We live in a world where historically undreamt-of wealth exists, where technology has been developed in a way that was only envisaged in science fiction, where enough food, shelter and the basics of life could be generated to satisfy the needs of every person on the planet.
Yet in this capitalist world, a great many people suffer hunger, malnutrition and preventable disease, and can’t get clean water or decent housing. Even in the richest countries, millions live in poverty and insecurity. It is also a world where the methods of capitalist production are unnecessarily destructive to the environment.
Despite the aspirations of capitalist governments and hundreds of years of study by pro-capitalist economists, it is crystal clear that they have no control over the economy and its repeated economic crises. Crisis is built into the DNA of capitalism.
In his March 2007 budget speech, Gordon Brown, then New Labour chancellor of the exchequer in Britain, and later prime minister, repeated his phrase “we will never return to the old boom and bust” only months before an economic crisis that engulfed Britain and the world.
Marxism analyses the processes that exist under capitalism and seeks to explain those crises. Not as an academic exercise, but to show the necessity of an alternative to capitalism, of socialism. The study of ‘political economy’ not only looks at economic processes, but also their link to social conditions, class struggle, and politics.
Before looking at the wider processes of capitalism, we need to start by looking at some basic concepts.
Commodities and value
Capitalism’s driving motive is to create capital, by making a profit. Each company is concerned with its own profits. To make that profit it creates ‘commodities’ – goods or services produced for sale only. These each has a ‘use value’, in other words, they are useful to those who buy them because of their physical properties. This is different to ‘exchange value’, in the Marxist sense. The capitalists are interested in what they can sell things for – exchanging the commodities they produce for money, making a profit and accumulating capital. Driven by that motive, they developed the mass production of goods, with economies of scale through concentrating many workers in one factory, and greater efficiency due to the development of machinery and through division of labour in the workforce.
Rather than making a whole product from start to finish, workers are often reduced to small repetitive tasks on a part of a future product – parts which in a global market can be made in different countries.
It is human labour ‘by hand or by brain’ that the creation of all commodities has in common. All natural resources must be worked on to realise their value. Minerals must be dug up and extracted from rock; wood has to be felled from trees. At each stage of production, from mining to smelting, milling or refining, manufacture and distribution, more labour is added, and more value is therefore added to each commodity.
But what gives each commodity its distinct value? Karl Marx explained that one commodity’s value in relation to another can be boiled down to the average units of labour contained in each.
All commodities take a particular time to make. How much labour time goes into each is dependent on the level of technique in society – methods of production, machinery etc. Obviously, if one person takes longer to make an identical object to someone else it does not give it more value! Rather, the value of it is dependent on a general level of the amount of time taken across the economy.
The key, therefore, is ‘socially necessary labour time’. If in one company the work is done less efficiently, for whatever reason, then the firm becomes uncompetitive and in the longer term can go out of business.
If technology results in greater productivity, more commodities can be produced in the same amount of time. Potentially a greater amount of wealth is created. But at the same time, the value of each individual commodity would fall as the socially necessary labour time in each unit reduces.
Labour power, surplus value and capital
When a worker is employed, they sell their ability to work to the boss, their ‘labour power’. The boss buys it for a specified period of time. But what the worker gets paid for that labour power, ie their wage is not determined by how much value they create for a commodity or service from their labour. When a worker gets paid an hourly rate, it gives the false impression that they are paid for all the work they do during each hour and for all the value that is created by it. In fact, they aren’t!
The new value created by workers through their labour is above what they get paid. Expressed in terms of the working day, in effect they work some of the time to pay their own wage, and some of the time for the boss’s profits and non-wage costs. In some industries, each worker may be working way below half their working hours to cover their wages.
So, profit comes from the unpaid labour of the working class, as Marx explained. Jeff Bezos’ billions have been made because of the low pay of his Amazon workers who distribute commodities and from the workers who make them.
The extra labour above the labour which pays the workers’ wages is ‘surplus value’. That in turn is subdivided into the business owner’s overheads, including rent on premises which goes to the landlord, and interest to the banker who loaned the money for the owner’s investment, with the remainder being profit.
Capitalism was not the first society divided into classes. Under feudalism and the slave-based societies before it, the ruling classes owned the means of production then too – ie the means of producing goods, whether based on slave labour or the ownership of land farmed by serfs. The exploitative relationship was clear between the owners and those that did the work. Slaves were forced to work for only their subsistence. Serfs worked part of their time to provide agricultural products for themselves and part for the landowner.
Under capitalism, the exploitation of workers can appear to be less obvious, as capitalist ideology portrays them as free individuals who can sell their labour as they wish – in that way attempting to hide the exploitative nature of it.
Despite capitalist propaganda that it is ‘entrepreneurs’ who create wealth, in fact, it is created by workers. The bosses argue that they bring together the capital, ie money, buildings, machinery and inputs like raw materials and components. This Marx called ‘constant capital’.
All those inputs represent wealth that has previously been created by other workers. They can be viewed as crystallised labour from previous processes and do not create new value in the product being created, but rather a transfer of value that had already been created. In that sense, it is ‘dead labour’. In the case of long-term investments like machinery, a very small amount of its value is transferred to each commodity made, equivalent to the wear-out of that machinery while making it.
It is the labour of workers applied to those inputs, called ‘variable capital’ by Marx, which creates new wealth. Although the new finished commodity incorporates the past values that have gone into its production, it is from that new value added by labour that bosses can accumulate capital.
The capitalist economy is of course not just about manufacturing; services are also bought and sold. Anything that goes on in society that makes a profit for the capitalist is seen by them as productive. So, the work of a nurse in a public sector hospital who saves lives is viewed as ‘unproductive labour’, whereas the work of a nurse employed by a private health company is ‘productive labour’. Publicly-owned health services, welfare states, etc, were created through the pressure and struggles of working-class people. As far as the individual capitalists are concerned, state-owned public services which are not fully part of the market limit their potential to maximise profits and are ‘a drain on resources’. Even though they benefit indirectly – as without state-run hospitals and schools their workers would be sicker and less well educated.
These services, along with other state-owned parts of the capitalist state apparatus, are paid for through taxation, which comes directly or indirectly both from workers’ wages and from the bosses’ profits.
Socialists have a different view from capitalists on what is productive or unproductive. To take one example, enormous amounts of money are spent on advertising and marketing, the vast bulk of which would not be necessary for a socialist society.
Wages and rate of profit
To the bosses, labour power is also a commodity. Like any commodity, if there is a shortage in the number of workers available there can be a tendency for their price (wages) to rise, and conversely fall if there is an excess, for example in times of mass unemployment. However, as with all commodities in the capitalist economy, the socially necessary labour time to create it determines its value.
For capitalism, the lowest level of wages needs to be enough to keep workers alive and to allow the workforce to reproduce itself, i.e. raise families, so that there is a supply of workers in future. Historically, and in some parts of the world today, that is the level of wages and they can even fall below it.
But social and historical factors also play a role in determining wages. The most important of course is the history and strength of workers’ movements, in general as well as in particular sectors and workplaces.
The general level of wages is not related to the value created by workers, nor is it in a direct relationship with the price the bosses can charge for what the workers produce. The reason bosses resist putting up wages is the obvious one – the more a worker gets paid, the lower the profit for the bosses. In effect that conflict is the basis for class struggle.
Apart from cutting wages, what other ways can bosses seek to increase their profit? They can lengthen the working day – getting workers to work more hours, as unpaid overtime or with a small increase in their wages. Marx described that as increasing ‘absolute surplus value’.
Or the bosses can try to squeeze more out of workers in the time they are working by intensifying their working conditions. For example, the number of workers in a company can be reduced in order to load more work onto the backs of the remaining workers – meaning they must work faster and harder for no extra pay. Many workers have experienced that.
The bosses may also invest in new techniques or machinery that raise the productivity of labour, meaning workers can produce more in the time they are working.
These last two Marx referred to as increasing ‘relative surplus value’.
For each worker the bosses employ, they want to know the proportion of new value created that becomes surplus value compared to that which goes on wages. This is the ‘rate of surplus value’. And the ratio of the surplus value compared to all costs, including that of constant capital (raw materials, components, machinery, etc) as well as wages, is the ‘rate of profit’.
Companies that invest in the most up-to-date machinery tend to become the most successful because they are able to undercut others by reducing their labour costs until others catch up.
In a socialist society, more wealth being created in a shorter time because of new technology would enable the working week to be drastically reduced with no loss in pay, sharing out the work that is necessary. It would be a democratically planned system in the interests of the whole of society, with workers able to spend more time on their lives outside work.
Capitalism, of course, isn’t primarily interested in the long-term welfare of workers. The logic of profit is that when workers are replaced with new technology, more people are thrown out of work.
Money and prices
In early human societies, exchange was by barter – ‘I will give you my pig in return for so many sacks of wool’. Today, the much easier method is of course to use money as a token of exchange, as for any kind of developed society barter as a means of exchange is obviously impractical. Money plays the role of allowing that exchange. The money value of each commodity is its price.
At first, it was necessary for that money to have its own inherent value, to give people confidence in its worth. So, precious metals came to be used – particularly silver or gold – with their own value put into the form of bars and coins. Their value arose from the labour time used to mine and refine them.
People were therefore confident that when selling a commodity with a certain value based on the labour time used to create it, they could get money in return with the same value, which they could then use to exchange for something else they needed.
Over time the commodity that became universally used was gold. However, as economies grew and became more complex, paper money, and coins made from cheaper metals, were created by state banks. The inherent value of that money was much lower or negligible, a mere token or IOU. But governments ‘guaranteed’ its declared value.
English bank notes still have ‘I promise to pay the bearer on demand the sum of… pounds’ printed on them and signed by the Bank of England’s chief cashier. Originally this was intended to give people confidence that they could get the notes equivalent in gold from the bank if they wished. However, today the bank holds nowhere near enough gold to be able to replace with actual gold all the sterling held by people worldwide in all its forms – in banks, other financial institutions and physical currency.
The price of a commodity is ultimately determined by its value. A commodity that requires a large amount of socially necessary labour time – such as a car – would not be priced at the same level as something requiring far less labour, such as a chair.
But prices do fluctuate up and down either side of that level of value. For example, a commodity’s price would tend to fall when there is too much supply of it compared to demand. If something is in short supply compared to the demand in the market, its price would tend to go up.
However, the capitalist market means that high prices for specific commodities encourage other companies to start producing those commodities in the hope of profit. That would increase their supply and tend to reduce their price back down towards the level of their value.
Also, there would always be a limit on how much most people would pay for a chair if they were in short supply. They would find something else to sit on instead! In cases of over-supply on the other hand, there would be a limit to how low-price manufacturers would be prepared to sell their products, and still be able to continue producing. So again there would be pressures against prices ranging too far from the value of the commodities based on the labour time used to create them, whether cars, chairs or whatever.
Inflation of general levels of prices is different and is touched on below.
Flaws and contradictions
Clear to all is the regularity of capitalist crises – recessions or slumps. In the booms, overproduction of capital and consumer goods eventually occurs – over-accumulation. When there are many millions of people without the basics of life, the idea that too much is produced can seem strange. But the problem in periods of over-production (or over-capacity) is that many people who need those things cannot afford to buy them, therefore the capitalists can’t sell them and the economy enters on a path towards recession.
This is one of the fundamental contradictions of capitalism. Working-class people don’t have enough money to buy back all the goods that they have produced, because they do not receive the full value of their labour. There is also a limit to the number of super yachts and private planes that the capitalists want to own!
This contradiction can be overcome for a while if the capitalists reinvest their surplus back into production. But they are now increasingly failing to do that, not even able to carry through their historic mission to develop productive forces.
In economic downturns, as many companies cannot sell all their products, they cut back on production, get rid of workers, reduce workers’ hours and pay, and a layer goes bust. Add that up across the economy and the working class has even less to spend, so a downward spiral can occur.
In sacking workers, closing plants, and allowing machinery to go idle, capitalism effectively destroys some of the means of production, including discarding the skills of many workers, proving yet again what a chaotic and inefficient system it is.
Referring to the average cost of recessions in Britain, the Bank of England website in January 2019 stated: “Looking at various examples throughout history, one estimate places the total economic cost of a typical financial crisis at around 75% of GDP [Gross Domestic Product – total annual national income]. That’s equivalent to £21,000 for every person in the UK”. From the horse’s mouth an admission of the waste and the lack of control they have over their own system.
It only recovers when the economy has sunk down far enough for some firms to once again see the prospect of making a profit – including because some of their previous competitors no longer exist.
Today, most large companies are not each owned by a single capitalist; rather they are usually co-owned by many shareholders. It may be that smaller investors, including workers, own some shares, but the vast majority are concentrated in a few hands, overwhelmingly owned by a small number of super-rich capitalists. US Federal Reserve data in July 2022 showed that the bottom 50% of US wage earners owned just 1% of US company shares.
There can be a complex web of ownership. Productive companies can be owned by other companies, such as ‘private equity firms’, set up just to make money out of leeching from them, sometimes using ‘asset-stripping’ or simply through buying and selling companies for a profit.
Economies have become increasingly monopolised – dominated by ever smaller numbers of larger and larger companies as they force their rivals out of business or take them over. The biggest companies on a world scale have turnovers greater than many countries. In 2021 the total share value of Apple was effectively bigger than the national income of every country in the world other than the top seven! No wonder the largest companies have such power and control over capitalist governments.
When a company increases its domination of a market for goods or services, one of the consequences is that the competition it faces from other firms reduces, and therefore the dominating company comes under less pressure to innovate and invest in new technology. This is another fundamental fault-line in the capitalist system – the once relatively progressive role of competition for the system becomes less of a driving force.
However, competition won’t be eliminated under capitalism, nor will innovation, and this brings about another contradiction. When the capitalists spend increasing amounts on new machinery in comparison to the new value created by the labour of workers, the rate of profit made on each individual commodity falls. This, Marx called the ‘long run tendency for the rate of profit to fall’.
This process shouldn’t be looked at in isolation as other factors can take the rate of profit in the opposite direction. For example, a feature of the early period of so-called ‘globalisation’ was multinational companies moving their production to countries where they could increase their rate of profit by paying lower wages.
Private ownership of the means of production is at the root of the underlying fault lines in capitalism, and to that can be added the barriers of the nation-state. Most large companies have arisen in a nation-state and have their base in it. Their influence over the government in that state frequently leads to the clash of different countries economically, such as over import tariffs, and sometimes militarily. Imperialism and global conflict are driven by the desire for the most economically powerful companies to increase their profits across the world, and the organisation of rival capitalists into contending nation-states.
That in turn builds more instability into the world economy, either as a direct result of military conflict or of trade, currency or cyber wars.
Debt and speculation
Sometimes the onset of a recession has been delayed by a huge expansion of credit, in effect borrowing against future income. There has been a ballooning of personal, government and corporate debt. But when it looks like the future income may not cover the debts soon enough, or ever, eventually the bubble bursts.
There have been all sorts of bubbles and they are exacerbated by financial speculation, which has risen dramatically in recent decades.
Capitalist banking and finance institutions are meant to help capitalism develop by lending for investment. If companies do not have enough capital to start or expand production, they can borrow, and then pay it back with interest as surplus value starts to be created. Finance is meant to ‘oil the wheels of industry’.
A company needing cash for investment could also issue more shares, on a promise of paying shareholders a regular dividend from profits. The shares are issued at a certain price. In as much as this enables companies to employ workers to create new value, it can play a positive role for those firms.
Shares of corporations that trade their shares publicly are sold and resold on the stock markets. The price goes up and down based on demand, and forecasts of the company’s future. However, while increases in share prices increase the nominal value of a company on paper, they often have no relation to the real value of the company – the capital actually existing and the size and skills of the workforce, becoming in part what Marx called ‘fictitious capital’. There are many variations of this.
Today, that aspect of the world economy is like a giant casino, with the speculation on shares, currencies, etc, playing no productive role. The impact the financial world can have on the real economy was shown in the banking collapse of 2007, which began with the collapse of the ‘sub-prime’ mortgage market in the US.
Mortgages had been incorporated into ‘financial instruments’ which mixed good debt with bad debt that would never be repaid. Those second-hand debts were then bought and sold as speculation, but eventually, confidence in their future potential to be re-sold plummeted. That had an immediate worldwide impact on banks that had bought them in vast amounts. Some banks collapsed, and others only survived because of huge government bailouts. Despite those bailouts and other government measures, a huge recession was still triggered by the financial crisis.
Inflation
Other problems in a capitalist economy can include inflation – a general and continuing rise in prices. The capitalists are OK with a small amount of it, as it encourages people to spend rather than save. Also, it helps to erode real wages and reduces historic debt. However, when it gets too high it can cause great instability in the system, pushing a layer of companies into bankruptcy and sharpening the class struggle as workers are forced to take strike action to defend their living standards.
The bosses often try to blame workers, by claiming that wage rises cause inflation. But it is socially necessary labour time that determines value, and value determines the level around which the price of commodities fluctuates. There is no direct causal relationship between wage rises and price rises.
Global management consultancy firm McKinsey summed up the real situation when in 2019 it wrote: “Labour’s share of national income – that is, the amount of GDP paid out in wages, salaries, and benefits – has been declining in developed and, to a lesser extent, emerging economies since the 1980s”.
So, the rise of inflation across much of the globe in 2022 could not have been due to the level of workers’ wages, which had continued to erode in real terms in the years after McKinsey’s words. Also, it is not inflationary if workers succeed, through struggle, in forcing a reversal of that trend – ie a transfer back into workers’ hands of some of the vast wealth their bosses have been accumulating.
Rather, that rise in inflation was triggered by disruptions to the supply of goods during the Covid pandemic lockdowns and subsequently the war in Ukraine, with extreme weather events also sometimes being a factor. Outright profiteering from the disruption and shortages, and also parasitic financial speculation, played a major role in exacerbating the price rises. Speculation on future prices, where nominal future amounts of a commodity are bought on the expectation of making a profit, can rapidly increase the demand and push up prices.
Another potentially inflationary factor in capitalist economies can be when governments significantly increase the money supply by printing or electronically creating more money, without there being any corresponding increase in the total wealth in the economy. Globally, huge sums were created in this way during the 2007-08 crisis and aftermath, and to an even greater extent during the Covid pandemic, another underlying factor in the 2022 inflation spike.
The circulation of money in an economy is very complex and some of it can be stashed away out of immediate use. Nevertheless, when more money is available than previously for the same amount of goods and services, inflation can be a consequence.
A look at history shows times when governments have printed money in vast amounts to cover debt and it has resulted in hyperinflation. One such example was the interwar German government attempting to pay off the heavy burden imposed on it by war reparations as a penalty for losing the first world war.
Failure to provide solutions
Capitalist politicians and economists have spent hundreds of years trying to work out how to overcome the flaws in their system. In periods of growth, they claim their methods are working. But in times of crisis, it becomes apparent that they do not.
‘Neoliberal’ economists base their ideas on the supremacy of the ‘free market’. They advocate reducing the role of government (except when it means shackling trade unions and repressing working-class struggle!), privatisation, deregulation and cutting back on the welfare state. Really it is about eliminating any barriers to the opportunity to increase profit at any cost.
However, the banking crash of 2007 delivered a major blow to neoliberal ideology. Governments were forced – to save their system – to temporarily, and in a pro-capitalist way, nationalise some banks to stop them from collapsing and pumped money into the system on a vast scale.
The turn to neoliberalism in governments began with the rise of what was then called ‘monetarism’ in the late 1970s and 1980s, promoted by the Pinochet dictatorship in Chile and the Thatcher government in Britain. It came after they had declared the failure of Keynesianism, which had been prevalent in the post-second world war period.
The basis for Keynesianism’s apparent success was the economic upswing that occurred after 1945, against the background of the destruction caused by the war. The predominant position of the United States in the capitalist world allowed it to pump large amounts of money into rebuilding war-hit areas. Also, it was able to force down tariff barriers.
Keynesianism advocated a big role for government in managing the economy by using its own spending. Where there was a threat of recession, the idea was that governments could spend their way out of it by boosting aggregate demand in the economy.
In theory, Keynesians thought they could fine-tune the economy and find a sweet spot between preventing recessions, and before creating inflation. That illusion was shattered when in the 1970s the world upswing came to an end. Not only did the recession hit, but also there was rising inflation at the same time – known as ‘stagflation’.
One of the few methods of government intervention approved of by purist neoliberal economists is the use of state banks, like the Bank of England, to influence interest rates. The theory goes that if they are kept low, it encourages capitalists to invest by borrowing cheaply, and increases spending generally by allowing low-cost credit. That is meant to be enough to reduce the threat of recession. On the other hand, the re-emergence of inflation would require raising interest rates to choke off spending and reduce inflation.
However, the return of stagflation in the 2020s created the dilemma for them that raising interest rates to try to combat inflation would bring forward an economic downturn.
Capitalist governments are not averse to attempting to combine aspects of neoliberal and Keynesian economics as they try in vain to solve economic problems when it is viewed as necessary. However, none of their theories can explain, or prevent the built-in contradictions and crises of capitalism. Marxist theory shows its superiority over all of them.
Remove capitalism
Capitalism’s cyclical crises do huge damage, and the long-term decay of the system means that the booms are generally becoming weaker and the downturns more profound. But Marxists don’t argue that there will simply be a once and for all collapse of the system. Left to its own devices, it eventually recovers from downturns but at great cost to working and middle class people.
It will take mass revolutionary movements of the working class to overthrow capitalism and break this cycle.
Marxists are at the forefront of struggles for massive increases in public sector spending, above-inflation wage and benefits increases for workers, and other gains. But victories on those issues will never be permanent under capitalism and cannot overcome the system’s inbuilt contradictions. Neither will it be possible to stop environmental degradation while the capitalist system remains in existence.
Only transformations to socialism can take societies forwards – through the top, key companies being publicly owned and controlled, and through democratically decided economic planning. The exploitation and waste inherent in capitalism would be ended, and economies – linked by socialist cooperation internationally – could be run for the benefit of the whole of society.
