|Capitalism's big con:
Understanding Marxist economics
by Peter Watson
THE PICTURE is the same wherever you look: part-time, low-paid jobs and
DIY stores where there were once factories, people scrambling to keep
their heads above water. This is Britain of the 21st century.
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.
For millions, a decent home would be a good start. But there’s very
little building going on. The choices for ordinary people are high
mortgage repayments, below-standard council housing or surrendering into
the ‘loving hands’ of a get-rich quick landlord.
And, when we demand more wages we're told they can't be afforded, we
have to wait until the economy is stronger.
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, but the privately run big companies are the most
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. Workers today cannot grow their own food or
make most of 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
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. Britain is not a poor country. But who
created that wealth? Who built the skyscrapers and palaces, the motorways
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
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 power (3) (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,
especially when you can't find where Tesco has hidden its bread. There are
a vast variety of prices for goods on the shelves. Why are all the prices
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
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 £25,000 and at another for £20,000. But it cannot
explain why a silicon chip generally sells for much more than an ice cream. A
silicon chip will alomst 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
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.
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 fivers 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.
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
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 £750 and I sell it to you for
£1,000, I've gained £250 and you have lost £250. 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
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 exmaple, 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
The Socialist Party calls 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
One way for bosses to increase surplus value is through unpaid
The working day
|A. necessary labour
|| surplus value
|B. necessary labour
|| 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
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
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
The working day
|A. necessary labour
|| surplus value
|B. necessary labour
|| 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 during the great
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
Today's manufacturing workers are worked to death and stress at work
results in millions of days lost, much more than are lost due to strikes.
Meanwhile, unemployed workers sit idle on the dole, 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
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. Nationalisation and
the welfare state were won in the past by working-class pressure on
government and the bosses. The capitalists were prepared to accept some
form of public sector to provide a workforce with basic health and
They also often rely on transport 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. This is the
root of the government’s Private Finance Initiative (PFI). 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 benefits.
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
Capitalist production has limits. When these limits are reached
workplaces shut and people are thrown onto the dole. And these crises are
caused because there is too much capital to maintain profits (this is
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
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
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
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
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 we have lived in a depression, 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
The Socialist Party says:
* Tax the super-rich! For a socialist government to take into public ownership the top 150
companies and banks that dominate the British economy, and run them under democratic working-class
control and management. Compensation to be paid only on the basis of proven need.
* A democratic socialist plan of production based on the interests of
the overwhelming majority of people, and in a way that safeguards the environment
Notes 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 three chapters 13, 14, 15, 25,27, 30. For how the market works read
Volume two, chapters 20 and 21 but beware these chapters are very
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, the
international socialist organisation which the Socialist Party is
affiliated to and Global Turmoil (1999).
Militant International Review (the forerunner of
Socialism Today; the Socialist Party’s theoretical journal) deals with
economic depression in issue number 53.
Also for more material on privatisation you can read
The Great Gold Rush (Socialist Party, 2002).
All books and pamphlets are available from Socialist
Books, PO Box 24697, London E11 1YD (Telephone: 020 8988 8789)
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
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
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 = £30. 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
The commodity against which the value of all other commodities is
NECESSARY LABOUR TIME
The part of the working day in which goods are produced to cover wage
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.