Marxian Economics: Value, Contradiction, and Profit

By Ben Bollinger

I have been wanting to write directly about Marxian economics for a while now, however until now I had not felt well read enough to write about it correctly; so now that I have actually done much research into not only Marxian economics, but also other schools of economics, I will go over the very basics of Marx’s theories.

Karl Marx is very different from other economists throughout history, rather than trying to understand one part of the economic system, Marx wanted to understand capitalism as a whole, he wanted to derive the hidden secrets of capitalist society through his methodology. The most fundamental part of Marxian economics is the Labor Theory of Value, from which Marx derives his ideas about crisis, profits, and money. Marx’s Labor Theory of Value was similar to Smith and Ricardo’s in that he accepted that all value is created through the labor process, however where Marx diverges from those classical economists is with his idea of socially necessary labor time (SNLT) and when he argues that simply performing labor, does not in itself produce value; for Marx’s Law of Value only applied to a capitalist system, and obviously it is common sense that in a capitalist system you won’t produce value by merely doing some random act of labor, but rather Marx argued that value is created by social labor, meaning labor that is realized in the social arrangements of the capitalist system (labor that has a use on the market), because rather than just seeing capitalism as an economic system, he also saw it as a system of social relations between individuals. From this view of capitalism, Marx argued that the specific value that any given commodity has, is dependent on the SNLT needed to create said commodity. Now, why does Marx say this? Why is it that SNLT is the deciding factor when it comes to determining the value of a commodity?

As stated previously, Marx determines the value of a commodity based on the socially necessary labor time needed to create that commodity, but many of Marx’s critics question why he takes this approach. Marx realizes value from the labor process because it is, what he calls, “The Third Thing” that all commodities have in common. Value is relevant in deciphering the rate at which one commodity exchanges with another, this is called an exchange-value. Neoclassical critics of Marx try to argue that commodities have many other things in common, one of those being the fact that all commodities produced in the market have a certain degree of utility towards consumers. So why then, they argue, does Marx not simply use marginal utility (subjective value) as they do, if Marx is looking for a common denominator to compare commodities and get their exchange-values? The first, most obvious, response is the fact that one cannot measure utility without reference to the labor process. Another reason marginal utility is flawed is because the theory abstracts from the very system it is trying to describe, by ignoring the fact that not only is capitalism influenced by people, but people are influenced by capitalism; and you must understand the social relations of capitalism in order to understand utility; which just brings you back to the labor process, but the most important reason that Marx rejects the idea of measuring a commodity’s value based on its subjective use to an individual is because use-values cannot be quantitatively compared in the same way that value based on socially necessary labor time can be. You cannot compare the use of a car to that of a bottle of water, or really anything that isn’t a car. However what you can compare, is how long it takes to produce a car vs how long it takes to produce a bottle of water; and in doing this, you’d find that a car is obviously more valuable than a bottle of water: because it takes longer to not only manufacture, but also to gather resources for. When using this logic, Marx came across one of many contradictions in the capitalist mode of production; that simply being the commodity itself. Because the value of a commodity is dependent on the socially necessary labor time needed to create it, this influences price in such a way that the price of any commodity will always fluctuate around the commodity’s value (SNLT), which is what we see in most cases:

ltv.PNG
Also see here

 What this further entails, is that because under capitalism commodities are made for their exchange-value (i.e. to be sold on the market) they are therefore always in contradiction with the commodity’s use-value because the two cannot be compared on a quantitative level; and so there will always be a disparity between how many goods are produced and where they’re allocated vs how many goods are needed and where they’re needed. This is clearly seen with the fact that there are more houses than homeless people, food is wasted at a rate which could virtually save children from starving if used correctly, we have many useless jobs that the market demands; just think of how much better our species could be doing if we made these goods and had these jobs for only utility, and not for market demand. So right away in capitalism we see a contradiction in something as fundamental to any market as the commodity itself, and we’re just getting started.

Profit is one of the most important foundations of capitalism, even its apologists admit this; though they claim this is a good thing. Capitalist apologists cling to the idea that profit is what drives innovation; and to an extent they’re right in this regard, but this is merely another contradiction as I will explain later. In the previous paragraph, I explained how value is created only through labor, and so following this logic unveils that market exchanges are always a zero sum gain, you cannot increase the aggregate value of an economy simply by market exchange. If this were possible, we wouldn’t need laborers, rather only traders. However, when hearing that value cannot be created through exchange, but rather only through labor, that begs the question: where do capitalists get their profit from? The capitalist is not performing any hard labor, they are not producing any value themselves, at most all the capitalist does is exchange commodities with other capitalists, so how is it then that the capitalist is always at the top of the pay pyramid? The answer should be quite obvious, the capitalists gets the most money because they are the ones who created the company and hired the workers. Now this sounds innocent when looking at this from within the capitalist framework. However, we must dig deeper into this social relation that takes place in our current mode of production. In order for the capitalist to make a profit, they must extract surplus value from their laborers. This is not the only way for profit to be generated, however for the sake of this essay I will be keeping it at this. How does the concept of profit, and surplus value play into class? The modern conception of what class is is far different from the Marxist view of it. The modern view of class is that there are three: the poor, middle class, and upper class; however we Marxists do not go by this idealist view, why? Because what defines someone being poor, middle class, or upper class when wealth disparities between these classes are in a constant state of change? Rather, we hold that one’s class is determined by his or her relation to the means of production, meaning that those who own the means of production are in one class (the capitalist class) and those who must sell their labor in order to engage in exchange on the market are in another class (the working class). Now, why is profit important? Why even explain where it comes from? What’s the point? The answer to all these questions is the fact that profit is what indeed drives any capitalist economy. Capitalists are driven by the pursuit of more and more profit, this should seem obvious at first, but why is this a bad thing? This is because, when profit is the main driver of industry, that puts it in the interest of the capitalist class; and because of the class division I explained earlier, it is therefore in contradiction with the interests of the working class. This can clearly be seen in the massive amounts of jobs that have been shipped overseas:jobs.jpgmncusempper.jpg

As well as the growing wealth gap between not only the rich and the poor, but also the wealth gap between workers and CEOs, and real wages and total productivity. Marx predicted this with stunning accuracy in what he called an increase in the rate of exploitation:

6-25-10inc-f1.jpg

ceo-pay.jpg

This is one of the main problems of capitalism, is the fact that it rests on inequality, and conflicting interests of classes. Because of these two simple truths about the system, this is one of the central reasons why we as Marxists hold that capitalism is a system that is unsustainable and will eventually collapse on itself. However, a more important reason why capitalism is an inherently unstable system, is because capitalists must invest in their own ultimate destruction in order to survive in the market place. What I mean by this is that because value is determined by SNLT, the only real way you can get ahead of other capitalists is by cutting the cost of production either through exporting jobs (as I showed earlier that was happening) but also through technological innovation; which is a know job killer (even though this is happening at a slower rate than job exportation):

destroying.jobs_.chart1x910_0.png

What is the consequence of this? Well there are many, however one of the most important ones as pointed out by Marx is that when capitalists decide to do things like this, yes they are increasing short-term profits they are also decreasing overall profit rates. This is what Marx called the tenancy for the rate of profit to fall; and, once again, the empirical data does indeed confirm Marx’s theories:

world-rate-simple-mean.png

As the profit rate since the beginning of modern capitalism in the global economy has indeed been falling. The consequences of this are highly debated among Marxists, ranging from total economic collapse, to causing recessions, to not having much impact at all. But one thing we do know happens when capitalism becomes less and less profitable for new businesses to enter the market is that there will be less newer companies entering as competition, as well as fewer businesses will survive on the market, and once again this is what we see:

graph3.gif0936fff.jpg

So these are a few of the many arguments that Marxian economics has to give about the capitalist mode of production, this obviously is no where close to the full explanation that Mar gives in his three volumes of Capital, which I would highly suggest you all read the basics of before trying to critique Marx’s theories.

Advertisements

2 thoughts on “Marxian Economics: Value, Contradiction, and Profit

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s