The Thought of Karl Marx

Part One

Today I launch what will undoubtedly be a many part tutorial on the thought of Karl

Marx. Since there may only be a handful of folks out there who actually want to read such a

tutorial, I will intersperse these segments on my blog with my usual commentary on the passing

scene. If anyone wishes to take this tutorial really seriously and supplement it with readings, let

me begin with a few suggestions. The most important thing, of course, is to read Marx himself.

The essential texts are The Economic-Philosophic Manuscripts of 1844, The Communist

Manifesto, and Volume One of CAPITAL. Among the early works, Part One of THE GERMAN

IDEOLOGY is also useful. Serious students will want to read all of CAPITAL -- the three

volumes, plus the so-called "fourth volume" -- the three volumes of THEORIES OF SURPLUS

VALUE -- but as that comes to five thousand pages of discussion of economics, I will

understand if you give it a pass.

This will be a tutorial on the thought of Karl Marx, not on Marxism, as it has come to be

called. There will be no discussion of Lenin, Stalin, Mao, Max Schachtman, Rosa Luxembourg,

the First, Second, Third, or Fourth Internationals, or even of the Sunnyside Progressive School,

which I attended until age six. If there is anyone for whom this multi-part tutorial is not enough

Wolff, there are always my two books on Marx: UNDERSTANDING MARX and

MONEYBAGS MUST BE SO LUCKY. Some years ago, Jerrold Siegel, a Professor at

Princeton, published a magnificent biography of Marx called MARX'S FATE. I recommend it

most warmly.

So, enough throat clearing. Let us begin.

Marx was born in 1818, in a small town near what is now the border of Luxembourg.

Although he came from a long line of rabbis, his father had made a pro forma conversion to

Christianity so that he could pursue his career as a lawyer. Marx was a brilliant student, and his
parents had great hopes for him, perhaps as a professor. At seventeen he went off to university,

studying first at Bonn [if my memory serves me -- I am doing this from memory, rather than

spending time checking things in books] and then at Berlin. He earned a doctorate in philosophy

with a dissertation on the ancient Greek atomists. I have actually read Marx's doctoral

dissertation, and you can trust me that it is not the very first thing by Marx you would want to

read. Its significance for his later development is that it dealt with philosophers who espoused

materialism, not -- as was then the philosophical rage in German speaking Europe -- idealism.

To understand Marx's life and thought, it is essential to call to mind, at least in its broad

outlines, what was happening in Europe when Marx was growing up. There were two great

upheavals underway, both of which had a profound effect on Marx, and, indeed, on every other

important thinker of that time. The first was the political upheaval triggered in the late

eighteenth century by the overthrow of the ancien regime in France, and then by the series of

military and political revolutions that were carried across Central and Southern Europe by

Napoleon's armies.

It is difficult for us, at this remove, to appreciate just how deeply the French Revolution

shook the European world. France was the wealthiest and most powerful nation in Europe. The

court at Versailles was the wonder of the European world, its wealth and elegance the model for

every lesser ruler, from Prussia to Russia. Continental Europe had not been much troubled by

the overthrow and eventual restoration of the Stuarts in England a century earlier, but when the

head of Europe's most powerful monarch fell into a basket, people took notice.

Napoleon's brief conquests broke up the old Hapsburg Empire and set free cultural and

political forces that transformed Central Europe. One can see the effects in the music of Chopin

and Liszt, and even in the collection of folk tales in local languages assembled by the Brothers

Grimm. Politically, Europe was aflame. In 1830, when Marx was a boy of twelve, the Paris
Commune brought the existing monarchy to an end, and though a new monarchy was quickly

installed, the lesson of those three glorious days was that direct action in the streets by the

common people could have dramatic revolutionary effects.

All of this must be kept in mind when one reads THE COMMUNIST MANIFESTO,

written by Marx in 1848 shortly before another round of political upheavals. The optimism

Marx exhibits in that early work is a direct consequence of the lessons of the previous sixty

years. If the Old Regime in France could be toppled, if the Hapsburg Empire could be shattered,

if street riots could bring down kings, how unreasonable was it to suppose that dedicated

communists could bring into existence the next stage of history?

The second great upheaval was less dramatic, but Marx eventually concluded that it was

much more important, and indeed was the cause of the political transformations -- I refer, of

course, to the explosive rise and expansion of capitalism. Unlike the political revolutions, this

transformation matured first in England. Even France, whose highly developed and rationalized

economy was still largely agricultural, did not experience the capitalist transformation as early as

did England, and in the part of Europe in which Marx was growing up, the economy was still for

the most part in a late feudal stage of development.

Marx devoted his life to analyzing capitalism, and we shall have a great deal to say, later

on, about his insights and conclusions. In these opening remarks, I want to deal, as it were, with

surfaces, appearances, rather than with the underlying structure of the economy. There were four

or five ways in which capitalism thrust itself into the consciousness of social observers both in

England and, somewhat later, on the continent. First of all, there was an explosion of output.

Goods were spewed from the new factories in astonishing quantities. In his great work, THE

CONDITION OF THE WORKING-CLASS IN ENGLAND IN 1844, Friedrich Engels, Marx's

lifelong collaborator and friend, describes the shop windows filled with goods, like a great
cornucopia overflowing with the bounties of industry. Marx chooses to begin the very first

paragraph of CAPITAL by saying, "The wealth of those societies in which the capitalist mode of

production prevails, presents itself as 'an immense accumulation of commodities.'" [He is

quoting himself here from an earlier work.] This sudden expansion of the scope of output

worked profound changes in English, and later in continental, society.

The second striking consequence of the advent of capitalism was the phenomenon of the

"new men," factory owners who had begun life in modest circumstances as apprentices or

journeymen, and made money so rapidly that in their own lifetimes they were able to marry their

daughters off to impecunious aristocrats or buy themselves titles. European society was

accustomed to enormous disparities in wealth, but rich families and individuals by and large

derived their wealth from ownership of land, which had been inherited from previous

generations. There were, of course, times of great trouble in the history of Europe when fighting

men, by force of arms, seized great estates and catapulted themselves into the ranks of the

nobles, but the newly wealthy capitalists were not buccaneers, aggrandizing themselves at the

point of a sword. Indeed, it really was not clear how they were able to become so rich so fast.

The third great change in English society was the transformation of cities. Huge slums

sprouted up, inhabited by landless, propertyless people whose sole source of food and shelter

was day labor in the new factories. Many of these were former peasants, driven off the land by

country squires who enclosed their land and turned it into sheep pastures to feed the new cloth

factories' demand for wool.

The fourth great change was the erosion of the traditional authority and position of the

landed aristocracy and the clergy. This is a complex story going back to the late Middle Ages,

and it would take too long even to sketch here. Suffice it to say that capitalism truly was, as

Marx was among the first to observe, the most revolutionary force ever let loose upon society.
 Finally, it is worth mentioning that among the byproducts of the explosive growth of

capitalism was the emergence, in the late eighteenth and early nineteenth centuries, of a large,

literate class of businessmen, merchants, and their families, who became not only a market for

the novel, as literary historians have noted, but also a powerful class demanding a real voice in

the affairs of government, and prepared to call into question the traditional authority of king,

noble, and cleric.

All of this was taking place as the young Karl Marx went off to university in 1835.

Tomorrow, we shall have to talk about what he found when he got there.

Part Two

As one might expect, the young Marx was powerfully shaped by the intellectual climate

of the German university world in which he found himself. The leading influence was the

German idealist philosopher Georg Hegel. Even though Hegel had died in '31, four years before

Marx first went off to university, his thought remained the framework within which everyone,

acolyte and critic, functioned. Hegel had been a deeply conservative political thinker, viewing

the Prussian state as the high point and fulfillment of the onward march of Reason in History, but

there was a rebel group of young men who featured themselves Left Hegelians, and Marx very

quickly became an important part of that informal circle. The intellectual world was in as much

of a ferment as the political and economic spheres. In 1835, David Strauss published his LIFE

OF JESUS, which created a storm of protest and controversy. What Strauss did was to bring to

bear on the Gospels the new techniques of textual interpretation and historiography then being

developed by German scholars, concluding that the accounts of the miracles were mythological

and could not be treated as reports of genuine events. Six years later, as Marx was completing

his doctoral dissertation, Ludwig Feuerbach stunned the philosophical and theological world

with his ESSENCE OF CHRISTIANITY, in which he argued that the standard Christian account
of Man as having been created in the image of God was exactly backwards. Man, he said, had

created God in his own image, taking the best characteristics of human beings -- their power of

reason, their capacity for benevolence, etc. -- and, by raising these human characteristics to the

highest conceivable level, had forged a conception of an omniscient, omnipotent, benevolent

deity.

This was heady stuff, and Marx was not alone in thinking that the world of ideas was

undergoing a revolution quite as dramatic as that taking place in the palaces of government and

the cathedrals of religion.

Faithful readers of this blog will know that I do not like Hegel's philosophy, but there is

no denying its profound influence on every branch of intellectual activity in the nineteenth

century. Marx took over from Hegel the structure or framework within which he conceptualized

the stages of economic development -- indeed even the very notion of stages of development

came from Hegel. In order to lay the groundwork for my later exposition of what Marx and

Engels eventually named Historical Materialism, therefore, I must spend some time

summarizing, or sketching the outlines, of Hegel's rather powerful idea. [Yesterday evening I

watched Rachel Maddow interviewing a Republican operative, and the generosity and good

spirit with which she treated this man, with whom, as she observed, she had virtually no

agreement on any matter of politics, set an example for me. So I shall acknowledge Hegel's

importance, and the originality and usefulness of his ideas, for all that I do not like him. As they

say in the self-help world, I am trying to be a better person. :) ]

What Hegel did, if I can put it this way, was to immanentize and secularize the Christian

story. The Christian story, in its outlines, recounts the succession of metaphysical or theological

stages through which human beings move on their way from the beginning to the end of history.

History begins with the Creation, which includes the creation of Man in the Garden of Eden.
The second stage begins with The Fall, which results in mortality and the expulsion from Eden.

The third stage commences with God's compact with Abraham, repeated and deepened by the

renewal of the compact [or Testament] with Noah and Moses. God gives to Man His Law, in the

form of the Ten Commandments and their elaboration, and promises that if Man will keep this

Law, God will make him to multiply and flourish. The entire period of the Old Testament is the

period of The Law. But man repeatedly shows that he cannot keep God's Law, which, since it is

eternal and divine law, must be obeyed to the last jot and tittle if at all. So God in His infinite

mercy makes The Law flesh in the Person of His only begotten son, Jesus Christ. With the

Incarnation there begins a new metaphysical stage in the history of Man, the stage of the Word

Made Flesh. Jesus offers Man salvation if he will but have faith, which is to say believe in the

truth of this Divine Promise. But this too is impossible for Man, so God confers upon some men,

despite their not deserving or having earned it, the ability to have Faith, which is to say Grace.

Jesus promises to return from beyond the grave, at which time the Final Judgment will determine

who is saved and who damned. And Time itself will end.

The crucial point to note here -- and this will, I promise, become central to Marx's

Historical Materialism -- is that the relationship of Man to God is absolutely different from one

stage of history to the next. Old Testament farmers may cultivate their crops and tend their

sheep in much the same way as New Testament farmers; Kings of Israel may resemble Medieval

kings in their styles of rulership. Hence, early modern painters will portray the characters of the

Old Testament as wearing clothing appropriate to sixteenth century Holland. But none of that

matters at all. All that is important is whether one lives before or after the Fall; whether one

lives under the Law or after the Law has been made Flesh. Everything is to be understood

theologically, not sociologically or anthropologically.

 What on earth does this have to do with capitalism and communism? Everything, as it

turns out. The logical structure of the Christian story is this: A sequence of stages, each one

utterly different from the others by virtue of its unique relation to God and His Law. The

Creation, the Fall, the Old Testament, the Incarnation, the Crucifixion, the Resurrection, the Last

Judgment, and the End of Time are defined by that relationship. There is, notice, no other order

in which these stages could possibly occur. Nor is it possible to skip a stage [begin to sound

familiar?]

Hegel took this story and translated it into a story about the unfolding in history of Geist

or Spirit. Each of the stages of human history, in his account, was defined by the degree to

which reason had unfolded itself and embodied itself in thought and society. And each stage of

human history could be understood as the unfolding throughout a society of this stage of

Reason's coming to know itself. [I have no idea what that means, so let us move on.] Thus, an

entire society could be seen as the expression, or embodiment, of a unified Idea -- the Classical

era, the Medieval era, the Baroque era, the Romantic era. Hegel taught us to see the painting,

architecture, sculpture, politics, even the styles of personality, as expressions of the same style or

form or Idea. Thus, when Jacob Burckhardt wrote, in his classic work, THE CIVILIZATION

OF THE RENAISSANCE IN ITALY, of "the Renaissance man" whose individuality extended

even to his designing his own distinctive mode of dress, he was drawing on an idea that had

originated in Christian eschatology and had been secularized and generalized by Hegel.

Very early in his intellectual development, the young Marx had the brilliant, though

rather simple-minded, idea of inverting Hegel's story [inversion is another of Hegel's favorite

categories]. Instead of construing the material elements of human life -- the wresting of a living

from nature -- as reflections of, or embodiments of, one stage in the unfolding of the Idea, Marx

undertook to construe the art, law, politics, and religion of each stage of social evolution as
reflections of the way in which human beings get their food, clothing, and shelter. This is the

sense in which Marx considered himself a Materialist rather than an Idealist. Marx retained

Hegel's secular Christian notion of stages of history, and he kept too the notion that the

succession of stages was necessitated, not random.

At first, when Marx really knew very little about the actual development and functioning

of a capitalist economy, he seized on Adam Smith's seminal idea of the Division of Labor and

with a great rhetorical and logical flourish made that the key to the succession of stages of

history. The nice thing about division of labor is that if one does not think too deeply about it, it

seems to be a unidimensional measure with natural endpoints. One starts with a society in which

there is no division of labor. Everyone simply gets a living from nature as best as he or she can.

This stage Marx calls Primitive Communism. With each major step forward in the division of

labor, one moves on to a new stage in history. Relying on his knowledge of European history

[no one in Europe knew much about any other history at that point], and passing rather lightly

over the exact ways in which division of labor advances, Marx then identified Slave Economies,

Feudal Economies, Capitalist Economies, Socialist Economies, and Communist Economies as

the necessary forms of the progressive further division of labor. Just as the starting point is

Primitive Communism, in which there is no division of labor, so the end of history [but not of

human existence] is Communism, in which the division of labor has been carried to so complete

an unfolding that no one is bound to a particular form of work. In one of his most famous

pronouncements, Marx wrote: . ." as soon as the distribution of labour comes into being, each

man has a particular, exclusive sphere of activity, which is forced upon him and from which he

cannot escape. He is a hunter, a fisherman, a shepherd, or a critical critic, and must remain so if

he does not want to lose his means of livelihood; while in communist society, where nobody has

one exclusive sphere of activity but each can become accomplished in any branch he wishes,
society regulates the general production and thus makes it possible for me to do one thing today

and another tomorrow, to hunt in the morning, fish in the afternoon, rear cattle in the evening,

criticise after dinner, just as I have a mind, without ever becoming hunter, fisherman, shepherd

or critic."

This passage has been much quoted and commented upon, but almost nobody notices that

Marx clearly meant it as a joke. The "critical critics" were a small group of Marx's fellow Left

Hegelians, led by the Bauer brothers, Bruno and Edger. Marx thought they were pompous

airheads, and he and Engels excoriated them in their very early work, THE HOLY FAMILY,

written in 1844 when Marx was twenty-six.

But be that as it may, Marx built Hegel's notion of stages of social development into the

theory of economic development that he called Historical Materialism. We shall have a good

deal to say about it a bit later on.

Next part: The Economic-Philosophic Manuscripts of 1844.

Part Three

Marx became involved in the founding and editing of a new journal [the RHEINSICHE

ZEITUNG], got himself bounced out of Prussia by the police for his troubles, and by 1844 was

living in Paris [there is a lot of history here that I am sliding over, since it would be tedious to

recount it. Check Wikipedia or Siegel's biography if you want to know the details]. He was by

this time connected with Engels, an association that would last until his death in 1883. It was in

Paris that the two of them wrote both THE HOLY FAMILY and THE GERMAN IDEOLOGY,

in which, among other things, they settled scores with the Bauers, Feuerbach, and other German

thinkers very close to them in political and philosophical orientation. But for our purposes, the

most important of Marx's many writings from the period was a curious document that did not see

the light of day until eighty years later -- the working or study notes usually labeled THE
ECONOMIC-PHILOSOPHIC MANUSCRIPTS OF 1844 but also sometimes referred to as the

Paris Manuscripts. These notes were in the form of a lengthy document in which Marx worked

out ideas that he was puzzling over having to do with the economic organization of society.

What he did was to draw vertical lines dividing each page into three columns, which were

headed Land, Labor, and Capital, the three fundamental categories of the Classical Political

Economy of Adam Smith, David Ricardo, and their lesser fellow economists. The column that

has, quite deservedly, drawn most of the attention is the one labeled "Labor." The long series of

paragraphs that Marx inscribed in this column have come to be referred to as "Alienated Labor,"

and they constitute the fullest and most carefully thought out discussion of this topic that Marx

ever wrote.

I have a good deal to say about Marx's theory of alienated labor, but before I begin, I

want to take just a moment to explain why this document became so politically important in the

20th century, more than a hundred years after it was written. Briefly [and, inevitably,

tendentiously], Lenin and Stalin and the Russian revolutionaries hijacked Marx's theories and

used them as the justification for a brutal and dictatorial State Capitalism that they instituted in

the Soviet Union. The sheer geopolitical success of the Soviet regime, both before and during

the Second World War, all but stifled the objection that this was not at all what Marx had had in

mind when he talked about socialism or communism. Marx's writings were elevated to the status

of Revealed Truths, and were taught in Russian schools in roughly the way that the Koran is now

taught in Madrassas. So rigid and doctrinaire was the slavish adherence to the supposed

doctrines of Marx that when the young Wassily Leontief approached the state economic planners

with his newly conceived mathematical system of Linear Programming, which he thought

[correctly] would be of use to them in planning the Soviet economy, he was told that Stalin

himself had decreed that since Marx only used addition, subtraction, multiplication, division, and
the taking of averages, the Soviet Union's economy was to be planned using nothing more.

Leontief emigrated to the United States and spent the rest of his career teaching at Harvard,

eventually winning the Nobel Prize. One of the delicious intellectual ironies of this subject is

that Leontief's mathematical methods became the means by which scores of modern economists

demonstrated the fundamental mathematical coherence of the theories that Marx set forth in

CAPITAL [I have already written about this on my blog, and will not repeat myself].

During the Second World War, the Yugoslav partisans, led by Marshal Tito, succeeded in

driving the Germans out of their lands without the help of the Red Army, with the result that in

the post-war period, the newly formed Yugoslavia was able to maintain a quasi-independence. A

number of Yugoslav philosophers and political theorists were eager to find some way of

embracing Marx's theories without toeing the Stalinist line. Casting about for writings by Marx

on which they could erect an independent, humanist Marxism, they came upon the Paris

Manuscripts, which had first been published in Russia in the 20s, but had then been all but

ignored by the Stalinist theoreticians. In the writings of the Young Marx, they heard a voice that

called to them and inspired them. To justify their concentration on these juvenalia, they

developed the theory of a "break' between the young Marx and the mature Marx. I will argue a

bit later on that there is in fact no such break as they claimed to discover. There is, actually, a

break or fundamental reversal in Marx's thinking, and it is important enough so that I shall spend

some time talking about it. But it does not have to do with alienated labor.

Well, let us at last turn to the teaching of the essay on alienated labor, and see what we

can learn from it. I shall begin, perhaps surprisingly, by talking about the Romantic conception

of artistic creativity. The painters, sculptors, poets, and composers of the medieval and classical

period were thought of as artisans, skilled craftsmen who worked for patrons or for entire

communities, decorating castles or churches and memorializing military victories and the
marriages of princes. But a different conception of artistic creativity emerged in the early

nineteenth century period that we now call the Romantic era. Artists began to be thought of --

and to think of themselves -- as lonely creators, inspired by their muses to tear works of great art

bleeding from their breasts [think Beethoven rather than Bach.] Thus understood, the act of

artistic creation has the following structure: First, the artist is inspired to form an idea in his or

her mind, an idea of a sculpture, a painting, a poem, a sonata, an idea of beauty. Then, by

exercising great skill with chisel and mallet, with canvas and brush, or with pen, the artist makes

the idea real, externalizes it, embodies it in some medium, thereby producing the work of art.

This self-externalization [or selbstentausserung -- it always sounds better in German]

may be achieved with great effort, leaving the artist exhausted, spent, drenched in sweat. Or it

may be accomplished with blinding speed and seemingly little or no effort at all. But in either

case, the completion of the act is, for the artist, a moment of triumph and fulfillment. The Idea

has truly been made Flesh. The labor is a fulfilling labor, the fatigue a good fatigue. There it

stands, on the page, or on the canvas, or on the podium -- what had begun as an idea in the

artist's mind is realized, made real, before him or her. And the work of art is now available to all

of us to see, to hear, to read, to experience and enjoy. Even those of us incapable of the act of

creation can derive great enjoyment from the work, and even inspiration.

But this act of creation has a dark side, a negative dimension, for what originally

completely and indisputably belonged to the artist alone, as an idea in mind, now takes on a life

of its own. The artist ages, but the work of art does not [think THE PICTURE OF DORIAN

GRAY]. At the moment of creation, the object, the embodied idea, belongs to the artist, but it

may -- indeed, it most probably will -- be sold, to someone whose intentions and appreciation

may be antithetical to those of the artist. There is no way that the artist can control how the

public experiences the work of art, what the experts choose to say about it, what uses it may be
put to, whether for the greater glory of a God whom the artist does not worship, a State to which

the artist owes no allegiance, or a collector for whose vulgar tastes the artist has only contempt.

Eventually, the artist may have to ask permission or pay an entry fee to view the work that he or

she has created. Is it any wonder that Emily Dickenson resisted publishing her immortal poems?

What began as an act of fulfilling and satisfying self-externalization runs the risk of

becoming an act of self-alienation [selbstentfremdung]. The term "alienation" has a double

meaning on which, as we shall see, Marx plays endlessly. To make alien, to alienate, means to

make an other, an enemy, something that stands over against oneself [gegen-stand]. But to

alienate also means to sell, to transfer title from one owner to another. In this sense, the word is

routinely used in the law. By alienating the work of art, by selling it, the artist becomes alienated

from it. The work of art becomes not simply other than him or herself, but perhaps even

inimical, hurtful, an enemy.

[May I be permitted a brief moment of narcissistic self-absorption? When I am writing --

indeed, as I have been writing these paragraphs this morning --I feel fully alive. My stubby

fingers fly over the keys, hitting wrong letters now and again but charged nevertheless with an

energy that I feel at no other time in my life. The words come as fast as I can get them onto the

screen, and I know, with utter certainty, that what I am saying is right. I never revise, and I

never show what I have written to another person before externalizing it, publishing it, either in

print or in cyberspace. Once I have published a book, I am finished with it. I move on, perhaps I

write another book. But what I have published now exists independently of me, and I cannot

control how it is construed, or the uses to which it is put, by persons I have never even met.

Now, I know all too well that these subjective feelings of mine do not correspond to any

objective greatness. When I see AMADEUS, after all, it is Salieri and not Mozart with whom I
identify. But I can at least imagine what it would be like to be Marx writing CAPITAL, or

Hume writing the TREATISE. Oh well.]

Marx, with what I consider a stroke of sheer genius, takes the Romantic conception of

artistic creativity and generalizes it to all of us, arguing that all human beings are capable of,

indeed must engage in, an act with the same fundamental structure -- the act of production. [I am

here conflating ideas taken from both the ECONOMIC-PHILOSOPHIC MANUSCRIPTS OF

1844 and THE GERMAN IDEOLOGY, which were, after all, written at roughly the same time.

It would take too long and be too tedious to sort this all out textually.] Human beings, unlike

animals, live by purposefully transforming nature in accordance with ideas in their minds, so as

to make it into goods that can satisfy their needs. [Marx did not know about tool use in animals,

but that really does not matter here.] They too first form an idea in mind -- of a stone shaped to

be a tool, of a field of grain, of a stick bent to form a bow -- and then externalize it, embodying

the idea in an object that can serve our needs, helping us to gain food, clothing, shelter, and other

humanly satisfying goods. But unlike the act of artistic creation, the act of production is

collective, social. We struggle with nature together, not alone. This act of collective self-

externalization, of production, is labor.

Marx here sets himself against a long tradition in Western thought, going all the way

back to the Book of Genesis, that sees labor as an evil, a painful necessity, a curse laid upon us

by God for our disobedience. Recall the words of GENESIS, Chapter 3, verses 16-19:

"Unto the woman he said, I will greatly multiply thy sorrow and thy conception; in sorrow thou

shalt bring forth children; and thy desire [shall be] to thy husband, and he shall rule over thee.

And unto Adam he said, Because thou hast hearkened unto the voice of thy wife, and hast eaten

of the tree, of which I commanded thee, saying, Thou shalt not eat of it: cursed [is] the ground

for thy sake; in sorrow shalt thou eat [of] it all the days of thy life;
Thorns also and thistles shall it bring forth to thee; and thou shalt eat the herb of the field;

In the sweat of thy face shalt thou eat bread, till thou return unto the ground; for out of it wast

thou taken: for dust thou [art], and unto dust shalt thou return."

So it is that man must labor painfully for his bread, as a curse for his disobedience. And so it is

that woman's bearing of children is called labor, for it too is painful, and a curse laid upon her

for her disobedience.

Well, enough for today. I shall continue with this after I have prepared my lecture for

Wednesday.

Part Four

In the essay on estranged, or alienated, labor can be found some of the most powerful

lines Marx ever penned. I will not try to summarize the entire essay. My summary would too

long, and inevitably would be like a prose summary of a poem -- never a good idea. Please read

it for yourself if you have not already done so. The central idea is captured in this phrase from

the very beginning of the essay: "the object which labour produces -- labour's product --

confronts it as something alien, as a power independent of the producer." Marx is here, and

elsewhere throughout the essay, trying to get some conceptual clarity about one of the most

puzzling aspects of the new capitalism, namely the fact that as capital becomes ever more

productive, spewing out goods in enormous quantities, the workers who produce those goods

remain impoverished and ever more powerless. Capital -- the factories, machines, farms, mines,

and also the techniques embodied in the machines -- is, after all, brought into existence by the

effort, the labor, of the workers. How can it be that they become more and more enslaved by

what they themselves have produced? It had not always been this way. In previous stages of

human history, an especially good harvest, a boom year, resulted in better times for all, if only
momentarily. While the rich remained rich, the poor enjoyed some measure of the success of

their efforts. But under capitalism, strong profits simply enlarge the power of accumulated

capital to fire adult workers and substitute children, to bargain down the wage, to entrap the

workers in endless penury.

Marx does not yet have a theoretical understanding of how this happens. For that we

must wait for CAPITAL, twenty-three years later. But he understands perfectly the human cost

of the capitalist mode of production. The alienation is multi-dimensional. First of all, the

worker, as we have seen, is alienated from the product of her labor, which appears to her as an

enemy controlling her and depriving her of freedom. The worker is also alienated from fellow

workers who are, or ought to be, colleagues and comrades in a collective undertaking. Since

jobs are scarce and there is an endless pool of men and women desperately seeking jobs [the

"reserve army of the unemployed," as Marx famously called them], each worker sees the others

as enemies, threatening to take one of the scarce jobs. The capitalist, who is the real enemy, is

misperceived as a benevolent figure graciously offering a subsistence job and allowing the

worker to survive for another day. The worker is alienated, as well, from the labor process,

which becomes mechanical, painful, constricting, enslaving, rather than fulfilling, graceful,

natural, human. And finally, the worker is alienated from herself, from her true nature or, in the

language of the day, her "species being." In what is surely one of the most moving passages in

the entire socialist literature, Marx writes:

"The worker only feels himself outside his work, and in his work feels outside himself. He is at

home when he is not working, and when he is working he is not at home. His labour is therefore

not voluntary, but coerced; it is forced labour. It is therefore not the satisfaction of a need; it is

merely a means to satisfy needs external to it. Its alien character emerges clearly in the fact that

as soon as no physical or other compulsion exists, labour is shunned like the plague."
 Each time I read this passage, I am reminded of a scene in that wonderful old Peter

Sellars movie, I'M ALL RIGHT JACK. Sellars plays a British communist union leader of the

old school. The union has successfully protected some of its members from being fired as

superfluous, and the men thus kept on spend their day sitting behind a stack of wooden pallets

playing cards. At one point, Sellars calls a strike, and the men at the factory down their tools and

walk off the job,. The four men playing cards suddenly realize that everyone is on strike,

whereupon they drop their cards in the middle of a hand and rush off. One can only assume that

when they get home they will -- play cards!

Over the next several years, Marx made several efforts to return to Germany before

finally going into exile in London with his wife, Jenny, and their young family. In 1848, while

still on the continent, he and Engels published the most famous political tract ever written: THE

COMMUNIST MANIFESTO. I am going to assume that everyone reading this tutorial has read,

or will now immediately read, the MANIFESTO. Like Plato's REPUBLIC and WAR AND

PEACE, it is one of those documents familiarity with which is the mark of literacy. In the

MANIFESTO, we see Marx beginning to develop the theories of economic development that we

know as Historical Materialism. The economic theory is still rudimentary, but the theory of

stages of development, and the crucial thesis that the law, politics, culture, and philosophy of an

age are a reflection of the way in which the economic activities of the society are organized, is

beginning to be worked out.

The MANIFESTO, in its ebullient, aggressive optimism, is very much the statement of

young men. "A spectre is haunting Europe -- the spectre of Communism," it begins ominously.

Immediately, the authors announce the central thesis of their doctrine: "the history of all hitherto

existing society is the history of class struggles." And off they go. In my opening remarks to

this tutorial, I tried to sketch the political situation in Europe when Marx and Engels were young,
as a way of explaining why they were so optimistic about the near-term prospects for a

communist revolution. They were not, after all, deluding themselves. In 1848, the year the

MANIFESTO appeared, Europe exploded into workers' uprisings, most prominently in Paris

itself. We know, with the benefit of a century and a half of hindsight, that the hopes of Marx and

other revolutionaries were doomed to be dashed, but it cannot have looked like that to them at

the time.

The failure of the 1848 uprisings had an interesting theoretical effect on Marx, I believe.

I observed earlier that there was indeed a break between the young Marx and the mature Marx.

It concerns the theoretically very significant issue of mystification. Originally, Marx took the

typical enlightenment position that in the Middle Ages, the real roots of clerical and monarchical

power were mystified by religious superstition and the fiction of the divine right of kings, but

that under capitalism, the clouds of mystery had been blown away by the cool breezes of reason,

so that it was immediately apparent to nineteenth century Europeans that the power of church,

state, and capital rested upon force alone. But the failure of the revolutions seems to have

persuaded Marx that Capital's power was itself mystified, by the doctrines of laisser-faire and

free trade, so that it was not at all easy to understand how the ever-greater productivity of

industrial capital served to strengthen its ability to defeat all challenges. By contrast, feudalism

was relatively transparent. It was obvious even to the peasants themselves that the wealth of

their feudal masters came from the days of labor service that they were forced to provide on the

lord's lands.

There is a great deal more to be said about Marx's writings in the period leading up to the

production of CAPITAL. My English translation of the Complete Works of Marx and Engels

runs to twenty thick volumes BEFORE the publication of Volume One of CAPITAL, for

heaven's sake! But the economic theory is the heart of his entire life's work, and there are limits
to how many blog posts I can get all of you to read, so I am going to stop here, and tomorrow

begin my discussion of Marx's mature economic theory.

Part Five

We come now to the heart of this tutorial, Marx's economic theories. It is worth noting

that the subtitle of CAPITAL is "A Critique of Political Economy." Marx's work is as much a

critique of previous economic theories as it is an analysis of the economic reality of capitalism.

Karl Marx was, at one and the same time, the greatest of the classical political economists,

bringing to completion more than a century of brilliant theorizing, and also the greatest critic of

classical Political Economy, devastatingly exposing the inner contradictions and inadequacies of

the classical tradition. In order to understand what he is talking about in CAPITAL, therefore,

we must spend a little time tracing the evolution of classical Political Economy from its origins

in France in the middle of the eighteenth century to the work of its greatest exponents, Adam

Smith and David Ricardo, against whom and in continuation of whom, Marx wrote.

Political Economy begins with the effort of Turgot and Quesney to understand the French

economy in the eighteenth century. These two theorists, who, with their fellows, have come to

be referred to as the Physiocrats, conceived agriculture as central to the wealth of Old Regime

France, so much so that they disparaged the productive efforts of artisans and craftsmen. Their

great contribution to the field, and to subsequent theorists, was their recognition that the on-

going productive economic activities of a nation must be conceptualized as an endless cyclical

process of REPRODUCTION. The output of the nation at one point in time becomes the input

of the productive process at a later point in time, so that there is a cycle of inputs and outputs, a

cycle of reproduction. This season's harvest provides the seed corn for next season's planting.

The iron ore dug from the mines this year becomes the shovels used to dig iron ore next year,

and so on. [This is the origin of the title of Piero Sraffa's seminal little book, PRODUCTION OF
COMMODITIES BY MEANS OF COMMODITIES.] There are, of course, some goods that are

by their nature not reproducible -- old master paintings, for example, whose value lies not only in

their beauty but also in their scarcity. Somewhat more importantly, one essential input into

production -- land -- is not in general reproducible [although it is of course possible, on the

margins, to carry out landfill operations that increase the available land, such as the project that

created the ile St. Louis in the Seine in the middle of Paris.] This latter element in the process of

production set for the classical theorists the problem of providing an adequate analysis of land

rents, a problem that was solved by Ricardo in one of the most brilliant achievements of the

classical school.

Although the Phsyiocrats did not themselves call attention to it, the concept of

reproduction can be usefully applied even to that input into production on which we shall focus

most of our attention, namely labor, for this generation's output of the production process [the

children] becomes the next generation's inputs [the parents], thus justifying the use of the word

"reproduction" to apply to that process as well. There is even a third sort of reproduction of

which we shall have to take account eventually as our exposition goes forward, namely the

reproduction of the social relationships and cultural institutions and ideological formations that

constitute a society. But we are getting ahead of ourselves.

And now, a word of caution before we begin. This is a complex subject, and I have

found it useful to proceed slowly when expounding it, starting with elementary concepts and

postponing until later the introduction of the complexities and complications that are a part of the

finished story. So please, before you write long comments asking why I have not mentioned

these essential complexities, show a little patience. If you really want to know whether I am just

ignorant of those complexities, then read my two books on Marx before you rush to comment.

Thank you.
 In order to have before use a numerical example of the process of reproduction, I am now

going to introduce a little model of a very elementary economy. Like all models, its construction

requires a good deal of abstraction.

Let us begin by imagining an economy in which there are only two produced goods [or, if

you prefer, two categories of produced goods], corn and iron [or agricultural goods and industrial

goods]. Each good requires inputs of corn, iron, and labor [forget about land for the moment],

and in each sector of production, the combination of these inputs results in a certain quantity of

output of one good or the other. [In deference to Marx's brilliant analysis of the commodity, I

am not yet referring to these goods as "commodities."] Since all of these theorists lived in the

temperate zone of the Northern Hemisphere. they all assume an annual growing cycle, and we

shall follow that tradition. Here is a simple numerical representation of the economy we are

describing. I choose to treat the reproduction of labor on a par with the reproduction of corn and

iron because that is the way Marx thought about it [as did Ricardo, by the way]. Sraffa's

approach is different, although either way is convertible to the other easily enough. Call this

System A:

Labor Input Corn Input Iron Input Output

Labor Sector 38 units 19 units 190 units

Corn Sector 100 units 2 units 16 units 300 units

Iron Sector 90 units 9 units 12 units 90 units

Total Input 190 units 49 units 47 units

A few preliminary observations about System A;

1. The size of the units is not indicated, but since this is supposed to be an annual cycle of

reproduction, presumably they are pretty big [millions of tons of corn, or something like that.]
2. There is not the slightest indication of what technology of production is being used.

Important though that obviously is, it is irrelevant for the purposes to which we are going to put

this model. Following the Classical Political Economists, we assume that there is one and only

one dominant technique used for the production of each good. If some entrepreneur introduces a

new and more efficient technique, the pressure of competition pretty soon forces all the other

entrepreneurs in that line to adopt it, and it becomes the new standard.

3. Notice [this is crucially important] that both corn and iron are required as inputs in each line

of production.

4. I could make the model somewhat more elaborate, in an effort to do a better job of

mimicking reality, but that would not change the theoretical analysis. It would just require us to

use rather more sophisticated mathematics. I prefer the transparency of the simple model. In a

more complex model, there might be hundreds of sectors of production, and in some of them

[this too is crucial] some goods might not be used as inputs, but they might be used in the

production of goods that were themselves used in the production process, and so we could say

that they were indirectly required. In general, there will be a distinction [also crucial -- there is a

lot of crucial stuff here] between those goods that are directly or indirectly required in every

single line of production, and those goods that are not directly or indirectly required in every line

of production. For reasons that will become clear, we shall call the first group of goods Basic

Goods, and the second group Luxury Goods. In System A, iron and corn are both Basic Goods.

5. This model is deliberately so simple that it even ignores fixed capital, which lasts through

more than one cycle of production, and joint production, a situation in which a given technique

of production has two or more salable outputs. As I said earlier, I am going to creep up on the

more complicated cases.

 Even the most cursory inspection of System A reveals that in each cycle of production,

there is more output than is required for the next cycle's input -- 251 units of corn and 43 units of

iron, to be precise. [The fact that there is, at this point, no extra labor produced is actually

analytically important -- wait for it.] If we meditate on this fact for a bit, three questions should

occur to us. All of Economics, Sociology, History, and Political Science is nothing more than

attempts to answer these three questions.

The first question is: WHO GETS THE SURPLUS?

The second question is: HOW DO THE SURPLUS-GETTERS GET THE SURPLUS?

The third questions is: WHAT DO THE SURPLUS-GETTERS DO WITH THE SURPLUS

WHEN THEY GET IT?

Tomorrow we shall begin answering these questions, in the course of which we shall hear

about Natural Price, Productive and Unproductive Labor, Necessary Labor and Surplus Labor,

Base, Superstructure, Ideology, The Labor Theory of Value, and other arcana. Stay tuned.

Part Six

Who gets the surplus?

In virtually every known society, the surplus is appropriated -- taken -- by some relatively

small subset of the population, with the result that the members of that subset live better than the

rest of the members of the society. We know these appropriators as kings, princes, oligarchs,

pharaohs, priests, generals, landed aristocrats, tyrants -- and as entrepreneurs, merchants,

advertising executives, lawyers, professors, and elected politicians. Almost always, the

appropriators trick out their appropriations with justifications, rationales [or rationalizations]

designed to persuade those from whom the surplus is taken of the rightness of the appropriation.

The surplus getters suggest that they are bigger, stronger, more handsome, more charismatic,
smarter, more productive, blessed by the Gods, sanctified by immemorial tradition, chosen by a

vote of the people, riding the wave of history. And for the most part, those from whom the

surplus has been taken -- the expropriated -- accept these rationales, sometimes grudgingly, quite

often willingly or even enthusiastically.

The surplus comes in many forms. It is extra grain harvested from the fields, over and

above what is needed to keep alive those who grow and harvest the grain. It is cloaks and

mantles over and above what is needed to shelter from the weather those who shear the sheep,

card and spin the wool, and weave the cloth for the cloaks and mantles. Sometimes it takes the

form of swords made from iron that would otherwise provide additional plowshares or in the

form of spears that could better serve as pruning hooks. [A little biblical reference there, for

those of a religious turn of mind.]

In some societies, the conditions of life of those who get the surplus are only slightly

more comfortable than those from whom the surplus is taken, but in many societies, the

differences are so great that after a while the two groups of people seem not even to be of the

same species or from the same world. The producers of the surplus are short, thin, careworn,

illiterate, and short lived. The surplus getters are tall, handsome, healthy, cheerful, well-

educated, and long-lived. The surplus producers struggle to keep their children from starving to

death. The surplus getters send their children to Ivy League schools and on to the Grand Tour of

Europe. Life is good for the surplus getters; not so good for those who produce the surplus.

How do the surplus getters get the surplus?

In many ways. Sometimes, like the Vikings of early medieval Europe, they simply sail

up the rivers of Western Europe from the coast each Fall and steal the harvest as the peasants

reap it. Or they ride into town as the bandits of the Southwest did and take the harvest at the

point of a gun. At first, this is, and is understood to be, simple theft. But as the bandits return,
year after year, the peasants become accustomed to the raids, and in an effort to avoid bloodshed,

prepare the harvest for the stealing. This is then called taxes. Eventually, one lone bandit rides

into town, not even wearing a gun, to collect the money the peasants have managed to acquire by

selling their crops. The state has arrived.

Sometimes the surplus getters hold the producers in bondage, forcing them to labor on

the lands owned by the surplus getters. Instead of seizing the surplus after it has been produced,

they forcibly command the labor of the producers, allowing to the producers only so much of the

annual product as is needed to keep them alive and allow them to raise up their replacements

when they wear out -- their children. This is known as slavery. The condition of the slaves is

often very little different from that of the nominally free producers whose surplus is taken from

them, or appropriated.

How do the surplus getters get the surplus in a capitalist society. in which all men are free

[we pass over in silence for the moment the condition of women], and all exchanges in the

marketplace voluntary and based on mutual self-interest? That there are surplus getters even in

this "very Eden of the innate rights of man" [CAPITAL, last page of Chapter VI] is manifest, for

cheek by jowl with the slums of Manchester, Liverpool, and London are great mansions in which

live the getters of the capitalist surplus. But HOW they get it is a mystery that eludes even the

greatest minds of the Classical tradition in Political Economy. It is to the solution of this great

puzzle that Marx devotes much of Volumes One, Two, and Three of CAPITAL, and we shall

return to this question shortly, for at its heart lies the secret of capitalism.

What do the surplus getters do with the surplus when they get it?

This is actually the question that exercised Smith and Ricardo the most. In their view,

entrepreneurs used the surplus [in the form of profits] to expand the scope of production,

reinvesting it in an expanded labor force, new machinery, more fields under cultivation, and so
on. The landed aristocrats, by contrast, used their share of the surplus [which came to them in

the form of rents] to employ crowds of liveried servants, give lavish balls, maintain gilded

carriages, consuming the surplus unproductively. Smith in particular was worried that as the

demand for grain pressed on the available land and rents rose, so much of the annual surplus

would be transferred to these unproductive expenditures that growth would come to a halt and

the dreaded "stationary state" would result. It is worth noting that the notion of class conflict

was central to classical political economy, and was not in any way original with Marx.

A share of the social surplus in most societies is consumed buttressing, protecting, and

rationalizing the privileged position of the surplus getters. Some of that share is used to support

a substantial military and police force which is available to put down any dangerous protests

from those who are being denied the fruits of their productive labors. Some supports priests and

churches, in which the virtues of submission and the promise of plenty in the next life serve to

dull the resentment of the expropriated producers. Some must be devoted to maintaining lawyers

and judges who can be counted on to resolve all disputes in a manner favorable to the surplus

getters' interests. And there is even a bit of this share left over to keep in comfortable

unproductivity artists to provide amusements for the surplus getters and philosophers to explain

why all is for the best in the best of all possible worlds.

The secret of the explosive power of capitalism, as Smith, Ricardo, and Marx well

understood, is that it alone, among all the forms of economy and society that history reveals to

us, relentlessly allocates as much as possible of the social surplus to reinvestment for the purpose

of expanding yet further the magnitude of the surplus. "Accumulate! Accumulate! That is

Moses and the Prophets to the capitalists," as Marx writes in one of many brilliant passages in

volume I of CAPITAL.
 There are of course books to be written on every one of the observations in the preceding

paragraphs, and Marx wrote a good many of them himself. But in the interest of brevity, I shall

concentrate here on one question among all those that have been raised or intimated, namely,

How in a capitalist economy does it come about that entrepreneurs exit from the market ever

richer? Exactly how is it that in a capitalist economy the annual surplus is appropriated by one

class, the entrepreneurs, or capitalists?

To answer this question, Marx must wrestle with and finally solve a technical puzzle

concerning the determinants of the prices of commodities in the marketplace that had baffled

Smith and in the end stumped Ricardo.

In the next post, we shall begin our discussion of this famous puzzle, leading finally to

Marx's version of that centerpiece of Classical Political Economy, the Labor Theory of Value.

Part Seven

The theoretically most interesting and problematic of the doctrines of the Classical

Political Economists is their explanation of how prices are determined in a laisser-faire capitalist

economy. Why, you may wonder, is that so important a question? Well you may ask. I myself

asked that same question of John Eatwell [currently Baron Eatwell and President of Queen's

College, Cambridge], when as a young man in his thirties he taught a brilliant graduate course on

Value Theory in the UMass Economics Department in the semester when I was first acquainting

myself with economic theory. He was rather startled by the question, not anticipating that a total

naif would be sitting in on his very advanced seminar, but the answer is quite simple. The two

great questions of Classical Political Economy are, First, how is the annual social product [the

"wealth of nations," in Smith's words] divided up among the three classes of society -- the landed

aristocracy, the entrepreneurs, and the laboring class? and Second, what are the conditions of

sustained economic growth? Growth and distribution are the alpha and omega of the classical
school. It is what makes their theories, otherwise so out of date, interesting today. Now, in a

laisser-faire money economy, the social product is apportioned to each class by the

intermediation of money. Each class receives a share of the social product in the form of the

money that it manages to lay its hands on. The landed aristocracy is paid a price for the use of its

land -- we call it rent. The entrepreneurial class is paid a price for the use of its capital -- we call

it profit. And the laboring class is paid a price for its laboring [or, as Marx will say, for the use

of its Labor Power -- but that gets ahead of our story.] -- we call it wages. These prices -- rents,

profits, and wages -- determine the distribution of the annual social product. The same processes

of competition that determine the prices of corn and iron, cloth and coal, eggs and cattle fodder

also determine rents, profits, and wages.

Confronted with this question, Adam Smith makes a series of brilliant conceptual moves

that virtually define the discipline of economics ever after. [Aside: I have just re-read Chapter

Two of my book, UNDERSTANDING MARX, in which I set forth Smith's innovative

conceptual moves in some detail. If anyone is really interested in this subject, I strongly

recommend looking at what I have written there. It is simply too detailed to reproduce here.]

He begins by observing that there is an ambiguity in the term "value," for sometimes we

mean by the value of a good its usefulness to us in satisfying some want or enabling us to

advance some undertaking. Water slakes our thirst. Cloth protects us from the elements. This

aspect of any good Smith calls its "value in use," or, as we have learned to say, its use value. But

goods may also be exchanged for other goods, and this aspect of them Smith calls their "value in

exchange," or exchange value. When we consume some good, it is its use value that concerns us

-- will this apple satisfy my hunger? Will that lump of coal burn well and provide warmth or

energy to drive a machine? But in the marketplace, our concern is for the exchange value of a
good. How many apples can I get in exchange for this bolt of cloth? How many bushels of corn

for a ton of coal?

Drawing on the notion of nature as a system of universal laws -- an idea well-established

in the late eighteenth century as a consequence of the manifest success of Newton and others in

articulating that system in elegant mathematical form -- Smith suggests that society is a second

nature, governed, as is physical nature, by universal laws. Instead of gravitation as the key to

these laws, Smith offers the universal tendency of men to "truck and bargain" in the marketplace.

[See David Hume's TREATISE OF HUMAN NATURE for a similar conceptual move -- in

Hume's case, the principle of the association of ideas. Hume and Smith, of course, were good

friends.]

We observe, Smith says, that in any given neighborhood or marketplace, there is a

customary or usual price at which goods sell, and also a customary or usual wage paid to

laborers, rent paid to land owners, and profit earned by entrepreneurs. These customary or usual

prices may, of course, vary on a particular day as a consequence of momentary factors, such as a

glut of corn one day or a scarcity of cloth the next. Smith, like Ricardo and Marx after him, was

quite aware of what have come to be called the "laws of supply and demand," but he, as did they,

considered these to be ephemera, not underlying determinants of the system of society. To those

customary prices Smith gives the name "natural prices," calling the momentary fluctuations

"market prices." The natural prices act, he says, like centers of gravity, drawing the fluctuating

market prices to them [you see the influence of Newton.] From that day forward, one of the

central tasks of Economics became the discovery of the determinants of natural price. Those of

you who have studied economics will be familiar with the notion of natural price under its

modern label, equilibrium price.

 What then determines the natural price of a good in the market? Smith is actually rather

confused about this question, and offers three answers without seeming to understand that they

are different from, and in fact incompatible with, one another. One source of his confusion is his

belief, which Ricardo shared, that in order to understand what happens when the relative prices

[exchange ratios] of two goods change, one needs to find in the circle of exchanging goods one

whose natural price never changes, so that any change can be traced to some alteration in the

conditions under which the other good is produced. All of this is fascinating, but much too

complex to go into here. [Once again, see my book.]

What matters is that Smith advances a seminal idea, on which all subsequent Classical

Political Economy rests. The natural price of a good, Smith proposes, is determined by the

amount of labor that is required to produce it.

Now, a small but important terminological matter. In the eighteenth and early nineteenth

centuries, the term "value" was used interchangeably with "natural price." The value in

exchange, or exchange value, of a good in the market was called either its natural price or its

value. Thus, when Smith advanced the hypothesis that the natural price of a good is determined

by the quantity of labor needed to produce it, he was offering a Labor Theory of Natural Price,

or, what was to him the same thing, a Labor Theory of Value. That, just so you know, is the

origin of this famous and controversial phrase.

In support of his hypothesis, Smith now sketches a little story in which is actually

embodied a theorem in rational choice theory. Here is the entire passage, from Book I, Chapter 6

of WEALTH OF NATIONS.

"In that early and rude state of society which precedes both the accumulation of stock
and the appropriation of land, the proportion between the quantities of labour necessary for
acquiring different objects seems to be the only circumstance which can afford any rule for
exchanging them for one another. If among a nation of hunters, for example, it usually costs
twice the labour to kill a beaver which it does to kill a deer, one beaver should naturally
exchange for or be worth two deer. It is natural that what is usually the produce of two days
 or two hours labour, should be worth double of what is usually the produce of one day's or
one hour's labour.

And there it is! The Labor Theory of Value, in its first appearance on the world stage. It

won't do in the form in which he presents it, of course, and Smith knows that. Indeed, in the

very first phrase of the first sentence, he indicates why it won't do. This simple theory may hold

for situations in which there is no accumulation of stock [hence no tools, farm animals, or other

inputs into production] and no appropriation of land [hence no rent charged for the use of the

land], but in the real world, all economic activity relies upon both "the accumulation of stock"

and the "appropriation of land."

Just so we are clear, let me spell out the problem, even at the risk of being a trifle tedious.

Suppose the deer hunters use bows and arrows to hunt the deer, while the beaver hunters use

beaver traps to catch the beaver. [Bows and arrows and beaver traps are "stock."] Now, it takes

labor to make a bow and arrows and also to make a beaver trap. Clearly, in deciding in what

ratios they will exchange the deer for the beavers, both groups of hunters need to take into

account that labor as well as the actual labor of hunting or checking the traps. It might be, for

example, that beaver traps take only a few moments to make, but really can be used only once

[the beavers wreck them trying to escape], whereas bows and arrows take many days to make,

but can be re-used for years. In some way or other, this indirectly required labor will have to be

taken account of if the two groups of hunters are to succeed in making rational decisions when

they enter into bargaining with one another.

Smith pretty much gave up on this problem, and there things stood for forty-one years.

Enter David Ricardo, arguably one of the three or four greatest economists of all time. The

solution to the problem, Ricardo proposed, is to think of the stock -- the tools, raw materials, etc.

used in the process of production -- as though they had embodied in them the labor that had been

expended at an earlier time in making them or gathering them. When workers use those tools
and machines as they work up the raw materials into the finished products ready to be sold in the

marketplace, we can think of them as transferring that embodied labor, along with their own

labor, to the finished product. Thus, the natural price, or value, of the end product is really

determined by the sum of the labor directly required in the production process and by the labor

indirectly required in earlier periods of production. The sum -- of embodied labor and direct

labor -- is the true determinant of natural price or value. This in a nutshell is Ricardo's version of

the Labor Theory of Value, and it is, as we shall see, a dramatic advance on Smith's hypothesis,

even though it is still not quite right.

At this point, I am going to stop, because in the next Part, I must incorporate some little

systems of equations into the text, and despite the helpful suggestions of a number of you, I have

not quite figured out how to do that. Also, I must lecture this afternoon to my graduate seminar,

and I think I ought at least to make a show of preparing for my lecture. See you all tomorrow, if

I succeed in sorting out the technical details of incorporating equations into the text.

Part Eight [part one]

We are now ready to engage with Ricardo's version of the Labor Theory of Natural Price

[or Value], to see what it means, and to ascertain whether it is correct. For a variety of reasons, it

is useful to change my original corn/iron model a bit by assuming that the surplus getters

[capitalists, in this case] use a portion of the physical surplus to underwrite a sector devoted to

the production of luxury goods. Technically, these are goods that require inputs of various sorts,

but whose output is not required as input into either the corn or the iron sector. They are, in

modern terminology, final goods. We could, of course, posit a sector devoted to the production

of luxurious clothing or sporty cars or gourmet breakfast foods, but since we are explicating

Ricardo, and therefore presumably analyzing the doings of stern, upright, seriously religious

Protestant businessmen, I shall assume that the luxury good to which they choose to devote a
portion of their surplus is theology books. By the way, some of you may be wondering why

Corn Flakes and frozen Macaroni and Cheese dinners do not count as luxury goods, even though

they, like theology books, are not used as inputs into any line of production, and thus are also

final goods. The answer -- and it turns out to be super important, theoretically -- is that Corn

Flakes and frozen Macaroni and Cheese dinners are wage goods -- i.e., things consumed by the

labor producing sector, which is to say by the workers. Thus they do enter indirectly into the

production of all the other sectors, because labor does. Way down the road, this is going to

allow me to invoke a nifty theorem proved by John von Neumann to demonstrate exactly when

Marx's sophisticated version of the Labor Theory of Value is true. I say this now just to keep up

the spirits of the cognoscenti among you who may be yawning and wondering when I am going

to get to the good stuff.

Here is the revised model:

Labor Corn Iron Books Output

Labor sector 42 21 0 210

Corn sector 100 2 16 0 300

Iron sector 90 9 12 0 90

Books sector 20 1 2 2 40

Total Input 210 54 51 2

Part Eight [part two]

You will notice that I have constructed the sector devoted to the production of devotional

literature so that iron, corn, and theology books are required as input. You may wonder in what

sense theology books can be required as input into the production of theology books. Let us just

suppose that the writers of the new books in each cycle of production read and re-read the

existing books so assiduously that they wear them out. Analytically speaking, what matters here
is that none of the output of the books sector is required as input into any other sector but itself.

[For those of a more formal turn of mind, the square matrix of unit input coefficients is semi-

positive and partially decomposable, with one of the submatrices representing the sector of basic

commodities and another representing the sector of luxury commodities, but we need not go into

that.]

Now, let us get to it. According to Ricardo, the natural price, or value, of a commodity

[which is to say, something reproducible, like corn or iron, not something non-reproducible, like

land or an Old Master] is determined by the quantity of labor that is required, directly or

indirectly, to produce it. By labor indirectly required Ricardo means the labor that was required

to produce the non-labor inputs into its production. If we look at the Corn Sector in the little

model above, we will see that 100 units of labor are required to produce 300 units of corn, so

each unit of corn requires one-third of a unit of labor directly. But each unit of corn also requires

1/150 of a unit of corn, as seed presumably [I get this number by dividing the left hand side of

the Corn Sector line through by 300, to find out what are called the "unit input requirements" of

the Corn Sector.] Now, we have just seen that each unit of corn requires 1/3 of a unit of labor, so

the corn that is used up in the production process of the Corn Sector must have required 1/450 of

a unit of labor in the previous cycle of production. This labor is described by Ricardo as being

"embodied" in the seed corn, and as being transferred to the output when the seed corn is used in

the production process. The same sort of calculation shows that a unit of corn requires 4/75 of a

unit of iron. Now, looking at the Iron Sector, we find that each unit of iron requires one unit of

labor to be produced, so that means that the iron that goes into one unit of corn production must

itself have required 4/75 of a unit of labor in the previous cycle of production. So, thus far, we

see that a unit of corn requires 1/3 of a unit of labor directly, and (1/450 + 4/75) or 1/18 of a unit

of labor indirectly -- 1/18 of a unit of embodied labor.

 But wait, you will protest [and you will be right], in that previous cycle of production to

which you have been alluding, corn and iron, as well as labor, were required to produce the corn

and iron that are being used in this cycle, so there are some extra little bits of embodied labor

carried over from an even earlier cycle, that must be added in. It doesn't take much mathematical

imagination to see that we have here the makings of an infinite sum of bits of embodied labor.

Two questions immediately present themselves: First, does this infinite sum converge on some

finite quantity? and Second, if it does, what does it converge on? How much total labor, directly

and indirectly, does it take to produce one unit of corn? Or, as we have learned to say, What is

the Labor Value of Corn?

Well, it turns out that we have here a problem whose answer can be arrived at by setting

up and solving a little system of simultaneous linear equations. The Table we have been

working with gives us a great deal of information about the production of corn, iron, and

theology books, but there are three quantities that it does not directly tell us about. namely, the

Labor Values of corn, iron, and theology books. These are, as they say in elementary algebra

classes, the unknowns [or, as Donald Rumsfeld would say, the known unknowns.] So, I am

going to choose three symbols to stand for these unknowns. Let us let Lc stand for the labor

value of corn, which is to say the total amount of labor directly and indirectly required for the

production of one unit of corn. Li will stand for the labor value of iron, and Lb for the labor

value of books. Three unknowns, three equations pretty easily arrived at. We can solve that

baby! Tomorrow, I will show you the equations [back to the scanner -- ugh], tell you what the

solution is [you are going to have to work out that bit of elementary math yourselves], and move

on to the next step in the process of checking to see whether Ricardo's Labor Theory of Value is

true.

Part Nine
 Using the variables defined at the end of the last Part, we can now set up a system of

three simultaneous linear equations. Here they are:

100 + 2Lc + 16Li + 0Lb = 300Lc

90 + 9Lc + 12Li + 0Lb = 90Li

20 + 1Lc + 2Li + 2Lb = 40Lb

The first equation says that 100 units of labor directly applied to 2 units of corn, in which

is embodied a quantity of labor two times the labor value of corn, and to 16 units of iron, in

which is embodied sixteen times the labor value of iron, yields 300 units of corn, in which is

embodied 300 times the labor value of corn. And so forth. Notice that the variable Lb does not

appear in either of the first two equations. That means that an increase in the difficulty of

producing theology books [problems with the proofs for the existence of God, perhaps] will have

no effect whatsoever on the labor value of either corn or iron. It also means that we can treat the

first two equations as a system of two linear equations in two unknowns, and after solving it we

can simply plug the values of Lc and Lb into the third equation to find the value of Lb. [All of

this is a mathematical representation of a very important set of facts about the economy, of

course.]

So what is the solution to the first two equations? Well, if you will carry out the

manipulations yourselves, you will find that Lc = 0.4 and Li = 1.2. Lb turns out to be equal to

0.6.

0.4 what? you may ask. 0.4 units of labor is the answer. That is how much direct and indirect

labor ends up being embodied in one unit of corn. If the dimension of labor happens to be

worker-years, and the dimension of corn happens to be metric tons, then the equations tell us that

in this system it takes 0.4 worker-years of labor, directly and indirectly, to produce one metric

ton of corn. [Real world factual plausibility is not an issue. We are doing economics here!]
We have now ascertained the labor values of the produced commodities in this system. Ricardo

says that these labor values determine the natural or equilibrium prices at which these

commodities sell in a laisser-faire marketplace. More precisely, he says that commodities

exchange in proportion to their labor values. To find out whether he is right, we must still figure

out what the equilibrium prices are, so that we can see whether they are proportional to the labor

values.

In calculating labor values, we remained in the sphere of production, attending only to the

quantities of inputs required for specified quantities of outputs, but now, as Marx would say, we

move into the sphere of circulation. We must set up a new system of equations that is a bit more

complicated to solve [second semester high school algebra], but before we can set up the

equations, we must make a number of simplifying assumptions and behavioral assumptions

about the capitalist economy in which all of this is taking place. Here are some of the things we

must assume. [Marx, as we shall see eventually, has enormously insightful and important things

to say about the historical, sociological, economic, and psychological conditions under which

these assumptions are plausible, but I can only talk about one thing at a time, so they will have to

wait for a while.]

First of all, we must assume that the goods being produced have become standardized, so

that one unit of corn or iron or books is much like another. If the society is still in the stage of

craft production, with hand crafted furniture and artisanal loaves of bread or wheels of cheese, it

will be impossible to represent the production process by our simple equations. The workers too

must be standardized, and stripped of their inherited skills, so that one unit of labor directly

applied is much like another. In the sphere of circulation, we must assume that competition

establishes a single price for each kind of good, a single wage rate for labor, and a single rate of

profit on invested capital [rent is not yet an issue.] All of these assumptions are hidden behind
the simple price equations we shall shortly be setting down. Marx was the first economist

[indeed, the first thinker of any sort] to recognize the enormous significance of these

assumptions. Much of the first several chapters of CAPITAL is devoted to spelling them out and

analyzing them. Later on, I shall have a good deal to say about them.

To formulate our equations, we need some new symbols for the unknowns. [I am

limited, unfortunately, by the fonts available to me, so this will be clumsier than I would like.]

First of all, we need a variable for each of the prices of the goods produced: Pc for the price of

corn, Pi for the price of iron, and Pb for the price of books. We shall use W for the money wage,

and R for the rate of profit. [Ordinarily one would use the Greek letter pi, but such is life in

cyberspace.] Here are the equations read off from the same data that yielded the labor value

equations:

(100W + 2Pc + 16Pi + 0Pb) (1 + R) = 300Pc

( 90W + 9Pc + 12Pi + 0Pb) (1 + R) = 90Pi

( 20W + 1Pc + 2Pi + 2Pb) (1 + R) = 40Pb

Why (1 + R), you may ask. Because the money that the capitalists get from selling their output

[300Pc in the case of the corn sector] must be enough to cover the cost of production [the 1] plus

enough to yield the going rate of profit on that cost [the R]. Hence (1 + R).

This is a system of three equations in five unknowns. Mathematicians call such a system

"underdetermined" [no, that is not what Althusser means by "underdetermined,' but that is

another matter entirely.] What to do? Well, the first step is to eliminate one of the price

variables. Remember that what we are interested in is relative prices, which is to say exchange

ratios between different commodities. The classical practice, employed by Smith, Ricardo, Marx

and all other classical Political Economists, is to select one commodity as the money in the

system, give one unit of it the price 1, and then express all other prices as multiples of that unit
commodity, or as it is usually called, numeraire. This can be an ounce of gold, a pound of silver

[the British Pound Sterling] or, if one is a Masaai warrior, one cow. In this case, we shall choose

corn as our numeraire, and set the price of one unit of corn equal to 1. When we plug that

assumption into our equations, we get:

(100W + 2 + 16Pi + 0Pb) (1 + R) = 300

( 90W + 9 + 12Pi + 0Pb) (1 + R) = 90Pi

( 20W + 1 + 2Pi + 2Pb) (1 + R) = 40Pb

This system is still undetermined, by one degree [as we say], because there are now three

equations and four unknowns. Notice that once again, the first two equations can be treated

separately, because the price of books, Pb, does not appear in them. They constitute a system of

two equations in three unknowns: Pi, W, and R.

There are two things we can do. The first is to reduce the equations to one by eliminating

the price of iron, so that we get a single equation in W and R. If we do this, we find with some

algebraic manipulations [which I must simply assume you folks can do on your own] that there is

the following inverse relationship between W and R:

(1 + R) = 6/(2W + 1)

Inspection reveals that as the wage rises, the profit rate falls, and vice versa, which nicely

demonstrates the fundamental Classical thesis that the interests of the working class and the

capitalist class are diametrically opposed.

But we can also try just to solve the two equations for the price of iron. In general, when

you have a system of two equations in three unknowns, you cannot do this, but if you go ahead

and try, you will discover, to your amazement, that the Wage and the Profit Rate drop out, and

the two equations yield the result Pi = 3. This is an extraordinary result. It seems that in this

system, the price of iron [and also the price of books, which turns out to be 1.5] is totally
independent of the wage rate and the profit rate. No matter how those fluctuate in inverse

relation to one another, the prices remain the same.

Well, Ricardo said that the prices at which goods exchange -- their natural prices or

values -- are proportional to the quantities of labor required directly and indirectly for their

production -- their labor values. Is he right? Let us see.

The price of corn is 1 and the labor value is 0.4, so the ratio is 1/.4 = 2.5

The price of iron is 3 and the labor value is 1.2, so the ratio is 3/1.2 = 2.5

The price of books is 1.5 and the labor value is 0.6 so the ratio is 1.5/.6 = 2.5

HEY PRESTO! RICARDO IS RIGHT. TA DA!

Ah well, if life were only that easy. Stay tuned. Tomorrow we shall discover the secret

of this remarkable result.

Part Ten

[The absence of comments on the last two posts suggests that I have finally succeeded in

boring you to death. But I am having such fun expounding this material, that I am going to press

on, even posting twice in one day. Perhaps it is just as well that I cannot see your eyes glaze

over.]

I guess you already figured out that I cooked the books to confirm Ricardo's hypothesis.

If you want to check up on me, just alter the numbers a little -- a bit more iron needed in the corn

sector, a trifle less corn in the iron sector, that sort of thing -- and solve the equations again, both

for the labor values and for the prices. The first thing you will discover is that the price

equations cannot be solved so nicely. It is still true that the wage and the profit rate vary

inversely -- that is, as Jane Austen says, a "truth universally acknowledged." But until you

specify a real wage [so much corn and so much iron per unit of labor] and plug it into the
equations, the system will be underdetermined. And when you do, the nice neat proportionality

between prices and labor values will not hold true.

What is happening? What is it about the little system I created that yields the nice neat

Ricardo-confirming results? Well, in the jargon that Marx would introduce a half century after

Ricardo published his great work, I created a system that exhibits "equal organic composition of

capital." That means that the ratio of labor directly required to embodied labor [or labor

indirectly required] is the same in all sectors lines of production. Check it out.

Another way of saying the same thing is that in some sectors of production, the labor

indirectly required has been embodied in the non-labor inputs for a longer time, and hence, when

we are figuring prices and profit rates, needs to be earning more profit. Suppose, for example,

that one producer is making wine, which must sit in its cask for three years before it can be sold,

while another producer is making bread that is sold hot out of the ovens. They may both have

the same amount of capital bound up in production, but the wine maker has to get a price that

compensates him for the time his capital has been tied up. Even if they are both getting 10%

annually on their invested capital, the wine maker's capital must earn 10% a year over three

years, which compounded is 33.1%, whereas the bread maker turns his capital over so rapidly

that he need make only a fraction of one percent on each turnover to rack up a 10% annual rate

of return. These differences will, when competition works its magic, drive the price of wine up

above the price of bread. But since the labor values of the wine and bread are unaffected by the

amount of time capital is tied up in production -- labor values only measure the quantity of labor

directly or indirectly required -- the ratio of the price to the labor value of wine will diverge from

the ratio of the labor value to the price of bread. This, for those of you who have ever wondered,

is what is called "the transformation problem." [By the way, some of you may in your study of
economics have come across the phrase "the roundaboutness of production." That phrase refers

to the same thing we have been discussing.]

Now the really interesting thing is that Ricardo knew all about this problem, and spent a

good deal of his life trying unsuccessfully to solve it. He was well aware that in the general case,

prices are not proportional to labor values. But the problem stumped him. It was left to Marx to

think the matter through more deeply and come up with a brilliant solution that is ALMOST, but

not quite, satisfactory. It is going to be some days before I get to that part of the story, so hold

the thought.

Strictly speaking, we have come to the end of our discussion of Ricardo, and are ready to

move on to Marx, but there is one more little matter that I should like to discuss, namely rent.

This is not part of Marx's story, because Marx knew that Ricardo had solved the problem of rent,

and therefore he did not bother with it. Still, it was a brilliant coup on Ricardo's part, and we

ought to be able to spare a few paragraphs to pay tribute to him.

The problem, in a nutshell, is this: Entrepreneurs [which in Ricardo's day frequently

meant investors renting land on which to grow grain or raise sheep] pay rent for the land they use

[to the landed aristocrats, those lazy bums]. That rent is one of their costs of production, as

surely as the wages they pay or the money they shell out for seed and farm machinery. But land

is not a produced commodity, and does not contain embodied labor that is passed along to or

embodied in the commodities produced on it. That being so, it would seem that the Labor

Theory of Value cannot hold true even in the special case of equal organic composition of

capital. The theory can only be true if rent is NOT a cost of production. But how can that be?

Certainly, if you ask an entrepreneur in the wool or corn trade, he will assure you that the rent he

pays is very much a cost of production. Why would he pay it otherwise?!

 Here is Ricardo's answer: In any country, there are many different qualities of arable

land, many variations in the productivity of the land. On some land, one need merely throw the

grain at the ground and crops will spring up. On other land, some cultivation is required, on still

other land fertilizer is needed to get a crop, and there is some land so arid and unproductive that

one can scarcely grow anything on it at all. Now, at a given level of demand for corn [i.e., grain

-- recall that "corn" is the English name for whatever is the dominant grain in a region, not for

what we call corn, which the English call maize], entrepreneurs will compete for the best land,

and they will offer rent to its owner, for they know that even after paying rent, they can make a

profit on such fertile land. When all the best land has been rented, the remaining entrepreneurs

will bid on the somewhat less fertile land. They will only be willing to pay lower rents, because

they will not be able to compete against the investors who have snatched the best land, if they are

forced to pay equally high rents. If demand presses on supply, and drives up prices in the

market, more entrepreneurs will fan out and offer rents to the owners of even less fertile lands.

The landowners are engaged in a parallel competition among themselves. The land is utterly

useless to them unless it is rented out, so although they will press for the highest rents they can

get, if push comes to shove, they will take whatever they can get.

At the margin, the least fertile plot of land will rent for virtually nothing per acre, for

there is so little demand for it that the last entrepreneur who comes along and offers pennies an

acre will succeed in striking a bargain. Remember, if you want to know why a landowner would

rent his land out for so little, the answer is that anything is better than nothing.

Now, come harvest time, all these entrepreneurs who have been raising indistinguishable and

interchangeable corn on lands of varying fertilities, on which they are paying varying rents, will

bring their crops to the market, and there competition will ensure that every bushel of corn sells

for the same price, REGARDLESS OF HOW MUCH OR LITTLE RENT HAS BEEN PAID
FOR THE LAND ON WHICH IT WAS GROWN. That means that the corn grown on the least

fertile land will fetch the same price in the market, and among the costs of production of the

capitalist who grew his corn on that land, rent does not appear. Therefore, rent is NOT a cost of

production.

BUT IF RENT IS NOT A COST OF PRODUCTION, WHAT IS IT?

The answer, Ricardo says, is that rent is a diversion into the pockets of the landowners of

a portion of the profit earned by the capitalist class. It is, functionally speaking, identical with

the money that is diverted today into the pockets of financiers, who drain the profits from

capitalists just as the landed aristocracy did in the late eighteenth and early nineteenth centuries.

We are now ready to turn to Marx.

Part Eleven

And so, after sixteen thousand words of preliminary remarks, I come finally to the

centerpiece of Marx's lifework, his analysis and critique of capitalism. Although, as I have

remarked, Marx wrote at least 5000 pages of economic analysis [and maybe more, as one

commentator noted], everyone, I think, will agree that the central text is Volume One of

CAPITAL. When we open the pages of this extraordinary book, we are immediately confronted

by a problem of great complexity and difficulty. Marx purports to be writing in the tradition of

Smith, Ricardo, and dozens of lesser lights, but his language bears almost no relation to theirs. It

is complex, convoluted, rife with metaphors, ironies, literary allusions, and metaphysical

crochets. Ricardo's language is recognizably like that of Smith, and Smith's language looks not

very different from that of Quesney [although it is, of course, English, not French], but Marx's

language is absolutely nothing like that of any of his predecessors. What on earth is going on?

In my opinion, this question is of such importance that it needs, and deserves, an entire book

devoted to it. So I wrote one. MONEYBAGS MUST BE SO LUCKY is my attempt to

confront, engage with, and answer the question. Each writer must choose a language whose

syntactic and literary possibilities are adequate to the complexity of the object of his or her

discourse. The classical political economists were children of the Enlightenment, and believed

that when the fog of superstition was blown away, what would remain was a simple, clear

transparent world whose structure could successfully be captured by a plain, non-metaphorical

prose. To them, the marketplace was a transparent world of rational calculation and exchange.

But Marx believed that capitalist economy and society is deeply mystified, presenting itself as

transparent when it is in fact opaque, as rational when it is in fact irrational, as the end of history

when it is in fact just one more stage in the unfolding of history. What is more -- this is really

difficult and important -- he is convinced that although we can, by great effort, see through the

opacity and the irrationality, we and he as inhabitants of that world can never entirely rid

ourselves of the effects of the mystifications. To express the full subtlety of this insight, he

needs a language that can, at one and the same time, reproduce that surface opacity and

irrationality, analyze and explicate it, and yet acknowledge our bondage to it, with full and

appropriate intensity of emotional articulation of each level. His solution, unique among social

scientists of any discipline or persuasion, is a complexly ironic discourse, rich with cultural

allusions and resonant with overtones and implications. No one had ever written social science

like this before, and no one has since, or perhaps ever will again.

This is not the customary view of Marx's language, of course. The reaction of the British,

as exemplified by Joan Robinson, has been to subscribe to what I elsewhere call the childhood

polio view of Marx's writing style. This is the notion that when he was young, he contracted a

nearly fatal case of Hegelism, which nearly destroyed his ability to move gracefully from the

beginning to the end of a sentence. Long years in England facilitated a partial recovery, but the

effects lingered, with the result that he never succeeded in achieving the limpid clarity of a David
Ricardo. Never mind that this view is offered with respect to the man who wrote THE

COMMUNIST MANIFESTO, arguably the most powerful piece of political prose ever penned.

We know for a certainty that the theory is wrong because while Marx was preparing Volume

One of CAPITAL for publication, he wrote, in ENGLISH, an exposition of his views, published

as the pamphlet VALUE, PRICE, AND PROFIT, which is as transparent a piece of Ricardian

prose as one could ask for. Clearly, Marx chose to write as he did because he believed that only

thus could he communicate his richly complex ironic vision of capitalist society and economy.

And, I am quite convinced, he was correct.

[After writing these last lines, I re-read portions of MONEYBAGS MUST BE SO

LUCKY, to keep some of its phrases and arguments fresh in my mind. That little book, I

believe, is, sentence for sentence and page for page, the best thing I have ever written, although it

has languished for years now, having, in David Hume's poignant phrase, fallen "stillborn from

the presses." I cannot reproduce it here, though I should like to, but perhaps some of you will be

moved to take a look at it.]

In the opening pages of CAPITAL, Marx begins his analysis of the mystifications of

capitalism, but I am going to postpone my discussion of this aspect of Marx's theory because it

would interrupt the story I have been telling about the Labor Theory of Value. I shall have to

return to this theme of mystification, however, because it is impossible to understand the full

complexity of Marx's economic theory without it.

Recall the point at which we had arrived when we concluded our look at Ricardo.

Ricardo solved Smith's problem of the "accumulation of stock" by revising the Labor Theory of

Value to take account of labor indirectly required for production -- or as Ricardo puts it,

"embodied labor." This embodied labor is thought of as residing in the capital inputs and being

transferred, but by bit, to the output in the process of production. [Marx will have a wonderful
time both ridiculing and embracing this bizarre notion of bits of labor being passed from the

spindle to the wool as the wool is spun into thread. He calls the notion absurd, crack-brained,

"verruckt," and yet, despite that fact, correct. We shall have to see later on what that is all

about.] But brilliant though Ricardo's revision was, it turned out to hold true only in the very

special case of economies like the little corn/iron-books model we were looking it. As I told you

[without proof, though that is easily supplied if you know a little linear algebra], prices are in

fact proportional to labor values only in the case in which each line of production exhibits the

same ratio of labor directly required to labor indirectly required -- a situation which Marx

equivalently describes as "equal organic composition of capital." [Marx also rather vividly

describes this as a situation in which each line of production uses the same proportions of "living

labor and dead labor."]

Since Marx believes that he can salvage the Labor Theory of Value despite this

problematic limitation, and in doing so reveal some very deep truths about capitalism, we might

expect him to begin Volume One of CAPITAL by posing the problem for the general case, in

which we do not have the convenient and rather unusual situation of equal organic composition

of capital. But to our surprise, Marx does not follow this strategy of exposition. Instead, all of

Volume One is written about the special case of equal organic composition, and it is not until

Volume Three that Marx completes his defense of the [now considerably revised and elaborated]

Labor Theory of Value. Why?

The reason is that Marx sees in the writings of his classical predecessors an even deeper

problem than that of the determinants of natural price, a problem of which Smith, Ricardo, and

Mill were not even aware. The problem goes so deep into the real nature of capitalism that it

takes Marx virtually an entire volume to solve it and explore the historical, ideological, social,

and economic implications of the solution. Eventually, he will use his solution to this little
understood problem as the clue to the final defense of the Labor Theory of Value. I shall argue

that it is his solution of the problem posed in Volume One, rather than his resolution of the

difficulties with the Labor Theory of Value, that is the real heart of Marx's entire critique of

capitalism. It is also the central truth of Marx's lifework, unrefuted to this day, a truth that stays

with us after history and mathematics and politics and time have tarnished Marx's reputation. It

is because of this truth that I call myself a Marxist.

If I may be facetious for a moment and make a little philosophical joke, the problem

Marx sees is the economic version of a more general problem that Martin Heidegger would later

pose: Warum gibt es uberhaput etwas, und nicht nichts? [Why is there is general something and

not nothing?] Marx asks, why, in a capitalist economy, are there any profits at all?

We know that in virtually every economy, there is a physical surplus each year that is

appropriated by someone in the society. And we know for a fact that there are enormous profits

in capitalist economies, because we can see the capitalists getting rich, year after year. It

certainly looks as though the capitalists are appropriating the surplus, and indeed, with a little

calculation, we can demonstrate that in our corn/iron/books model, the natural price of the annual

physical surplus exactly equals the profits garnered by the capitalists. [To demonstrate this, we

would first have to specify the wage, and this, as we shall see, is a profoundly important step in

the process of analyzing what is going on in the economy.] But why are there any profits at all?

Why do capitalists get rich under capitalism?

We know why slave masters get rich. They force their slaves to perform productive labor

whose product the masters appropriate. We know why feudal lords get rich. They compel their

serfs to labor several days a week on the lord's land, and the lords then appropriate what is grown

on that land. But in a capitalist economy, there are no slaves, there are no serfs. There are only

legally free men and women who voluntarily accept jobs working in the factories of their
employers, the entrepreneurs. These workers are paid wages determined by the forces of the free

market. How, in this situation, can it be that the workers merely survive, and the capitalists

grow fat on profits?

The apologists for capitalism on the eighteenth and nineteenth centuries had a number of

answers to this question, all of them, needless to say, very flattering to the capitalists, and these

answers have stayed with us. One can still find them in modern mainstream economics

textbooks.

The first answer, and my favorite, is the abstinence, or, as I like to think of it, the cheese-

paring, theory of profits. According to this explanation, most people improvidently and

wantonly spend every bit of money they can lay their hands on, buying fine clothes and hard

liquors and expensive delicacies for their dinner table, and so they never grow any wealthier.

But a few sternly religious upstanding Protestant men live simply, pare their cheese, scrimp on

their clothing, eschew hard liquor, and set aside every bit of money they can squeeze out of their

daily budgets until they have amassed enough to start a small business. "Many a mickle makes a

muckle," as George Washington said, misquoting the old Scots proverb. Profit is then the

reward in this life for the virtue that will be even more lavishly rewarded in the next. Modern

economics jettisons the religious trappings and simply calls profit the reward for waiting [i.e.,

waiting to consume.]

This explanation of profit, spiritually uplifting though it may be, is unfortunately not

terribly plausible analytically. In fact, it confuses the rate of interest with the rate of profit. To

see that this is indeed a confusion, perform the following little thought experiment. Imagine two

would-be entrepreneurs, each of whom decides to launch a business. We may suppose that both

businesses, once started, will have gross annual receipts of five million dollars and annual

expenses [including raw materials, machinery, labor, utilities, and so forth] amounting to
$4,840,000. The going rate of interest, let us assume, obtainable at the local bank, is 6%. The

first entrepreneur, a fine upstanding Puritan, has saved for years and managed finally to assemble

a fund of one million dollars, which he decides to invest in his start-up. By doing so, of course,

he chooses to forego the sixty thousand dollars in interest that he could earn simply by putting

his money in the bank. At the end of the year, when it comes times for him to do his books and

figure out whether he has made a profit, he will have to subtract, from his gross revenues, not

only the cost of his labor, raw materials, machinery, and so forth, but also that lost sixty thousand

dollars. That is, as they say these days, the opportunity cost to him of using his million dollars to

start the business. His calculations yield a happy result. Against his five million in gross

revenues, he writes the $4,840,000 he has spent for all those inputs, adds to this the $60,000 in

foregone bank interest, and finds that he still has $100,000 left over, for a healthy 10% profit on

his invested one million. In short, he has made a profit. The second entrepreneur, who has until

now led a rather profligate life, has no savings at all, but he is a fast talker, and manages to

persuade a banker to lend him one million dollars, in order to launch his business. His end of

the year calculations yield exactly the same result. He has five million in revenues, four million

eight hundred and forty thousand in production costs, and sixty thousand in bank interest, all of

which, when deducted from his gross revenues, leaves him with the same 10% profit. So it

seems that profit is not the reward for abstinence, upstanding living, and frugality.

[This is growing rather long. I shall continue tomorrow.]

Part Twelve

Other explanations [and justifications]have been offered for the existence of profits. The

profit earned by the entrepreneur, it was said, is actually his wages of management -- a more

plausible rationale in the early days when businesses were routinely run by their owners. But

this too is fairly obviously a non-starter. To see why, just consider a business inherited by the
ne'er-do-well son of an industrious, hard-working capitalist. Not wishing to spend his days on

the shop floor overseeing his employees, the son hires a manager, to whom he pays whatever

salary is the going rate in the labor market. That salary is one of the costs of doing business, to

be subtracted from gross earnings before a profit rate is calculated. The young man would be

quite surprised if he were informed that the salary of the manager had entirely gobbled up the

company's profits, leaving nothing for him to disport himself on the Riviera.

Equally implausible is a more recent rationale, which traces profits to the compensation

for entrepreneurship and innovation. No doubt, in any economic system, some compensation

must be made for those indispensable talents, but why then do routine businesses, not engaged in

daring and exciting flights of innovation and entrepreneurship, also earn a solid profit?

Marx poses the problem in its full difficulty by positing, as I have said, that commodities are

exchanging at prices proportional to their labor values -- which, as we have seen, means that

there is equal organic composition of capital in all lines of production. Now, under those

circumstances, the capitalist pays for his inputs a money price proportional to the labor embodied

in those inputs. He then hires workers to transform those inputs into salable output. What wage

does he pay his employees? Well [this is the crucial point in the entire exercise], the workers

are, from the point of view of the theory of laisser-faire capitalism, petty commodity producers,

producing their laboring, which they sell for a wage, so they, like everyone else, are paid a

money wage proportional to the cost to them of producing their labor. This means that they are

paid enough money to buy the food, clothing, and shelter they require to be able to continue to

work. In addition, since their physical plant [their bodies] wears out, they must be paid enough

for a depreciation fund so that when their physical plant is completely spent [and they die], it can

be replaced. In short, they must be paid enough to raise children who, at the age of twelve or

thirteen, are ready to take their place in the factories. [Yes, Marx fully intends this as bitterly
ironical, which is to say BOTH literally true AND ALSO a devastating condemnation of

capitalism. This is why he needs a complex language capable of capturing all of this. More of

this anon.]

Now, when the capitalist combines his various inputs, the result is a product embodying a

quantity of labor directly and indirectly applied. The product is then sold in the market, and by

Marx's assumption, it, like the inputs, sells at a money price proportional to its labor value. And

here is the nub of the problem. The capitalist has paid the labor value price for his inputs. He

has combined them [including, perhaps, his own managerial laboring], thereby transferring to the

output all of that embodied and direct labor. And he now sells the output for its labor value,

which is to say for a money price proportional to the labor embodied in it. How on earth can he

make a profit? If he decides arbitrarily to slap a 10% surcharge on the cost of his inputs, that

will do him no good, because all the other capitalists will do the same, and the cost to him of his

inputs will rise so as to eat up what he gained by upping the price of his output. As Marx writes

at the very end of Chapter Five ["Contradictions in the Formula of Capital"]:

"Our friend, Moneybags, who as yet is only an embryo capitalist, must buy his
commodities at their value, must sell them at their value, and yet at the end of the process must
withdraw more value from circulation than he threw into it at starting. His development into a
full-grown capitalist must take place, both within the sphere of circulation and without it. These
are the conditions of the problem. Hic Rhodus, hic salta!" ["Here is Rhodes. Jump here!" -- the
tag line of an ancient Roman story about a braggart who claimed to have made a great broad
jump in Rhodes, and was challenged to reproduce it on the spot.]

And now, in the very next paragraph, Marx springs his great discovery, the solution to

that puzzle that had stumped all of his predecessors, namely: In a capitalist system, how do the

surplus-getters get the surplus? [As I have been phrasing it.] Here is his answer.

"In order to be able to extract value from a commodity, our friend, Moneybags, must be so lucky
as to find, within the sphere of circulation, a commodity, whose use-value possesses the peculiar
property of being a source of value, whose actual consumption, therefore, is itself an
embodiment of labour, and consequently, a creation of value. The possessor of money does find
on the market such a special commodity in capacity for labour or labour-power."
 A few words about the language of this passage. First of all, the term translated by

Aveling, Moore, and Engels as "Moneybags" is geldbesitzer, whose standard translation is

"possessor of money." But the etymology of "geldbesitzer" suggests someone sitting on money,

and that calls to mind the wonderful nineteenth century caricatures of Thomas Nast and others,

who routinely represented capitalists as fat men in tails and top hats with big dollar signs or

pound signs on their breasts, sitting on bags of money. The translation "Moneybags" perfectly

captures Marx's mocking tone. This character is presented to us by Marx as a naive, decent

fellow searching in the market for a commodity that will have the magical quality of adding

more value, when it is consumed in production, than is contained within it. We are invited to

imagine him trying first this commodity and then that, until, hey presto, he hits upon labor, and

suddenly finds that he is making a profit.

This is crackbrained, mad, absurd, "verruckt," as Marx says. [I cannot do an umlaut in

this damned blog, so you will have to supply the umlaut each time I write "verruckt."] But it is

also true, and the solution to the mystery of profit. The fact that a proposition about capitalism

can be both true and crack-brained is one of Marx's way of showing us that capitalism, despite its

surface appearance of every-day simplicity and rationality, is in fact deeply mystified and shot

through with what he calls, following Hegel, "contradictions."

The precise solution to the problem, Marx says, is that there is a distinction, in the case of

labor but in the case of no other commodity, between the Labor-Power of the worker, which is a

human capacity, and the Labor, which is what the worker does when hired by the capitalist. The

worker is paid for his or her Labor-Power [strictly, although Marx does not say so, the Labor-

Power is rented, not sold], and the natural price of that Labor-Power, as for any other

commodity, is its replacement cost, which is to say the amount of labor embodied in it. When

the worker eats food, wears clothes, and rests at night in a shelter, he or she is consuming
commodities purchased in the market at their natural prices. The labor embodied in those wage

goods is then transferred to the worker, or more precisely is transferred to the worker's Labor-

Power, reconstituting it.

Now comes the real secret. Let us suppose that it takes six hours of labor a day, directly

and indirectly, to produce the food, clothing, and shelter that the worker needs to reconstitute her

Labor-Power for one more day. In that case, the worker will be paid a money wage proportional

to those six hours of embodied labor. BUT, when the worker goes to work the next day, she will

be required to work a full twelve-hour day. In working a twelve hour day, she will embody

twelve hours of new labor, living labor, labor directly required, in the product that the capitalist

will eventually sell. And the difference between the six hours of embodied labor she must

purchase in the form of wage goods, and the twelve hours of labor she is required to perform, is

the surplus labor, or Surplus Value, extracted from her by the capitalist. When the capitalist sells

the product in the market, at its value, he appropriates that six hours of surplus labor, in the form

of an equivalent amount of money, which thereupon becomes his profit.

How do I know that the embodied labor in the wage goods will be less than the labor time

given up in the sphere of production? Because it is a mathematical truth, easily proved, that IF

THERE IS A PHYSICAL SURPLUS IN THE SYSTEM AS A WHOLE, THEN THERE WILL

BE SOME AMOUNT OF SURPLUS LABOR PERFORMED IN THE SPHERE OF

PRODUCTION. What is more, THE LABOR VALUE OF THE PHYSICAL SURPLUS WILL

EXACTLY EQUAL THE SURPLUS LABOR PERFORMED IN THE SYSTEM, AND THE

MONEY VALUE OF THE PHYSICAL SURPLUS WILL EXACTLY EQUAL THE MONEY

PROFIT.

Or, as we say these days, Ta da!

There is a very great deal more to be said, but I must go teach, so I will post this, and continue

tomorrow.

Part Thirteen

Marx has now answered the question, Why are there profits in a capitalist economy?

Profit is the money representation of the surplus labor extracted from the workers in the process

of production, and then realized in the sphere of circulation, when the output is sold. Since I am

trying to bring this tutorial to a close before the 2012 presidential election [ :) ], I am simply

assuming that all of you are capable of going back to the equations of our little system and

checking that the labor value of the physical surplus equals the surplus labor extracted in the

system, and the price of the physical surplus equals the total profit appropriated in the system. If

anyone is having trouble doing that, speak up and I will spend a moment showing you how to do

it.

It would seem natural, at this point, to move on to the second big question, which was left

pending by Ricardo, namely, What happens in the general case when unequal organic

composition of capital results in the deviation of prices from labor values? [This is, strictly

speaking, the Transformation Problem.] But there is an enormous amount to be said before we

get to that problem. Indeed, what remains to be said constitutes most of the content of Volume

One of CAPITAL. So for the next several days, I will be rapidly summarizing the high points of

Marx's brilliant socio-historical-anthropological-psychological analysis of capitalism.

Let us start with the little matter of the wage. Recall that in order to introduce the concept of

surplus labor, and with it the central concept of surplus value, Marx [and we] must specify a real

wage. A real wage, for those of you unfamiliar with the jargon of economists, is the actual

market basket of goods and services that the worker buys with his or her money wage. For

purposes of simplicity of exposition, we are assuming that all workers spend their money wages
for the same market basket of goods. This is not a wildly implausible assumption in an

economy, like that of mid-nineteenth century England, in which industrial workers are getting

subsistence wages and living very near the edge.

Ricardo was powerfully influenced by Thomas Malthus, whose ESSAY ON THE

PRINCIPLE OF POPULATION, first published in 1798, took the dismally pessimistic view that

any increase in the well-being of workers would lead to an increase in population that would

press against available food resources and drive the wage down to subsistence. A lowering of

the wage below subsistence [as a result of desperate competition among unemployed men and

women for scarce jobs] would simply cause a dying off of the starving, until the supply of labor

had adjusted itself. Ricardo concluded that the wage would always be at subsistence level,

leaving the entire annual physical surplus to be divided between entrepreneurs and landowners.

But in a move of profound theoretical significance, Ricardo argued that what constituted

subsistence has a cultural, or historical, or habitual component. Here is the crucial passage from

Chapter V of the PRINCIPLES, "Of Wages":

"It is not to be understood that the natural price of labour, estimated even in food and
necessaries, is absolutely fixed and constant. It varies at different times in the same country, and
very materially differs in different countries. It essentially depends on the habits and customs of
the people. An English labourer would consider his wages under their natural rate, and too
scanty to support a family, if they enabled him to purchase no other food than potatoes, and to
live in no better habitation than a mud cabin; yet these moderate demands of nature are often
deemed sufficient in countries where "man's life is cheap", and his wants easily satisfied. [n.b.
Ricardo has in mind the Irish.] Many of the conveniences now enjoyed in an English cottage,
would have been thought luxuries at an earlier period of our history."

In this brief but pregnant passage is encapsulated the entire history of the labor movement

and the struggle for a living wage. At each stage in history, workers organize and strike for an

improvement in their conditions -- enough money to buy meat once a week, enough money to

have sugar for their tea, enough money to buy new clothing for their children when they go to

school, enough money for indoor plumbing, for medical care, for a vacation once a year. Their
employers condemn this demand for luxuries, and say that their workers are making demands

that will drive them out of business. When the workers are successful, for a while they treat their

improved conditions of life as a windfall. But eventually, they succeed in establishing that

improvement as a component of their subsistence, as necessary to them. And then the struggle

moves on. Always, they are demanding some portion of the annual surplus, and then redefining

the concept of surplus so that it does not include that portion now allocated to them as wages.

Ricardo understood this, almost three hundred years ago, even if our modern economists do not.

When General Motors reneges on its commitment to provide health care for its retired workers, it

is redefining downward the market basket of goods and services that constitutes subsistence.

When corporations outsource jobs, they are searching for a labor force that defines its

subsistence wage more restrictedly, and so are willing to leave a larger share of the annual

surplus to the capitalists. Everything I have just said can of course be said, in one way or

another, in the language and conceptual framework of neo-classical economics. But Classical

Political Economy makes these sorts of insights natural and immediate. It pushes them to the

fore, so that anyone reading their writings sees them easily. That is one of the great strengths of

the Classical school.

Marx understood everything that I have just attributed to Ricardo, but he went a very

great deal further in analyzing the historical and institutional changes that are embodied in, and

hidden beneath, Ricardo's laconic observations. Marx showed us that a long historical process is

necessary to produce a standardization of produced goods that fits them for the role of

"commodity' in a capitalist economy. A parallel process of de-skilling and regimentation is

necessary before it makes any sense to speak, as we do in our little equations, of so and so many

units of labor required for the production of one unit of corn or iron. Only when traditional craft

labor has been destroyed, and replaced by industrial labor, are the units of labor plausibly
interchangeable. Yet another process of routinization must take place in the processes of

production, through the introduction of machines. All of these historical processes, interacting

on one another, eventually bring about a state of affairs in which it is possible, meaningfully, to

speak of quanta of "socially necessary labor" as embodied in standardized commodities.

One small point, among the scores that Marx makes so brilliantly, will perhaps help to explicate

these remarks. Imagine, if you will, two workers employed in automobile assembly plants. John

works in a Toyota plant; Mary works in a General Motors plant. They are both averagely

efficient, work at the same speed, work on roughly comparable machines, and embody the same

amount of labor each hour in the cars that they help to assemble. Now suppose that, thanks to

the bumbling incompetence of a GM executive overseeing a product line OTHER than the one

on which Mary works, the entire division that he oversees operates in a sub-standard manner,

inefficiently producing sub-standard cars that GM cannot sell. This reduces the profitability of

GM as a whole, of course. The net result is that Mary, whose work process has been entirely

unaffected by the screw-up in the other division, ends up embodying LESS socially necessary

labor in the cars she is assembling than does John, working for Toyota. Nothing has changed in

Mary or John's behavior, but the logic of embodied labor calculations, based as they are on

quanta of socially necessary labor, results in their generating and embodying quanties of Labor

Value that diverge from one another. If Bob has the misfortune to be employed in a buggy whip

factory, still being operated by a demented capitalist despite the total lack of demand for buggy

whips, then Bob will, from a systemic perspective, embody no socially necessary labor at all in a

product. He might just as well be digging holes and filling them up. It is for this, and other

reasons, that Marx describes the commodity as "a very queer thing, abounding in metaphysical

subtleties and theological niceties." [Once again, I urge you to read my little book,

MONEYBAGS, where all of this is gone into at much greater length.]

 Part Fourteen

Why are the workers compelled to accept a wage that allots to them nothing more than

subsistence? This, of course, is the real story of capitalism, and Marx devoted a great deal of

time and many pages to his answer. Marx was, among other things, the first great economic

historian [that is to say, historian of economic matters -- he was also the first great historian of

economic theory, which is another thing entirely. See the three volumes of THEORIES OF

SURPLUS VALUE.] Looking principally at the evolution of capitalism in England [the data for

which were more readily available to him], Marx argues that over a period of several centuries,

peasants and artisans were progressively deprived of their ownership of or access to the means of

production -- the land, in the first instance, but also the forests, the mines, the tools of their

trades, and also, eventually, the inherited knowledge and skill that made them productive

craftspersons. Having no access to the means of production, they were left with nothing but their

capacity for labor, or as Marx calls it, their Labor Power. They are compelled to work for wages,

at terms set for them by the capitalists. At the same time, the traditional bonds between lord and

peasant are broken, so that on the one side, the workers are legally free to accept work wherever

and at whatever wage they choose, while on the other side, the employer is liberated from any

traditional or legal responsibility for the well-being, indeed for the survival, of his workers. It is

no concern of his if they starve to death. To be sure, if an employer offers wages well below the

market standard, his workers will leave him for an employer offering better wages. But the

competition between workers and employers is unequal, because the employers own and control

the means of production, and are capable of sitting out a strike, whereas the workers are living

from hand to mouth. The key to understanding any historical era, Marx says, is identifying who

controls the means of production. It is for this reason that the central demand of socialists is

collective control and ownership of the means of production.

 A few side notes on this vast subject, which I am merely touching on. First, in the

seventeenth century, as capitalism and wage labor were developing, it was common to view

working for wages as a kind of slavery [what eventually came to be called by radical critics

"wage slavery."] John Locke, in his classic SECOND TREATISE OF CIVIL GOVERNMENT,

asserts that I acquire ownership in a portion of the common given to us by God by mixing my

labor with it. [Thus, if I clear an uncultivated field and make it ready for cultivation, I acquire

ownership of the field by mixing my labor with it.] If my servant [his word], who works for me

for wages, clears the land, then, since I own his labor, I and not he acquire property in the land.

It is in this way that one individual comes to own vastly more land than he could ever mix his

labor with.

Second, Marx considers the appropriation of the means of production perfectly just, by

bourgeois [say, Lockean] conceptions of justice. But does he think it is REALLY just? The

answer -- rather surprising to readers who expect Marx to be a utopian reformer -- is that there is

no such thing as Real JUSTICE. Morality is a by-product of the structure of the social relations

of production in an era. Feudal justice simply IS justice in a feudal society, albeit it is an

anachronism in a capitalist society. So long as the slave owner in a slave society pays the

contracted price for his slaves, he has a legitimate claim to own them IN A SLAVE SOCIETY.

Marx never, never says that socialism OUGHT to replace capitalism. He says that socialism

WILL replace capitalism, as a consequence of the working out of the "laws of motion" of

capitalist society and economy.

One amusing final observation. Capitalism, for purposes of rationalizing the subsistence

wage, construes the worker as a petty commodity producer whose commodity is Labor-Power

[and for whom the wage is the cost of production of that commodity.] Now, in the American tax

code, independent business owners are permitted to deduct their costs of doing business from
their gross taxable income before arriving at the net taxable income on which they owe taxes.

So, since the worker must eat, wear clothes, and find shelter in order to produce, each day, his or

her product -- Labor-Power -- the worker ought to be able to deduct the cost of food, clothing

and shelter [and also medical expenses, etc.] from his or her gross taxable income before arriving

at the net taxable amount. Good luck! If I am not mistaken, someone [in Connecticut?] actually

took such a claim to court. The logic of the claim was, I believe, unassailable, but not

surprisingly, the court threw it out. So much for bourgeois justice when it conflicts with the

interests of the ruling capitalist class.

Not only did Marx study the history of the development of capitalism, and the history of

economic theory, he also studied what actually went on in the factories that were spewing out the

vast quantities of commodities that were making capitalists rich. In this as well he was breaking

new ground. Marx did not go into factories and watch the production process. Instead he went

to that great library, the British Museum. Why so? Because one of the achievements of the

Reform Movement that flourished in England in the first third of the nineteenth century was the

establishment of a cadre of professional Parliamentary Factory Inspectors charged by the

government with traveling around England and gathering data, first hand, on the conditions in

the rapidly multiplying factories. The Inspectors not only observed the production process.

They also interviewed workers and collected data on their working and living conditions. Their

observations were presented to Parliament in [I think] semi-annual Factory Inspectors' Reports,

which Marx read, volume after volume. [These reports have been reprinted by the Irish

University Press, and should be available in most really good university libraries.] Much of the

extraordinary Chapter X of CAPITAL Volume One, "The Working Day," is drawn from the

reports, as Marx's footnotes indicate.

 Marx describes the endless devices by which employers sought to extract extra labor time

from their employees. They would even go so far as to push back the hands of the clock in the

factory so as to steal an extra few minutes of unpaid labor. These detailed, matter of fact

descriptions give the modern reader an appalling picture of life in the early factories. But it is

very important to be clear that Marx is NOT saying that these tricks and thefts on the part of the

capitalists explain or account for the existence of profit. One of the beauties of Marx's theory is

that it accounts for profits in the ideal, never actualized case in which workers are faithfully paid

the wages for which they contracted, the production line is not speeded up above the norm for

the industry as a whole, and equal organic composition of capital in all liens of production

guarantees that all goods, outputs and inputs, exchange in proportion to their labor value.

It is also important to be clear that despite Marx's itemizing of the cruelties and dishonesties of

English capitalists, he insists that we will only have a satisfactory theory of capitalism if we can

explain how it works when all the capitalists are good-hearted, upstanding, honest men and all

the workers dutiful and obedient employees. His analysis and critique focus on the structure of

capitalism, its logic, so to speak, not on the many corruptions of it and deviations from the

canons of bourgeois justice.

There is, of course, a great deal more to be said about Marx's account of capitalism, but at

this point I want to continue the story I have been telling about Marx's completion and critique of

the classical school of Political Economy. We had gotten as far as showing [or at least reporting

-- I have not set down the proofs here. They can be found in UNDERSTANDING MARX] that

in the special case of equal organic composition of capital, prices are proportional to labor values

and surplus labor is extracted annually from the workers in an amount exactly equal to the labor

value of the annual physical surplus. The ratio of total profits to total surplus value is then
exactly equal to the ratios of prices to labor values, and thus, in that direct sense, profit just IS the

surplus labor extracted from the workers.

One terminological point before we move on to Marx's solution to Ricardo's problem of

unequal organic composition. In common speech, to exploit something is to make use of it so as

to achieve some end. Now, in that very generally sense, we may say that the factory owner

exploits coal's natural ability to burn in such a manner as to fuel a power machine, and the corn

producer exploits iron's ability to hold its shape and serve as a plowshare. But there is a more

precise and limited sense of the word that Marx invokes in his account of the origin of profit. To

exploit an input into production in this limited sense is to extract from it, in the process of

employing it in production, more value than has been embodied in it in the process by which it

was produced. There is, Marx says, only one such commodity [see the mocking passage, quoted

above, about Moneybags] -- namely, Labor Power. The capitalist buys a day's Labor Power

from its producer, the worker, at its natural price, namely a price proportional to the quantity of

labor embodied in it. [By the way, I keep inserting the term "proportional to" because money

and labor are measured in two different units -- pounds sterling, let us suppose, for money, and

hours of average socially necessary labor time for labor. Hence they can never, in the strict

sense, be "equal."] The capitalist then extracts from the labor power, in the production process,

MORE VALUE THAN IS CONTAINED IN IT.

It is in this precise sense that, according to Marx, CAPITALISM RESTS ON THE

EXPLOITATION OF THE WORKING CLASS.

And, if I may end today's post with a personal note, it is this proposition, in my

considered judgment, that is absolutely true, and remains when all the criticisms I have yet to

mount are leveled against Marx's specific solution of Ricardo's problem. The simple truth, as
true now as it was when Marx first advanced it, is that capitalism rests upon exploitation. That is

why, on this blog and elsewhere, I call myself a Marxist.

Part Fifteen

The time has come to see how Marx solves Ricardo's problem. This is going to get a

trifle gnarly, so you will have to follow along carefully. Our exposition will take us from

Volume One into Volume Three [Chapter 10]. Bear with me. To save space and time, I will

simply state the results of solving little equations and carrying out little calculations. Those who

are serious about mastering this subject are encouraged to work the equations out for themselves

on a piece of paper.

Recall the problem we face: Ricardo was aware that in the general case, when different

lines of production exhibit differing degrees of capital intensity, prices are not proportional to

labor values. He was convinced that the labor required directly or indirectly in production was

still the key to understanding the determination of the distribution of the social product, but he

simply could not figure out what happens when some lines of production are more labor

intensive and others more capital intensive.

To focus our attention, it will be useful to introduce a new model for analysis. [I trust

you understand that everything I say about these little three sector models can be proved quite

generally for a system with any finite number of lines of production. The formal proofs are all in

the Appendix to my book UNDERSTANDING MARX.] So, consider this new model, with

three sectors: corn, iron, and tools. Notice that in this model there are no luxury goods

[theology books]. Corn, iron, and tools are all required, directly or indirectly, in the production

of all three sectors. This, we shall discover, is essential to Marx's analysis. I will discuss it at

length a little later on. Notice also that I have specified the real wage, which is once again 0.2

units of corn and 0.1 units of iron per unit of labor.

 Labor Corn Iron Tools Output

Labor 30 15 0 150

Corn Sector 80 128 2 3 240

Iron Sector 20 16 1 5 60

Tools Sector 50 6 27 4 16

Using Lc to stand for the labor value of corn, Li to stand for the labor value of iron, and

Lt to stand for the labor value of tools, we can form three labor value equations, as before, from

the input and output data of those three sectors. When we solve the equations, we get the

following result, using the symbol "~" to mean "approximately equal to."

Lc ~ 0.9344

Li ~ 1.2168

Lt ~ 7.3712

In Marx's terminology, the total amount of embodied labor required by a sector of

production is called its Constant Capital, which he labels C. The total amount of direct labor

required he calls its Variable Capital, which he labels V. He uses these terms because the capital

inputs yield up a constant amount of embodied labor to the output in the production process, but

the labor power inputs yield up an amount of labor that varies according to the capitalist's ability

to wring more labor out of his workers.

Having solved the equations for the variables Lc, Li, and Lt, we can now plug these

values back into the table and calculate the ratio of constant to variable capital in each sector,

which Marx calls The Organic Composition of Capital. This is the same ratio that Ricardo
would call the ratio of embodied or indirectly required labor to directly required labor. These are

all different terms for the same mathematical quantities. When we do this, we find the

following:

The organic composition of the corn sector is 0.1713

The organic composition of the iron sector is 0.1164

The organic composition of the tools sector is 0.2271

The organic composition of the entire system is 0.1746

Quite obviously, this is not at all a case of equal organic composition of capital. We can

now set up the price equations, using Pc for the price of corn, Pi for the price of iron, Pt for the

price of tools, W for the money wage, and R for the profit rate. Because we have specified the

real wage, this system of three equations now has four unknowns: Pc, Pi, Pt, and R. When we

set the price of corn equal to 1, we have a system that can be solved. The results are as follows:

Pc = 1

Pi ~ 1.364

Pt ~ 7.455

R ~ 1/3

At these prices, the real wage ~ .3364

As should be obvious, in this system prices are not proportional to labor values.

Pc/Lc ~ 1.0702

Pi/Li ~ 1.12097

Pt/Lt ~ 1.0014

Now Marx makes his move. Tomorrow I shall tell you about Marx's big idea. [Hey!

This stuff is so deep in the weeds even my eyes glaze over. I have to do something to keep you

coming back.]
 Part Sixteen

Now Marx makes his move. [This paragraph is actually quoted from page 127 of my

book, UNDERSTANDING MARX. It seems to me somehow vaguely cheating to quote from a

book rather than to write something new, but I did write it myself, after all.] The prices at which

commodities exchange in the market are merely the surface of the capitalist market, the

appearance. The underlying reality is the extraction of surplus value from the workers in the

sphere of production. As Marx says in a letter to Engels in the year following the publication of

volume one, "profit is for us first of all only another name or another category of surplus value

...[S]urplus value gets the form of profit, without any quantitative difference between the one and

the other. This is only the illusory form in which surplus value appears."

The equality of profits with surplus value is an economy-wide fact, Marx claims. In any

single industry, the particular capital intensity may cause prices to deviate from surplus value, so

that the equality of the two, and the grounding of capitalism on exploitation, is hidden from

view. But in the society as a whole, the total of profits, rent, interest and other unearned income

must exactly equal the surplus labor value extracted from the workers. Marx adds the assertion

of a second claim: That the total price of all the commodities sold in a time period must equal

the total labor value of those commodities, even though the price of an individual commodity

may lie above or below its labor value.

As it stands, Marx's solution to the problem posed by Ricardo is incoherent. The problem

is one of units. Prices are measured in units of whatever is being used as money in the economy.

Labor values are measured in units of labor time [hours, person-years, etc.] Strictly speaking,

they cannot be equal unless one is deliberately stipulating the equality as a way of defining the

money unit, in which case the equality is a tautology. But there is a simple way of capturing
what Marx really intends to assert, namely in the following equality, which is definitely not a

tautology:

(total profits/total surplus value) = (total prices/total labor values)

Since the numerator of each side of the equation is measured in money units, and the

denominator is measured in labor time units, the units cancel out, leaving Marx asserting the

equality of two pure fractions.

Marx also asserts one more equality, between the money profit rate and something he

calls the value rate of profit. This latter quantity is simply the ratio between the surplus value

extracted in the economy as a whole [ S] and the sum of the constant capital [C] and variable

capital [V], measured in labor units. In other words:

The value rate of profit = S/(C+V)

So Marx claims that S/(C+V) = R

Is Marx right? Let us start by checking our little corn/iron/tools economy, the one that

does not have equal organic composition of capital. We can do this, albeit a trifle tediously, by

plugging into Marx's equation the values we got for prices, profits, labor values, and profit rate in

that system. Here is what we get:

Total profits are simply the total money cost of all the capital inputs in the system,

including labor [evaluated by means of the money wage], multiplied by the system wide profit

rate, which is 1/3. When we carry out this calculation, we find that

Total profits ~ 110.28 money units [which, we will recall, was specified as units of corn,

because we set Pc = 1.]

Total surplus value is calculated by subtracting the total amount of necessary labor in the

economy [which is the labor value of all the real wages earned by the workers] from the total

amount of labor employed in the economy. This is equal to 150(1 - Lw).

 Total surplus value ~ 103.71 units of labor.

Total prices are arrived at by simply adding up the money price of the total output: Total

prices ~ 441.12 money units

Total values are calculated in analogous fashion by adding up the labor value of all the

outputs. Total values ~ 415.20 units of labor

Now we can check Marx's claim.

(total profits)/(total surplus value) ~ 1.063 money units/unit of labor

(total prices)/(total values) ~ 1.062 money units/unit of labor.

Marx is right! [Indeed, the minor difference is actually a result of rounding. The actual

result is a strict equality.]

But this is just for our little corn/iron/tools model. What about the general case? Well,

there is bad news, and there is good news. The bad news is that if you add a theology books

sector, the equality break down. The good news is that the equality holds for EVERY

POSSIBLE LINEAR REPRODUCTION MODEL IN WHICH THERE ARE NO LUXURY

GOODS. What does all of this mean?

Well, when there are no luxury goods, the entire physical surplus is being used to expand

the magnitude of production. In other words, an economy without any of its surplus diverted to

luxury goods is engaged in the fastest possible rate of growth. "Accumulate, Accumulate, that is

Moses and the Prophets to the capitalists," says Marx. Now, to the more alert among you, the

following question may occur: As capitalists attempt to reinvest all of their profits in expanded

production, how do we know that they will not be frustrated by bottlenecks and gluts -- too little

of one input, too much of another? Can we be certain that balanced growth is in fact possible,

whatever the technical specifications of production may be?

 The answer, I am happy to say, is yes. There may indeed be mismatches between supply

and demand at first, but it is a mathematical fact [proved in the Appendix of my book] that for

any linear single-product system of production, there is some vector of levels of activity of the

different industries, arrived at over time by the forces of competition, that supports a process of

balanced growth, year after year. The growth rate, needless to say, is equal to the profit rate.

Interestingly enough, the great twentieth century mathematician John von Neumann proved a

theorem in growth theory exactly along these lines. As a consequence, an economy embarked on

maximum growth is said to be on a von Neumann balanced growth path.

[There is one really hinky other case in which Marx's equation is true, but as it has no

apparent economic meaning, and involves some hairy propositions about maximal eigenvalues, I

will leave it alone. You can find it discussed in Abraham-Frois and Berrebi's fascinating book,

THEORY OF VALUE, PRICES, AND ACCUMULATION.]

This is the theoretical high point for Marx, the outer limits of the success of his version of

the Labor Theory of Value. The key to the entire development in Marx is the distinction

between labor and labor-power, which opens up the possibility of surplus value. Tomorrow, I

will show you that Marx is all wrong, but that nevertheless his underlying intuition about

capitalism is correct. I will also suggest an alternative theoretical formulation of this underlying

intuition. Stay tuned.

Part Seventeen

I write these next words with tears in my eyes -- not because it turns out that Marx is

wrong. No, I am a grown-up, I have lived through twenty years of Reagan, Bush, and Bush

without breaking. I have shown that I can take it. The tears are for my one claim to economic

fame. In 1981, I published an essay entitled "A Critique and Reinterpretation of Marx's Labor

Theory of Value," in a journal called PHILOSOPHY AND PUBLIC AFFAIRS. [I believe it is

available on-line.] In that essay, I proved an extremely important theorem that shows that Marx

was wrong to impute the exploitative capacity of capitalism to the labor/labor power distinction.

I was, I firmly believed, the first person ever to realize the underlying logical flaw in Marx's

argument, and to demonstrate it mathematically. The proof was not much from a mathematical

point of view. Indeed, when I had first actually proved the theorem several years earlier, I was

ignorant of linear algebra, and had used nothing but elementary algebra and some ingenious

labeling moves. After the essay appeared [since I made the mistake of publishing it in a

philosophy journal, almost no one read it who was capable of appreciating it], the brilliant,

mathematically extremely sophisticated Marxist John Roemer published a reply and criticism in

the journal in which, in passing, he pointed out that the same theorem had been published two

years earlier by Josep M. Vegara in a monograph entitled ECONOMIA POLITICA Y

MODELOS MULTISECTORIALES. [For those who are interested, the proof appears in section

3.5 of that book.] As I am linguistically challenged, and do not even read Spanish, let alone

Hungarian or Japanese, I had of course not noticed Vegara's book. In the essay, I go on to

develop an entirely original alternative analysis of exploitation, which in due course I shall

repeat here [Roemer criticized that too]. But since this was my one shot at a genuine formal

proof to which my name could be attached, I still weep, all these years later, for the lost

opportunity. I am not the only person to whom this has happened, needless to say. At some

point in the 70's, Samuel Bowles presented to his class at UMass an elegant formal refutation of

Marx's famous claim about the falling rate of profit. When he finished, one of the graduate

students said, "Sam, Okishio proved that in 1960." Bowles was reduced to publishing a note in

1981 in the CAMBRIDGE JOURNAL OF ECONOMICS with the rather modest title "Technical

Change and the Profit Rate: A Simple Proof of the Okishio Theorem." I think I will stick to

philosophy. In that field, if someone publishes an idea before you do, all you need to do is put
brackets around your essay and a negation sign in front of the brackets, and then publish. You

will get just as much respect.

So, herewith an informal, very simple, and elegant exposition of Vegara's Theorem.

[God, how I hate writing those words.] The purpose of formal representations of arguments is

to exhibit certain very general structural features of the arguments without the distraction of the

content. Suppose I present you with the following argument: All Martians are vegans. All

vegans are politically correct pompous asses. Therefore, all Martians are politically correct

pompous asses. If you have never had an elementary course in logic, you may protest that there

are no Martians, and that you are offended by the statement about vegans. These natural

reactions are likely to blind you to the fact that the argument is a perfectly valid instance of what,

in the old days, was called a syllogism in Barbara, namely All A are B, All B are C, therefore All

A are C. [As a mnemonic device to help them remember which syllogisms are valid, the

medievals gave all the various possibilities names in which in which a sequence of three vowels

stood for the major and minor premises and the conclusion. Since "All A are B" was labeled a

proposition in the "a" form, the name Barbara, with syllables aaa, stands for a syllogism in which

each of the three propositions is of the form "All x are y."]

Marx, as we have seen, makes a number of formal claims about the relationship between

the physical surplus, the quantity of labor directly indirectly required to produce a commodity,

the prices at which goods exchange in a market ruled by competition, and the profit rate. Some

of these claims are true, others are true under certain interesting circumstances, and still others

are false. Marx also makes the very strong claim that all of these theses rest on the distinction,

unique to the labor input in production, between labor and labor power. Taken all together, he

claims to have shown rigorously that capitalism and its profits rest on the exploitation of the

working class. What is more, he argues, on the basis of all of these claims, that exploitation is
completely compatible with bourgeois morality, whose fundamental command is to give equals

for equals.

We have translated many of Marx's claims into formal mathematical assertions, and have

been able by this device to establish exactly when, and under what circumstances, they are true.

Suppose now that we look back at the equations we formulated for the purpose of calculating

labor values and prices and see whether, in those equations, there is some formal representation

of Marx's signature innovation, the distinction between labor and labor power.

On first inspection, the answer would seem to be yes. Here, for example, is the equation

we formulated, in the corn/iron/books model, for the labor values in the corn sector:

100 + 2Lc + 16Li + 0Lb = 300Lc

The labor inputs are distinguished by the fact that in the process of production, each unit

contributes one full unit of labor value to the corn output, whereas the corn and iron inputs

contribute only an amount equal to their labor value. The amount of labor required to produce a

unit of labor is, we saw, necessarily LESS than one unit of labor [this follows necessarily from

the fact that the system as a whole produces a physical surplus], and yet it contributes a full unit

of labor to the output. The difference between those two quantities -- the amount of labor

required to produce a unit of labor and a unit of labor -- is precisely the surplus labor that is

transformed, in the sphere of circulation, into profit.

But suppose now we ask a question that it never occurred to Smith or Ricardo or Marx to

ask, a question [I cannot let this go] which, for a brief moment, I thought I was the first person

ever to ask: How much corn, directly and indirectly, does it take to produce one unit of iron, one

unit of books, one unit of corn itself, AND ONE UNIT OF LABOR? Why on earth ask that

question? There is no plausible distinction between corn and corn power, after all. But that is

just the point. If we look at the equations, the only thing that tells us which input is labor, which
is, corn, which is iron is the label. Suppose we keep the same physical characteristics of the

model, but rewrite the equations so that they are set up to discover how much corn it takes,

directly and indirectly, to produce one unit of each input. Following our labeling practice, let is

call Ci the amount of corn, directly and indirectly required to produce one unit of iron, Cl the

amount of corn directly and indirectly required to produce one unit of labor, Cb the "corn value"

of books, and Cc the "corn value" of corn itself.

We can certainly do this. Nothing stops us from formulating such equations. But will

they have any economic meaning? Do we have any assurance that we won't get absurd results,

such as a negative value for the "corn value" of books? And, most important of all, will it turn

out that it takes less than one unit of corn to produce a unit of corn, so that there is some "surplus

corn value" generated each time we use corn as an input into production?

The answer to all of these questions, and any other similar questions we might ask, is a

simple YES. EVERY SINGLE RESULT WE PROVED IN OUR VARIOUS SYSTEMS WITH

REGARD TO LABOR, LABOR VALUES, AND SURPLUS LABOR VALUE, CAN BE

PROVED IN EXACTLY A PARALLEL MANNER FOR CORN VALUES, OR FOR IRON

VALUES OR TOOL VALUES. The only thing we cannot do is replicate these results for "book

values," because books are not required directly or indirectly as an input into every line of

production. They are a luxury commodity, as I called them.

It is necessarily true that all of the corn values or iron values or tools values] will be

positive, that the corn [or iron or tools] value of the physical surplus will exactly equal the

surplus corn [or iron or tool] value extracted from the corn inputs, that in an economy embarked

on a von Neumann balanced growth path:

(total money profits)/(total surplus corn value) = (total money prices)/(total corn values)

and so on and on.

 Clearly, Marx and Smith and Ricardo are right that there is something special about labor

that sets it apart from all the other inputs into production, but the distinction between labor and

labor power is not it, because the revised equations we wrote [well, we did not actually rewrite

all of them, but you get the idea] appear to demonstrate that in our system corn is exploited!

What on earth is going on?

I have an answer [and this one IS in some sense original with me, I think], but I must

prepare now to lecture this afternoon about Michael Oakeshott, so my answer will have to wait

until tomorrow.

Part Eighteen
Let us step back for a moment from the equations to remind ourselves of the core of

Marx's understanding of capitalism. Every social formation, every stage of history, he claims, is

determined fundamentally by who owns or controls the means of production -- the material

factors of production without which human beings cannot live and reproduce their conditions of

being. In a feudal society, the land is the premier means of production, and it is controlled by the

landed aristocracy, who compel others to work as peasant farmers on that land, and to yield up a

portion of the annual product as a surplus, which the lords then use as they wish. Land continues

to be essential to life in a capitalist economy, but it is joined by other factors of production,

including machinery, raw materials, factories, technical knowledge, and also the money capital

that entrepreneurs use to buy the factors of production.

The central fact of capitalism is the dispossession of the vast majority of working men

and women, their exclusion from access to and control over any means of production.

Propertyless, the great mass of people are forced to sell their labor to those who control those

means, on terms dictated by the owners of the means of production. Despite the surface

appearance of bargaining between legal equals in a market free of all coercion, the sale of labor
for wages is in reality an unequal bargain, forced on the workers by their need for food, clothing,

and shelter.

The distinction between labor and labor power was Marx's attempt to capture a

fundamental structural feature of capitalism, in such a manner as to solve the Ricardian problem

of price determination while also identifying the precise quantitative and qualitative origin of the

profits that, year by year, swell the wealth of the entrepreneurs and cement their control over the

eternally propertyless working class. Thus it was that Marx sought to prove, rigorously and

quantitatively, the fundamental proposition of his critique of capitalism, which is that

CAPITALISM RESTS ON THE EXPLOITATION OF THE WORKING CLASS.

But Marx's idea, ingenious as it is, proves not to be satisfactory, as we have seen, because

it does not succeed in building his insight unambiguously into the formal structure of his theory.

Every one of the propositions he advances concerning labor and labor value, many of which, as it

turns out, are formally correct, can be replicated for any other input into production that is

directly or indirectly required in all lines of production -- what Sraffa, in a different analytic

context, calls Basic Commodities.

Now I am convinced that Marx's fundamental insight about capitalism is completely

correct, so quite naturally, I am led to ask this question: Is there some other way of capturing

Marx's insight in the formal structure of the equations that represent the determination of prices

in a competitive capitalist market equilibrated by a system-wide rate of profit and a consistent

system-wide set of relative prices? Because I was so powerfully impressed and persuaded by

Marx's complex literary and sociological interpretation of what he calls the mystifications of

capitalism [an interpretation that I analyzed at length in MONEYBAGS], I wondered whether

the formal device by which we capture Marx's economic insight might also, somehow, build the

irony and mystification into the equations, if indeed that is even imaginable, so that instead of
two interpretations of CAPITAL, one economic and mathematical, the other literary and

sociological, we would have a single integrated representation of the full complexity of Marx's

thought.

Reflecting on this question for a while, I was led to the following train of thought.

According to bourgeois ideology and economic theory, the market is a site of voluntary,

uncoerced, mutually advantageous exchanges. The cobbler makes more pairs of shoes than he

can wear, the farmer grows more wheat than he can eat. They meet in the market and agree to

exchange shoes for wheat, to each one's benefit. Once money has replaced barter, the circulation

of commodities is a bit more indirect, but no less free and uncoerced. The cobbler sells his shoes

for money, and with his money buys wheat from a retail merchant, who in turn has bought the

wheat from the farmer, who in her turn buys the cobbler's shoes from a stall in the marketplace.

All of these purchases and sales are motivated solely by self-interest, and the only

requirement,imposed fairly and universally, is that contracts for the purchase or sale of

commodities be honored fully.

Like the cobbler, the farmer, the coal monger, and the clothier, bourgeois law and

ideology would have it that the worker too is an independent entrepreneur who buys his raw

materials in the market [food, clothing, shelter] in order to bring a commodity back into that

market for sale. The worker's commodity is a service, not a physical object, but in that respect

he is no different from the plumber or the electrician. Like them, and all other commodity

producers, the worker enters freely into a contract for the sale of that service, a contract that is

enforced impartially by the law.

By a long historical process of development leading to the full instantiation of capitalism,

the worker has been freed from all legal and traditional constraints on the sale of his or her labor.

The worker can go to whichever buyer offers the best price for the labor, anywhere that the law
of the land reaches, be it London, Manchester, Liverpool, or Bath. Nor are there any constraints

on what sort of labor the worker contracts to provide. She is free to work in a blacking factory, a

cloth factory, a coal mine, or on a wheat farm. And she is entirely free to walk away from any

place of employment for a higher wage or an easier job. It is this complete freedom of entry and

exit that creates what we come to call a "labor market," precisely analogous in its functions to the

market for coal, iron, or wheat.

The buyer too, the employer, is bound by no traditional obligations to a particular group

of workers. He can hire them at will, and fire them the moment it is in his interest to do so, just

as no law requires him to continue to buy coal from a coal monger if his furnaces have been

banked or even allowed to cool because of a shortfall in demand in the market for his goods. If

the worker, or the coal monger, or the tool and dye maker protests that he needs to sell his goods

or services, the buyer, the entrepreneur, replies that that is none of his concern. They were not

compelled to enter into a bargain with him, and inasmuch as he has paid for the goods and

services for which he contracted, at the price he contracted to pay, his obligations have been met.

Now, the free movement of buyers and sellers throughout the entire national or international

market over time produces a stable system of prices, so that a quarter of wheat or a ton of coal

sells for no more, and no less, in one place than in another [taking account of transportation

costs.] What prompts this movement is the ceaseless search on the part of all the producers for

the highest possible rate of return on their invested capital. There are rigidities, of course -- once

a cloth manufacturer has purchased his machinery and built his factory, he has some economic

interest in continuing to make cloth, at least until he can extract his capital [by selling the factory

to another entrepreneur and the machinery on the second-hand market, perhaps] and transfer it to

a more profitable line of production. Capitalism, as a twentieth century economist would

eventually observe, is a process of "creative destruction." [Joseph Schumpeter, for those who are

wondering.]

Precisely at this point, as Marx is at great pains to make clear, the whole superstructure of

liberal bourgeois philosophy and political theory and law is introduced to justify the treatment of

labor power as a commodity. Workers are treated in law, in ideology, and in philosophy as small

producers, petty entrepreneurs who bring their product, like any other capitalists, to the market

and exchange it for the products of other capitalists' enterprises. Their fixed capital is their

bodies, which, according to classical liberal philosophy and jurisprudence, they own. Their

circulating capital is the fund they spend for food and clothing. Assuming that they live at the

level of bare subsistence, the worker-capitalists are not likely to hire labor services (although

they may be forced to go to a doctor from time to time). Hence, all their capital will be constant

capital, none of it will be variable capital, to use Marx's terminology. Why are the workers

unable to move their capital freely to sectors paying a higher rate of return? The simple answer,

once more, is that their fixed capital is their bodies and their circulating capital is the food they

eat to stay alive. A steel producer who finds the return in steel declining can, given a long

enough period of time, cash in his investment and shift his capital to clothing, rental housing, or

luxury appliances. The worker who notices the absence of any significant rate of return on her

capital investment, and who, like any prudent capitalist, wishes to shift to a more profitable line,

will find it necessary to separate herself ("alienate herself," to use the technical legal term) from

her body. And by a quite unfortunate metaphysical accident -- which, however, can scarcely be

blamed on capitalism itself -- she is unable to survive that particular liquidation of her

investment.

It will be objected that workers are not really petty capitalists. Just so. But the objection

entirely misses the point of Marx's analysis. The workers must be made to appear as petty
capitalists, in law, in political philosophy, and in the formal theory of political economy. A

political economy that fails to model the essential mystification and ideological self-deception of

capitalist economic, political, and legal relationships will be an inadequate theory of capitalism.

An adequate political economy must capture that feature as false, in order to be true to the reality

and to the appearance of capitalism. We have here a very strange requirement indeed. We need a

formal model of an ironic, dialectical relationship between appearance and reality. The trouble

with other attempts to capture Marx's meaning is that they are either literary renderings, which

preserve the irony and the intricate interrelation between appearance and reality, but without the

formal structure that will allow us to calculate the magnitudes of the relevant variables; or else

they are formal models, like the Sraffa model, that lose entirely the element of mystification and

self-deception. If we agree with Marx that capitalism has its own mad logic, then we will search

for a model that embodies both the logic and the madness of capitalism. I suggest that the correct

way to begin this process is to treat the workers as though they were petty entrepreneurs,

producers, producing a commodity -- labor power -- for the market, and then capture the inner

madness of this way of thinking of them by stipulating that they, alone among all capitalists, are

unable to shift their capital about from sector to sector.

To repeat, since this is a strange way of thinking, all of the entrepreneurs are ceaselessly

searching for more profitable lines of production in which to invest their capital -- SAVE FOR

ONE GROUP, THE WORKERS. The workers have what might, with full and deliberate ironic

intent, be called a metaphysical problem. Their capital is not factories or mines or farms or

money but their bodies. The inputs they must obtain to enable them to produce their labor

services are the food, clothing, and shelter they need to continue to live. If the return on labor

services sinks so low that the labor producer, the worker, barely makes enough to pay for her

inputs, offering virtually no rate of profit whatsoever, the only way she can cash in her capital, so
as to shift it to a more profitable investment, is -- to cash it in -- to die. She is trapped in her

condition as provider of labor, and has no choice, if she would live, but to sell that labor in the

market at whatever price she can get.

This is the bitter reality that lurks beneath the bourgeois ideological surface of equal

uncoerced exchange. The status of the cloth manufacturer is precisely equal to that of the

machine tools manufacturer. That is why they find it easy and natural to frequent the same

clubs, buy homes in the same gated community, and send their children to the same public [i.e.,

private] schools. It is the structure of the underlying reality that explains the ever-increasing

wealth of the entrepreneurs and the perpetual penury of the workers.

So I asked myself, how can I capture this complex situation, this contrast between surface

appearance of equal exchange and underlying reality of relentless exploitation, in a system of

equations that will express formally the bitter irony of construing workers as free and equal small

commodity producers and at the same time yield a satisfactory account of the determination of

equilibrium prices in an economy exhibiting a uniform rate of return on invested capital? The

result of my ruminations was a revision of the corn/iron/tools model, which is readily

generalizable to an economy with any finite number of sectors of production.

Tomorrow, I will set the revised model before you and discuss some of the conclusions we can

draw from it [and from its generalization to any number of sectors of production].

Part Nineteen

Here are the price equations of our corn/iron/tools model, revised so as to represent workers as

petty commodity producers. In order to indicate that capital cannot be transferred from the labor

producing "industry" to other lines of production, I introduce a new variable, r, to stand for the

rate of "profit," if there is any, in that "industry.

( 0Pl + 30Pc + 15Pi + 0Pt )( 1 + r ) = 150Pl

( 60Pl + 128Pc + 2Pi + 3Pt )( 1 + R) = 240Pc

( 20Pl + 16Pc + 1Pi + 5Pt )( 1 + R) = 60Pi

( 50Pl + 6Pc + 27Pi + 4Pt )( 1 + R) = 16Pt

It is not necessary to specify the real wage because that is implied by the input quantities of the

first line of production. This is now a system of four equations in six unknowns: Pl, Pc, Pi, Pt, r,

and R. We reduce the number of unknowns to five by stipulating that corn is the money

commodity, as before, setting Pc = 1. That still leaves one degree of freedom.

It is not difficult to demonstrate [see the essay referenced above] that r and R vary inversely to

one another. That, note, is different, formally speaking, from showing that the wage and the

profit rate in the old system vary inversely to one another, although the underlying facts are

much the same. A non-zero r means that the workers have somehow managed to extract from

the capitalists some portion of the surplus. But this way of representing things, besides making

no reference to the Labor Theory of Value, also opens the way for economists like Gary Becker

to introduce the notion of "human capital." Workers who, in effect, drive the wage above bare

subsistence can either consume the extra in the form of a somewhat less miserable standard of

living, or they can -- as Becker might say -- invest in the improvement of their capital stock

[themselves] by paying for education, which will allow them to produce a new and higher priced

commodity -- namely, skilled labor. This way of thinking, crazy as it is [Marx is brilliant on

this], leads naturally to the countless discussions of the "return on investment in education' in the

form of higher lifetime earnings.

Notice, by the way, that if we wish to continue with this charade of labor as a commodity

produced by a petty bourgeois entrepreneur, we must allow for several labor sectors, each with

its own particular "product" [some form of unskilled or skilled labor or educated labor] and with

its own rate of return. We can even analyze a failure of some children of the educated workforce
to take advantage of the opportunities provided by their parents as their choosing to consume the

additional portion of the surplus made available to them instead of investing it, thus reproducing

the fairytale about prudent and imprudent capitalists [ants and grasshoppers.] And, of course, the

variation in the rates of return in the several labor sectors permits us to talk about the relative

exploitation of unskilled workers by much better compensated skilled workers.

The point of all this is to elaborate on the fundamental verrucktheit, or craziness, of the

manner in which bourgeois ideology [law, economic theory, philosophy, sociology, etc.]

mystifies and conceals the exploitative nature of capitalism, making it appear that the failure of

the workers to improve themselves is attributable to their imprudence rather than to the

disadvantageous position in which they find themselves vis-a-vis capital.

[A propos, Susie and I saw "Company Men" last night, an interesting movie about the

effects of the economic crisis on three privileged and advantaged corporate executives -- Ben

Affleck, Chris Cooper, and Tommy Lee Jones, with a nice turn by Kevin Costner. It is worth

seeing, I think.]

It is not difficult to show, formally, that the total profit appropriated by the corn, iron, and

tools sectors is equal to what is lost to the labor sector by its inability to shift its capital to a more

profitable line investment.

I have now come to the end of my story, even though there is a very great deal more to be

said about Marx's theories, some of which I have said at length in my two books and several

articles on him. Let me explain why I have taken so very much time and expended so much

effort expounding and analyzing the Labor Theory of Value, only in the end to show [with

arguments original to Vegara and myself] that the theory is incorrect.

Part of the reason, to be totally honest, is that I simply find the analytics of the theory

fascinating and elegant. My entire life has been spent taking impossibly difficult theories [such
as those in Kant's First Critique] and clarifying them in my own mind until I can present them to

others as clear, simple, elegant, and beautiful. My second reason is to rescue Marx from the

unfounded criticism that he is -- in the infamous words of Paul Samuelson -- a "minor post-

Ricardian autodidact." I was so offended by those words when I first read them that I felt a need

to show, clearly and simply, that they were just not true. My third reason is that I believe one

cannot really come to grips with the profound truth at the heart of Marx's critique of capitalism

without first working through this theoretical story and becoming completely clear on its precise

status and limits. Speaking simply for myself, I could not have been led to an understanding of

the ironic structure of Marx's critique, and the core irrationality of treating workers as though

they are participants in a free market of exchange among producers and consumers, had I not

first made my peace, intellectually, mathematically, and theoretically with Marx's own attempts

to capture that craziness.

I hope this tutorial has been useful to some of you. As I feared, it went on for a very long

time, so long, I imagine, that I lost a number of readers along the way. But I have enjoyed

writing it, and it will live forever in cyberspace, in the weird way things have of surviving in that

realm.