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Analysing an Economic System

One criticism of Marx’s Capital is that, written 150 years ago, it is describing conditions in mid-century Victorian Britain which have long since disappeared. It does do this, but this is to miss the point. Marx was analysing an economic system, not the particular political, sociological and historical conditions under which it happened to operate in his day. It was written not, or not just, as a criticism of conditions in mid-Victorian Britain but as an analysis of capitalism in general, of the capitalist economic system as such irrespective of the conditions in which it operated.

As Marx was writing in mid-19th century Britain, most of his concrete examples are drawn from the experience of capitalism in and up to that period. Then, the main industry was textiles whose products were exported throughout the world; the main source of energy was burning coal in steam engines; and the dominant form of ownership of means of production was a factory owned and managed by an individual capitalist family.

Marx’s examples are drawn from the 1860s but, even before he died in 1883, things had begun to change. The production of machines was becoming more important than textile production; coal was about to be used to raise steam to drive electricity-generating turbines; the joint stock company with limited liability was becoming the dominant form of capitalist ownership. But these developments did not alter how capitalism worked as an economic system. It continued to operate in the same basic way that Marx had analysed.

Technology and the political and sociological framework are even more changed today but capitalism as an economic system still works in the same way. The fact that Marx never saw a motor car or an aeroplane or radio, television, electronic computers or knew of nuclear power or genetic engineering does not affect his theory.

Political economy

The subtitle of Capital, when it was translated into English in 1887, was ‘A Critical Analysis of Capitalist Production’. It was this, but a strict translation of the original German would have been ‘A Critique of Political Economy’, a subtitle used in more modern translations.

‘Political Economy’ was the name applied by David Ricardo, author of The Principles of Political Economy and Taxation (1821), and others to the study that they were engaged in of the production and distribution of wealth in a market economy. They imagined that they were discovering a natural process just as other scientists were. Marx’s major criticism of them was that in reality they were analysing one historically-evolved, and ultimately passing, way of organising the production and distribution of wealth, which he called ‘the capitalist mode of production’.

Nevertheless, the ‘economic laws’ they posited still acted as if they were natural laws, even though they came into being only under specific social and historical conditions. The Political Economists saw the ‘natural’ way to organise the production and distribution of wealth, and which they regarded as being distorted by political interference, as: factories and other workplaces owned by capitalists; production carried out by wage-workers; and the capitalist owners aiming to make a profit by investing money in production and selling what was produced at prices established by the market.

On the basis of these assumptions (and policy recommendations) they sought to work out how wealth would be distributed between capitalists, wage-workers, and those who owned land and other natural resources. They also sought to work out how the prices of goods produced for sale (which they called ‘commodities’) were determined. They correctly identified this as having something to do with the time taken to produce them.

Marx made his own contribution to this analysis and in particular solved the mystery of how profit could arise if all commodities exchanged at their labour-time values. His solution was to make a distinction between what workers expended in production (‘labour’) and what they sold (their ‘labour power’) and for which they were paid a full price as their wages. He showed that profit arose not in circulation but in production, out of the difference between the value of what wage workers produced, which belonged to their capitalist employer, and the value of what they were paid for the sale of their labour-power, a difference he called ‘surplus value’.

The adepts of political economy didn’t like this any more than they liked being told that what they were studying was not the natural laws of production and distribution. Their successors, realising where a labour theory of value might lead, abandoned this approach and began to analyse the economic system in terms of how businesses experienced it.

Greed is irrelevant

The concept of ‘surplus value’ is key to Marx’s analysis of capitalism as an economic system. He saw the driving force behind production under capitalism as being to maximise the amount of surplus value. This was not because capitalists were greedy, but was something imposed on them by the economic laws of capitalism. These laws forced capitalists to re-invest in production as additional capital most of the profits they made.

Capitalists, he argued, were in competition with each other to sell their products and make a profit. To win what he called ‘the battle of competition’ firms had to reduce the unit cost of what they produced so as to be in a position to sell more cheaply than their rivals without impingeing on their own profits. A firm could achieve this by reducing the time needed to produce its product, or, what is the same thing, increasing the productivity of its workforce, but this involved equipping them with more efficient machines, bought out of previously made profits. The first firm to do this would make a temporary ‘super-profit’ but this would disappear as other firms, to stay in the race for profits, also bought more productive machines and the market price for the product fell, restoring profits to their ‘normal’ level.

Capitalist competition thus results in a race to reduce costs by increased productivity, mainly through the installation of more efficient machines. The tendency under capitalism is for most profits to be reinvested in production as further capital, for more and more capital to be accumulated by being invested in expanding the means of production and so both production and employment (though the first at a faster rate than the second). This economic ‘growth’ is built-in to capitalism and is not a free choice of those running capitalist enterprises, so it can’t be reversed. It’s a drive that will last as long as capitalism does.

Forms of enterprise

One consequence of Marx’s analysis of capitalism as an economic system operating according to its own economic laws is that the institutional form in which a capital is embodied and treated as a single unit – whether the individual capitalist owner of Marx’s day, a limited liability company (what in America is called a ‘corporation’), a state-owned enterprise, or even a worker-run cooperative – is incidental. What is decisive is that, whatever the institutional form, commodities are being produced for sale on a market with a view to profit; which means that the enterprises are subject to the economic laws of capitalism and have to keep on re-investing profits in more modern machinery in order to keep costs down and stay in the battle of competition.

Also incidental is the distribution of that part of profits that is not re-invested in production but is used for the consumption of those who manage units of capital. Those who 'personify capital' (Marx's term) can be individual capitalists, company directors, big shareholders, or government officials. They don’t have to be bloated men in top hats smoking a cigar. In the history of capitalism there has also been a wide variety of personal beneficiaries of capitalist production, from individual capitalist owners (an almost distinct breed these days) to top level state officials, civil and/or military. In fact the Britain of Marx's day was itself exceptional in having a landed aristocracy in a position to command a share, in the form of ground-rents and royalties, of the surplus value extracted from the workers by their immediate employers.

That Marx’s analysis of capitalism was not tied to conditions in mid-century Victorian Britain is shown by the fact that the same economic laws, the same economic drive to accumulate capital out of surplus value created by wage-labour, operated also in the former USSR. The institutional framework there – the absence of individual capitalist ownership and the almost total state ownership of the means of production, and the distribution of the consumption part of surplus value amongst various layers of state officials – was quite different from what obtained in the West. Yet capitalism existed there. Even the abolition of private capitalists and capitalist private property rights is compatible with the existence of capitalism.

Marx’s analysis of the way capitalism works is valid wherever there is sectional ownership and control of the means of wealth production and where production is carried out by wage-workers for sale on a market with a view to profit. As this is undoubtedly still the case today, Marx’s Capital remains valid and relevant.