likely to buy cars or washing machines, for instance. This will mean that the

producers of such consumer goods will demand less steel from the steel producers. The laid-off

workers will also have less income to spend on food or clothing, which will create economic

downturn and unemployment in the food and clothing industries. Thus, a localised structural

imbalance becomes a generalised recession. The original disproportionality between the

outputs of the different industry sectors triggers an economic crisis.

The value of this strand of Marxist crisis theory is its insight into the transmission process:

it shows how a localised problem can trigger an economy-wide downturn and how the price

mechanism performs a corrective function when such a downturn does occur. As already

noted, discounting unsold stock may help it to be sold. Fundamentally, the cheapening of

capital will tend to restore the potential for future profitability. This is what Marxists call the

'devalorisation of capital'. The reduction in the value of capital helps raise the rate of profit,

CHAPTER 17: E CO NOMIC CRI SE S 143

because less capital now has to be outlaid to achieve those profits. Recessions are painful for

capitalists as well as workers: usually, some capitalist enterprises are forced out of business

altogether. Marxists regard the weeding out of the more inefficient capitals as 'cleansing'

the economy as a whole, thereby creating the conditions for renewed capital accumulation

process. No pain, no gain, it seems. The swelling of the ranks ofthe reserve army of unemployed

labour is also conducive to the enforcement of more discipline on the workforce. For all these

reasons, a capitalist economy is likely to bounce back from a recession brought on by structural

imbalance or disproportionality. Yet, according to a second strand of Marxist crisis theory,

more fundamental problems remain.

The tendency of the rate of profit to fa II Is the problem of recession deeply embedded in the capital accumulation process itself? This

second strand of Marxist crisis theory posits that the more successfully capitalists accumulate

capital, the greater the downward pressure on the rate of profit. Seeing their profit rates

falling, capitalists will be less inclined to expand the productive capacity of their enterprises .

Investment and output fall. An economic crisis occurs . Individual success causes systemic

failure.

This paradox can be explained in various ways. Box 17.1 (on p. 145) sets out the formal

explanation, using some simple algebraic notation . The basic proposition is that the capital

accumulation process tends to raise the organic composition of capital, which is the ratio of

constant capital to variable capital. Broadly speaking, this means that capitalists install more

machinery and equipment in the process of expanding their businesses. If the rate of surplus

value remains unchanged, the rate of profits would then tend to decline. This is definitional,

but what is the underlying economic logic? Recall that, according to the labour theory of

value, labour produces value. So, if the process of capital accumulation causes less labour to

be used in production (relative to capital goods such as plant, machinery, and equipment), the

rate of profit will fall. The total amount of surplus value generated may well continue to rise

but, expressed as a ratio of total capital outlaid (constant capital and variable capital), the rate

of profit will decline.

One might wonder why capitalists would continue to accumulate capital and expand

their businesses if the effect is to undermine their own rate of profit. It seems self-

defeating. The best explanation of this paradox hinges on the tension between individual

and collective rationality. It is indeed rational for individual capitalists to invest , perhaps

by installing the latest equipment in order to gain an advantage relative to their rivals. If

their rivals follow suit, however, the advantage is eradicated. All the firms then face the

general tendency for the rate of profit to fall. The source of capitalism's vitality-individual

initiative in search of higher profits-becomes its Achilles heel as falling profit rates

periodically herald recession.

144 PART IV: T H E CR ITI QU E OF CA PITA LI S M

Explained in this way, one might think that recession would not be merely an intermittent

problem. The tendency for the rate of profit to fall could be expected to be even more persistent

than the problem of sectoral disproportionality, perhaps destined to sound the death knell

of the whole system. Indeed, Marx did expect this tendency of the rate of profit to fall to be

manifest in intensifying economic crises over time, but he also conceded that there would be

offsetting forces. The rate of surplus value could rise. That would offset the effect of increases

in the organic composition of capital. Of course, capitalists are always concerned to raise the

rate of surplus value. If installing new machinery enables capitalist firms to increase the pace

of work performed by their workforce, they thereby increase the intensity of labour. If the

resulting increase in the rate of surplus value is proportionately larger than the increase in the

organic composition of capital, the overall profit rate will actually rise. The crisis tendency is

averted.

Other offsetting forces noted by Marx included the effect of foreign trade in cheapening

raw materials, the depression of wages below the value oflabour power, and the cheapening of

constant capital. The first of these-foreign trade-may provide a short-run counter to a falling

profit rate. However, by drawing distant lands into the capitalist production process (what we

would now call globalisation), it ultimately reproduces the same systemic contradictions , but

on a larger scale.

The second offsetting force-depression of wages-looks the most obvious counter to the

falling rate of profit. Marx actually placed little stress on it because of the general assumption

that all wages and prices are market determined. Wages in general, therefore, reflect the value

of labour power. However, where employers have particular monopoly power, and where the

replenishment of the reserve army of labour weakens the bargaining position of labour, wage

cutting is always an option. That, too, may offset the tendency of the rate of profit to fall.

As for the third factor-cheapening of constant capital-it is important to understand

that, in Marxist theory, the organic composition of capital is defined in terms oflabour values,

not market prices. If machinery and other capital goods are becoming relatively cheap in

the market, increased mechanisation is possible without raising the organic composition of

capital. In such circumstances, the overall rate of profit may be constant, or even rising, and

there need be no general tendency towards economic crisis.

An apparently weak conclusion beckons. The rate of profit may go up or down

according to the relative strength of a rising organic composition of capital and these

various offsetting forces. In other words, what starts out as a strong proposition about

the inexorable tendency towards economic downturn ends up saying that the outcome is

contingent. Capital accumulation can create the conditions for recession, but, equally, it

may create the conditions for yet more accumulation. Is this a weak conclusion? Perhaps not.

Capitalism does, indeed, alternate between periods of growth and recession. The Marxist

theory suggests this pattern is explicable in terms of the relative movements in the rate of

surplus value and the organic composition of capital. 3 The wave-like motion of capitalist

development is thereby explained.

CHAPTER 17: ECONOMIC CRISES 145

BOX 17.1 THE MECHANICS OF THE FALLING RATE OF PROFIT

The total value of commodities produced = c + v + s

where c is constant capital

v is variable capital

s is surplus value

Three important ratios using these terms can be defined as follows:

s/v is the rate of surplus value (sometimes called the rate of exploitation)

c/v is the organic composition of capital

s/(c + v) is the rate of profit. This rate of profit can be expressed in terms of the rate of surplus value and the organic

composition of capital by dividing each term in the numerator and denominator by v; that is:

s/v

c/v+l

This is an alternative expression for the rate of profit, showing its positive relationship

with the rate of surplus value (s/v) and its inverse relationship with the organic composition

of capital (c/v).

Why does this rate of profit tend to fall as capital accumulation occurs? Consider the

effect of a rise in c/v, caused by businesses installing more plant and machinery in their

production processes. If s/v remains constant, any such ·rise in c/v depresses the rate of

profit.

The assumption of a constant s/v is crucial to this reasoning; however, the assumption

may be relaxed. Then the rate of profit may rise or fall depending on the relative size of

changes in c/v and s/v. In other words, the rate of profit may fall (hera lding a recession) or

rise (heralding a period of expansion) according to the re lative movements in the rate of

surplus value and the organic composition of capital.

Underconsumption What about consumers? Is the inadequacy of their spending, relative to the vast growth in

output of goods and services, an alternative explanation of recurrent economic crises? Here is

a third strand of reasoning about the cause of recurrent economic crises. As Marx put it:

the epochs in which capitalist production exerts all its forces are always periods of overproduction,

because the forces of production can never be utilised beyond the point at which surplus value can

be not only produced but also realised; but the sale of commodities, the realisation oft he commodity

capital and hence also of the surplus value, is limited not only by the consumption requirements of

society in general, but by the consumption requirements of a society in which the great majority are

poor and must always remain poor. 4

146 PART IV: T H E CR ITI QU E OF CAP ITAL I SM

Monopoly Capital: An Essay on the American Economic and Social Order, an influential

book by American Marxist economists Paul Baran and Paul Sweezy, develops this reasoning.

According to Baran and Sweezy, modern capitalism is monopoly capitalism. 5 The large

companies that now dominate the economy have the power to raise the prices of their

products simultaneously, and sometimes collude to do so. They also have the ability to lower

their costs through technical innovation. A widening gap between prices and costs results,

making possible an even greater economic surplus. The problem is who is to buy the goods.

Capitalists try to keep workers ' wages down, but thereby undermine the major source of

potential consumer spending. Capitalists' own consumption can partly fill the gap, but the

scope for this is limited because capitalists must channel a proportion of their funds into

business investment if capital accumulation is to continue. Commercial advertising helps to

promote sales and, more generally, to foster a consumerist culture. The extension of credit

facilities enables consumers' spending to exceed their incomes, at least in the short run.

Governments also do their bit to pump up the aggregate demand through various forms of

civilian and military expenditure, thereby helping to absorb the economic surplus. However,

to the extent that these expenditures are financed by general taxation, they only divert

expenditures from private to public sectors; the general problem of underconsumption

remains. The root problem is the restricted purchasing power of the mass of the people, which

prevents the growth of productive capacity being easily matched by a corresponding growth

of demand.

Setting this underconsumptionist reasoning in the context of Marxist theory illustrates

the inherent tension between the conditions for the production and realisation of surplus

value. The production of surplus value requires low wages, whereas the realisation of surplus

value is facilitated by high wages . Low wages keep production costs down, but high wages help

capitalists sell their products. From the viewpoint of an individual capitalist, the ideal solution

is obvious enough: keep the wages of your own workers down but encourage other capitalists

to pay high wages to their workers in order to generate a buoyant market demand for your

products. However, if aU capitalists seek that outcome, it just cannot add up. The tension is

systemic. From the viewpoint of capitalists as a whole, wages are always simultaneously too

high and too low. This is because wages have a dual role-as a cost of production and as a source

of demand for goods and services. Oscillations in the level of economic activity are the result

of capitalist firms, and governments acting on their behalf, wrestling with this contradiction.

Economic crises and social change These three strands of Marxist crisis theory-emphasising disproportionalities, the tendency

of the rate of profit to fall, and the problem of underconsumption-can aU be applied to

understanding downturns in the level of economic activity in the real world. Explanations for

particular economic crises at specific times and in specific places cannot simply be read off from

these theories , but they direct attention to key variables for analysis. A fuller understanding

CHAPTER 17: E CONOMIC CR I SES 147

of particular crises, such as the global financial crisis that began in 2007-08 and created

deep recessions in many nations, requires consideration of the historical context. Such

consideration includes the monetary factors associated with financial institutions, the role

played by governments, the problems of inflation and deflation, the impact of international

trade, and so forth. The Marxist analysis focuses on basic underlying conditions, rooted in the

nature of capitalist production, but recognises that other factors may play a part. 6

An economic crisis does not necessarily herald the demise of capitalism. If it precipitates

structural economic changes that are conducive to renewed capital accumulation, slump turns

into boom. It is rather like a crisis in your personal life: if you make the necessary adjustments

to cope with it, life goes on and may even be better than before. In the case of economic crises,

the adjustments are often painful, usually involving the closure of businesses and the loss of

jobs. However, if that weeding out of inefficient elements results in a more dynamic economy,

then capitalism moves again into an expansionary phase. Looked at from this perspective,

a theory of periodic economic crises is not a theory of breakdown. It is an explanation of

alternating booms and slumps, what orthodox economists more politely call 'the business

cycle'.

Whether it is sensible to retain an economic system whose structural contradictions

cause recurrent recessions-not to mention alienation and class inequality-remains the

big question. If enough people think not, and decide to do something about it, alternative

political economic arrangements can be fashioned. This is where the Marxian view turns

towards the workers, not as victims of capitalist exploitation, but as the active agents of

progressive political economic change. Marx anticipated that the working class, enlightened

by radical intellectuals like himself, would bring about the revolutionary transformation

from capitalism to socialism.

More moderate reformers have advocated incremental changes to the economic system to

reduce its tendency to periodic crises. Keynesian and institutional economists have done so,

as we will see in later chapters. Marxists are usually sceptical of such attempts to put 'band-

aids' on the structural problems of capitalism. The fundamental flaw in the system that they

identify is that economic crises are a feature of an economic system based on production for

profit. Crises arise whenever the conditions for profit are not present, whether because of

structural imbalances, insufficient demand, or any other factor. At such times, unemployment

and unfilled social needs coexist. Any genuinely rational economic system would mobilise the

unemployed resources to make the goods and services to satisfy those needs . Capitalism does

not do this, because it is based on production for profit rather than production to directly

satisfy human needs.

Therein lies the general Marxist case for moving from capitalism, with its inherent class

conflicts and crisis-prone character, to a socialist alternative. Marx anticipated that the

problems of recurrent economic crisis would fuel this revolutionary sentiment and bring more

converts to the socialist cause. The penultimate chapter in this book returns to the question of

why this has not come to pass-or at least not yet-in the advanced capitalist nations.

148 PART IV: THE CRITIQUE OF CAPITALISM

Conclusion Marxism provides insight into how cooperation and conflict coexist within the capitalist

economy. It emphasises the economy's inherently contradictory character. Workers and

capitalists have to cooperate to win their daily bread (and cake), but there is a fundamental

conflict of interest, manifest in distributional struggles and crisis tendencies. In seeking to

develop an analysis of these conditions, Marxist political economy presents us with some

particularly distinctive propositions:

profits come from the exploitation oflabour

growth comes from the accumulation of capital

crises come from contradictions in the system of production for profits

conflict comes from the class structure

change comes from class struggle.

This interpretation of capitalism is as contentious today as it was when it was first

developed. Marx just will not lie down. Although his ideas were formulated in an early phase

of capitalist development, they continue to have striking resonance today. Indeed, as long

as capitalism exists, Marxism is bound to be a major reference point for the analysis of its

contradictions. Equally predictably, the Marxist interpretation of capitalism is hotly contested

by those with a stake in maintaining the existing economic system.

KEY POINTS