Capitalism’s big con: Understanding Marxist economics
by Peter Watson, 2002
The following was originally published by the Socialist Party, the England & Wales affiliate of the Committee for a Workers International to which WASP is also affiliated. In places, small changes have been made to the language, and some examples changed, in order to make it more suitable for a South African audience.
Although the ruling class claims that economics is too complicated for ordinary people to understand, it is important for Marxists. It explains the production and share out of society’s wealth. Today, things that people need aren’t being made, or if they are, we can’t afford them.
Government policy can affect the economy. But capitalist governments cannot get rid of the basic problems we face, exploitation, unemployment, mass poverty and periodic economic crises. That is why socialists, while fighting for the best possible deal under capitalism, also fight to overthrow capitalism and replace it with socialism. An understanding of what makes capitalism tick is important if we’re going to get rid of it.
What is capitalism?
Capitalism is based on the private ownership of production – the firms, workplaces and finance system. Capitalists make a living on this ownership by getting profit on their investments, instead of selling their labour power like the working class. There may be some parts of the economy under public ownership (e.g. parastatals such as Eskom or PRASA), but the privately run big companies are the most important part.
Private ownership did not start with capitalism. Slave society and feudalism were also based on private ownership. Ordinary people were exploited then as well. Slaves worked for only food and shelter; serfs in feudal times worked part of the week for the landowner or gave a part of their crops to them (or both).
The way workers are exploited under capitalism is different. The serf usually owned or had rights to land. Most food and other necessities were made by the serfs themselves. Most workers today cannot grow their own food or make their own clothes. They are forced to work for the boss to make ends meet.1
Today we have the so-called “consumer society”. That means we must buy and sell to live. All parts of life become a commodity, something to be bought and sold, whether it is a TV, the latest music or our ability to work – that is why Marx called capitalism “generalised commodity production”.
This is the idea of the “market system” where everything is for sale. Right-wingers call it the “free market”. But there’s nothing free about the market when you’re low-paid. Neither can there be freedom when the world is divided out and stitched up by giant companies.
Workers create the wealth
Just a glance at the income and lifestyles of the top bosses and the wealthy, or a glimpse of the large and sometimes beautiful buildings in our cities, brings one conclusion. Society is not poor. But who created that wealth? Who built the skyscrapers, the highways and railways?
Nature provides the resources, the air, water, minerals and food that we need to live. But we can’t use most of nature’s resources directly – they need to be worked on to make them useful. Rain for example only takes on a value when it is processed to become drinkable. It is bottled and turned into a commodity.
It is labour that gives commodities value in the Marxist sense of the word2.
The source of all commodity values in capitalist society comes from the labour of the working class, the vast majority of people who live by selling their labour power3 (also see definition at end).
Working-class people do not have investments in the way that the capitalists do. We can only make ends meet by selling our ability to work for wages. Some workers may own a few shares, but they will still have to go out to work to earn a living. Unemployed and part-time workers are still members of the working class – it is the fault of the system that they are denied the right to work.
We make the money
Wandering round the supermarket can be a frustrating business. There are a vast variety of prices for goods on the shelves. Why are all the prices different?
Capitalist economists say it is all down to “supply and demand”. If I have a thousand ice creams to sell and only one person wants to buy one, they are going to be very cheap (and very messy!). If I have one ice cream and a thousand people want one, it will be sold for a fortune.
No-one can deny this occurs as far as it goes. But it all evens itself out. If there are a thousand people wanting an ice cream some more ice cream vans are going to get wind of it and try and get in on the act.
The factor that makes one thing more expensive than another is not down to supply and demand in the long run. It is down to the length of labour time taken in its production. This is the core of the Labour Theory of Value that Marx helped to develop. Supply and demand may explain why a BMW sells at one time for R1,250,000 and at another for R1,000,000. But it cannot explain why a silicon chip generally sells for much more than an ice cream. A silicon chip will almost always sell for more than an ice cream because vastly more labour time is spent in making it.
To give an example of how the labour theory of value works: It may take four hours to make a table and just two to make a chair. To this labour time is added the labour time taken in producing the wood, screws and tools used up in making the table and chair. In the example below this makes the table twice the cost of the chair.
LABOUR TIME + RAW MATERIALS etc. = TOTAL TIME
TABLE: 4 hours + 4 hours = 8 hours
CHAIR: 2 hours + 2 hours = 4 hours
What has this got to do with prices? Money seems to rule our lives. There’s never enough of it. But at root it is the working class that makes the money.
Money is the measure of the value of something we buy. Instead of “the number of labour minutes” spent making the tin of beans there’s a price tag: money is the expression of value in the real world. Obviously it’s totally impractical for everyone to exchange goods with one another through barter: capitalist society needs a universal expression of exchange value. And that’s why we have money.
But in the real world the amount of money in circulation in a particular country can get totally out of alignment with the value of the goods and services being produced, leading to major problems for the capitalist. In the modern economy there is speculation and money swindling. Sometimes governments print money to overcome short-term problems. But if there is more money around than real values of goods the result is inflation – money is worth less. If more and more money floods into the economy it becomes valueless – that is completely worthless. This happened in Zimbabwe through the 2000s.
When hyperinflation hit Germany in 1923 people traded in cigarettes rather than money. Money is therefore tied to real values produced by workers. Like a piece of elastic it can go so far before it twangs back to measure true value as measured by workers’ labour.
We produce the profits
Capitalism has been mentioned, but what is capital? 4 A suitcase full of R100 notes under the bed is nice to have, but it isn’t capital. Capital is money, land, plant, machinery and materials, which are brought together to employ workers. Workers are the source of the wealth of the capitalist class. But, more than that, they are the source of new wealth, new capital, stocks and shares, which feeds the lifestyle and investment plans of the bosses.
How can this be? The rip-off is not obvious. If somebody works 40 hours they get the “going rate” and come out with 40 hours’ worth of money before deductions. This is one of capitalism’s big myths – that employment is based on “a fair day’s work for a fair day’s pay”. A look at the working day helps clear up the fog.
The working day
A person may be employed for eight hours in a day. In that time, eight hours of labour time is spent in producing goods or services. As most workers know, they create a huge amount of wealth, or ‘value’ for the bosses they work for in those eight hours. The employee will never receive the value produced in those eight hours back in form of pay. If s/he did, no profit would be made and the company would go bust. In this example, the person receives wages equal to the value produced by only four hours work. But he/she cannot go home after four hours: the worker has to carry on working free for the boss for the other four hours contracted in their eight hour day.
Every day, in fact every hour of the day, people are making their employers richer. They are allowed no say in how that wealth should be used. They can only improve their wages by fighting for it. This extra four hours of labour in our example produces what Marx called ‘surplus value’ 5. It is this unpaid labour, the unpaid labour of the working class, which is divided into rent to the workplace landlord, interest to the banker and profit to the workplace boss.
Everything sold in the shops has a piece of surplus value in it. Everything bought makes the bosses richer. Capital accumulates and grows. The bosses don’t invest because they like to see people in work – they invest solely to make a profit. If there’s no profit, there’s no production. And profit comes from the unpaid labour of the working class.
Some argue that it is the consumers not workers that are exploited. They argue that employers “overcharge” – they mark up their goods to rob the consumer. It is certainly true that shops will try and rob us if they can. But new wealth doesn’t mainly come from overcharging. If I have a car that’s worth R25,000 and I sell it to you for R28,000, I’ve gained R3,000 and you have lost R3,000. There’s been a transfer of money from you to me. But there’s been no new wealth created. (And in any case, it is likely that the dealer down the road will undercut me.)
A capitalist starts with a load of money. He rents a workplace, machines, employs workers and ends with more than s/he started with. This comes from the unpaid labour of the working class.
What decides how much should go to the worker and how much to the boss? The employer will try and keep wages or “necessary labour time” 6 (also see definition at end) down as low as possible to keep profits up. The bottom line is sufficient money to keep the worker fit enough to come back to work the next day and raise a new generation of workers. But even that is not definite.
In times of high unemployment bosses would not be bothered if bad health hits workers due to low pay – as long as there are others to take their place. Nowadays it takes two incomes to have enough money to raise a new generation of workers.
Workers need to push the balance the other way. Through union organisation they can force the employer to give ground and raise wage rates.
Workers’ wage increases are usually blamed when inflation takes off. A glance at the working day example shows this is untrue. If there is a pay rise it just means the “cake” is divided in a different way: the dividing line between necessary labour and surplus value changes in favour of the workers. For instance, in our example, the worker might get wages to the value of five hours labour, and only work 3 hours for free for the boss. Workers get more and the bosses less. The total value of goods hasn’t altered. The cause of inflation lies not in pay rises, but in the “money swindles” of financiers and governments.
Every battle in the workplace boils down to a battle over the “line” between wages and surplus value. Every dispute over tea breaks, bonuses and overtime is about how much “free labour” workers are going to give to the boss. The existence of surplus value shows that workers are never “overpaid”.
We call for a 35-hour working week without loss of pay (and with regular or compulsory overtime consolidated into the pay also). With determined, fighting trade union leadership this can be achieved. For many workers, however, long hours of overtime are the only way to make ends meet. Overtime suits the employer. It cuts down the need to employ more staff.
One way for bosses to increase surplus value is through unpaid overtime.
The working day
|A. necessary labour (wages)||surplus value|
|four hours||four hours|
|B. necessary labour (wages)||surplus value|
|four hours||eight hours|
In example A of a working day the boss gets four hours’ surplus value. By making the working day longer and keeping wages the same surplus value goes up to eight hours (working day B). This is called absolute surplus value.
Back in feudal times serfs on the land worked with the seasons and daylight. Work was hard and starvation never far away. But production of food was stopped when there was enough. Under capitalism night becomes day, working hours become limited only by union power and the need for sleep.
The fact that many workers get time and a half or double time for overtime shows that surplus value exists. The employers can pay higher rates and still make a profit.
Many workers would like to work a well-paid 35 hour week, but are forced into low-paid, part-time jobs due to a lack of real jobs and provision of cheap nurseries and childcare. These part-time and casual jobs give workers few rights and are therefore very profitable for the boss.
Another way for employers to increase surplus value is through speeding up production.
The working day
|A. necessary labour (wages)||surplus value|
|four hours||four hours|
|B. necessary labour (wages)||surplus value|
|Two hours||six hours|
In working day A there is four hours’ surplus value. If production speed is doubled the worker makes up his/her wages in half the time. In working day B wages have not been cut, but by working twice as hard the worker has produced enough goods to cover wages in only two hours instead of four. By speed-ups the employer gets six hours surplus value instead of four. This is called relative surplus value 7.
How does the capitalist increase productivity? One way is to force workers to work harder. Plain terror tactics may be used. Or else bonus schemes, “the carrot that bites”, may be used to coax people. Bonus schemes will rarely compensate workers for the extra surplus value produced or else the employer would not introduce them. Most bonus schemes are divisive – they set worker against worker.
The boss will seek to drive workers into the ground. But the human body can only take so much before we start getting angry. And employers are greedy for more profits than our sweat can provide.
The machine rules our lives
The secret of capitalism’s development lies in the use of machinery. Someone using modern machinery will generally always be more productive and therefore more profitable than a worker without it. From steam power to the most modern “computer integrated manufacture” the story has been the same. Speed up production to cover wage costs as quickly as possible and therefore increase surplus value per worker massively.
In modern car plants wages are made up so quickly that workers work free for the boss for much of the year.
New technology has the potential to reduce the working week to just a few hours. But under capitalism this “labour saving device” becomes a stick to break our backs. The cost of machinery is so great that the employer steps up production to pay off debt. Work becomes unending in 24-hour shift rotas.
And machinery replaces labour. This fact was hidden, for example, in Europe and North America, and even to an extent in South Africa, during the world economic upswing of 1950-1973. While big investment took place in assembly line production (for example in big car plants) large numbers of workers were still needed to staff the machinery. Today’s technology needs far fewer workers.
Today’s manufacturing workers are worked to death and stress at work results in millions of days lost. Meanwhile, unemployed workers sit idle, unable to produce goods and services useful to society. A socialist society, as stated, would reduce the working week without loss of pay so that the available work is shared out, until all the unemployed are employed on proper union rates of pay.
The service industries
A lot of people today do not work in manufacturing industry. There has been a growth of “services” like finance and shopping. Many employees in service industries make surplus value for their bosses. Workers in McDonald’s make profit through their ability to cook burgers at very low pay rates. People don’t need to “make” something to produce surplus value. A care assistant in a private nursing home produces a profit for her employer, just like a manufacturing worker does.
A lot of service industries are involved in selling goods and services. Shops present goods in an attractive way to coax people to buy. Many finance companies just spend their time marketing money to capitalists and workers.
These services are largely “unproductive” in the capitalist sense in that they do not produce surplus value directly. The bosses in this sector make money by taking a share of the surplus value produced by the companies they provide services for. It certainly doesn’t make them any nicer to their own workforce!
Profit’s “logic” says that a public sector is also “unproductive”. Being paid out of government taxes and income means that they don’t make surplus value for bosses. The capitalists often rely on transport infrastructure and power laid on by the state to help their profiteering. The aim of privatisation is to bring socially useful jobs directly into the profit system. This gives the rich a double bonus: a chance to turn a profit while gaining government tax cuts. Service to the public is at the bottom of the priority list 8.
They gamble with our money
In the early days of capitalism the family-owned firm was normal. As more “efficient” firms swallowed others, great monopolies began to run the world. As surplus value became greater and greater, the money created through workers’ labour began to be traded through finance companies. Big banks became giants.
Building societies, insurance companies and pension funds have developed to trade people’s money for a profit. The capitalist may never visit the company s/he invests in. The stock exchange lists shares in the big firms and government stocks. The capitalist’s leisurely pastime involves gambling with our money by picking out the stocks and shares she or he thinks will be the best bet.
The biggest gamble is on the money markets. By buying and selling the world’s currencies trillions of dollars are traded worldwide every day! And then we’re told there is no money for public services or social grants.
The market doesn’t work
If capitalism keeps making profits why does the economy keep crashing? Why is there mass unemployment? What’s wrong with the ‘market economy’? At one time capitalist economists thought economic crisis was due to sunspots or the movement of the planet Venus. Today they sometimes blame computers for stock exchange crashes. The truth lies within the guts of capitalism itself.
Capitalist production has limits. When these limits are reached workplaces shut and people are thrown onto into unemployment. And these crises are caused because there is too much capital to maintain profits (this is called “over-accumulation”). Too much capital thrown at the ‘free’ market, too many goods and too little demand.
How can there be “too much capital”? Under a socialist plan there can never be “too much”. Investment would simply be sufficient to meet people’s needs. But capitalism depends on profits and the rate of return. Yet if profits aren’t high enough production suddenly comes crashing down.
“Over-accumulation” shows itself in a number of ways. Here are two:
a) Tendency for the rate of profit to fall
Capitalists invest large sums in machinery to get surplus value from each worker. While each worker makes enormous profits there can be a trend for the costs of machinery to cut the rate of return for the boss.
b) Problems in the market
Workers are not paid for their full day’s work. As we have seen, they are not paid equal to the value of the goods they produce. They therefore cannot buy back all the goods they produce. Capitalism tries to overcome this by the sale of the extra goods between members of the capitalist class. There is always the possibility of “overproduction” producing more than society can buy. In the market there is no democratic control of production. Anarchy and crisis can result 9.
Economic boom followed by recession is as natural to capitalism as breathing to a human being. Workers build up production during a boom only to see it destroyed later.
At the height of a boom capitalism hits barriers it cannot break through. Investment has raised the costs of machinery, possibly leading to a decline of profit rates. The lack of buying power can hit sales. Bankers and governments are fearful for the future and raise interest rates. Raising the cost of borrowing raises the cost for the industrial capitalist, eating into profits. Inflation can take off as financiers look away from industry towards speculating on the money markets and property. There is an “overaccumulation” of capital and the house of cards collapses.
In the depths of a recession factories are on short time or shut, unemployment is high and shops have permanent sales. Banks normally have low interest rates to encourage people to borrow.
Capitalists will only invest so long as they make money out of it. Once companies start to turn in a loss, or a much-reduced profit, capitalists will take their money somewhere else – often out of industry and into finance markets. Company closures and putting people on the dole are the result.
As well as the recessions and booms of the short-term “trade cycle”, there are also long-term trends in capitalism. 1950 to 1973 were years of upturn with high growth and profit rates. A change was detonated in 1974-75 by massive oil price rises and problems with the US dollar.
The underlying reasons, however, were more deep-seated than this. Large assembly line production methods brought rising profits and full employment in the main capitalist countries. But these methods were unable to sustain rising profits indefinitely. By the end of the 1960s, profit rates and productivity improvements were tailing away. US economic control over the globe was starting to be challenged by Japan and Germany.
Since 1974 the world economy has stagnated, a long period of problems and crisis for capitalism. Growth and profit rates are low compared to the 1950-73 period. New technology has been developed in the workplace. But it has not solved the problems. Capitalism has become increasingly parasitic.
The massive investment in machinery increases costs and therefore attacks profitability. New technology under capitalism means redundancies. The huge pool of unemployed in the advanced capitalist countries means less money around to buy the goods that the “state of the art” factories produce 10.
Capitalism makes the few rich at the expense of the many. Despite marvellous inventions it cannot solve the basic killers in the world, malnutrition, malaria and war. The market doesn’t work. It has outlived itself. Only a democratic plan of production can link the talents of the human race harmoniously with the earth’s resources. Once a democratic socialist planned economy is established, the end of the world’s suffering beckons.
Back to Topic 3 index.
1) See Marx’s pamphlet Genesis of Capital
2) See Marx’s pamphlet Wages Price and profit chapter 6.
3) See Marx’s pamphlet Wage Labour and Capital chapter 1.
4) See Wage Labour and Capital chapter 3.
5) See Wages Price and Profit chapters 7-11 and Engels’ introduction to Wage Labour and Capital
6) You can find the definition of “necessary /labour time” in Capital Volume one, chapter 9, section one.
7) See Capital Volume one, chapter 12.
8) See Capital Volume three, Chapters 17 and 19, and Marx’s Theories of Surplus Value Part One, Chapter 4 for more on “productive” and “unproductive” labour.
9) If you want to tackle the theory of crisis read Paul Mattick’s Economic Crisis and Crisis Theory or Makoto Itoh’s The Basic Theory of Capitalism. Some relevant chapters in Capital are Volume 3, chapters 13, 14, 15, 25,27 and 30. For how the market works read Volume 2, chapters 20 and 21 but beware these chapters are very complicated.
10) For more detailed explanation of what has happened in the world economy since 1945 and the economic turning point reached in 1973 read The World Economy – processes and prospects in A World in Crisis (1993) published by the Committee for a Workers’ International and Global Turmoil (1999).
ABSOLUTE SURPLUS VALUE
Surplus value produced by making the working day longer.
Wealth accumulated to exploit labour power and create surplus value. “Self-expanding value”: it grows (accumulates”) through exploitation.
The mode of production based on producing commodities, with a class system of wage labour and private ownership of production.
Something produced for sale on the market. Its value is measured by the “average socially necessary labour time” needed to produce it – the average time taken to produce it under given social conditions.
CONSTANT CAPITAL (C)
Capital put into machinery and raw materials. Sometimes called “dead labour”.
The general system of lending and borrowing for a profit.
The value of a commodity compared with others. For example: 1 coat = 20 pairs of socks = 2 pairs of trousers = R30. It is measured by the socially necessary labour time of the commodities being exchanged.
The ability to produce. For its price (wages) see Necessary Labour Time.
The commodity against which the value of all other commodities is measured.
NECESSARY LABOUR TIME
The part of the working day in which goods are produced to cover wage costs.
ORGANIC COMPOSITION OF CAPITAL
The proportion between the value of dead labour (machinery and material) and labour power in a capitalist industry or economy.
RATE OF EXPLOITATION (OR SURPLUS VALUE)
The ratio of unpaid to paid labour (S/V).
RATE OF PROFIT
How surplus value compares with the total costs of production (S/C+V).
RELATIVE SURPLUS VALUE
Surplus value produced by reducing labour time.
SURPLUS VALUE (S)
Rent, interest and profit, the unpaid labour of the working class.
The usefulness of any given object.
The “glue” that binds the capitalist economy together. The value of something is measured by the labour time taken in its production. It appears in comparison to another product, as exchange value. It shows itself in three forms: commodities, money and capital.
VARIABLE CAPITAL (V)
Wages. The section of total capital used to employ labour power.