Marxist Economics A Glossary of Terms, Part I: Basics By Marc Newman Labour Labour is the process by which human beings interact with their environment to produce use-values. Those who perform labour are sometimes called direct producers. Worker A direct producer under capitalism. An owner and seller of the commodity labour power. The recipient of wages. A worker is exploited as part of the normal operation of the capitalist economic process. Commodity A commodity is a useful thing (it has a use value) which has been produced for exchange, and has an exchange value. A commodity is peculiar to situations of production for a market. There are no commodities in pre-class societies, though of course, there are products. Commodities exist but are marginal to the economic process under slave and feudal forms of society. They become a mainstream part of economic life only under capitalism. As a result, capitalism can be understood as an economic system based on generalised commodity production. Labour Theory of Value One of the most basic tenets of Marxist economics is that labour is the source of all value. This sharply contradicts the accepted wisdom of mainstream economics which is that value is produced when various factors of production, such as capital, labour and raw materials (and in some accounts, property) interact. Marx s response is that capital is merely an artificial extension of labour (see dead labour below), and that labour properly understood, is a process of interaction between the labourer and their environment. Some neo-classical fundamentalists would argue that there is no value at all apart from market prices. But this fails to explain the coherent movement of prices (in the long term) associated with improvements in the productivity of labour. One corollary is that if the labourer, or direct producer, has a portion of the value they produce taken by some other person (ie a capitalist), then this is exploitation. The Labour Theory of Value (or LTV) is the foundation stone of Marxist economics, and was borrowed historically from the classical economics Smith & Ricardo. Relations of Production The relations of production are the social relationships that govern how production is organised in a given society. The relations of production today are capitalist relations of production. They are subject to minor variations, but do not change in fundamentals unless the social system changes. Thus, feudal relations of production involved the exploitation of the peasants by the lords through the appropriation by the latter of a part of the grain and other items they produced. This is made possible through the monopoly of force held by the lords and their ostensible control of the land the peasants worked. These social relations gave way to capitalist social relations during the period of the bourgeois revolutions. Capitalist social relations involve the appropriation of part of the value produced by a worker by the owner of capital, the capitalist. This is made possible primarily through the monopoly of capital held by the new ruling class, though is backed up by a monopoly of force. 1-1 (of 4 pages)
Forces of Production The forces of production are the purely technical aspects of production. The steam powered factory is a significant increase in the forces of production over the water mill. Computers are an increase on the abacus. Better mathematical skills in engineering are also an increase in the forces of production. Making workers work harder might increase the amount produced but does not increase the forces of production. Increases in the forces of production might also be called innovation. The distinction between forces and relations of production is important in that that either can change at different paces and somewhat independently of the other. But each also places important limits on the other clockwork and gunpowder were well understood in imperial china, but not applied to production because of the limitations imposed by feudal relations of production. On the other hand, capitalism was inconceivable without the development of certain improvements in the forces of production. These two should be seen as mutually conditioning. Value Value in marx s system is twofold. Every commodity has a use-value and an exchange value. When used in an unqualified way, in the context of Marxist economics, this generally means exchange value. Use-value The useful qualities of a product that make it worth producing. The use value of bread, for example, is that it can be eaten, and is nourishing. This is a purely qualitative measure. All products of human labour, even in pre-class societies, have a use value. (nb. This should not be confused with something being worthwhile. The use-value of weapons is their ability to destroy or kill more effectively. This is a use-value, even if not necessarily one we would applaud). Exchange-value The worth of a commodity. This is a quantitative measure. It is different from, though related to, price. It is determined by the Socially Necessary Labour Time required to produce the commodity. Socially Necessary Labour Time (SNLT) The time taken to produce a given commodity at the average level of skill, technique and work intensity, and with the average level of tools and raw materials. The SNLT of a commodity determines its exchange-value, and therefore strongly shapes prices. Price The market price of a commodity. This will therefore be experience fluctuations caused by supply and demand variations. It will tend to oscillate around the exchange value of a commodity. Wages The price of the commodity labour power. Like other commodities is basically determined by the SNLT taken to produce it (through domestic labour, the value of inputs, such as food, shelter, etc). Unlike other commodities, it is also socially determined, in that social expectations play a role in the formation of the value of labour power, and struggle is a key factor in realising those expectations. Struggle is also a principal the means by which the market price of labour power oscillates around its value. The employer has a go at push wages below the value of labour power, the workers have a go at pushing it above. The continual ebb and flow of the struggle is a major factor in the oscillation of the level of wages around the value of labour power. 1-2 (of 4 pages)
Labour-power A commodity for sale under capitalism, that allows the buyer control of a certain amount of labour time. The price of labour power is wages. It is sold by workers. Labour power is also unique, in that it expands in value when used. The use-value of labour power is that it produces value. This observation is critical to Marx s account of exploitation. Production When labour power is bought, a wage is agreed, and the purchaser (the capitalist) is able to direct the worker in the agreed amount of labour. Once labour has concluded, commodities are produced. Owing to their payment of a wage, the capitalist then appropriates the commodities for sale. Capitalist production is predicated on the expectation that the value of commodities produced (usually v ) is greater than the value of the labour power used to produce it (usually w ). The difference between the two is known as surplus value (or the surplus value left over once the value of wages has been paid). Surplus value The difference between the value of commodities produced, and the value of wages paid to produce them. s = v w It is not the same as profit, profit is a part of surplus value. Other parts are used to pay for the capital used up in the production process. Exploitation Exploitation is the difference between the value of the products of labour, and the value paid to the producer. It is equivalent to surplus value. Exploitation is not an exception but a basic part of the functioning of a capitalist economy. This is not to be confused with a moral statement about particularly bad workplace practices, it is a normal (if bad) part of the workings of the system. Rate of Exploitation The ratio of surplus value to wages. E = s / w The rate of exploitation is a key indicator in Marxist economics. It is a measure of how much value workers are denied by the payment of wages, and the extraction of profits. An increase in the rate of exploitation can be accomplished in a number of ways: i) By reducing wages paid ii) iii) By making workers work harder this is referred to as increasing the intensity of work. The value of goods produced in the given amount of time increases, as more output is created. By innovations that increase the productivity of each hour of labour time, thus generating more output per hour of labour time. Dead Labour The amount of dead labour is the concentration of labour time accumulated in a commodity. The exchange value of a commodity can also be described as the amount of dead labour accumulated in it. All commodities are accumulations of dead labour, or labour already performed. Capital can be understood as vast accumulations of dead labour that has been appropriated to someone other than the labourer. The dead weigh like a nightmare on the brains of the living Marx wasn t just talking about ideas, he was also referring to the way in which the labour of past generations is used to oppress the present generation of workers by the capitalists who control it. 1-3 (of 4 pages)
Capital Capital is equipment and raw materials used in production. Capital is accumulations of dead-labour. Owners of capital are capitalists. Capitalist Owners of capital. By virtue of their control of these accumulations of dead labour, capitalists are able to force workers to sell their labour power, and then appropriate a portion of the value produced as profit. Profit Income accruing to the capitalist because of their control of capital. Profit (usually p ) is not to be confused with surplus value, but is a component of it. Profit is surplus value minus capital expended in the process of production: p = s c or p = v w c Rate of Profit The rate of profit is a ratio between the profit made and the outlays (wages + capital used). r = p / (w + c) The rate of profit is a key determinant of how (or whether) capital is invested in new production. There is both a specific Rate of Profit in an individual enterprise, but also a general, or average, rate of profit, across an economy. The rate of profit is more important to capitalists than the amount of profit produced. What is important to them is the return on investment, which is expressed by the rate of profit. If capitalists are unable to turn a profit, that is to say, the general rate of profit meets or approaches zero, capitalists will stop investing and the capitalist system grinds to a halt in an economic crisis. 1-4 (of 4 pages)
Marxist Economics A Glossary of Terms, Part II: Crisis By Marc Newman Economic Crisis If at any point in the economic cycle, a capitalist is unable to realise their profits through the sale of their commodities, their actual profit rates fall. The unplanned nature of capitalism makes this a regular occurrence just due to bad guesswork by corporate strategists. However, there are moments when this sort of crisis of overproduction (of having produced more than it is possible to sell) becomes general. Profit rates fall across the economy. As the general rate of profit approaches zero, capitalists stop investing in new cycles of production. They stop buying new capital goods. Unprofitable production stops, workers are laid off. They are unable to consume commodities at the same level, which exacerbates and generalises the crisis. Idle capital has its price driven down by its abundance, and is bought up on the cheap by the more stable firms, other capital is abandoned and effectively destroyed. Competitors are removed. The more stable firms are then able to use their larger stocks of capital to engage in new, profitable production, made possible by the crisis itself. But what causes economic crisis? Uniquely, in history, capitalist crisis is a crisis of overproduction (rather than the crises of underproduction typical of previous class societies). In the midst of despression and hardship large stockpiles of commodities generally remain unused and rotting. The underlying cause, Marx argues, of the falling profit rates that set off the self-destructive cycle of investment strikes, layoffs and falling consumption is the rising organic composition of capital. Organic Composition of Capital The organic composition of capital is the ratio of capital, or dead labour, (c) to wages (w) O = c / w The more capital intensive production becomes (as the forces of production increase), the more the organic composition of capital (OCC) rises. A rising OCC is a natural product of capitalism, as profit is reinvested in more capital. This gives rise to a tendency for the rate of profit to fall. Declining Rate of Profit A rising OCC is a problem for capitalists, because it places pressure on profit rates. All other things being equal, a rising OCC means a falling rate of profit. Mathematically speaking, if E and w remain constant, a rise in c causes a fall in r. If wages remain steady, and capitalists are unable to extract a higher ratio of surplus value from the labour process, further capital investment is unprofitable. In real world terms, capital intensive investment increases outlays. If the amount of labour employed (remember, labour is the source of all new value) remains the same, and the rate of exploitation remains the same, then profits will fall. In general terms, if p is invested in further capital, r will tend to fall. This is true even if the amount of profit increases what matters to capitalists is the rate of return on their investment. Thus profit tends to negate itself. This is the key cause of capitalist crisis. The mechanism which forces capitalists to continue to invest more capital intensively despite its destructive effects, is capitalist competition. There are also a number of countervailing tendencies, or factors which offset the falling rate of profit. 2-1 (of 2 pages)
Effects of Capitalist Competition One firm innovates, buying newer, more expensive machinery. By improving its forces of production, it is able to undercut the prices of competitors rising productivity of labour, driven by the new technology, means the commodites require less labour time to produce them. But for a time, they are able to charge the old price. This allows the first innovators to make super-profits, and effectively steal a proportion of surplus value from their competitors. Gradually, as competitors get on the band wagon, the SNLT required to produce the commodity across society drops. Price competition between the competing firms drives down the price to the level suggested by the new SNLT taken to produce them. Once a new equilibrium is reached, the profits for our original firm will drop back to their original level, only with higher costs of production, based on the new capital intensive process (the rising OCC). In general terms, capitalist competition forces individual firms to behave in ways that contradict the interests of the capitalist class in general, undermining their long term profitability. Countervailing Tendencies There are a number of factors that offset the tendency of the rate of profit to fall, or countervailing tendencies. If there weren t, capitalism would be dead already. They are often thought by academics to be counter arguments to Marx s economics, but they are a necessary component of a complete understanding of capitalist functioning. That notwithstanding, the tendency of the rate of profit to fall remains an important self-destructive impulse in the capitalist economic structure, and the key cause of economic crisis. Three of the most important countervailing tendencies are: i) The capacity of capitalists to raise the rate of exploitation (E). If exploitation, or the rate of production of surplus value, increases, larger profits are possible. This can be done either by lowering wages (w) or by increasing productivity per hour of labour time through innovation or raising work intensity. ii) iii) Raising the rate of exploitation is limited extensively by the length of the working day. It is limited intensively by the need to maintain the supply of labour-power increasing the pace of work beyond a certain point will actually work people to sickness or death. It is also limited, obviously, by working class resistance. The waste of capital if profit (or part of it) is wasted instead of invested (for instance spent on luxury goods for the rich, or on an arms race) this will stop (or limit) the rise in the OCC. This is the key to the long boom after WWII, what has been called the permanent arms economy. The destruction of capital (as in war) may even cause a fall in the OCC. So many ways in which war is good for business Luxury consumption is limited by the need of individual capitalists to reinvest the maximum proportion of their capital in order to expand their profit-making capacity. It is virtually impossible for capitalists to consciously agree to waste large amounts of capital, and it is limited on a national scale by the need to compete internationally. Occasionally, innovations can arise which actually reduce the organic composition of capital. Sometimes the new machines are cheaper than the old ones, as their production processes improve. However, while this can offset the rising OCC, over time, once capitalists have invested in all of this category of investments available to them, they must also invest in the capital intensive ones that will push up the OCC. New capital technologies with few producers and more immature technique are always more expensive, which means that on balance the OCC will still rise. 2-2 (of 2 pages)