The Labor Theory of Value and Surplus Value
The key to understanding the nature of the capitalist economy, according to Marx, lies in understanding the nature of the commodity.
Part I: The Basics of the Labor Theory of Value
The key to understanding the nature of the capitalist economy, according to Marx, lies in understanding the nature of the commodity. A commodity is something that is useful and that is produced in order to be exchanged for a different kind of commodity. Parents who make bread to feed their family are not producing commodities. Bakers who produce bread to sell on the market are producing commodities.
As Marx pointed out in Capital, commodities have not existed in all human societies. They were virtually absent in very early communal societies where members would share their wealth with one another or redistribute it by giving gifts to one another. They would not produce things in order to exchange them with other members of their community. An elder of a tribe might teach a youth how to fish but expect nothing in return. As societies became more complex, commodities became more prevalent. Capitalism is unique in that commodities entirely dominate the economy. Everything seems to have its price. People who are professional teachers expect to be paid and will refuse to teach without compensation.
Once the economy is overtaken by commodities, things that people never imagined could become commodities finally succumbed. Marx offered this description:
“Finally, there came a time when everything that men had considered as inalienable became an object of exchange, of traffic and could be alienated. This is the time when the very things which till then had been communicated, but never exchanged; given, but never sold; acquired, but never bought – virtue, love, conviction, knowledge, conscience, etc. – when everything, in short, passed into commerce. It is the time of general corruption, of universal venality, or, to speak in terms of political economy, the time when everything, moral or physical, having become a marketable value, is brought to the market to be assessed at its truest value.” [The Poverty of Philosophy]
A commodity is defined as having both a use value (it must be useful to someone other than its owner) and an exchange value (someone else must be willing to give up something they possess in exchange for it). An article without any use value does not qualify as a commodity because no one will be willing to exchange something for it. The commodity’s exchange value amounts to how many commodities of a different type a person can get in exchange for this commodity. If a jacket can be exchanged for five loaves of bread, the exchange value of the jacket amounts to those five loaves. If the jacket could also be exchanged for one table, then the exchange value of the jacket is also one table. And so on.
The use value of a commodity and its exchange value are distinct. The use value of a commodity is something subjective; one person might find a commodity far more useful than another person. But the exchange value of a commodity has an aura of objectivity. Four bicycles might be exchanged for one sofa, regardless of how much use the two people engaged in the exchange find in these commodities.
The question then arises: what is the determining factor underlying the quantity in which the commodities are exchanged? Why do four bicycles equal one sofa? This question takes us to the heart of the labor theory of value. Sofas and bicycles must have something in common in order to be placed in this equation. There is little in common with the physical qualities of bicycles and sofas. It is true that both have specific weights, but the weight of an object does not determine its exchange value. If it did, diamonds would be cheaper than a bale of hay!
But all commodities are the products of labor and have that property in common. Even though a specific kind of labor might be involved in the production of a specific kind of commodity, still all commodities embody an expenditure of human energy and have this abstract labor in common. An object of use has a definite amount of exchange value because a specific amount of labor is required to produce it. If producing a sofa requires four times the amount of labor required to produce a bicycle, then the sofa, all other things being equal, will exchange for four bicycles. “Labor” as a quantity here does not mean the actual amount of time it took to produce something, because that would imply that one could increase the amount of labor embodied in the product just by slowing down the labor process, and in this way make it more valuable. Instead, it is a matter of socially necessary labor time at a particular stage in history. If someone takes four hours to produce something that, on average in a given time and social context, only requires two hours of labor, the article is still only worth the equivalent of two hours of labor.
The amount of socially necessary labor time required to produce an article is historically relative. For example, when power-looms were introduced into the process of weaving, the amount of time required to produce a specific amount of cloth was roughly cut in half. Today, thanks to computers we can compute the answer to a complex mathematical question in a matter of seconds whereas previously it took hours.
The “exchange value” of a commodity refers to how many other commodities it can be exchanged for. As mentioned earlier, a chair might be exchanged for ten loaves of bread, three jackets, two stools, etc., and the number of each of these commodities represents the chair’s exchange value. The capital-v “Value” of the chair is the socially necessary amount of labor time required to produce it, which is measured in minutes, hours and days. Value, or labor time, is the determining factor of a commodity’s exchange value. If one article requires twice the amount of labor time to produce as a second article, then the first article will exchange for two of the second article so that the amount of labor time is equal on both sides of the exchange.
In order to facilitate the exchange of commodities, humans created a special commodity: money. The value of a piece of gold is established on the same basis as any other commodity: the amount of socially necessary labor time required to produce it. Because of the substantial amount of labor time necessary to mine and refine gold and silver and because metals are easily divisible into small units, precious metals such as these were ideally suited to serve as money. They were particularly useful when one person wanted to buy a commodity from a second person but did not possess any commodities that the second person wanted. Money allows a person to sell a commodity to one person and use the gold acquired in the transaction to buy a commodity from a third person. The amount of gold that a commodity commands on the market, then, is referred to as its “price.” Eventually, in order to facilitate an even greater circulation of commodities, paper currencies were introduced. A particular type of paper money was stipulated as representing a specific amount of gold.
Only labor creates Value. Machines and tools do not create it, even though they allow the worker to become more productive. However,the machine’s value is transferred to the commodity it helps produce. For example, suppose a commodity such as linen is created over the course of eight hours with the help of an instrument or tool. And suppose the cotton that serves as the raw material for the production process embodies four hours of labor time. And further suppose that at the end of the day the tool has been completely used up and must be replaced the next day. Finally, suppose two hours of labor were required to produce the tool. Since the tool is a necessary component of the labor process, the labor required to produce it must be factored in as part of the labor time required to produce the linen. Consequently, the total labor time embodied in the linen is equal to the four hours required to produce the raw materials or cotton, eight hours that were expended during the workday to produce it, plus the two additional hours required to produce the instrument. The total Value of the commodity is fourteen hours of labor time.
This same principle applies if the type of implement used in the labor process is a machine instead of a tool. Suppose at the beginning of the day the raw materials that are to be transformed into a final product embody 60 minutes of labor. And suppose by running a machine a worker could produce sixty commodities in a ten-hour day. Further suppose the machine wears down and must be completely replaced after one hundred days. Finally, suppose the machine itself required one hundred hours of labor time to produce. Without taking into consideration the value transferred from the machine, each commodity would contain 10 minutes of labor time performed by the worker plus an additional one minute of time contributed by the raw materials. According to our stipulations, the machine would lose one hour of its value in each ten-hour workday. That means each of the sixty commodities produced in the course of the day would contain an additional minute of labor time contributed by the machine. Each commodity would then have a total value of twelve minutes of labor time.
There is an initial simplicity to the labor theory of value because of its apparent logic. Articles containing equal amounts of labor time are exchanged for each other. But there are wild, often unpredictable forces that underlie this process of exchange. If many members in a community unexpectedly decided to produce chairs, there might be many more chairs on the market in relation to demand than previously existed. In this situation, supply has risen while demand has remained the same, and the people who produced chairs are forced to compete with one another for buyers. In such a situation they might be forced to lower the price of the chair below its Value in order to sell it. Or conversely, if people producing chairs decided to move into another field of production so that there are far fewer chairs in relation to demand, then buyers would be forced to compete with one another to get a chair. Here the people who produce chairs could raise their prices above the chair’s Value and still be assured of a sale.
When the price of chairs rises above their Value, then other members of the community are tempted to move into the chair business in order to take advantage of the windfall. Then, when too many people begin to produce chairs, the supply of chairs exceeds demand, and once again its price falls.
Supply and demand, consequently, are the unpredictable variables that enforce the relation of socially necessary labor time in the exchange of commodities. When there is overproduction, the exchange value or price of a particular commodity falls; when there is underproduction, the exchange value or price rises (assuming demand has remained constant in both cases). Over extended periods of time and in the midst of these wild fluctuations, however, the average price of a commodity corresponds to the socially necessary labor time required to produce it, or its Value.
Capitalism, then, exhibits certain inherent characteristics. Individuals are in constant competition with one another where each strives to get the best deal for themselves. People are forced, above all, to look after their own welfare. As the philosopher Thomas Hobbes, an early witness to capitalism, noted, it is a “war of all against all.” Instead of sitting down and calculating the needs of society as a whole and then tailoring production to meet these needs, which would put conscious human reason in control, capitalism relies on the blind forces of supply and demand to forge some kind of crude correlation between production and people’s needs. When overproduction of a particular commodity occurs, people are thrown out of work and must seek employment in another line of business. They might have to leave their community and loved ones behind and travel far distances before finding work again. When underproduction occurs, consumers cannot access the various things that they need, or must pay a highly inflated price for them. Capitalism exhibits this wild disjointedness as it lurches in one direction and then another to make wrenching corrections. This is its normal mode of operation. The rare exception exists when production exactly corresponds to demand.
As Marx noted:
“But it is precisely these fluctuations which, viewed more closely, carry the most frightful devastation in their train, and, like an earthquake, cause bourgeois society to shake to its very foundations – it is precisely these fluctuations that force the price to conform to the cost of production [i.e., socially necessary labor time]. In the totality of this disorderly movement is to be found its order. In the total course of this industrial anarchy, in this circular movement, competition balances, as it were, the one extravagance by the other.” [Wage Labor and Capital]
The picture of life under capitalism gets even bleaker when the analysis of a special commodity is taken into consideration: labor power.
Part II: Marx’s Analysis of Labor Power and the Exploitation Inherent to Capitalism
Under capitalism with its emphasis on “freedom” and “individuality,” people are considered to be the owners of themselves, including, their capacity or potential to work and create things. Like almost everything else in capitalist society, this capacity also becomes a commodity, but one that is sold only for a specific amount of time. If it were permanently sold, the worker would become a slave and lose all freedom. Marx called it labor power and pointed out it can be bought and sold on the market like any other commodity. He was the first political economist to identify labor power as a commodity and demonstrate how it allows us to understand the origin of surplus value, which Marx argued is the basis of all profit. This means that the concept of labor power enables us to understand why capitalism is inherently exploitative.
The question arises: what determines the Value of this labor power? Why do some workers get paid more for their labor power at the end of a day’s work than other workers? The answer can be found in the same way that Value is determined for any other commodity: it is determined by the socially necessary labor time required to produce it.
In order to be able to get up and have the energy to work, people must have certain needs fulfilled: they must sleep, they need food and water, and they need clothes and shelter to protect themselves from the elements so that they can maintain their health. With these most basic needs satisfied, people can generally perform at least menial labor. All these needs imply that a certain amount of labor must be expended in order for people to be in a position to work. The labor time required to fulfill all these basic needs each day constitutes the Value of the worker’s labor power for that day. Some needs, such as the procurement of food and liquid, must be satisfied as a rule every day. Other needs, such as rent for housing, might only be paid once a month. In order to calculate the value of the labor power for one year, one would take the Value of the food and liquid consumed each day and multiply it by 365, then add the Value of the month’s rent and multiply that by twelve, and finally add the Value of the clothes, assuming they last one year. To calculate the value of the labor power for one day, the yearly value would be divided by 365.
For example, suppose in a particular society one hour of labor time is contained in a unit of gold. And suppose this unit of gold has been arbitrarily correlated with $1 of paper money. Further suppose the food and liquid consumed by the worker each day embody three hours of labor time. These three hours would then be represented by $3. Moreover, suppose the yearly rent and expenditure on clothes, when divided by 365, amounts to $1 for the rent and $1 for the clothes. Then this worker’s labor power, all other things being equal, would have a Value of five hours of socially necessary labor time per day, which would be correlated with $5. If supply and demand were exactly equal, then when workers sell their labor power to the capitalist, they could expect to receive $5 for one day of work.
Eventually workers get old and can no longer work. If the worker were paid just enough to survive as an individual but not enough to have a family, then within the period of a generation or two the capitalist class would be out of a workforce. Consequently, the wages paid to the worker must also include the reproduction of the workforce and therefore include enough compensation for the worker to have children and support a family.
However, some jobs are quite sophisticated and require special training. Hence, the labor power to do the job requires additional labor time to produce over and above securing the bare necessities for survival. Someone must teach the worker a particular skill. Accordingly, the amount of time required to train the worker would increase the value of this worker’s labor power. For this reason the wages (the price or exchange value of the labor power) of skilled workers, all other things being equal, are higher than the wages of unskilled workers. Today young people are prepared to go into debt to receive additional education to raise the Value of their labor power.
Thus far we have seen that commodities, on the average, are exchanged with one another on the basis of equivalents of labor time. If one commodity embodies five hours of labor time, then, on average, it will be exchanged for another commodity embodying five hours of labor time. And this law is also true of labor power. When the worker approaches the capitalist with the intent of selling his or her labor power for a limited time, and if supply equals demand, then the wage paid to the worker corresponds to the Value of their labor power. When supply and demand are fluctuating, the wage paid for the labor power will sometimes rise above its Value and sometimes sink below, but on average over an extended period, equivalents are exchanged for equivalents and workers are paid according to the Value of their labor power.
The question then rises, what is the source of surplus value or what we normally think of as profit if everyone exchanges commodities on the basis of equality? The answer lies in the unique nature of labor power.
Like all commodities, labor power has a use value in addition to its exchange value. Once workers sell their labor power to the capitalists for a period of time, the capitalist proceeds to use this commodity. And the use value of labor power consists of the worker actually performing work, which means that the worker begins to create value for the capitalist. Labor power, alone, is the source of all value.
Suppose once again we have a situation in which $1 has arbitrarily been correlated with one hour of labor time, and for simplicity’s sake suppose supply and demand are exactly equal. We will use our previous example and assume the Value of a worker’s labor power for one day is five hours of labor time or exactly $5. Moreover, suppose the capitalist provides the worker with an amount of raw materials that altogether embody ten hours of labor time that are entirely consumed by the end of the day. Furthermore, suppose the instruments of labor lose one hour of labor time each day, which must then be included in the labor required to make the product. Finally, suppose that the working day is eight hours.
In order for the workday to begin, the capitalist must somewhere have acquired money in advance to pay for the raw materials, the instruments, and the labor power of the worker. In this example, this initial outlay amounted to $10 for the raw materials, $1 for the instrument, and $5 for the labor power for a total of $16.
But the Value of the finished product in this example is a different matter. Ten hours of labor are embodied in the raw materials and must be included in the labor time of the final product. Also, the use of the instrument adds another hour of Value each day. Finally, the eight hours of work performed by the worker must be included as well. The Value of the final product, then, amounts to nineteen hours of labor time, which would then be correlated with the price of $19. The capitalist ends the day with $3 surplus value or profit.
If the capitalist demanded that the workday be extended to ten hours and the worker felt compelled to submit, then the final product would be worth $21, meaning the surplus value would amount to $5.
The capitalist exploits workers because the wage given to the workers represents only the Value of the workers’ labor power. However, the workers are then required to work beyond the time represented by this Value. If the wages for the labor power equal $5 and each hour of work is represented by $1, then every hour of work after 5 hours represents surplus value for the employer.
Capitalism is a competitive system. Capitalists in the same line of business compete against one another for workers and customers. Workers compete against one another for jobs. And consumers compete against one another for articles of consumption. If two capitalists are producing cars and if the quality and price of the cars are roughly equal, then, all other things being the same, customers will patronize each business with the same frequency. But if one capitalist is particularly cunning and competitive and manages to force the workers to work an additional two hours every day without additional pay, and passes this savings on to the consumer, then this capitalist can undersell the competition, lure customers away, and eventually put the competition out of business. Every capitalist must maximize their competitive edge or they risk being pushed out of business.
For this reason, there is constant pressure on the capitalist to keep wages to a minimum and increase the rate of exploitation of the workforce. If they think they can get away with it, some capitalists even cheat workers out of the wage that was agreed upon. These underlying economic forces mean there are permanent, antagonistic interests between workers and capitalists: Workers want enough material wealth to live a comfortable, long life. Conversely, capitalists want to maximize their profits by keeping wages down and the working day long in order to prevail over their competitors.
At times in history there are exceptional periods when competition is minimal. In the aftermath of World War II, for example, the infrastructures of Europe and Japan were decimated so that the U.S. capitalist class had little competition. Consequently, they could raise the wages of workers without jeopardizing their competitive edge. But as time progressed, Europe and Japan recovered, China developed its infrastructure, and by the 1980s they represented a formidable threat. All these factors contributed to the rising globalization of the world economy. Since then, wages in the U.S. have stalled or declined. Lack of competition is the exception, not the rule.
There are some important implications of Marx’s analysis for social relations among members of capitalist societies. For example, what he has described implies that capitalism, despite its emphasis on “freedom” and “individuality,” divides individuals into two separate classes with entirely different interests, experiences, and even different cultures. Because of this it becomes increasingly difficult or unlikely that an individual would be able to leave their class.
Under capitalism, workers are paid for the value of their labor power, meaning the amount of labor required to produce those articles the worker needs each day in order to survive and be able to perform work. That means each day the workers entirely spend their wages on these articles, so they are forced to return to work the next day and repeat the process. After they have consumed the means of survival, they have nothing left at the end of the day. Because they are paid only for the Value of their labor power, they are forced to return again and again. Their “freedom” consists in being able to quit a particular employer, but they can’t quit the capitalist class because they need to work to survive.
The capitalist class is in a different position. In the first example above where the workday was eight hours, the capitalist finished the day with $3 profit from an original outlay of $16. After six additional days, the capitalist will have accumulated $18 in profit and is then in a position to acquire additional raw materials, an instrument and a new worker. Now the capitalist can reap $6 of surplus value or profit each day, and in the same way continue to expand. Because capitalists produce for profit, there is a tendency for them to become progressively wealthier. The inequalities in wealth gradually expand between the working class and the capitalist class so that the position of the capitalists becomes more deeply entrenched with each new day, and workers become increasingly stuck in the working class.
Capitalism could not have come into existence if, at its outset, everyone confronted everyone else with equal amounts of wealth. It was necessary that before capitalism could get underway some people must have owned the instruments of production and had the ability to secure raw materials and labor power while others were entirely lacking in these resources and were compelled to seek work from those who had them. History made sure that these conditions existed.
Capitalists, according to Marx, like to explain their original advantage by reference to their natural superiority: “Its origin is supposed to be explained when it is told as an anecdote of the past. In times long gone by there were two sorts of people; one, the diligent, intelligent, and, above all, frugal elite; the other, lazy rascals, spending their substance, and more, in riotous living.”
In actual fact, the capitalists’ advantage was derived from an entirely different source: “The expropriation of the agricultural producer, of the peasant, from the soil, is the basis of the whole process. The history of this expropriation, in different countries, assumes different aspects, and runs through its various phases in different orders of succession, and at different periods.” But he added, “In actual history it is notorious that conquest, enslavement, robbery, murder, briefly force, play the great part.”
The theory outlined by Marx in Capital has been criticized as not economically accurate. But Marx never intended to write an economic treatise. Capital is rather a description of the social relations that are engendered by capitalism: the everyone-for-themselves mentality, the routine practice of capitalists exploiting working people to enrich themselves, the separation of people into classes with conflicting interests, and the lack of freedom of people stuck in these classes where one’s destiny is to a large degree determined by birth.
Marx describes an irrational system where no one is in control but where we are all the victims of unpredictable economic crises and where the working class always gets the short end of the stick. During the Great Recession, millions of working people lost their jobs and their homes through no fault of their own while the bankers, who caused the crisis, were given lavish bailouts.
Instead of allowing ourselves to be ruled by the market, Marx envisioned a socialist society in which people come together and through a democratic decision-making process rationally plan their economy. It would be a society in which people realize that their own well-being is dependent on the well-being of the entire community, so that, “In place of the old bourgeois society, with its classes and class antagonisms, we shall have an association, in which the free development of each is the condition for the free development of all.” [The Manifesto of the Communist Party]
As capitalism grows, so does the working class. Capitalists bring workers together in close association where workers can communicate easily with one another and discover how many complaints they have in common. It is simply a matter of time for the working class to organize itself on a widespread basis and decide the time has come to abolish a system that does not operate in the interests of the vast majority and is producing an environmental crisis for the planet. “What the bourgeoisie therefore produces, above all, are its own grave-diggers. Its fall and the victory of the proletariat are equally inevitable.” [The Manifesto of the Communist Party]