There’s a story of how a self-made billionaire got started in the world of business. As a child, he lived next door to an apple orchard and one day he climbed over its wall and took as many apples as he could carry in his coat. He went door to door and sold them for $3.00 but, rather than spend the money on treats, he bought two large wicker baskets and went back and filled them with apples, which he was able to sell for $27.00. Then his grandfather died and left him $250 million in his will.
This little tale directs some justified mockery at the ‘rags to riches’ myth and it’s certainly true that most capitalists grew up with parents who were themselves very wealthy. However, the question still arises of just where the wealth comes from that these people amass during their lives. To the capitalists, wealth seems to be generated by the smart investments and entrepreneurial skills of those who own and control capital.
There are a million glowing media accounts of how billionaires climbed the ladder of success in which everything is attributed to their clever choices and winning deals. You will seldom read about the lives of the working class people whose labour actually produces the wealth of this society. The brilliant tactics or unscrupulous dealings that capitalists engage in may explain how they get a bigger share than their rivals, but the loot they fight over is the product of human labour.
This entirely false view of where society’s wealth comes from is dominant because it is backed up by the economic, social and political power of the capitalist class in general. As Karl Marx and Friedrich Engels put it, ‘The ideas of the ruling class are, in any age, the ruling ideas.’ This means that the official discourse and the general view of how society works is shaped by the needs of the present ruling class and, if we are to correct that, we need to take an entirely independent approach that isn’t bound by their narrow interests.
Historical materialism
To form a view of human societies that is rooted in reality, we have to understand that we meet our needs by transforming the natural world through collective labour. This shapes how society is organized and, in turn, forms the basis for our ideas, beliefs and values. Engels sets out this perspective of ‘historical materialism’ in ‘Socialism: Utopian and Scientific,’ written in 1880.
‘The materialist conception of history,’ Engels writes, “starts from the proposition that the production of the means to support human life and, next to production, the exchange of things produced, is the basis of all social structure; that in every society that has appeared in history, the manner in which wealth is distributed and society divided into classes or orders is dependent upon what is produced, how it is produced, and how the products are exchanged. From this point of view, the final causes of all social changes and political revolutions are to be sought, not in men’s brains, not in men’s better insights into eternal truth and justice, but in changes in the modes of production and exchange.’
In the development of human societies, the existence of exploiting classes is a relatively recent development. For tens of thousands of years, most people lived as ‘immediate return’ hunter gatherers, taking what they needed from nature without building up any kind of social surplus. These were very egalitarian societies, without private property, social classes or a state power to rule over them. Moreover, gender-based inequality and oppression were not the defining features they would later become.
Engels set out this general view when he wrote ‘The Origin of the Family, Private Property and the State’ in 1884. Since his time, however, the study of early human societies — particularly in the last several decades— has confirmed his conclusions and taken them further.
Roughly ten thousand years ago, with populations growing, human societies started to turn towards agriculture. This drove major changes. The domestication of animals and the ability to grow crops promoted the concept of private property and encouraged inequality. Social classes emerged and landowners increased their wealth and power until they took on the dimensions of ruling classes. These exploitative relations created divisions in society so profound that slavery could develop and, as slaves had to be controlled and subdued, state power developed to protect the interests of the owners of slaves and land. Humanity had arrived at the dawn of class society.
Capitalist society is but the latest (though the last) form of class-based exploitation. In Europe, the increasing capacity to produce social wealth became incompatible with a system that was based on the feudal ownership of land. That society was pushed aside, revolutions took place and kings were beheaded. The peasants who produced the wealth under the old system were driven off the land and turned into employed workers, labouring for the new capitalist classes.
The new working class that emerged was still an exploited class but the basis on which exploitation took place is not as easy to understand as under previous systems. Slaves were physically compelled to perform labour for their owners and all they got in return was some food, clothing and shelter. Peasants similarly were tied to the land of the feudal lords and were provided with their own plots of land that were the basis of their survival. Part of the time they worked these plots but they had to spend another part of their working lives working on the lord’s land or else they had to turn over a portion of what they produced. For the modern worker, however, things are somewhat disguised and have to be carefully examined to get to the bottom of things.
Labour and value
Marx begins the first volume of his great work ‘Capital’ with a chapter that considers the central role of the commodity. Earlier societies also produced commodities but, under capitalism, they took on a more pervasive form. Marx points out the dual nature of the value of a commodity: it is ‘in the first place, an object outside us, a thing that by its properties satisfies human wants of some sort or another and this is its ‘use value.’ Commodities are also, however, ‘the material depositories of exchange value.’ That is to say they can be bought and sold and traded against each other, through the medium of money, according to the amount of labour that went into their production. Insofar as they are items that satisfy a certain need, the labour is of a particular type. But when they are traded according to their values, that value is determined by ‘human labour in the abstract.’
The capitalist must buy certain commodities and use them in the productive process. These are themselves all products of labour with amounts of value in them. Capital has to be laid out to provide a workplace, tools, equipment and raw materials. These can be considered as receptacles of ‘dead labour’ in that they generate no new value but pass on their existing value into the commodities being created. Now, however, we have to consider the ‘living labour’ that is performed by the workers who are producing the new commodities for the capitalist. This means adding new value to the products. It is here that we get to the question of just how exploitation occurs under capitalism.
Let’s again compare capitalism to slavery. Slaves know exactly what they are giving the slave owner and whatever he is giving back to them, in the form of the necessities of life. Under capitalism, however, the worker agrees to work for a certain wage for a fixed period of time. The capitalist provides that sum and the agreement is honoured. It is a classic commodity deal and, just as the capitalist bought raw materials, he purchased something from the worker. But what was that exactly?
Clearly, what the capitalist needed from the worker was labour but, if value is determined by the quantity of labour, how can the capitalist purchase labour, sell the product of that labour at its value and make a profit? It’s here that Marx broke with the ideas of the economists and laid bare the nature of exploitation under capitalism. He understood that what the worker sells isn’t labour but the ability to provide ‘labour power.’ Like any commodity it has a value and, in this case, it is the value of the commodities the worker must consume to stay alive and raise a family, in order to maintain and reproduce the ability to work.
Labour power, then, has a value. But put into action in a capitalist workplace, it has the unique quality among commodities of creating value through the labour it performs. The wage that the capitalist provides is presented as compensation for the labour of the worker but, in reality, it is the ability to work that has been paid for. Only a part of the working day is spent reproducing the value of labour power. The rest of the day is given over to creating value for the capitalist that is never paid for. That part Marx called ‘surplus value’ and it forms the basis for the making of profit, which is the oxygen of capitalism.
In the third volume of Capital, Marx shows the way things work in practice in a capitalist economy. In doing this, he demonstrates how matters appear to the capitalists and the economists who serve their interests. The rate of surplus value is measured according to the ratio of paid to unpaid labour. The rate of profit, on the other hand, is assessed according to the return on total capital outlay, including equipment and raw materials. This means that the capitalist tends to see profit as something that flows from the overall investment, rather than as something that is squeezed from the workers.
In this volume, Marx also shows that, while surplus value is being produced in capitalist workplaces exactly as he previously described, each capitalist doesn’t actually pocket the fruits of exploitation according to how much unpaid labour was generated in his workplaces. There is a general tendency towards an average rate of profit, whereby investment flows out of low profit enterprises and into those with higher rates and this competitive process seeks (but never entirely attains) an equilibrium in the form of average profit. Supply and demand and the cut and thrust of competition also ensure that commodities are sold at prices that differ from their real value. You can see that the role of labour as the generator of social wealth is obscured by the actual workings of a capitalist economy in a range of ways.
The matter is further complicated by the fact that a share of the loot goes to some capitalists who aren’t directly involved in productive investment. Fortunes are made by merchants, bankers and landlords who have no immediate connection to the extraction of surplus value. In our time, a huge share of profits goes to entirely parasitic forms of speculation, into stock markets, and into real estate investments. This lends itself to the notion that the riches-to-even-more-riches process is due to entrepreneurial skill, rather than old fashioned exploitation.
Falling profits
If capitalists don’t want to embrace a labour theory of value, for very understandable reasons, they have no choice but to try and explain the reasons why their system is so prone to economic crisis. Various theories are put forward in this regard, but the third volume of Capital offers a fundamental explanation: the law of the tendency of the rate of profit to fall. Though Marx makes very clear that this tendency is subject to a whole series of counteracting influences, the implications of this law are clearly of great importance in the crisis-ridden present day.
As we saw, surplus value is extracted from the actual labour engaged in during production. The investment in labour power that must be made to set this in motion is referred to as the ‘variable capital.’ The outlay for equipment, tools and raw materials, on the other hand, is called the ‘constant capital.’ This portion of the productive capital transfers its value to the new product of labour without creating any new value. The development of technology means that an ever greater investment in constant capital is required to set labour in motion. Increased portions of ‘dead labour’ are required in order to activate ‘living labour.’ This is referred to as the ‘organic composition of capital’ and the increase in the constant capital component leads to a fall in the profit rate.
In the competition between capitalists, the introduction of labour saving technology will enable one to outproduce and underprice the others. This means that the individual capitalist gains a temporary advantage by contributing to a lower rate of profit for his class in general. In recent years, a range of Marxist economists have deepened the study of this law, seeking empirical confirmation of it in the capitalist economies. A growing body of evidence exists to show ‘that Marx’s law of profitability is the ultimate cause of capitalist crisis.’
It is important to stress that, only under a system that is based on the destructive and unsustainable pursuit of profit can the growth of productive capacity be a source of crisis and poverty. A rational and just socialist society, one focused on the needs of people and the preservation of the natural world, would use such gains to enrich the lives of everyone.
The capitalist system, based as it is on exploitation, is controlled by a ruling class that can’t acknowledge the realities of its irrational and crisis-ridden system. The working class, who make up the great majority, can’t challenge this system with the ideas of the class that exploits them. An understanding of the society we live in is required before we can change it and, in that regard, the analysis of the workings of a capitalist economy that Marx and Engels provided is more vital today than ever before.
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