Introduction

In this article, written in 1963 and publisheed in 1964, Ernest Mandel provides an introduction to basic Marxist economic theory, that is to say, a Marxist analysis of what capitalism is, where it came from, and how it functions. Mandel introduces the Marxist theory of value as it exists in capitalist economies, explaining the relationship between use value, exchange value, and commodity production, as well as identifying the capture of surplus value as the central component of capitalist exploitation. Armed with these basic definitions, Mandel then goes on to explore the historical origins of capitalism, as well as the internal contradictions of capitalist production the lead to crises in the capitalist economic system.

An Introduction to Marxist Economic Theory

by Ernest Mandel

I. The Theory of Value and Surplus Value

In the last analysis, every step forward in the history of civilisation has been brought about by an increase in the productivity of labour. As long as a given group of men barely produced enough to keep itself alive, as long as there was no surplus over and above this necessary product, it was impossible for a division of labour to take place and for artisans, artists or scholars to make their appearance. Under these conditions, the technical prerequisites for such specialisation could not possibly be attained.

Social surplus product

As long as the productivity of labour remains at a level where one man can only produce enough for his own subsistence, social division does not take place and any social differentiation within society is impossible. Under these conditions, all men are producers and they are all on the same economic level.
Every increase in the productivity of labour beyond this low point makes a small surplus possible, and once there is a surplus of products, once man’s two hands can produce more than is needed for his own subsistence, then the conditions have been set for a struggle over how this surplus will be shared.
From this point on, the total output of a social group no longer consists solely of labour necessary for the subsistence of the producers. Some of this labour output may now be used to release a section of society from having to work for its own subsistence.
Whenever this situation arises, a section of society can become a ruling class, whose outstanding characteristic is its emancipation from the need of working for its own subsistence.
Thereafter, the labour of the producers can be divided into two parts. A part of this labour continues to be used for the subsistence of the producers themselves and we call this part necessary labour; the other part is used to maintain the ruling class and we give it the name surplus labour.
Let us illustrate this by the very clear example of plantation slavery, as it existed in certain regions and periods of the Roman Empire, or as we find it in the West Indies and the islands of Portuguese Africa starting with the 17th century, on the great plantations which were established there. In these tropical areas, even the slave’s food was generally not provided by the master; the slave had to produce this himself by working a tiny plot of ground on Sundays and the products from this labour constituted his store of food. On six days of the week the slave worked on the plantation and received in return none of the products of his labour. This is the labour which creates a social surplus product, surrendered by the slave as soon as it is produced and belonging solely to the slavemaster.
The work week, which in this case is seven days, can be divided into two parts: the work of one day, Sunday, constitutes necessary labour, that labour which provides the products for the subsistence of the slave and his family; the work of the other six days is surplus labour and all of its products go to the master, are used for his sustenance and his enrichment as well.
The great domains of the early Middle Ages furnish us with another illustration. The land of these domains was divided into three parts: the communal lands consisting of forest, meadows, swamps, etc.; the land worked by the serf for his own and his family’s subsistence; and finally, the land worked by the serf in order to maintain the feudal lord. The work week during this period was usually six days, not seven. It was divided into two equal parts: the serf worked three days on the land from which the yield belonged to him; the other three days he worked on the feudal lord’s land, without remuneration, supplying free labour to the ruling class.
The products of each of these two very different types of labour can be defined in different terms. When the producer is performing necessary labour, he is producing a necessary product. When he is performing surplus labour, he is producing a social surplus product.
Thus, social surplus product is that part of social production which is produced by the labouring class but appropriated by the ruling class, regardless of the form the social surplus product may assume, whether this be one of natural products, or commodities to be sold, or money.
Surplus value is simply the monetary form of the social surplus product.
When the ruling class appropriates the part of society’s production previously defined as “surplus product” exclusively in the monetary form, then we use the term “surplus value” instead of “surplus product”.
As we shall see later on, however, the above only constitutes a preliminary approach to the definition of surplus value.
How does social surplus product come into existence? It arises as a consequence of a gratuitous appropriation, that is, an appropriation without compensation, by a ruling class of a part of the production of a producing class. When the slave worked six days a week on a plantation and the total product of his labour was taken by the master without any compensation to the slave, the origin of the social surplus product here is in the gratuitous labour, the uncompensated labour, supplied by the slave to the master. When the serf worked three days a week on the lord’s land, the origin of this income, of this social surplus product, is also to be found in the uncompensated labour, the gratuitous labour, furnished by the serf.
We will see further on that the origin of capitalist surplus value, that is to say, the revenue of the bourgeois class in capitalist society, is exactly the same: it is uncompensated labour, gratuitous labour, which the proletarian, the wage worker, gives the capitalist without receiving any value in exchange.

Commodities, use value and exchange value

We have now developed several basic definitions which will be used throughout this exposition. A number of others must be added at this point.
Every product of human labour normally possesses utility; it must be able to satisfy a human need. We may therefore say that every product of human labour has a use value. The term “use value” will, however, be used in two different senses. We will speak of the use value of a commodity; we will also talk about use values, as when we refer, for example, to a society in which only use values are produced, that is to say, where products are created for direct consumption either by the producers themselves or by ruling classes which appropriate them.
Together with this use value, a product of human labour can also have another value, an exchange value. It may be produced for exchange on the market place, for the purpose of being sold, rather than for direct consumption by the producers or by wealthy classes. A mass of products which has been created for the purpose of being sold can no longer be considered as the production of simple use values; it is now a production of commodities.
The commodity, therefore, is a product created to be exchanged on the market, as opposed to one which has been made for direct consumption. Every commodity must have both a use value and an exchange value.
It must have a use value or else nobody would buy it, since a purchaser would be concerned with its ultimate consumption, with satisfying some want of his by this purchase. A commodity without a use value to anyone would consequently be unsaleable, would constitute useless production, would have no exchange value precisely because it had no use value.
On the other hand, every product which has use value does not necessarily have exchange value. It has an exchange value only to the extent that the society itself, in which the commodity is produced, is founded on exchange, is a society where exchange is common practice.
Are there societies where products do not have exchange value? The basis for exchange value, and a fortiori for trade and the market place, is constituted by a given degree of development of the division of labour. In order for products not to be directly consumed by their producers, it is essential that everybody should not be engaged in turning out the same thing. If a particular community has no division of labour, or only its most rudimentary form, then it is clear that no reason for exchange exists. Normally, a wheat farmer has nothing to exchange with another wheat farmer. But as soon as a division of labour exists, as soon as there is contact between social groups producing different use values, then exchange can come about, at first on an occasional basis, subsequently on a more permanent one. In this way, little by little, products which are made to be exchanged, commodities, make their appearance alongside those products which are simply made for the direct consumption of their producers.
In capitalist society, commodity production, the production of exchange values, has reached its greatest development. It is the first society in human history where the major part of production consists of commodities. It is not true, however, that all production under capitalism is commodity production. Two classes of products still remain simple use value.
The first group consists of all things produced by the peasantry for its own consumption, everything directly consumed on the farms where it is produced. Such production for self-consumption by the farmer exists even in advanced capitalist countries like the United States, although it constitutes only a small part of total agricultural production. In general, the more backward the agriculture of a country, the greater is the fraction of agricultural production going for self-consumption. This factor makes it extremely difficult to calculate the exact national income of such countries.
The second group of products in capitalist society which are not commodities but remain simple use value consists of all things produced in the home. Despite the fact that considerable human labour goes into this type of household production, it still remains a production of use values and not of commodities. Every time a soup is made or a button sewn on a garment, it constitutes production, but it is not production for the market.
The appearance of commodity production and its subsequent regularisation and generalisation have radically transformed the way men labour and how they organise society.

The Marxist theory of alienation

ou have no doubt already heard about the Marxist theory of alienation. The emergence, regularisation and generalisation of commodity production are directly related to the expanding character of this phenomenon of alienation.
We cannot dwell on this aspect of the question here but it is extremely important to call attention to it, since the history of trade covers far more than the capitalist era. It also includes small-scale commodity production, which we will discuss later. There is also a postcapitalist society based on commodities, a transitional society between capitalism and socialism, such as present-day Soviet society, for the latter still rests in very large measure on the foundations of exchange value production. Once we have grasped certain fundamental characteristics of a society based on commodities, we can readily see why it is impossible to surmount certain phenomena of alienation in the transitional period between capitalism and socialism, as in Soviet society, for example.
Obviously this phenomenon of alienation does not exist — at least in the same form — in a society where commodity production is unknown and where the life of the individual and his social activity are united in the most elementary way. Man works, but generally not by himself; most often he is part of a collective group having a more or less organic structure. His labour is a direct transformation of material things. All of this means that labour activity, the act of production, the act of consumption, and the relations between the individual and his society are ruled by a condition of equilibrium which has relative stability and permanence.
We should not, of course, embellish the picture of primitive society, which was subject to pressures and periodic catastrophes because of its extreme poverty. Its equilibrium was constantly endangered by scarcity, hunger, natural disasters, etc. But in the periods between catastrophes, especially after agriculture had attained a certain degree of development and when climatic conditions were favourable, this kind of society endowed all human activities with a large degree of unity, harmony and stability.
Such disastrous consequences of the division of labour as the elimination of all aesthetic activity, artistic inspiration and creative activity from the act of production and the substitution of purely mechanical and repetitive tasks were nonexistent in primitive society. On the contrary, most of the arts, music, sculpture, painting, the dance, were originally linked to production, to labour. The desire to give an attractive and appealing form to products which were to be used either by the individual, his family, or larger kinship groups, found a normal, harmonious and organic expression within the framework of the day’s work.
Labour was not looked upon as an obligation imposed from without, first of all because it was far less intense, far less exhausting than under capitalism today. It conformed more closely to the rhythms of the human organism as well as to the rhythms of nature. The number of working days per year rarely exceeded 150 to 200, whereas under capitalism the figure is dangerously close to 300 and sometimes even greater. Furthermore, there was a unity between the producer, his product and its consumption, since he generally produced for his own use or for those close to him, so that his work possessed a directly functional aspect. Modern alienation originates basically in the cleavage between the producer and his product, resulting both from the division of labour and commodity production. In other words, it is the consequence of working for the market, for unknown consumers, instead of for consumption by the producer himself.
The other side of the picture is that a society which only produces use values, that is, goods which will be consumed directly by their producers, has always in the past been an impoverished society. Not only was it subject to the hazards of nature but it also had to set very narrow limits to man’s wants, since these had to conform exactly to its degree of poverty and limited variety of products. Not all human wants are innate to man. There is a constant interaction between production and wants, between the development of the productive forces and the rise of new wants. Only in a society where labour productivity will be developed to its highest point, where an infinite variety of products will be available, will it be possible for man to experience a continuous expansion of his wants, a development of his own unlimited potential, an integrated development of his humanity.

The law of value

One of the consequences of the appearance and progressive generalisation of commodity production is that labour itself begins to take on regular and measurable characteristics; in other words, it ceases to be an activity tied to the rhythms of nature and according with man’s own physiological rhythms.
Up to the 19th century and possibly even into the 20th, the peasants in various regions of Western Europe did not work in a regulated way, that is to say, they did not work with the same intensity every month of the year. There were periods in the work year when they worked very hard and other periods, particularly during the winter, when all activity virtually came to a halt. It was in the most backward agricultural areas of most of the capitalist countries that capitalist society, in the course of its development, found a most attractive source of reserve manpower, for here was a labour force available for four to six months a year at much lower wages, in view of the fact that a part of its subsistence was provided by its agricultural activity.
When we look at the more highly developed and prosperous farms, those bordering the big cities, for example, and which are basically on the road to becoming industrialised, we see that work is much more regular and the amount of expended labour much greater, being distributed in a regular way throughout the year, with dead seasons progressively eliminated. This holds true not only for our times but even as early as the Middle Ages, at least from the 12th century on. The closer we get to the cities, that is to say, to the marketplace, the more the peasant’s labour becomes labour for the market, that is to say, commodity production, and the more regulated and more or less stable his labour becomes, just as if he were working inside an industrial enterprise.
Expressed another way, the more generalised commodity production becomes, the greater the regulation of labour and the more society becomes organised on the basis of an accounting system founded on labour.
When we examine the already fairly advanced division of labour within a commune at the beginning of commercial and craft development in the Middle Ages, or the collectives in such civilisations as the Byzantine, Arab, Hindu, Chinese and Japanese, certain common factors emerge. We are struck by the fact that a very advanced integration of agriculture and various craft techniques exists and that regularity of labour is true for the countryside as well as the city, so that an accounting system in terms of labour, in labour-hours, has become the force governing all the activity and even the very structure of the collectives. In the chapter on the law of value in my Marxist Economic Theory, I give a whole series of examples of this accounting system in work-hours. There are Indian villages where a certain caste holds a monopoly of the blacksmith craft but continues to work the land at the same time in order to feed itself. The rule which has been established is this: when a blacksmith is engaged to make a tool or weapon for a farm, the client supplies the raw materials and also works the blacksmith’s land during the whole period that the latter is engaged in making the implement. Here is a very transparent way of stating that exchange is governed by an equivalence in work-hours.
In the Japanese villages of the Middle Ages, an accounting system in work-hours, in the literal sense of the term, existed inside the village community. The village accountant kept a kind of great book in which he entered the number of hours of work done by villagers on each others’ fields, since agriculture was still mainly based on cooperative labour, with harvesting, farm construction and stock breeding being done in common. The number of work-hours furnished by the members of one household to the members of another was very carefully tallied. At the end of the year, the exchanges had to balance, that is, the members of household B were required to have given household A exactly the same number of work-hours which members of household A had given household B during the year. The Japanese even refined things to the point — almost 1000 years ago! — where they took into account that children provided a smaller quantity of labour than adults, so that an hour of child labour was “worth” only a half-hour of adult labour. A whole system of accounting was set up along these lines.
There is another example which gives us a direct insight into this accounting system based on labour-time: the conversion of feudal rent from one form to another. In feudal society, the agricultural surplus product could take three different forms: rent in the form of labour (the corvee), rent in kind, and money rent.
When a change is made from the corvee to rent in kind, obviously a process of conversion takes place. Instead of giving the lord three days of labour per week, the peasant now gives him a certain quantity of wheat, livestock, etc., on a seasonal basis. A second conversion takes place in the changeover from rent in kind to money rent.
These two conversions must be based on a fairly rigorous accounting in work-hours if one of the two parties does not care to suffer a loss in the process. For example, if at the time the first conversion was effected, the peasant gave the lord a quantity of wheat which required only 75 workdays of labour, whereas previously he had given the lord 150 workdays of labour in the same year, then this conversion of labour-rent into rent in kind would result in the sudden impoverishment of the lord and a rapid enrichment of the serfs.
The landlords — you can depend on them! — were careful to see to it when the conversion was made that the different forms of rent were closely equivalent. Of course the conversion could eventually turn out to be a bad one for one of the participating classes, for example, against the landlords, if a sharp rise in agricultural prices occurred after rent was converted from rent in kind to money rent, but such a result would be historical in character and not directly attributable to the conversion per se.
The origin of this economy based on an accounting in labour-time is also clearly apparent in the division of labour within the village as it existed between agriculture and the crafts. For a long time the division remained quite rudimentary. A section of the peasantry continued to produce part of its own clothing for a protracted historical period, which in Western Europe extended almost a thousand years; that is, from the beginning of the medieval cities right up to the 19th century. The technique of making clothing was certainly no mystery to the cultivator of the soil.
As soon as a regular system of exchange between the farmer and textile craftsman was established, standard equivalents were likewise established — for example, an ell of cloth [a measure varying from 27 to 48 inches] would be exchanged for 10 pounds of butter, not for 100 pounds. Obviously the peasants knew, on the basis of their own experience, the approximate labour-time needed to produce a given quantity of cloth. Had there not been a more or less exact equivalence between the time needed to produce the cloth and the time needed to produce the butter for which it was exchanged, there would have been an immediate shift in the division of labour. If cloth production were more lucrative than butter production, the butter producers would switch to producing cloth. Since society here was only at the threshold of an extreme division of labour, that is to say, it was still at a point where the boundaries between different techniques were not clearly marked, the passage from one economic activity to another was still possible, particularly when striking material gains were possible by means of such a change.
In the cities of the Middle Ages as well, a very skilfully calculated equilibrium existed between the various crafts and was written into the charters which specified almost to the minute the amount of labour-time necessary for the production of different articles. It is inconceivable that under such conditions a shoemaker or blacksmith might get the same amount of money for a product which took half the labour-time which a weaver or other artisan might require in order to get the same amount of money for his products.
Here again we clearly see the mechanism of an accounting system in work-hours, a society functioning on the basis of an economy of labour-time, which is generally characteristic of the whole phase which we call small-scale commodity production. This is the phase intervening between a purely natural economy, in which only use values are produced, and capitalist society, in which commodity production expands without limit.

Determination of the exchange value of commodities

nce we have determined that the production and exchange of commodities becomes regular and generalised in a society based on an economy of labour-time, on an accounting system in work-hours, we can readily understand why the exchange of commodities, in its origins and inherent nature, rests on this fundamental basis of an accounting system in work-hours and consequently follows this general rule: the exchange value of a commodity is determined by the quantity of labour necessary to produce it. The quantity of labour is measured by the length of time it takes to produce the commodity.
This general definition of the labour theory of value is the basis of both classical bourgeois political economy from the 17th century to the beginning of the 19th century, from William Petty to Ricardo; and Marxist economic theory, which took over the theory of labour value and perfected it. However, the general definition must be qualified in several respects.
In the first place, not all men are endowed with the same capacity for work, with the same strength or the same degree of skill at their trade. If the exchange value of commodities depended only on the quantity of labour expended individually, that is, on the quantity of labour expended by each individual in the production of a commodity, we would arrive at this absurdity: the lazier or more incompetent the producer, and the larger the number of hours he would spend in making a pair of shoes, the greater would be the value of the shoes!
This is obviously impossible since exchange value is not a moral reward for mere willingness to work but an objective bond set up between independent producers in order to equalise the various crafts in a society based both on a division of labour and an economy of labour-time. In such a society wasted labour receives no compensation; on the contrary, it is automatically penalised. Whoever puts more time into producing a pair of shoes than the average necessary hours — an average determined by the average productivity of labour and recorded in the Guild Charters, for example! — such a person has wasted human labour, worked to no avail for a certain number of hours. He will receive nothing in exchange for these wasted hours.
Expressed another way, the exchange value of a commodity is not determined by the quantity of labour expended by each individual producer engaged in the production of this commodity but by the quantity of labour socially necessary to produce it. The expression “socially necessary” means: the quantity of labour necessary under the average conditions of labour productivity existing in a given country at a given time.
The above qualification has very important applications when we examine the functioning of capitalist society more closely.
Another clarifying statement must be added here. Just what do we mean by a “quantity of labour”? Workers differ in their qualifications. Is there complete equality between one person’s hour of work and everybody else’s, regardless of such differences in skills? Once again the question is not a moral one but has to do with the internal logic of a society based on an equality between skills, an equality in the marketplace, and where any disruption of this equality would immediately destroy the social equilibrium.
What would happen, for example, if an hour’s work by an unskilled labourer was worth as much as an hour’s work by a skilled craftsman, who had spent four to six years as an apprentice in acquiring his skill? Obviously, no one would want to become skilled. The hours of work spent in learning a craft would be wasted hours since the craftsman would not be compensated for them after becoming qualified.
In an economy founded on an accounting system of work-hours, the young will desire to become skilled only if the time lost during their training period is subsequently paid for. Our definition of the exchange value of a commodity must therefore be completed as follows: “An hour of labour by a skilled worker must be considered as complex labour, as compound labour, as a multiple of an hour of unskilled labour; the coefficient of multiplication obviously cannot be an arbitrary one but must be based on the cost of acquiring a given skill.” It should be pointed out, in passing, that there was always a certain fuzziness in the prevailing explanation of compound labour in the Soviet Union under Stalin which has persisted to this very day. It is claimed that compensation for work should be based on the quantity and quality of the work, but the concept of quality is no longer understood in the Marxist sense of the term, that is to say, as a quality measurable quantitatively by means of a specific coefficient of multiplication. On the contrary, the idea of quality is used in the bourgeois ideological sense, according to which the quality of labour is supposed to be determined by its social usefulness, and this is used to justify the incomes of marshals, ballerinas and industrial managers, which are ten times higher than the incomes of unskilled labourers. Such a theory belongs in the domain of apologetics despite its widespread use to justify the enormous differences in income which existed under Stalin and continue to exist in the Soviet Union today, although to a lesser extent.
The exchange value of a commodity, then, is determined by the quantity of labour socially necessary for its production, with skilled labour being taken as a multiple of simple labour and the coefficient of multiplication being a reasonably measurable quantity.
This is the kernel of the Marxist theory of value and the basis for all Marxist economic theory in general. Similarly, the theory of social surplus product and surplus labour, which we discussed at the beginning of this work, constitutes the basis for all Marxist sociology and is the bridge connecting Marx’s sociological and historical analysis, his theory of classes and the development of society generally, to Marxist economic theory, and more precisely, to the Marxist analysis of all commodity-producing societies of a precapitalist, capitalist and postcapitalist character.

What is socially necessary labour?

A short while back I stated that the particular definition of the quantity of socially necessary labour for producing a commodity had a very special and extremely important application in the analysis of capitalist society. I think it will be more useful to deal with this point now although logically it might belong to a later section of this presentation.
The totality of all commodities produced in a country at a given time has been produced to satisfy the wants of the sum total of the members of this society. Any article which did not satisfy somebody’s needs, which had no use value for anyone, would be a priori unsaleable, would have no exchange value, would not constitute a commodity but simply a product of caprice or the idle jest of some producer. From another angle, the sum total of buying power which exists in this given society at a given moment and which is not to be hoarded but spent in the market, must be used to buy the sum total of commodities produced, if there is to be economic equilibrium. This equilibrium therefore implies that the sum total of social production, of the available productive forces in this society, of its available work-hours, has been distributed among the various sectors of industry in the same proportions as consumers distribute their buying power in satisfying their various wants. When the distribution of productive forces no longer corresponds to this division in wants, the economic equilibrium is destroyed and both overproduction and underproduction appear side by side.
Let us give a rather commonplace example: toward the end of the 19th and beginning of the 20th century, a city like Paris had a coach-building industry, which together with associated harness trades employed thousands or even tens of thousands of workers.
In the same period the automobile industry was emerging and although still quite small it already numbered some scores of manufacturers employing several thousands of workers.
Now what is the process taking place during this period? On the one hand, the number of carriages begins to decline and on the other, the number of automobiles begins to increase. The production of carriages and carriage equipment therefore shows a trend toward exceeding social needs, as these are reflected in the manner in which the inhabitants of Paris are dividing their buying power; on the other side of the picture, the production of automobiles is below social needs, for from the time the industry was launched until the advent of mass production, a climate of scarcity existed in this industry. The supply of automobiles on the market was never equal to the demand.
How do we express these phenomena in terms of the labour theory of value? We can say that in the carriage industry more labour is expended than is socially necessary, that a part of the labour expended by the sum total of companies in the carriage industry is socially wasted labour, which no longer finds an equivalent on the marketplace and is consequently producing unsaleable goods. In capitalist society, when goods are unsaleable it means that an investment of human labour has been made in a specific industrial branch which turns out to be socially unnecessary labour, that is to say, it is labour which finds no equivalent in buying power in the marketplace. Labour which is not socially necessary is wasted labour; it is labour which produces no value. We can see from this that the concept of socially necessary labour embraces a whole series of phenomena.
For the products of the carriage industry, supply exceeds demand, prices fall and goods remain unsaleable. The reverse is true in the automobile industry where demand exceeds supply, causing prices to rise and under-production to exist. To be satisfied with these commonplaces about supply and demand, however, means stopping at the psychological and individual aspects of the problem. On the other hand, if we probe into the deeper social and collective side of the problem, we begin to understand what lies below the surface in a society organised on the basis of an economy of labour-time.
The meaning of supply exceeding demand is that capitalist production, which is anarchistic, unplanned and unorganised, has anarchistically invested or expended more labour hours in an industrial branch than are socially necessary, so that a whole segment of labour-hours turns out to be pure loss, so much wasted human labour which remains unrequited by society. Conversely, an industrial sector where demand continues to be greater than supply can be considered as an underdeveloped sector in terms of social needs; it is therefore a sector expending fewer hours of labour than are socially necessary and it receives a bonus from society in order to stimulate an increase in production and achieve an equilibrium with social needs.
This is one aspect of the problem of socially necessary labour in the capitalist system. The other aspect of the problem is more directly related to changes in the productivity of labour. It is the same thing but makes an abstraction of social needs, of the “use value” aspect of production.
In capitalist society the productivity of labour is constantly changing. Generally speaking, there are always three types of enterprises (or industrial sectors): those which are technologically right at the social average; those which are backward, obsolete, on the downgrade, below the social average; and those which are technologically advanced and above average in productivity.
What do we mean when we say a sector or an enterprise is technologically backward and has a productivity of labour which is below the average? Such a branch or enterprise is analogous to our previously mentioned lazy shoemaker, that is, it is one which takes five hours to produce a specific quantity of goods in a period when the average social productivity demands that it be done in three hours. The two extra hours of expended labour are a total loss, a waste of social labour. A portion of the total amount of labour available to society having thus been wasted by an enterprise, it will receive nothing from society to compensate it. Concretely it means that the selling prices in this industry or enterprise, which is operating below average productivity, approach its production costs or even fall below them, that is to say, the enterprise is operating at a very low rate of profit or even at a loss.
On the other hand, an enterprise or industrial sector with an above average level of productivity (like the shoemaker who can produce two pairs of shoes in three hours when the social average is one pair per three hours) economises in its expenditure of social labour and therefore makes a surplus profit, that is to say, the difference between its costs and selling prices will be greater than the average profit.
The pursuit of this surplus profit is, of course, the driving force behind the entire capitalist economy. Every capitalist enterprise is forced by competition to try to get greater profits, for this is the only way it can constantly improve its technology and labour productivity. Consequently all firms are forced to take this same direction, and this of course implies that what at one time was an above-average productivity winds up as the new average productivity, whereupon the surplus profit disappears. All the strategy of capitalist industry stems from this desire on the part of every enterprise to achieve a rate of productivity superior to the national average and thereby make a surplus profit, and this in turn provokes a movement which causes the surplus profit to disappear, by virtue of the trend for the average rate of labour productivity to rise continuously. This is the mechanism in the tendency for profit rates to become equalised.

The origin and nature of surplus value

And now, what is surplus value? When we consider it from the viewpoint of the Marxist theory of value, the answer is readily found. Surplus value is simply the monetary form of the social surplus product, that is to say, it is the monetary form of that part of the worker’s production which he surrenders to the owner of the means of production without receiving anything in return.
How is this surrender accomplished in practice within capitalist society? It takes place through the process of exchange, like all important operations in capitalist society, which are always relations of exchange. The capitalist buys the labour-power of the worker, and in exchange for this wage, he appropriates the entire production of that worker, all the newly produced value which has been incorporated into the value of this production.
We can therefore say from here on that surplus value is the difference between the value produced by the worker and the value of his own labour-power. What is the value of labour-power? In capitalist society, labour-power is a commodity, and like the value of any other commodity, its value is the quantity of labour socially necessary to produce and reproduce it, that is to say, the living costs of the worker in the wide meaning of the term. The concept of a minimum living wage or of an average wage is not a physiologically rigid one but incorporates wants which change with advances in the productivity of labour. These wants tend to increase parallel with the progress in technique and they are consequently not comparable with any degree of accuracy for different periods. The minimum living wage of 1830 cannot be compared quantitatively with that of 1960, as the theoreticians of the French Communist party have learned to their sorrow. There is no valid way of comparing the price of a motorcycle in 1960 with the price of a certain number of kilograms of meat in 1830 in order to come up with a conclusion that the first “is worth” less than the second.
Having made this reservation, we can now repeat that the living cost of labour-power constitutes its value and that surplus value is the difference between this living cost and the value created by this labour-power.
The value produced by labour-power can be measured in a simple way by the length of time it is used. If a worker works 10 hours, he produces a value of 10 hours of work. If the worker’s living costs, that is to say, the equivalent of his wage, is also 10 hours of work, then no surplus value would result. This is only a special case of the more general rule: when the sum total of labour product is equal to the product required to feed and maintain the producer, there is no social surplus product.
But in the capitalist system, the degree of labour productivity is such that the living costs of the worker are always less than the quantity of newly created value. This means that a worker who labours for 10 hours does not need the equivalent of 10 hours of labour in order to support himself in accordance with the average needs of the times. His equivalent wage is always only a fraction of his day’s labour; everything beyond this fraction is surplus value, free labour supplied by the worker and appropriated by the capitalist without an equivalent offset. If this difference did not exist, of course, then no employer would hire any worker, since such a purchase of labour-power would bring no profit to the buyer.

The validity of the labour theory of value

To conclude, we present three traditional proofs of the labour theory of value.
The first of these is the analytical proof, which proceeds by breaking down the price of a commodity into its constituent elements and demonstrating that if the process is extended far enough, only labour will be found.
The price of every commodity can be reduced to a certain number of components: the amortisation of machinery and buildings, which we call the renewal of fixed capital; the price of raw materials and accessory products; wages; and finally, everything which is surplus value, such as profit, rent, taxes, etc.
So far as the last two components are concerned, wages and surplus value, it has already been shown that they are labour pure and simple. With regard to raw materials, most of their price is largely reducible to labour; for example, more than 60% of the mining cost of coal consists of wages. If we start by breaking down the average manufacturing cost of commodities into 40% for wages, 20% surplus value, 30% for raw materials and 10% in fixed capital; and if we assume that 60% of the cost of raw materials can be reduced to labour, then we already have 78% of the total cost reduced to labour. The rest of the cost of raw materials breaks down into the cost of other raw materials — reducible in turn to 60% labour — plus the cost of amortising machinery.
The price of machinery consists to a large degree of labour (for example, 40%) and raw materials (for example, 40% also). The share of labour in the average cost of all commodities thus passes successively to 83%, 87%, 89.5%, etc. It is obvious that the further this breakdown is carried, the more the entire cost tends to be reduced to labour, and to labour alone.
A further proof used by Marx in Capital, and an original reductio ad absurdum proof, are not included in this abridged copy

Capital and Capitalism

Capital in precapitalist society

Between primitive society founded on a natural economy in which production is limited to use values destined for self-consumption by their producers, and capitalist society, there stretches a long period in human history, embracing essentially all human civilisations, which came to a halt before reaching the frontiers of capitalism. Marxism defines them as societies in which small-scale commodity production prevailed. A society of this kind is already familiar with the production of commodities, of goods designed for exchange on the market and not for direct consumption by the producers, but such commodity production has not yet become generalised, as is the case in capitalist society.
In a society founded on small-scale commodity production, two kinds of economic operations are carried out. The peasants and artisans who bring their products to market wish to sell goods whose use value they themselves cannot use in order to obtain money, means of exchange, for the acquisition of other goods, whose use value is either necessary to them or deemed more important than the use value of the goods they own.
The peasant brings wheat to the marketplace which he sells for money; with this money he buys, let us say, cloth. The artisan brings his cloth to the market, which he sells for money; with this money he buys, let us say, wheat.
What we have here, then, is the operation: selling in order to buy. Commodity—Money—Commodity, C—M—C which has this essential character: the value of the two extremes in this formula is, by definition, exactly the same.
But within small-scale commodity production there appears, alongside the artisan and small peasant, another personage, who executes a different kind of economic operation. Instead of selling in order to buy, he buys in order to sell. This type of person goes to market without any commodities; he is an owner of money. Money cannot be sold; but it can be used to buy, and that is what he does: buys in order to sell, in order to resell: M—C—M’.
There is a fundamental difference between the two types of operation. The second operation makes no sense if upon its completion we are confronted by exactly the same value as we had at the beginning. No one buys a commodity in order to sell it for exactly the same price he paid for it. The operation “buy in order to sell” makes sense only if the sale brings a supplementary value, a surplus value. That is why we state here, by way of definition. M’ is greater than M and is made up of M+m; m being the surplus value, the amount of increase in the value of M.
We now define capital as a value which is increased by a surplus value, whether this occurs in the course of commodity circulation, as in the example just given, or in production, as is the case in the capitalist system. Capital, therefore, is every value which is augmented by a surplus value; it therefore exists not only in capitalist society but in any society founded on small-scale commodity production as well. For this reason it is necessary to distinguish very clearly between the life of capital and that of the capitalist mode of production, of capitalist society. Capital is far older than the capitalist mode of production. The former probably goes back some 3000 years, whereas the latter is barely 200 years old.
What form does capital take in precapitalist society? It is basically usury capital and merchant or commercial capital. The passage from precapitalist society into capitalist society is characterised by the penetration of capital into the sphere of production. The capitalist mode of production is the first mode of production, the first form of social organisation, in which capital is not limited to the sole role of an intermediary and exploiter of non-capitalist forms of production, of small-scale commodity production. In the capitalist mode of production, capital takes over the means of production and penetrates directly into production itself.

Origins of the capitalist mode of production

What are the origins of the capitalist mode of production? What are the origins of capitalist society as it has developed over the past 200 years?
They lie first of all in the separation of the producers from their means of production. Subsequently, it is the establishment of these means of production as a monopoly in the hands of a single social class, the bourgeoisie. And finally, it is the appearance of another social class which has been separated from its means of production and therefore has no other resources for its subsistence than the sale of its labour-power to the class which has monopolised the means of production.
Let us consider each of these origins of the capitalist mode of production, which are at the same time the fundamental characteristics of the capitalist system as well.
First characteristic: separation of the producer from his means of production. This is the fundamental condition for existence of the capitalist system but it is also the one which is generally the most poorly understood. Let us use an example which may seem paradoxical since it is taken from the early Middle Ages, which was characterised by serfdom.
We know that the mass of peasant-producers were serfs bound to the soil. But when we say that the serf was bound to the soil, we imply that the soil was also “bound” to the serf, that is, he belonged to a social class which always had a base for supplying its needs, enough land to work so that the individual serf could meet the needs of a household even though he worked with the most primitive implements. We are not viewing people condemned to death by starvation if they do not sell their labour-power. In such a society, there is no economic compulsion to hire out one’s arms, to sell one’s labour-power to a capitalist.
We can express this another way by stating that the capitalist system cannot develop in a society of this kind. This general truth also has a modern application in the way colonialists introduced capitalism into the African countries during the 19th and early 20th centuries.
Let us look at the living conditions of the inhabitants in all the African countries. They were stock breeders and cultivators of the soil, on a more or less primitive basis, depending on the character of the region, but always under the condition of a relative abundance of land. Not only was there no scarcity of land in Africa, but in terms of the ratio of population to the amount of available land, it may be said that land reserves were virtually unlimited. It is true, of course, that the yield from these lands was mediocre because of the crude agricultural implements and the standard of living was very low, etc., but there was no material force pushing this population to work in the mines, on the farms or in the factories of the white colonialist. Without a transformation in the administration of land in Equatorial Africa, in Black Africa, there was no possibility for introducing the capitalist mode of production. For that, compulsion of a non-economic character had to be used, a thoroughgoing and brutal separation of the black masses from their normal means of subsistence had to be carried out. A large part of the lands had to be transformed overnight into national domains, owned by the colonising state, or into private property belonging to capitalist corporations. The black population had to be resettled in domains, or in reserves, as they have been cynically called, in land areas which were inadequate for sustaining all their inhabitants. In addition, a head-tax, that is to say, a money tax on each inhabitant, was imposed as another lever, since primitive agriculture yielded no money income.
By these various extra-economic pressures, the colonialists created a need for the African to work for wages during perhaps two or three months a year, in order to earn the money to pay his tax and buy the small supplement of food necessary for his subsistence, since the land remaining at his disposal was no longer adequate for a livelihood.
In such countries as South Africa, the Rhodesias, and part of the former Belgian Congo, where the capitalist mode of production was introduced on a grand scale, these methods were applied on the same scale, and a large part of the black population was uprooted, expelled, and forced out of its traditional existence and mode of work.
Let us mention, in passing, the ideological hypocrisy which accompanied this movement, the complaints of the capitalist corporations that the blacks were lazy since they did not want to work even when they had a chance to make ten times as much in mines and factories as they did from their traditional labour on the land. These same complaints had been made about the Indian, Chinese and Arab workers some 50 to 70 years earlier. They were also made — a rather good proof of the basic equality of all the races which make up humanity — against the European workers, French, Belgian, English, German, in the 17th or 18th centuries. It is simply a function of this constant fact: normally, because of his physical and nervous constitution, no man cares to be confined for eight, nine, 10 or 12 hours a day in a factory, mill or mine; it really requires a most abnormal and unusual force or pressure to make a man engage in this kind of convict labour when he has not been accustomed to it.
A second origin and characteristic of the capitalist mode of production is this concentration of the means of production in monopoly form and in the hands of a single social class, the bourgeoisie. This concentration is virtually impossible unless a continual revolution is taking place in the means of production, in which the latter become increasingly complex and more costly, at least so far as the minimum means of production required for launching a big business (initial capital expenditures) are concerned.
In the guilds and trades of the Middle Ages, there was great stability in the means of production; the weaving-looms were transmitted from father to son, from generation to generation. The value of these looms was relatively small, that is to say, each journeyman could expect to get back the counter-value of these looms after a certain number of years of work. The possibility for establishing a monopoly arrived with the industrial revolution, which unleashed an uninterrupted development of increasingly complex mechanisms and concomitantly, a need for ever greater capital sums in order to start a new enterprise.
From this point on it may be said that access to the ownership of the means of production becomes impossible for the overwhelming majority of wage-earners and salaried personnel, and that such ownership became a monopoly in the hands of one social class, the class which possesses capital and capital reserves and can obtain additional capital by virtue of the single fact that it already has some of it. And by virtue of this same fact, the class without capital is condemned to remain perpetually in the same state of deprivation and consequently under the continuous compulsion to labour for somebody else.
The third origin and characteristic of capitalism: the appearance of a social class which has no possessions save its own hands and no means of subsistence other than the sale of its labour-power, but at the same time, is free to sell this labour-power and does so to the capitalist owners of the means of production. This is the appearance of the modern proletariat.
We have here three elements which combine with each other. The proletariat is the free worker; he constitutes both a step ahead and a step backwards, compared with the serf of the Middle Ages: a step ahead because the serf was not free (the serf was himself a step ahead compared with the slave) and could not move about freely; a step backwards because, in contrast with the serf, the proletarian has also been “liberated” from, that is to say, deprived of, all access to the means of production.

Origins and definition of the modern proletariat

Among the direct ancestors of the modern proletariat we must include the uprooted population of the Middle Ages which was no longer bound to the soil or incorporated in the trades, corporations and guilds of the free towns, and was consequently a wandering, rootless population, which had begun to sell its labour by the day or even by the hour. There were quite a few cities in the Middle Ages, notably Florence, Venice and Bruges, where a “labour market” appeared as early as the 13th, 14th, or 15th centuries. These cities had a place where the poor who did not belong to any craft, were not journeymen for an artisan and had no means of subsistence, assembled and waited to be hired by some merchant or businessman for an hour, half a day, a day, etc.
Another origin of the modern proletariat, closer to us in time, lies in what has been called the disbanding of the feudal retinues. It therefore corresponds with the long and slow decline of the feudal nobility, which set in during the 13th and 14th centuries and terminated with the bourgeois revolution in France at the end of the 18th century. In the remote Middle Ages, there were sometimes
50, 60 to over 100 households living directly from the feudal lord. The number of these individual attendants began to decline, especially during the 16th century, which was marked by a sharp rise in prices, and as a consequence, a great impoverishment of all those social classes with fixed money incomes. The feudal lords of Western Europe were also hard hit because most of them had converted rent in kind into money rent. One of the results of this impoverishment was a massive discharge of a substantial section of the feudal retinues. In this way thousands of former valets, servants, and clerks to the nobles became wanderers, beggars, etc.
A third origin of the modern proletariat comes from the expulsion of a part of the peasantry from its lands as a result of the transformation of these agricultural lands into grasslands. The great English Utopian socialist Thomas More advanced this magnificent formula as far back as the 16th century: “Sheep have eaten men”; in other words, the transformation of fields into grasslands for grazing sheep, as a result of the development of the wool industry, threw thousands upon thousands of English peasants off their lands and condemned them to starvation.
There is still a fourth origin of the modern proletariat, one which played a somewhat lesser role in Western Europe but an enormous one in Central and Eastern Europe, Asia, Latin America and North Africa: it is the destruction of the former artisans in the competitive struggle between the handicrafts and modern industry as the latter made its way into these underdeveloped countries from the outside.
In summary, the capitalist mode of production is a regime in which the means of production have become a monopoly in the hands of a social class and in which the producers, separated from these means of production, are free but are deprived of all means of subsistence and consequently must sell their labour-power to the owners of these means of production in order to subsist.
What is characteristic of the proletarian therefore is not the level of his wage, whether this be high or low, but primarily the fact that he has been cut off from his means of production, or that his income is insufficient for him to work for his own account.
In order to learn whether the proletarian condition is on the road to disappearing or whether, on the contrary, it is on the road of expansion, it is not so much the average wage of the worker or the average salary of the clerk which we must examine, but this wage or salary as compared with his average consumption; in other words, we must look into his possibilities for savings and compare them with the expenses of setting up an independent enterprise. If we determine that each worker, each clerk, can, after ten years of work, put aside a pile of savings which would allow him to purchase a store or small workshop, then we might say that the proletarian condition is regressive and that we live in a society in which property in the means of production is spreading and becoming generalised.
If we find, however, that the overwhelming majority of workers, manual, white-collar and governmental, remain the same poor fellows after a life of labour that they were before, in other words with no savings or not enough capital to buy means of production, we may conclude that the proletarian condition has become generalised rather than contracted, and that it is far more prevalent today than it was 50 years ago. When we examine statistics on the social structure of the United States, for example, we can see that over the past 60 years, there has been an uninterrupted decrease every five years in the percentage of the active American population working for its own account and classified as businessmen or working in a family business, whereas the percentage of this same population which is compelled to sell its labour-power has steadily increased.
Moreover, if we examine the statistics on the distribution of private wealth, we find that the overwhelming majority of workers, we may say 95%, and the very great majority of white-collar workers (80 or 85%) are not even able to amass petty sums, small capitals; in other words, these groups expend their entire incomes. Fortunes are in reality limited to a very small fraction of the population. In most capitalist countries, 1%, 2%, 2.5%, 3.5% or 5% of the population possess 40%, 50%, 60% of the private wealth of the country, the balance being in the hands of 20% or 25% of this same population. The first category of possessors is the big bourgeoisie; the second category is the middle and petty-bourgeoisie. And all those who are outside these categories own nothing but consumer goods (sometimes including their housing).
When honestly compiled, statistics on estate duties and inheritance taxes are very revealing on this subject.
A specific study made by the Brookings Institute (a source above any suspicion of Marxism) for the New York Stock Exchange reveals that only one or 2% of workers own stocks and further that this “ownership” averages about $1000 worth.
Virtually all capital is therefore in the hands of the bourgeoisie and this reveals the self-reproductive character of the capitalist system: those who possess capital keep on accumulating more and more; those who do not possess it rarely can acquire it. In this way the division in society is perpetuated in a possessing class and a class compelled to sell its labour-power. The price for this labour-power, the wage, is virtually consumed in toto, whereas the possessing class has a capital constantly increasing from surplus value. Society’s enrichment in capital therefore takes place, so to speak, for the exclusive profit of a single social class, namely, the capitalist class.

The fundamental mechanism of capitalist economy

And now what is the functioning basis of this capitalist society?
If you were to go to the Printed Cottons Exchange on a certain day, you would not know whether there was exactly enough, or too little, or too much printed cottons, measured against the existing needs in France at that moment. You would only find that out after a certain time: that is to say, if there were overproduction and a part of production unsaleable, you would see prices fall. If there were, on the contrary, a scarcity, you would see prices rise. The movement of prices is the thermometer telling us whether there is a scarcity or plethora. And since it is only after the event that we find out whether the quantity of labour expended in an industrial branch has been expended in a socially necessary way or whether part of it has been wasted, it is only after the event that we are able to determine the exact value of a commodity. This value, therefore, is, if you choose to call it so, an abstraction; but it is a real constant around which prices fluctuate.
What causes the movement in these prices and consequently, in longer terms, the movement in these values, in this labour productivity, in this production and in this overall economic life?
What makes Sammy run? What causes capitalist society to move? Competition. Without competition there is no capitalist society. A society where competition is radically or completely eliminated would no longer be capitalist to the extent that there would no longer be a major economic motive for accumulating capital and consequently for carrying out nine tenths of the economic operations which capitalists execute.
And what is the basis of competition? Two ideas are basic to it but these do not necessarily overlap. First is the idea of the unlimited market, the market without restrictions, without exact boundaries. Then there is the idea of a multiplicity of decision centres, above all in matters of investment and production.
If all production in a given industrial sector were concentrated in the hands of a single capitalist firm, competition would still not be eliminated, because an unlimited market would still exist and there would still be a competitive struggle between this industrial sector and other sectors to capture as much of this market as possible. Furthermore, there would always be a possibility that a foreign competitor might enter the scene and provide new competition right in the very same sector.
The reverse is also true. If we can conceive a totally and completely limited market, but one in which a great number of enterprises are fighting to capture a part of this limited market, then competition must obviously survive.
Therefore only if these two phenomena were to be suppressed simultaneously, that is to say, if there were only one producer for all commodities and the market became absolutely stable, frozen and without any capacity for expansion, could competition disappear completely.
The appearance of the unlimited market displays all of its significance when compared with the period of small-scale commodity production. A guild in the Middle Ages generally worked for a market limited to the city and its immediate suburbs, and in accordance with fixed and specific labour techniques.
The historical passage of the limited market to the unlimited market is illustrated by the example of the “new clothiers” of the countryside which replaced the old city clothiers in the 15th century. There were now cloth manufacturers without guild regulations, without production limits, therefore without any market restrictions, who tried to infiltrate everywhere, seek clients everywhere, and not only went beyond the immediate area of their production centres, but even tried to organise an export trade to very distant countries. On the other hand, the great commercial revolution of the 16th century stimulated a relative reduction in the prices of a whole set of products which had been considered great luxuries in the Middle Ages and were only within the purchasing range of a small part of the population. These products suddenly became far less expensive, and even came within the reach of a significant part of the population. The most striking example of this trend is sugar, which has become a commonplace product today and is undoubtedly to be found in every working-class household in France or in Europe; in the 15th century, however, it was still a highly luxurious article.
The apologists for capitalism have always pointed to the reduction in prices and widened market for a whole set of products as the benefits brought about by this system. This argument is true. It is one of the aspects of what Marx called “the civilising mission of capital”. To be sure we are concerned here with a dialectical but real phenomenon where the value of labour-power has a tendency to fall by virtue of the fact that capitalist industry produces the commodity equivalent of wages with ever increasing rapidity while it simultaneously has a tendency to rise by virtue of the fact that this value of labour-power progressively takes in the value of a whole series of commodities which have become mass consumer goods, whereas formerly they were reserved for a very small part of the population.
Basically, the entire history of trade between the 16th and 20th century is the history of a progressive transformation from trade in luxury goods into trade in mass consumer goods; into trade in goods destined for an ever increasing portion of the population. It is only with the development of the railroads, of the means for fast navigation, of telegraphy, etc., that it became possible for the whole world to be marshalled into a real potential market for each great capitalist producer.
The idea of an unlimited market does not, therefore, merely imply geographic expansion, but economic expansion, available purchasing power, also. To take a recent example: the extraordinary rise in the production of durable consumer goods in world capitalist production during the past 15 years was not at all due to any geographic expansion of the capitalist market; on the contrary, it was accompanied by a geographic reduction in the capitalist market, since a whole series of countries were lost to it during this period. There are few, if any, automobiles of French, Italian, German, British, Japanese or American manufacture exported to the Soviet Union, China, North Vietnam, Cuba, North Korea, or the countries of East Europe. Nevertheless, this expansion did take place, thanks to the fact that a much greater fraction of the available purchasing power, which had increased absolutely as well, was used for buying these durable consumer goods.
It is no accident that this expansion has been accompanied by a more or less permanent agricultural crisis in industrially advanced countries, where the consumption of a whole group of agricultural products has not only ceased to increase on a relative basis but is even beginning to show an absolute decline: for example, the consumption of bread, potatoes, and of commonplace fruits like apples, pears, etc.
Production for an unlimited market, under competitive conditions, results in increased production, for an increase in production permits a reduction in costs and affords the means for beating a competitor by underselling him.
If we look at the long-term change in the value of all commodities which are produced on a large scale in the capitalist world, there can be no doubt that their value has declined considerably. A dress, knife, pair of shoes, or schoolboy’s notebook today has a value in hours and minutes of labour which is far lower than it was 50 or 100 years ago.
Obviously real production values must be compared and not sale prices, which include either enormous distribution and sales expenses or swollen monopolistic superprofits. Using gasoline as an example, especially the gasoline distributed in Europe and originating in the Middle East, we find that its production costs are very low, barely 10% of the sale price.
In any event, there can be no doubt about the fact that this drop in value has actually taken place. Growth in labour productivity means a reduction in the value of goods, since the latter are manufactured with an ever reduced quantity of labour-time. Therein lies the practical tool which capitalism possesses for enlarging its markets and defeating its competitors.
What practical method does the capitalist have for sharply cutting his production costs and simultaneously sharply increasing his production? It is the development of mechanisation, the development of means of production, mechanical instruments of labour of ever increasing complexity, originally powered by steam power, then by gasoline or diesel oil, and finally by electricity.

The growth in the organic composition of capital

All capitalist production can be represented in value by the formula: C+V+S. The value of every commodity consists of two parts: one part represents crystallised or conserved value and the other newly created value. Labour-power has a dual function, a dual use value: that of preserving all existing values in the instruments of labour, machines, buildings, while incorporating a fraction of this value into current production; and that of creating a new value, which contains surplus value, profit, as one of its components. Another part of this new value goes to the worker, and represents the counter-value of his wage. The surplus value portion is appropriated by the capitalist without any counter-value.
We call the equivalent of wages variable capital and designate it by V. Why is it capital? Because, in effect, the capitalist advances this value; it constitutes, therefore, a part of his capital, which is expended before the value of the commodities produced by the workers in question can be realised.
We call that part of capital which is transformed into machines, buildings, raw materials, etc., whose value is not increased by production but merely preserved by it, constant capital and designate it by C. The part of capital called variable capital, V, the part used by the capitalist to buy labour-power, is so termed because it is the only part of capital which lets the capitalist increase his capital by means of a surplus value.
Since this is the case, what is the economic logic of competition, of the drive to increase productivity, to increase mechanical means, machine labour? The logic of this drive, that is to say, the fundamental tendency of the capitalist system, is to increase the weight of C the weight of constant capital, with respect to variable capital. In the fraction C/V, C tends to increase, that is to say, the part of total capital made up by machines and raw materials, but not in wages, tends to increase with the advances in mechanisation and wherever competition compels capitalism to step up labour productivity.
We call this fraction C/V the organic composition of capital: it is therefore the ratio between constant capital and variable capital, and we say that in the capitalist system this organic composition has a rising tendency.
How can the capitalist acquire new machines? What is the meaning of the statement that constant capital keeps on increasing?
The fundamental operation of capitalist economy is the production of surplus value. But so long as the surplus value has merely been produced, it remains locked in the commodities and the capitalist cannot use it; unsold shoes cannot be transformed into new machines, into greater productivity. In order to be able to buy new machines, the industrialist possessing shoes must sell these shoes, and a part of the proceeds of this sale can then serve to purchase new machines, as a supplementary constant capital.
Expressed another way: realising surplus value is the necessary condition for the accumulation of capital, and capital accumulation is simply the capitalisation of surplus value.
Realising surplus value means the sale of goods but also the sale of such goods under conditions where the surplus value they contain can actually be realised in the market. All businesses operating at average productivity in society — whose total production therefore corresponds with socially necessary labour — are supposed to realise the total value and surplus value produced in their plants, neither more nor less, when their goods are sold. We saw previously that those enterprises which are above the average in their productivity will capture a part of the surplus value produced in other enterprises, whereas those operating at a lower than average productivity will not realise a part of the surplus value produced in their plants but must surrender it to other plants which are technologically ahead of them. Consequently, the realisation of surplus value means the sale of goods under conditions in which all of the surplus value produced by the workers in a plant manufacturing commodities is actually paid for by their purchasers.
As soon as the stock of goods produced in a given period is sold, the capitalist is reimbursed with a sum of money which constitutes the counter-value of the constant capital expended in achieving this production, that is to say, the raw materials used together with the fraction of the value of machines and goods amortised by this production. He has also been reimbursed with the counter-value of wages which he advanced in order to effect this production. In addition, he is in possession of the surplus value produced by his workers.
What happens to this surplus value? A part of it is unproductively consumed by the capitalist, for the poor fellow has to live, has to keep his family alive together with his entourage; and everything he spends for these purposes is completely withdrawn from the process of production.
A second part of the surplus value is accumulated and is utilised by being transformed into capital. Accumulated surplus value is, consequently, that entire part of surplus value which is not unproductively consumed in meeting the private needs of the ruling class, and which is transformed into capital, either into supplementary constant capital, that is to say, into a supplementary quantity (more exactly: a value) of raw materials, machines, buildings; or into supplementary variable capital, that is to say, means for hiring more workers.
We now understand why the accumulation of capital is the capitalisation of surplus value, that is to say, the transformation of a large part of surplus value into supplementary capital. And we also understand how the process of growth in the organic composition of capital represents an uninterrupted succession of capitalisation processes, that is to say, of the production of surplus value by workers and its transformation by the capitalists into supplementary buildings, machines, raw materials and workers.
It is consequently inaccurate to say that it is the capitalist who creates employment, since it is the worker who produced the surplus value, which was capitalised by the capitalist, and used, among other things, for hiring more workers. In reality, the entire mass of fixed wealth we see in the world, the whole mass of plants, machines, roads, railroads, ports, hangars, etc., etc., all of this enormous mass of wealth is nothing but the materialisation of a mass of surplus value created by the workers, of nonreimbursed labour which was transformed into private property, into capital for the capitalists. It is, in other words, a colossal proof of the continuous exploitation undergone by the working class since the origin of capitalist society.
Do all capitalists progressively add machines, increase their constant capital and the organic composition of their capital? No, the increase in the organic composition of capital takes place antagonistically, by way of a competitive struggle governed by that law which the great Flemish painter, Peter Breughel, portrayed in an engraving: the big fish eat the little.
The competitive struggle is therefore accompanied by a continuous concentration of capital by the displacement of a large number of businessmen by a smaller number, and by the transformation of a certain number of independent business people into technicians, managers, foremen, and even simple subordinate office personnel and workers.

Competition leads to concentration and monopoly

The concentration of capital is another permanent law of capitalist society and is accompanied by the proletarianisation of a part of the bourgeois class, the expropriation of a certain number of bourgeois by a smaller number of bourgeois. That is why the Communist Manifesto of Marx and Engels emphasises the fact that capitalism, which claims to defend private property, is in reality a destroyer of this private property, and carries out a constant, permanent expropriation of a great number of proprietors by a relatively small number of proprietors. There are several industrial branches in which this concentration is particularly striking: coal mining had hundreds of companies during the 19th century in a country like France (there were almost 200 in Belgium); the automobile industry had 100 or more firms at the beginning of the century in countries like the United States and England, whereas today their number has been reduced to four, five or six such companies at most.
Of course, there are industries where this concentration has not been carried so far, such as the textile industry, the food industry, etc. In general, the greater the organic composition of capital in an industrial branch, the greater is the concentration of capital, and conversely, the smaller the organic composition of capital, the smaller is the concentration of capital. Why? Because the smaller the organic composition of capital, the less capital is required at the beginning in order to enter this branch and establish a new venture. It is far easier to put together the million or two million dollars necessary for building a new textile plant than to assemble the hundreds of millions needed to set up even relatively small steel works.
Capitalism was born of free competition and is inconceivable without competition. But free competition produces concentration and concentration produces the opposite of free competition, namely, monopoly. Where there are few producers, they can readily reach agreements, at the expense of the consumers, in dividing up markets and preventing any lowering of prices.
So in the span of a century, the whole capitalist dynamic appears to have changed its nature. First we have a movement proceeding in the direction of a constant fall in prices because of a constant rise in production and a constant multiplication of the number of enterprises. At a certain point, the sharpening of competition brings with it a concentration of enterprises and a reduction in the number of enterprises. The remaining companies are now able to reach agreement on preventing further price reductions and such agreement can only be honoured, of course, by limiting production. The era of monopoly capitalism thus displaces the era of free competitive capitalism at the beginning of the last quarter of the 19th century.
Naturally, when we speak of monopoly capitalism, we must not in the least presume a capitalism which has completely eliminated competition. There is no such thing. We simply mean a capitalism whose basic behaviour has changed, that is to say, it no longer strives for a constant lowering of prices by means of a constant increase in production; it uses the technique of dividing up the market, of setting up market quotas. But this process winds up in a paradox. Why do capitalists who began as competitors now turn to concerted action in order to limit this competition and to limit production as well? The answer is that it is a method of increasing their profits. They only do so if it brings them more profits. Limiting production permits increasing prices, bringing greater profits and consequently increased capital accumulation.
This new capital can no longer be invested in the same branch, since this would mean an increase in productive capacity, resulting in increased production, and leading to a lowering of prices. Capitalism has been caught up in this contradiction commencing with the last quarter of the 19th century. It then suddenly acquired a quality which only Marx had foreseen and which was not grasped by economists like Ricardo or Adam Smith; suddenly, the capitalist mode of production took on a missionary role. It began to spread throughout the world by means of capital exports, which enabled capitalist enterprises to be set up in countries or sectors where monopolies had not yet entrenched themselves.
The consequence of monopoly in certain branches and of the spread of monopoly capitalism in certain countries is that the capitalist mode of production has been reproduced in branches still free from monopoly control and in countries which had not yet become capitalist. This is how colonialism in all its varieties managed, toward the beginning of the 20th century to spread like a powder train in the course of a few decades, starting from the small part of the world to which the capitalist mode of production was limited, and eventually embracing the whole world. Every country on the map was thus transformed into a sphere of influence and field of investment for capital.

Tendency of the average rate of profit to decline

We saw previously that the surplus value produced by the workers in each factory remained “locked” in the products, and that the question whether or not this surplus value would be realised by the capitalist factory owner was decided by market conditions, that is to say, by the possibility for the factory to sell its products at a price which would allow all of this surplus value to be realised. By applying the law of value developed earlier, we can set up the following rule: all enterprises which are producing at the average level of productivity will, roughly speaking, realise the surplus value produced by their workers, that is to say, they will sell their products at a price equal to the value of these products.
But this will not be the case for two categories of enterprises: those operating below and those operating above the average level of productivity.
What is the category of enterprises operating below the average level of productivity? This is nothing but a generalisation of the lazy shoemaker we mentioned previously. It is, for example, a steel mill which produces 500,000 tons of steel in 2.2 or 2.5 or three million man-hours, when the national average for this production is two million man-hours. It is therefore wasting social labour-time. The surplus value produced by the workers in this factory will not be realised in its entirety by the owners of this plant; it will work at a profit below the average rate of profit for all enterprises in the country.
But the total mass of surplus value produced in society is a fixed mass, dependent in the last analysis on the total number of labour hours supplied by all workers engaged in production. This means that if there are a certain number of enterprises which do not realise all the surplus value produced by their workers because the enterprises are operating below the average level of productivity and have therefore wasted social labour-time, then there is an unexpended balance of surplus value available which is captured by the plants operating above the average level of productivity. Having economise on social labour-time, the latter are rewarded by society.
This theoretical explanation is a general demonstration of the mechanism determining the movement of prices in capitalist society. How does this mechanism operate in practice?
Let us say the average selling price of a locomotive is a million dollars. What then will be the difference between a plant operating below the average productivity of labour and one operating above it? The first will spend, let us say, $900,000 to produce a locomotive, and its profit will be $100,000. On the other hand, the plant producing above the average level of labour productivity, will spend, let us say, $750,000 and will make $250,000 profit, that is 33% on its current production, whereas the average rate of profit is 18% and enterprises working at this average social labour productivity produced locomotives at a cost of $850,000, realising $150,000 in profit, that is to say, 18%.a
In other words, capitalist competition favours those enterprises which are technologically ahead; these enterprises realise superprofits as compared with the average profit. Average profit is basically an abstract idea, exactly like value. It is an average around which the real profit rates of different branches and enterprises fluctuate. Capital flows toward the branches where there are superprofits and flows away from those branches in which profits are below the average. By virtue of this ebb and flow of capital from one branch to another, the rates of profit tend to approximate this average, without ever completely reaching it in an absolute and mechanical way.
This is the way then that equalisation of the rates of profit is effected. There is a very simple way to determine this abstract average rate of profit: we take the total mass of surplus value produced by all workers in a given year and in a given country, and draw its ratio to the total mass of capital investment in that country.
What is the formula for the rate of profit? It is the ratio between surplus value and total capital. It is therefore S/(C+V). Still another formula must be considered as well: S/V; this is the rate of surplus value, or better still, the rate of exploitation of the working class. It specifies the way in which the newly produced value is divided between workers and capitalists. If, for instance, S/V equals 100% this means that the newly produced value is divided into two equal parts, one part going to the workers in the form of wages, the other going to the bourgeois class in the form of profits, interest, dividends, etc.
When the exploitation rate of the working class is 100%, the eight-hour working day then consists of two equal parts: four hours of labour in which the workers produce the counter-value of their wages, and four hours in which they supply gratuitous labour, labour which is not paid for by the capitalists and its product appropriated by the latter.
At first sight, it seems that if the organic composition of capital C/V increases, the profit rate S/(C+V) will decline, since C becomes increasingly greater relative to V, and S is a product of V and not of C. But there is a factor that can neutralise the effect of an increase in the organic composition of capital: it is precisely an increase in the surplus value rate.
If S over V, the surplus value rate increases, this means that in the fraction S/ (C+V), both the numerator and denominator increase, and in this case the value of the fraction can remain the same, under conditions where the two increases occur in a certain proportion.
In other words, an increase in the surplus value rate can neutralise the effects of an increase in the organic composition of capital. Let us assume that the value of production C+V+S goes from 100C+100V+100S to 200C+100V+100S. The organic composition of capital will therefore go from 100 to 200%, the profit rate will fall from 50 to 33%. But if at the same time the surplus value goes from 100 to 150, that is to say, the surplus value rate goes from 100 to 150%, then the profit rate 150/300 remains at 50%: the increase in the surplus value rate neutralises the effect of the increase in the organic composition of capital.
Can these two movements occur in exactly the necessary proportions for them to neutralise each other? Here we touch the basic weakness, the Achilles heel of the capitalist system. These two movements cannot develop proportionally over the long run. There is no limit whatever to the increase in the organic composition of capital. For V there is a theoretical limit of zero, assuming the arrival of total automation. But can S/V also increase in an unlimited way, without any limit whatever? No, for in order to produce surplus value it is necessary to have working workers, and this being the case, the fraction of the workday in which the worker reproduces his own wage cannot fall to zero. It can be reduced from eight hours to seven, from seven hours to six, from six hours to five, from five hours to four, from four hours to three, from three hours to two, from two hours to one, from one hour to 50 minutes. It would already be a fantastic productivity which would permit the worker to produce the counter-value of his entire wage in 50 minutes. But he could never reproduce the counter-value of his wage in zero minutes and zero seconds. There is a residual which capitalist exploitation can never suppress.
This means that in the long run the fall in the average rate of profit is inevitable, and I personally believe, contrary to the idea of quite a few Marxists, that this fall is also demonstrable in statistics, that is to say that the average rates of profit today in the big capitalist countries are much lower than they were 50, 100 or 150 years ago.
Of course, if we examine shorter periods, there are fluctuations up and down; there are numerous factors which come into play (we will discuss them later, when dealing with neo-capitalism). But for the long run, the movement is very clear, both for interest rates and profit rates. We should point out, moreover, that among all the developmental tendencies of capitalism, this was the one most clearly perceived by the theoreticians of capitalism themselves. Ricardo speaks of it; John Stuart Mill stresses it; Keynes is highly aware of it. There was a maxim in England at the end of the 19th century which was practically a popular saying: capitalism can withstand anything except a fall in the average interest rate to 2%, because that would kill investment incentive.
This maxim obviously contains a certain kind of error in its reasoning. Calculations of percentages, of profit rates, have a real value, but it is still, after all, a relative one to a capitalist. What interests him is not exclusively the percentage he makes on his capital, but also the total amount which he makes.
And if the 2% applies not to $100,000 but to $100 million, it still represents $2 million, and the capitalist would do an awful lot of thinking before he would say that he preferred to let his capital lie idle rather than to accept the revolting profit of a mere $2 million a year.
In practice, we see therefore that there is no total halt in investment activity following a fall in the profit and interest rates but rather a slowing down proportional to the fall in profit rate in an industrial branch. On the other hand, when there is more rapid expansion and a rising tendency of the profit rate in certain industrial branches or in certain periods, then investment activity resumes, speeds up, the movement then seems to feed on itself, and the expansion appears to have no limits up to the time when the tendency reverses once more.

The fundamental contradiction in the capitalist system and the periodic crises of overproduction

Capitalism has the tendency to extend production without limits, to extend its arena of activity over the whole world, to view all human beings as potential customers. (Parenthetically, there is a pretty contradiction worth stressing, one which Marx already mentioned: each capitalist always likes to see other capitalists increase the wages of their workers, because the wages of those workers are purchasing power for the goods of the capitalist in question. But he cannot allow the wages of his own workers to increase, for this would obviously reduce his own profit.)
The world is consequently structured in a most extraordinary way, having become an economic unit with an interdependence of its different parts which is extremely sensitive. You know all the cliches which have been used to depict this: if someone sneezes on the New York Stock Exchange, 10,000 peasants are ruined in Malaya.
Capitalism produces an extraordinary interdependence in incomes and a unification in tastes for all human beings. Man has suddenly become conscious of the wealth of human possibilities, whereas in precapitalist society, he was enclosed in the narrow natural possibilities of a single region. In the Middle Ages, pineapples were not eaten in Europe, only locally grown fruits, but today we eat fruits which may have been produced anywhere in the world and are even beginning to eat fruits from China and India which we were not accustomed to eating prior to the second world war.
There are consequently mutual links being established among products and among men. Expressed in other terms, there is a progressive socialisation of all economic life, which is becoming a single assemblage, a single fabric. But this whole movement of interdependence is simply centred in an insane way around private property, private appropriation, by a small number of capitalists whose private interests, moreover, collide more and more with the interests of the billions of human beings included in this assemblage.
It is in the economic crises that the contradiction between the progressive socialisation of production and the private appropriation which serves as its driving power and its support, breaks out in the most extraordinary way. For capitalist economic crises are incredible phenomena like nothing ever seen before. They are not crises of scarcity, like all precapitalist crises; they are crises of overproduction. The unemployed die of hunger not because there is too little to eat but because there is relatively too great a supply of foodstuffs.
At first sight the thing seems incomprehensible. How can anyone die because there is a surplus of food, because there is a surplus of goods? But the mechanism of the capitalist system makes this seeming paradox understandable. Goods which do not find buyers not only do not realise their surplus value but they do not even return their invested capital. The slump in sales therefore forces businessmen to suspend their operations. They are therefore forced to lay off their workers. And since the laid-off workers have no reserves, since they can subsist only when they are selling their labour-power, unemployment obviously condemns them to the starkest poverty and precisely because the relative abundance of goods has resulted in a slump in sales.
The factor of periodic economic crises is inherent in the capitalist system and remains insurmountable. We shall see further on that this remains equally true in the neo-capitalist regime in which we are now living, even if these crises are now called “recessions”. Crises are the clearest manifestation of the fundamental contradiction in the system and a periodic reminder that it is condemned to die sooner or later. But it will never die automatically. It will always be necessary to give it a conscious little push to effect its demise, and it is our job, the job of the working-class movement, to do the pushing.
Chapter III Neo-Capitalism is not included in this abridged copy, as its then-current analysis of the evolution of capitalist economies in the mid-20th century is less relevant to current readers.
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