Part One:—
The Labour Theory Of Value & Surplus Value

The Commodity

The wealth of capitalist societies appears as a collection of commodities. The individual commodity is its elementary form. Marx begins Capital with an analysis of the commodity.

A commodity has two forms of value:
a) Use value.
b) Exchange value.

The use value of the commodity is self explanatory. The commodity must be useful to some individual in society. If it has no use, it cannot be exchanged and therefore has no exchange value.

The exchange value is that proportion in which use values of one kind exchange for use values of another.

In order for the use values of commodities to be exchanged, Marx reasoned that they must have some common element. How can someone exchange, say, a given quantity of Brussels Sprouts for, say, a six-pack of Beer? The Brussels Sprouts will satisfy a completely different set of needs to the Six Pack of Beer. What is the common element?

In Marx’s view, the common denominator which enables diverse commodities to be exchanged is that they have "abstract human labour" objectified in them. An individual or group of individuals has expended labour on an object to produce a commodity. The amount of value in a commodity is determined by the amount of "socially necessary" labour, which is contained in it. So a worker will not increase the value of a commodity by working in an inefficient manner. The labour that is contained in a commodity must be "socially necessary".

Of course, there are numerous "concrete" forms of human labour such as the labour of the carpenter, plumber and machine operators, which produce use values. But human labour in the "abstract" is the expenditure of labour power in its general physiological sense by using brain and muscles.
Use Value and Exchange Value are two of the conditions for the existence of a Commodity. Fresh Air for instance has a Use Value. Without it human life would be impossible. However, it is not a commodity because it has no exchange value. It cannot be exchanged and no human labour was expended in its creation.

A thing can be useful and a product of human labour, but not a commodity. A person who satisfies his own human needs by say growing his own Brussels Sprouts is not producing a commodity.

Finally, a commodity must be produced for others (i.e. have a social use value) and be transferred through the medium of exchange. Therefore the corn rent given by a serf to a feudal landlord is not a commodity.

Money And The Circulation Of Commodities

In pre-capitalist or early capitalist societies a system of barter operated between commodities. One commodity was exchanged for another commodity of the same worth. Of course, in many instances, the seller defrauded the buyer, but the general rule was one of exchange of equivalents. The problem with barter is that there has to be a "double coincidence" of wants.

"Double Coincidence of Wants" means that, in order for a barter exchange to take place, the buyer of the commodity has to have a commodity that the seller wants.

The process of barter is as follows:

C1 – C2

The owner of commodity 1 has to want commodity 2 and the owner of commodity 2 has to want commodity 1. The worth of each commodity also has to be equal.

In order to overcome the problems of barter, a "universal equivalent" commodity or money-commodity was developed. This is a commodity, which can be exchanged for any commodity. The process of exchange, mediated by money, is denoted by the following:

C – M – C

That is, the owner of a commodity brings his commodity to the market and sells it for money (C – M). In his hands the seller of the commodity looks at his commodity as a means to obtain exchange value or money. Once he has money—"the universal equivalent"—in his hands, he can buy any commodity he wishes (M – C). He is not relying on the coincidence that the person who bought his commodity just happens to have a commodity that he himself wants and is also willing to sell it.

To quote from modern economic textbooks, money must satisfy the following conditions:

1. A medium of exchange
2. Unit of Account (i.e. denotes the price of other commodities)
3. Store of value

Marx thought that Nomadic peoples were the first to develop the money-commodity. The money-commodity they used was their "chief element of indigenous alienable wealth": cattle. However, a money-commodity such as cattle very imperfectly satisfies the conditions of "unit of account" and "store of value". In general pre capitalist societies exchanged goods between communities, rather than within communities, so cattle—despite its disadvantages—was appropriate for Nomadic societies.

Numerous commodities have been used as money but, as commodity exchange became more widespread both within and between communities, precious metals began to be used as money. The advantage of precious metals is that each sample possesses a uniform quality and is capable of precise quantitative differentiation. They are also less prone to depreciation with the passage of time. Therefore precious metals are much more satisfactory as a unit of account and store of value than other commodities which have been used as money, such as cattle.
When precious metals were originally used, the value of commodities was denoted by the weight in Gold or Silver, but gradually the money names of metal weights separated from their original weights because:

1. Introduction of foreign money among less developed peoples (e.g. in Ancient Rome names of foreign coins were different from indigenous weights).
2. More precious metals drive out less precious metals as money form, but retain the weight names of old metals.
3. Centuries of debasement of metals by Kings.

For example the money name of the "pound" originally denoted the weight of a pound of silver. This money name of the pound continued even after gold became the money-commodity. The money name of a pound in Marx’s time actually represented 1/15th of the weight of a pound of Gold. Gradually money became a thing in itself, which had lost all connection with its origins as a commodity.

As commodity circulation in societies developed, tokens of value such as paper money replaced precious metals in the day to day exchange of commodities. Such money represented a value far greater than its own intrinsic value, which was nominal.

The development of money away from its origins as a commodity, albeit a commodity which served as a "universal equivalent", facilitated the development of commodity circulation. However, it also mystified the value of commodities. People began to think of money itself as the thing that determined the value of commodities.

Marx insisted that it was not money that makes commodities commensurable, but the fact that all commodities as values are "objectified human labour". Money is the "form of appearance of the measure of value, which is immanent in commodities namely: labour time".

Profits And Surplus value

Many "bourgeois economists" in Marx’s time, such as David Ricardo, accepted that labour determined the value of commodities, but this idea is not something that a modern student of economics would be familiar with. In most modern economics textbooks the question of value is not even discussed. The criticism that economists know the price of everything, but the value of nothing is more true than is generally realised.

As far as modern economists are concerned the price of a commodity is arrived at by the intersection of supply and demand. This might describe the world but it does not explain it.

I once heard the famous linguist and political philosopher, Noam Chomsky, describe all modern social science as being pseudo-science. It describes the inputs that go into the box or process and then describes the outputs, but it make no attempt to understand what is going on within the process.
In order for Marx to explain how profits are generated he had to analyse the process of production. Although Marx’s view that labour determined value was not an original idea, his theory of surplus value remains a startling insight into the laws of motion of the capitalist system.

As indicated above the process for the exchange of commodities is:

C – M – C
(Commodity - Money - Commodity)

The owner of a commodity exchanges his commodity for money and then uses the money to buy commodities to satisfy his own needs. The commodity, which the owner wishes to sell has no use value for himself, it has merely exchange value. He hopes that there are prospective buyers who would value his commodity as a use value and thereby part with their money in order to consume that commodity.

Even in relatively underdeveloped societies of small-scale production, it would be normal for the producer of commodities to produce a lot of one commodity and exchange this commodity for small quantities of a variety of different commodities. So, a cobbler could produce say twenty pairs of shoes and exchange them for a loaf of bread, a litre of milk, a pound of meat etc.

Societies found from experience that there are productive benefits from specialisation and the division of labour. Nevertheless, the process of C – M – C still holds true. The money representing, say, 1/20th of a pair of shoes will enable the cobbler to buy a pound of butter to help feed his family.

Although from time to time the cobbler might be able to sell his shoes at greater or less than their real value, such transactions are deviations from the norm. In general the process of C – M – C represents an exchange of commodities of equal value, which is mediated by money.

The process also reflects the mentality of the seller of commodities. He (the cobbler in our example) is producing his commodities in order to enable him to buy other commodities, which satisfy his own needs and the needs of his family. However, Marx noticed that there was a class of people in society whose behaviour could not be explained by the process C – M – C.

This class bought in order to sell. Its objective seemed to be to accumulate exchange value rather than to satisfy its own needs. Its behaviour could be more accurately described as:

M – C – M

It bought commodities with money in order to sell them again. At first glance such behaviour seemed to reflect the behaviour of a miser, but it was noticed that there was method in the madness of this capitalist class. It seemed to sell its commodities at more than it bought them for. The process looked more like the following (± means 'extra'):

M – C – (M + M±)

With money it bought commodities and sold these for an amount that was greater than it had bought them for. M± represented the profit that the capitalist made (apart from his outlay).

But how could it achieve this? The system was based on the exchange of equivalents. The owners of commodities went into the market place as equals and exchanged commodities at their values.

Most modern economists would not consider the origin of profits worth discussing, since profits are the "natural order of things" and are beyond discussion, but economists in Marx’s time recognised that there was a theoretical problem.

Some believed that profits were generated during the circulation of commodities. But in many cases one set of capitalists sold commodities to another set. If one set was defrauding the other, how could the capitalist class as a whole generate profits?

Other nineteenth century economists believed that the workers worked a portion of their time for the capitalist class for nothing. But the problem with this is it doesn’t explain why a free worker as distinct from a serf or a slave would voluntarily work for nothing in order to enrich the capitalist class.

Marx’s solution to the conundrum was as follows.

Under capitalism two classes face each other. One class owns and controls the means of production. This is the capitalist class or the bourgeoisie. The other class does not own any means of production. Therefore it is unable to produce commodities, which it can sell in the market place. This class, which Marx called the Proletariat, has only one commodity to sell: its own labour power.

The worker of his own free will enters the market place and alienates his own labour power, which is consumed by the capitalist in the production process.

It is important to emphasise that the worker is not selling the products of his labour because he has not the means to produce products or commodities. He is selling his "labour power" or his capacity to produce products.

The value of "labour power" (as distinct from the value of the products of labour) is equal to the value of the means of subsistence necessary for the maintenance of its owner.

Marx’s definition of the "means of subsistence" is quite flexible. For instance it recognises that the value of labour power contains a historical and moral element. The seller of his labour power must receive a price, which would enable him to perpetuate himself and his children. Training costs for skilled labour also increase the value of labour power.

The worker does not renounce his ownership rights over his labour power, otherwise he would be a slave. He merely sells his labour power for a period of time to the capitalist.

In most respects labour power is no different from any other commodity. It is an exchange value for the worker, the seller of the commodity. When it is sold to the capitalist it becomes a "use value". The use value of labour power for the capitalist consists of the exercising of that power in the production process in order to create commodities.

In this last respect the commodity "labour power" is unique. It is the only commodity, which has the capacity to create value.

Once the capitalist has bought the labour power for an agreed period of time, he has the right to use that labour power in the production of commodities. The greater the value of the commodities the worker produces on behalf of the capitalist, the greater is the benefit to the capitalist.

Because the value of labour power merely represents the capacity of the worker to produce commodities, there is no reason why this value should equal the value of the commodities actually produced. Indeed, if the worker only produced commodities equal to the value of his labour power, the capitalist would not be interested in buying this commodity. The value of the inputs would be equal to the value of the outputs and there would be no point in the capitalist financing the production process.

But, fortunately for the capitalist, the worker is not constrained from producing only the value of his labour power. He can produce value over and above this value. The proportion of value that is created over and above the value of labour power is called "Surplus Value" and this is the source of all profits.

The following example illustrates how surplus value is generated. A coal miner works an eight hour day and is paid €100 a day. In the course of the day he is producing a commodity (coal) which has a value by virtue of the work that he is expending in the coal mine. If, after four hours of work, he extracts coal to the value of €100 he has produced an amount of coal with a value equal to the value of his labour power or his wage. The value of €100 is equal to the value of his labour power, the value which will enable him to reproduce himself in good condition on subsequent days.

But, just because he has produced commodities equal to his means of subsistence in four hours, that is no reason why the owner of the coal mine should let him go home. After all he has made a contract with the worker to use his labour power for eight hours. Therefore the value of the commodities produced in the last four hours of the coal miner’s working day represents surplus value, value over and above the value of his labour power. It is value, which the capitalist expropriates from the worker by virtue of the fact that he owns the means of production and therefore owns the commodities resulting from the production process.

In this way Marx has explained the origins of profits without having to violate the laws of the capitalist system. Profits can be generated even in a system which is based on the exchange of commodities of equal value. The origin of profits does not take place within the circulation sphere, but within the production process. Strictly speaking the process should not be described as:

M – C – (M + M±)

A more correct description would be:

M – {C – (C + C±)} – (M + M±)
(Production)

Surplus value is generated within the production process ( C – (C + C±) ). The value of commodities produced (C + C±) exceeds the value of the commodities bought ( C ). This enables the capitalist to sell his commodities at a price, which is greater than the sum of their parts. The surplus product or C± has a money value of M±.

Marx’s theory of value and surplus value has come in for much criticism over the years. The most popular criticism in recent times has been that workers are paid above a subsistence wage. Indeed this criticism has been directed at Socialism in general by people who have never read Marx. "We are all middle class now" say the Blairite leaders of the Labour movement. What an appalling thought!

Whatever about the claim that we are all middle class, there is some merit to the argument that workers are paid in excess of a subsistence wage. Ordinary workers do have access to a bewildering variety of commodities, most of which are not essential to their existence. But Marx did say that the "means of subsistence" had an "historical and moral" element. Therefore you could say that, even though workers in the nineteenth century could survive quite happily without, say, television, that this commodity is essential for cultural reasons to a worker in the 21st century.

Nevertheless, I would be prepared to concede that workers are paid wages above a subsistence level. But I would also make the following points.

Firstly, the fact that many workers may have a standard of living above a subsistence level is not because of the system itself. Many of the gains have been achieved by collective political intervention in the form of the labour movement. For Labour Leaders to deny that there are classes any more is to invite an erosion of those gains and to disable a defence of them against capitalist interests. There is no safeguard within the system itself that would prevent a reversion towards a subsistence standard of living for the mass of people.

Secondly, let us not be too complacent. For example, the USA has had spectacular growth in its GNP in the last thirty years and yet the real value of wages has dropped since the early 1970s.

Thirdly, it is an interesting question as to how the standard of living of the working class in Europe and America is dependent on cheap commodities as well as profits with their source in the "Developing World". The extent to which our standard of living is dependent on surplus value from the Third World is not something, which the cheerleaders for capitalism wish to dwell on.

Finally, the theory of surplus value is not dependent on the question of whether the price paid for labour power is equal to the means of subsistence or not. For surplus value to exist, all that it is necessary to show is that the price paid for labour power is less than the value created by the use of that labour.

In my view Marx’s theory of surplus value is still a valid explanation for the source of profits in the capitalist system despite the gains, whether real or imagined, which have been made by the working class over the last 100 years of so.

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