Main Themes in Marx’s Classical Approach
From value to surplus value
According to Marx, it is a specific characteristic of the capitalist mode of production that human labour-power also assumes commodity-form. Its value is determined, just like that of any other commodity, by the amount of socially necessary labour required in its (re)production.
In order to (re)produce his labour-power the labourer needs certain amounts of means of subsistence (for himself and his family), that is, a certain consumption basket, the size and composition of which is determined, at any given time and place, by physiological, historical, and cultural circumstances: “Therefore the labourtime necessary for the production of labour-power is the same as that necessary for the production of those means of subsistence; in other words, the value of labour-power is the value of the means of subsistence necessary for the maintenance of its owner” (Marx [1867] 1976: 274). That the workers’ remuneration cannot systematically exceed the subsistence level Marx explains with reference to competitive pressures on the labour market that result from the existence of an “industrial reserve army”, that is, especially from the existence of a pool of unemployed workers, which is continuously replenished by the displacement of workers consequent upon the introduction of labour-saving technical progress.The use-value of the commodity labour-power consists in its “productive consumption” in the production process: the capitalist “consumes” the commodity labourpower he has purchased at its labour-value r by employing it, together with various means of production whose aggregate labour value is given by c, in the production of a certain commodity. Marx called the raw materials, intermediate products, and the means of production purchased by the capitalist “constant” capital, because their value is merely transferred onto the product without any change, either in a single production cycle (raw materials and intermediate products) or else over a number of production cycles (tools and machines).
With the “variable” part of the capital advances labour-power is purchased, which reproduces not only its own value but generates an additional value conferred to the product. The value of the product, λ, is given by the amount of (socially necessary) labour which has been used up in its production in the form of “direct” or “living” labour, l, and in the form of “indirect” or “previously expended” labour, which is “congealed” in the means of production, c, that is:
The term v denotes what Marx calls “surplus value”. Its existence obviously derives from the fact that a part of the “living” labour performed by the worker consists of “unpaid” or “surplus labour”, because the labourer has to work longer than is necessary for reproducing his means of subsistence (l > r). In volumes I and II of Capital, Marx supposed all commodities, including the commodity labour power, to exchange at their (labour-) values. Accordingly, “exploitation” is not “explained” by him from wages being “too low,” that is, from assuming that workers have to sell their commodity - their labour power - below its value. Exploitation, Marx insisted, is a phenomenon that is not generated in the sphere of circulation, but in that of production.
The “transformation problem”
In volume I of Capital Marx maintained that the value of a commodity is given by the quantity of socially necessary abstract labour required in its production. The exchange ratios between any two commodities are then given, by definition, by the ratio of their labour values. However Marx, who had carefully studied the contributions of Smith and Ricardo, was of course aware of the fact that the “prices of production” (or “natural prices”, as his precursors called them) must generally deviate from labour values. He was convinced, however, that he understood much better than his predecessors why these deviations occur and how their magnitudes can be ascertained.
What had prevented his precursors from developing a correct solution to the problem? According to Marx, the reason for their failure is to be found in Adam Smith’s erroneous idea that the annual social product (exclusive of rent) can be entirely reduced to wages and profits; an idea which had also been implicitly adopted by Ricardo when he supposed in his determination of the general rate of profits that all capital can be reduced to advanced wage capital in a finite number of steps. Both had overlooked that a part of the annual product, which Marx called “constant capital”, must be used in order to replace the used-up means of production. If this is taken into account, it becomes immediately obvious that the deviations of production prices from labour values are caused by the differences in the proportions of the two capital components in the production of the various commodities, that is, by differences in the proportions between “living labour” and “dead labour” (vorgetane Arbeit). If the constant capital is again assumed for simplicity to consist only of circulating capital, the value of an industry’s annual product is equal to c + l, where c is the value of the constant capital (the quantity of “indirect” labour) and l is the quantity of “living” (or “direct”) labour. Denoting by v the value of the wages advanced in this industry - Marx’s “variable capital” - the industry’s costs of production in value terms amount to c + v, and the surplus value generated in this industry is given by s = (c + l) - (c + v) = l - v. The rate of profit in value terms of this industry is then given by:
It is thus seen to depend on two magnitudes: on s/v, a ratio that Marx calls “rate of surplus value” or “rate of exploitation”, and on c/v, which expresses the so-called “organic composition of capital”. Under competitive conditions (and on the assumption of the mentioned deskilling of labour and the emergence of a uniform length of the working day) the rate of surplus value must be the same in all industries.
The organic composition of capital, however, is determined by technology and will in general differ across industries. An exchange of commodities at their labour values would therefore be associated with different profit rates across industries. The tendency towards uniform rates of profit in competitive conditions therefore leads to systematic deviations of relative prices from labour values. These deviations are necessary in order to relate the surplus value of the economic system as a whole, S, which was generated in the individual industries in proportion to the industries’ variable capitals, to the capital of the economic system as a whole, C + V.Marx believed that for the system as a whole these deviations of production prices from labour values must exactly compensate each other, so that the general rate of profits is the same as the one which emerges if the economy as a whole is considered as a single industry, that is, the same as:
where S, C, and V denote total surplus value, total constant capital, and total variable capital, respectively. In Marx’s view, the labour theory of value, although it does not directly give a correct theory of relative prices, nevertheless provides the basis of such a theory. That Marx felt justified to make use of the labour theory of value in volumes I and II of Capital was therefore due to his conclusion, at which he had already previously arrived (but from which we now know that it is untenable) that the general rate of profits calculated at production prices is the same as the value rate of profits. However, if this mode of exposition may have seemed justified to Marx as being easily comprehensible for his readers, with the benefit of hindsight it was a mistake, which has seriously impeded the understanding of his work. The fact that volumes II and III of Capital became available only much later has contributed to the solidification of the misconception that Marx had meant to determine relative prices directly by means of the labour theory of value.
When Marx, in section 2 of volume III of Capital, explicated his idea of the redistribution of surplus value in the course of the transformation of labour values in prices of production, he noted explicitly that his transformation procedure was not fully accurate, because the means of production have to be evaluated at production prices rather than at labour values (1894 [1981]: 259-60, 264-5). He overlooked, however, the important implication that he then also had no justification for supposing that the ratio of total profits to total capital is the same as if commodities were exchanged at labour values, that is, he overlooked that his “successivist”, two-step procedure for the determination of the general rate of profits and relative prices, as Ladislaus von Bortkiewicz (1906-07 [1952]: 38) called it, was thereby undermined.
Reproduction, accumulation, and crises
As Marx explained in his Foreword to Capital, “it is the ultimate aim of this work to reveal the economic law of motion of modern society” (1867 [1976]: 92). Accordingly, the analysis of the dynamism of the capitalist development process formed a central element in Marx’s work. In this analysis, as in Marx’s thinking generally, the concept of “reproduction” occupied a prominent place. Social relations and social formations exist, Marx argued, because the prevailing mode of production systematically reproduces them. In capitalist societies the reproduction of capital is associated with the reproduction of the class relations: at the end of the production and circulation process the capitalist has reproduced his advanced capital, together with surplus value, whereas the labourer has reproduced only his labour power. If social production is organized capitalistically, the production process itself thus reproduces capitalists and labourers as social classes.
Accumulation of capital requires that part of the previously generated surplus value is used in the production process again. If the reinvested surplus were used only for increasing the activity levels of the existing production processes, the constant capital and the variable capital would be increased proportionately, and there is “reproduction on an extended scale”.
However, this need not be the case. In general, the accumulation process is bound up with changes in the structure and organization of capital and in production relations; new machinery and new methods of production, of transportation, or of organization are introduced, and new products and new markets are developed. The competitive process forces each individual capitalist to search constantly for less costly methods of production, better product quality, new markets, and so on. In addition, Marx argued that the accumulation process is also bound up with an increasing concentration and centralization of capital: larger capitals displace smaller capitals owing to the exploitation of increasing returns to scale and scope, and capital becomes ever more centralized by means of take-overs of competitors.The schemes of “simple” and “extended reproduction” in chapters 20 and 21 of volume II of Capital, which Marx developed on the basis of Franςois Quesnay’s Tableau economique, are widely regarded as one his finest analytical achievements (see Gehrke and Kurz 1995). The model of simple reproduction depicts the commodity circulation between two sectors. The first sector produces capital goods for itself and for the second sector producing consumption goods, and receives in return the consumption goods required for the alimentation of the workers and the capitalists’ consumptions. For this simple two-sectoral model with circular production relations Marx showed the conditions for a stationary reproduction equilibrium. In the next step, he then turned to the analysis of extended reproduction and showed by means of simple numerical examples that balanced capital accumulation must be associated with an expansion of the two sectors in lock-step, that is, with steady-state growth. The original manuscripts published in the MEGA edition show that Marx had also worked out more elaborate versions of the reproduction schemes with six sectors, which in terms of their analytical structure are similar to the three-sector models of Feldman (1928 [1964]), Mahalanobis (1953), and Lowe (1976); see Mori (2007).
In Marx’s writings there is no consistently elaborated cycle theory, but there are several approaches to the explanation of crises. One of these relates to the reproduction schemes and locates the source of crisis-ridden developments in disproportions that occur in the accumulation process and that tend to reinforce themselves. In addition, Marx also put forward theoretical explanations based on under-consumption arguments, which refer to insufficient purchasing power of the working class as triggering an insufficient overall effective demand. However, Marx’s most elaborate explanation for crises and economic stagnation derives from his “law of the tendency of the rate of profits to fall”, which he set out in volume III of Capital.