The Economics of Capitalism

Karl Marx spent a lifetime studying capitalism, its origins and development, its economic laws and the consequences of its operations. It led him to conclude that capitalism is only a stage in human history and that its replacement by socialism is in the interest of the working class, who are the vast majority of capitalism’s population.

Marx’s work is ignored or rejected not only by the capitalists but also, so far, by the great majority of the working class. British workers’ continued support for capitalism rests on one or other of the two great delusions of the present day—the present Tory delusion that capitalism will work smoothly and for the benefit of all if only government intervention is reduced, and the equally fatuous delusion of the Labour Party and trade unions that prosperity will be achieved by more government intervention.

Both groups proclaim that it is possible under capitalism to abolish unemployment or reduce it permanently to very low levels, and that state capitalism (nationalisation) is significantly different from private capitalism. Indeed both groups falsely describe state capitalism as socialism.

About the basic structure of capitalism some facts are not seriously in doubt. Fifty years ago a supporter of capitalism, Professor Edwin Cannan, outlined it as follows:

    “The greater part of industry and property is immediately controlled by persons and institutions whose object is to make a profit on their capital . . . the majority of workers work as they are directed to work by persons and bodies of persons who employ them in order to make a profit by getting more than they pay for all expenses, and they reckon their profit as a percentage of their capital. The greater part of property is also in the hands of such persons and institutions.”

On the last aspect, the ownership of property, the government appointed Royal Commission on the Distribution of Income and Wealth found that in 1976 the richest ten per cent owned 61 per cent of wealth and the poorest 80 per cent only 22 per cent.

When Marx described profit making as “exploitation” he was not using the term in the restricted popular meaning of excessive profit or profit obtained by paying very low wages. For him all profit is  obtained by exploitation. Nearly all the wealth annually produced in this country is the result of the labour of workers. In the view of employers and most workers (and of Professor Cannan) workers are paid for all the work they do in the wages or salary they receive. Marx showed that this is a fallacy. What workers sell to employers is not their labour but their mental and physical energies, their “labour power”. The distinction is vital.

The employer, having bought the workers’ labour power for an hour, a day or a week sets them to work in order to make a profit out of it. This the employer is able to do because in each period of employment labour power has the unique quality of being able to produce a value greater than its own value. In, say, a five day week workers might be working for three days to produce the equivalent of their wages and working for the two more days producing a surplus, what Marx called surplus value. This is the process of exploitation.

To say that labour power has a value to bring it into line with all other commodities produced by the workers for the capitalists, in accordance with Marx’s Labour Theory of Value. If, in given conditions of production, ten hours of labour are needed on average to produce one commodity and twenty hours for another, the value of the latter will be double the value of the former. For this purpose skilled labour counts as a multiple of less skilled labour, “so that a smaller quantity of skilled labour is equal to a larger quantity of simple labour”.

The value of labour power, skilled and unskilled, like that of other commodities, is determined by the quantity of labour needed to produce it, that is the labour needed to maintain workers and their families.

    “A certain mass of necessities must be consumed for a man to grow up and maintain his life. But the man, like the machine, will wear out and must be replaced by another man. Beside the mass of necessities required for his own maintenance, he wants another amount of necessaries to bring up a certain quota of children that are to replace him in the labour market and to perpetuate the race of labourers. Moreover to develop his labouring power, and acquire a given skill, another amount of values must be spent.”

    (Marx, Value, Price and Profit, Chapter 7.)

The value of labour power does not have to be the bare physical minimum of existence and it is not a fixed amount. It can rise or fall, depending on whether conditions are relatively favourable or unfavourable for workers, through union organisation, to maintain or improve wages. Employers resist wage claims because at any given time the higher the wage the smaller the profit.

Profit comes out of surplus value but if capitalists rent land from landowners or use borrowed money they have to surrender part of surplus value as rent or interest before arriving at the profit on their capital.

It should be noted that the creation of value and surplus value takes place only in the sphere of the production of commodities. There are millions of workers outside that sphere, in finance, commerce, insurance, administration. The value of their labour power and the wages or salaries they receive are subject to the same conditions as the wages of workers in the sphere of production.

In the continuous struggle over the amount of wages and salaries the outcome “resolves itself into a question of the respective powers of the combatants” (Marx, Value, Price and Profit, Chapter 14). An approximate indication of the position for the year 1978 is shown by official figures which gave £83,372m. as the wages and salaries of some 23 million workers and £22,475m. as the gross trading profits of companies and the surpluses of the nationalised industries.

The problems of the capitalists do not end when the workers have produced commodities. The next step is that the commodities have to be sold in order that the profit can be realised. As Marx showed, capitalism goes through “a series of periods of moderate activity, prosperity, overproduction, crisis and stagnation”, and “except in the periods of prosperity, there wages between the capitalists the most furious combat for the share of each in the markets”.

The largest share of the market goes to the capitalist with the cheapest product and capitalists therefore are always seeking ways of reducing the amount of labour needed to produce a given commodity, notably by installing labour saving machinery. So capitalism is always creating unemployment, which, in periods of depression rises to peak levels. At these times, as with the present when 1.5 million are unemployed, masses of workers are out of work because the capitalists cannot make a profit by employing them.

All non-Marxist economists treat this as evidence that something has gone wrong and that it could be remedied by a different government policy. Like an editorial in the Financial Weekly (29 February) which says of the Tory government: “Economic policies that have already brought 1½ million unemployed and could push the figure up to 2 million must be wrong”. Nothing has “gone wrong”: it is simply the way capitalism works, in accordance with its own economic laws, and there is no government policy which could materially alter it.

The last Labour government, with its belief that unemployment can be abolished by increasing government expenditure, vastly increased that expenditure but saw unemployment double to 1,600,000 in 1977.

The Tory government, with its opposite policy of reducing government expenditure is committed also to less government borrowing, less dependence on income tax and more dependence on indirect taxes like VAT, less nationalisation, no recourse to an incomes policy to hold down wages and to weakening the unions by amending trade union law. Every one of these conditions existed in 19th Century capitalism, but it culminated in what was known as the Great Depression, which began in 1874 and lasted for twenty years. (It is ironical that Tory ministers, who have themselves used the argument that whatever validity Marxian economics had in the 19th Century no longer applies because capitalism now is different, should themselves be recreating the conditions of 19th Century capitalism.)

As regards the Labour Party belief that state capitalism (nationalisation) is different from private company capitalism it is only necessary to look at the strikes in those industries and the thousands of redundancies to see how hollow this is. All the nationalisation Acts required the Boards to operate so that, “taking one year with another”, they produce a surplus. In recent years Labour and Tory governments have laid down profit rates on capital invested for each nationalised industry (for the Postal Service a profit rate on turnover).

To complete Marx’s analysis of capitalism it is necessary to consider briefly his exhaustive treatment of the relation of prices of commodities to their values. He recognised that in developing capitalism commodities rarely sell at their value. Apart from supply and demand fluctuations of prices, and the effect of monopolies, he showed that, as it is put by Kautsky in his Economic Doctrines of Karl Marx (p. 89)

    “The prices of most commodities permanently deviate from their values, in as much as the prices of one-half of those commodities are permanently as much below their values as those of the other half are above them.”

But the whole of this, including the concept of the tendency to an equal rate of profit on each £1000 of industrial and commercial capital rests fully on Marx’s Labour Theory of Value.

Edgar Hardcastle