AS AN economic theorist Marx was first of all a very learned man. It may seem strange that I should think it necessary to give such prominence to this element in the case of an author whom I have called a genius and a prophet. Yet it is important to appreciate it. Geniuses and prophets do not usually excel in professional learning, and their originality, if any, is often due precisely to the fact that they do not. But nothing in Marx’s economics can be accounted for by any want of scholarship or training in the technique of theoretical analysis. He was a voracious reader and an indefatigable worker. He missed very few contributions of significance. And whatever he read he digested, wrestling with every fact or argument with a passion for detail most unusual in one whose glance habitually encompassed entire civilizations and secular developments. Criticizing and rejecting or accepting and coordinating, he always went to the bottom of every matter. The outstanding proof of this is in his work, Theories of Surplus Value, which is a monument of theoretical ardor. This incessant endeavor to school himself and to master whatever there was to master went some way toward freeing him from prejudices and extra-scientific aims, though he certainly worked in order to verify a definite vision. To his powerful intellect, the interest in the problem as a problem was paramount in spite of himself; and however much he may have bent the import of his final results, while at work he was primarily concerned with sharpening the tools of analysis proffered by the science of his day, with straightening out logical difficulties and with building on the foundation thus acquired a theory that in nature and intent was truly scientific whatever its shortcomings may have been.
It is easy to see why both friends and foes should have misunderstood the nature of his performance in the purely economic field. For the friends, he was so much more than a mere professional theorist that it would have seemed almost blasphemy to them to give too much prominence to this aspect of his work. The foes, who resented his attitudes and the setting of his theoretic argument, found it almost impossible to admit that in some parts of his work he did precisely the kind of thing which they valued so highly when presented by other hands. Moreover, the cold metal of economic theory is in Marx’s pages immersed in such a wealth of steaming phrases as to acquire a temperature not naturally its own. Whoever shrugs his shoulders at Marx’s claim to be considered an analyst in the scientific sense thinks of course of those phrases and not of the thought, of the impassioned language and of the glowing indictment of “exploitation” and “immiserization” (this is probably the best way to render the word Verelendung, which is no more good German than that English monster is good English. It is immiserimento in Italian). To be sure, all these things and many others, such as his spiteful innuendoes or his vulgar comment on Lady Orkney, are important parts of the show, were important to Marx himself and are so both for the faithful and for the unbelievers. They explain in part why many people insist on seeing in Marx’s theorems something more than, and even something fundamentally different from, the analogous propositions of his master. But they do not affect the nature of his analysis.
Marx had a master then? Yes. Real understanding of his economics begins with recognizing that, as a theorist, he was a pupil of Ricardo. He was his pupil not only in the sense that his own argument evidently starts from Ricardo’s propositions but also in the much more significant sense that he had learned the art of theorizing from Ricardo. He always used Ricardo’s tools, and every theoretical problem presented itself to him in the form of difficulties which
occurred to him in his profound study of Ricardo and of suggestions for further work which he gleaned from it. Marx himself admitted much of this, although of course he would not have admitted that his attitude toward Ricardo was typically that of a pupil who goes to the professor, hears him speak several times in almost successive sentences of redundancy of population and of population that is redundant and again of machinery making population redundant, and then goes home and tries to work the thing out. That both parties to the Marxian controversy should have been averse to admitting this is perhaps understandable.
Ricardo’s is not the only influence which acted on Marx’s economics but no other than that of Quesnay, from whom Marx derived his fundamental conception of the economic process as a whole, need be mentioned in a sketch like this. The group of English writers who between 1800 and 1840 tried to develop the labor theory of value may have furnished many suggestions and details, but this is covered for our purpose by the reference to the Ricardian current of thought. Several authors, to some of whom Marx was unkind in inverse proportion to their distance from him and whose work ran in many points parallel to his (Sismondi, Rodbertus, John Stuart Mill), must be left out of account, as must everything not directly pertaining to the main argument— so, for instance, Marx’s distinctly weak performance in the field of money, in which he did not succeed in coming up to the Ricardian standard. Now for a desperately abbreviated outline of the Marxian argument, unavoidably unjust on many counts to the structure of Das Kapital which,
.partly unfinished, partly battered by successful attack, still stretches its mighty skyline before us!
Marx fell in with the ordinary run of the theorists of his own and also of a later epoch by making a theory of value the corner stone of his theoretical structure. His theory of value is the Ricardian one. I believe that such an outstanding authority as Professor Taussig disagreed with this and always stressed the differences. There is plenty of difference in wording, method of deduction and sociological implication, but there is none in the bare theorem, which alone matters to the theorist of today.
Both Ricardo and Marx say that the value of every commodity is (in perfect equilibrium and Perfect competition) proportional to the quantity of labor contained in the commodity, provided this labor is in accordance with the existing standard of efficiency of production (the “socially necessary quantity of labor”). Both measure this quantity in hours of work and use the same method in order to reduce different qualities of work to a single standard. Both encounter the threshold difficulties incident to this approach similarly (that is to say, Marx encounters them as he had learned to do from Ricardo). Neither has anything useful to say about monopoly or what we now call imperfect competition. Both answer critics by the same arguments. Marx’s arguments are merely less polite, more prolix and more “philosophical” in the worst sense of this word.
Everybody knows that this theory of value is unsatisfactory. In the voluminous discussion that has been carried on about it, the right is not indeed all on one side and many faulty arguments have been used by its opponents. The essential point is not whether labor is the true “source” or
“cause” of economic value. This question may be of primary interest to social philosophers who want to deduce from it ethical claims to the product, and Marx himself was of course not indifferent to this aspect of the problem.
For economics as a positive science, however, which has to describe or explain actual processes, it is much more important to ask how the labor theory of value works as a tool of analysis, and the real trouble with it is that it does so very badly. To begin with, it does not work at all outside of the case of perfect competition. Second, even with perfect competition it never works smoothly except if labor is the only factor of production and, moreover, if labor is all of one kind.
If either of these two conditions is not fulfilled, additional assumptions must be introduced and analytical difficulties increase to an extent that soon becomes unmanageable. Reasoning on the lines of the labor theory of value is hence reasoning on a very special case without practical importance, though something might be said for it if it be interpreted in the sense of a rough approximation to the historical tendencies of relative values. The theory which replaced it—in its earliest and now outmoded form, known as the theory of marginal utility—may claim superiority on many counts but the real argument for it is that it is much more general and applies equally well, on the one hand, to the cases of monopoly and imperfect competition and, on the other hand, to the presence of other factors and of labor of many different kinds and qualities.
Moreover, if we introduce into this theory the restrictive assumptions mentioned, proper tionality between value and quantity of labor applied follows from it.4 It should be clear, therefore, not only that it was perfectly absurd for Marxists to question, as at first they tried to do, the validity of the marginal utility theory of value (which was what confronted them), but also that it is incorrect to call the labor theory of value “wrong.” In any case it is dead and buried. Though neither Ricardo nor Marx seems to have been fully aware of all the weaknesses of the position in which they had placed themselves by adopting this starting point, they perceived some of them quite clearly. In particular, they both grappled with the problem of eliminating the element of Services of Natural Agents which of course are deprived of their proper place in the process of production and distribution by a theory of value that rests upon quantity of labor alone. The familiar Ricardian theory of the rent of land is essentially an attempt to accomplish that elimination and the Marxian theory is another. As soon as we are in possession of an analytical apparatus which takes care of rent as naturally as it does of wages, the whole difficulty vanishes. Hence nothing more need be said about the intrinsic merits or demerits of Marx’s doctrine of absolute as distinguished from differential rent, or about its relation to that of Rodbertus.
But even if we let that pass we are still left with the difficulty arising out of the presence of capital in the sense of a stock of means of production that are themselves produced. To Ricardo it presented itself very simply: in the famous Section IV of the first chapter of his Principles he introduces and accepts as a fact, without attempting to question it, that, where capital goods such as plant, machinery and raw materials are used in the production of a commodity, this commodity will sell at a price which will yield a net return to the owner of those capital goods. He realized that this fact has something to do with the period of time that elapses between the investment and the emergence of salable products and that it will enforce deviations of the actual values of these from proportionality to the man-hours “contained” in them—including the man-hours that went into the production of the capital goods themselves—whenever these periods are not the same in all industries. To this he points as coolly as if it followed from, instead of contradicting, his fundamental theorem about value, and beyond this he does not really go, confining himself to some secondary problems that arise in this connection and obviously believing that his theory still describes the basic determinant of value.
Marx also introduced, accepted and discussed that same fact and never questioned it as a fact. He also realized that it seems to give the lie to the labor theory of value. But he recognized the inadequacy of Ricardo’s treatment of the problem and, while accepting the problem itself in the shape in which Ricardo presented it, set about to attack it in earnest, devoting to it about as many hundreds of pages as Ricardo devoted sentences. In doing so he not only displayed much keener perception of the nature of the problem involved, but he also improved the conceptual apparatus he received. For instance, he replaced to good purpose Ricardo’s distinction between fixed and circulating capital by the distinction between constant and variable (wage) capital, and Ricardo’s rudimentary notions about duration of the processes of production by the much more rigorous concept of “organic structure of capital” which turns on the relation between constant and variable capital. He also made many other contributions to the theory of capital. We will however confine ourselves now to his explanation of the net return to capital, his Theory of Exploitation.
The masses have not always felt themselves to be frustrated and exploited. But the intellectuals that formulated their views for them have always told them that they were, without necessarily meaning by it anything precise. Marx could not have done without the phrase even if he had wanted to. His merit and achievement were that he perceived the weakness of the variousarguments by which the tutors of the mass mind before him had tried to show how exploitation came about and which even today supply the stock in trade of the ordinary radical. None of the usual slogans about bargaining power and cheating satisfied him. What he wanted to prove was that exploitation did not arise from individual situations occasionally and accidentally; but that it resulted from the very logic of the capitalist system, unavoidably and quite independently of any individual intention
This is how he did it. The brain, muscles and nerves of a laborer constitute, as it were, a fund or stock of potential labor (Arbeitskraft, usually translated not very satisfactorily by labor power). This fund or stock Marx looks upon as a sort of substance that exists in a definite quantity and in
capitalist society is a commodity like any other. We may clarify the thought for ourselves by thinking of the case of slavery: Marx’s idea is that there is no essential difference, though there are many secondary ones, between the wage contract and the purchase of a slave—what the employer of “free” labor buys is not indeed, as in the case of slavery, the laborers themselves but a definite quota of the sum total of their potential labor.
Now since labor in that sense (not the labor service or the actual manhour) is a commodity the law of value must apply to it. That is to say, it must in equilibrium and perfect competition fetch a wage proportional to the number of labor hours that entered into its “production.” But what number of labor hours enters into the “production” of the stock of potential labor that is stored up within a workman’s skin? Well, the number of labor hours it took and takes to rear, feed, clothe and house the laborer.This constitutes the value of that stock, and if he sells parts of it—expressed in days or weeks or years—he will receive wages that correspond to the labor value of these.
That is, barring the distinction between “labor power” and labor, the solution which S.Bailey (A Critical Discourse on the Nature, Measure and Causes of Value, 1825) by anticipation voted absurd, as Marx himself did not fail to notice (Das Kapital, vol. i, ch. xix). parts, just as a slave trader selling a slave would in equilibrium receive a price proportional to the total number of those labor hours. It should be observed once more that Marx thus keeps carefully clear of all those popular slogans which in one form or another hold that in the capitalist labor market the workman is robbed or cheated or that, in his lamentable weakness, he is simply compelled to accept any terms imposed. The thing is not as simple as this: he gets the full value of his labor potential.
But once the “capitalists” have acquired that stock of potential services they are in a position to make the laborer work more hours—render more actual services—than it takes to produce that stock or potential stock. They can exact, in this sense, more actual hours of labor than they have paid for. Since the resulting products also sell at a price proportional to the man-hours that enter into their production, there is a difference between the two values—arising from nothing but the modus operandi of the Marxian law of values—which necessarily and by virtue of the mechanism of capitalist markets goes to the capitalist. This is the Surplus Value (Mehrwert).6 By appropriating it the capitalist “exploits” labor, though he pays to the laborers not less than the full value of their labor potential and receives from consumers not more than the full value of the products he sells. Again it should be observed that there is no appeal to such things as unfair pricing, restriction of production or cheating in the markets for the products. Marx did of course not mean to deny the existence of such practices. But he saw them in their true perspective and
hence never based any fundamental conclusions upon them.
Let us admire, in passing, the pedagogics of it: however special and removed from its ordinary sense the meaning might be which the word Exploitation now acquires, however doubtful the support which it derives from the Natural Law and the philosophies of the schoolmen and the writers of the Enlightenment, it is received into the pale of scientific argument after all and thus serves the purpose of comforting the disciple marching on to fight his battles. As regards the merits of this scientific argument we must carefully distinguish two aspects of it, one of which has been persistently neglected by critics. At the ordinary level of the theory of a stationary economic process it is easy to show that under Marx’s own assumptions the doctrine of surplus value is untenable. The labor theory of value, even if we could grant it to be valid for every other commodity, can never be applied to the commodity labor, for this would imply that workmen, like machines, are being produced according to rational cost calculations. Since they are not,= there is no warrant for assuming that the value of labor power will be proportional to the man-hours that enter into its “production.” Logically The rate of surplus value (degree of exploitation) is defined as the ratio between surplus value and the variable (wage) capital.
Marx would have improved his position had he accepted Lassalle’s Iron Law of Wages or simply argued on Malthusian lines as Ricardo did. But since he very wisely refused to do that, his theory of exploitation loses one of its essential props from the start. Moreover, it can be shown that perfectly competitive equilibrium cannot exist in a situation in which all capitalist-employers make exploitation gains. For in this case they would individually try to expand production, and the mass effect of this would unavoidably tend to increase wage rates and to reduce gains of that kind to zero. It would no doubt be possible to mend the case somewhat by appealing to the theory of imperfect competition, by introducing friction and institutional inhibitions of the working of competition, by stressing all the possibilities of hitches in the sphere of money and credit and so on. Only a moderate case could be made out in this manner, however, one that Marx would have heartily despised.
But there is another aspect of the matter. We need only look at Marx’s analytic aim in order to realize that he need not have accepted battle on the ground on which it is so easy to beat him. This is so easy only as long as we see in the theory of surplus value nothing but a proposition about stationary economic processes in perfect equilibrium. Since what he aimed at analyzing was not a state of equilibrium which according to him capitalist society can never attain, but on the contrary a process of incessant change in the economic structure, criticism along the above lines is not completely decisive. Surplus values may be impossible in perfect equilibrium but can
be ever present because that equilibrium is never allowed to establish itself. They may always tend to vanish and yet be always there because they are constantly recreated. This defense will not rescue the labor theory of value, particularly as applied to the commodity labor itself, or the argument about exploitation as it stands.
But it will enable us to put a more favorable interpretation on the result, although a satisfactory theory of those surpluses will strip them of the specifically Marxian connotation. This aspect proves to be of considerable importance. It throws a new light also on other parts of Marx’s apparatus of economic analysis and goes far toward explaining why that apparatus was not more fatally damaged by the successful criticisms directed against its very fundaments. If, however, we go on at the level on which discussion of Marxian doctrines ordinarily moves, we get deeper and deeper into difficulties or rather we perceive that the faithful do when they try to follow the master on his way. To begin with, the doctrine of surplus value does not make it We shall see later how Marx tried to replace that prop. any easier to solve the problems, alluded to above, which are created by the discrepancy between the labor theory of value and the plain facts of economic reality. On the contrary it accentuates them because, according to it, constant capital—that is, non-wage capital—does not transmit to the product any more value than it loses in its production; only wage capital does that and the profits earned should in consequence vary, as between firms, according to the organic composition of their capitals. Marx relies on the competition between capitalists for bringing about a redistribution of the total “mass” of surplus value such that each firm should earn profits proportional to its total capital, or that individual rates of profits should be equalized. We readily see that the difficulty belongs to the class of spurious problems that always result from attempts to work an unsound theory, and the solution to the class of counsels of despair. Marx, however, believed not only that the latter availed to establish the emergence of uniform rates of profits and to explain how, because of it, relative prices of commodities will deviate from their values in terms of labor, but also that his theory offered an explanation of another “law” that held a great place in classical doctrine, namely, the statement that the rate of profit has an inherent tendency to fall. This follows in fact fairly plausibly from the increase in relative importance of the constant part of the total capital in the wage-good industries: if the relative importance of plant and equipment increases in those industries, as it does in the course of capitalist evolution, and if the rate of surplus value or the degree of exploitation remains the same, then the rate of return to total capital will in general decrease. This argument has elicited much admiration, and was presumably looked upon by Marx himself with all the satisfaction we are in the habit of feeling if a theory of ours explains an observation that did not enter into its construction. It would be interesting to discuss it on its own merits and independently of the mistakes Marx committed in deriving it. We need not stay to do so, for it is sufficiently condemned by its premises. But a cognate though not identical proposition provides both one of the most important “forces” of Marxian dynamics and the link between the theory of exploitation and the next story of Marx’s analytic structure, usually referred to as the Theory of Accumulation.
The main part of the loot wrung from exploited labor (according to some of the disciples, practically all of it) capitalists turn into capital— means of production. In itself and barring the connotations called up by Marx’s phraseology, this is of course no more than a statement of a very familiar fact ordinarily described in terms of saving and investment. For Marx however this mere fact was not enough: if the capitalist process was to unfold in inexorable logic, that fact had to be part of this logic which means, practically, that it had to be necessary. Nor would it have been satisfactory to allow this necessity to grow out of the social psychology of the capitalist class, for instance in a way similar to Max Weber’s who made Puritan attitudes—and abstaining from hedonist enjoyment of one’s profits obviously fits well into their pattern—a causal determinant of capitalist behavior. Marx did not despise any support he felt able to derive from this method. But there had to be something more substantial than this for a system designed as his was, something which compels capitalists to accumulate irrespective of what they feel about it, and which is powerful enough to account for that psychological pattern itself. And fortunately there is. In setting forth the nature of that compulsion to save, I shall for the sake of convenience accept Marx’s teaching on one point: that is to say, I shall assume as he does that saving by the capitalist class ipso facto implies a corresponding increase in real capital. This movement will in the first instance always occur in the variable part of total capital, the wage capital, even if the intention is to increase the constant part and in particular that part which Ricardo called fixed capital—mainly machinery.