Marx saw himself as the heir and critic of classical political economy, which concen­trated its attention on the production and distribution of the means of subsistence (Dobb 1973).

Ricardo and his followers explained the evolution of modern economies in terms of the fundamental conflict between the different social classes in a predomi­nantly agricultural society where the producers enjoyed a bare minimum standard of living and the surplus product was shared between landlords and capitalist farmers.

According to the principle of historical materialism, the relations that define the eco­nomic system, and the institutions of politics and the law, as well as the dominant forms of social consciousness, are all ultimately determined by the requirements of the produc­tive forces, which consist of means of production and human labour power. The produc­tive relations are relations of power, and usually also of ownership, over the productive forces. Three propositions are central to historical materialism. The development thesis states that human creative intelligence, reacting to scarcity, makes the productive forces develop over time. The primacy thesis asserts that it is the level of development reached by the productive forces that explains the nature of the productive relations, which in turn account for the nature of the superstructure (non-economic institutions such as the legal system and the state).

Marx distinguished several modes of production, characterised by the different ways in which surplus labour was performed and the resulting surplus product was appropri­ated. In primitive communism there was little or no surplus and no class stratification. In classical antiquity the critical social relation was that between slaves and slave-owners, while under the feudal mode of production surplus labour was extracted through the serf’s obligation to work, without remuneration, for several days each week on the lord’s land. In none of these early modes of production were market relations of over-riding importance; the production of commodities was not central to the way in which they operated. In classical antiquity and feudalism, the exploitation of the producers was directly observable. Capitalism, by contrast, is defined by the dominance of commod­ity production, and above all by the fact that human labour power has itself become a commodity. This gives rise to the appearance that every hour of work is paid for, con­cealing the underlying reality of surplus labour, which is now produced in the form of surplus value.

The theory of historical materialism maintains that the classical, feudal and capital­ist modes of production followed each other in chronological sequence, each serving at first to develop the forces of production but eventually becoming a fetter upon them. Capitalism would in its turn give way to socialism/communism, which, Marx believed, constituted the final stage in the unfettering of human productive potential, with the eventual abolition of the market and the direct regulation of production by society in accordance with genuine human needs. Another typology that Marx used was a three­fold distinction between relations of personal dependence, as in slavery and serfdom, material dependence, in which impersonal market relations concealed the producers’ continuing dependence on their own products, and free individuality, a future society where people would control their own lives and cooperate freely with others inside and outside of production (Marx 1857 [1973]: 158).

Most of the central features of the capitalist mode of production were identified by Marx and Engels as early as 1848 in the Communist Manifesto, and their analysis has formed the basis for all subsequent developments in Marxian political economy (Hobsbawm 1998). These core features are: exploitation; alienation and fetishism; com­pulsion to accumulate; concentration and centralisation of capital; constant revolution­ising of the means of production; global expansion; social and economic polarisation; intensification of class conflict; increasingly severe economic crises, accompanied by the growth of a reserve army of unemployed workers; development of socialist relations within capitalism; and the eventual replacement of capitalism by socialism/communism through proletarian revolution.

Marx’s masterpiece was, of course, his Capital, the first volume published in 1867 and the second and third (edited by Engels) only after his death, in 1885 and 1894 respec­tively (Fine and Saad-Filho 2010; Harvey 2010; Howard and King 1985). For Marx the defining characteristic of capitalism is the relationship between wage labourers and capitalists: capital is defined as a social relation, not primarily as a sum of value or a col­lection of machines and buildings. In this relationship workers are not only exploited, that is, forced to perform surplus labour or required to work for longer than would be necessary to produce the means of subsistence that they need to keep them alive and able to work. They are also alienated, since the products of their labour have escaped their control and have instead become external forces that increasingly dominate their own producers. Marx sometimes referred to alienation as human self-estrangement, meaning by this that although people exist in a social world of their own collective making they relate to it only as strangers. Alienation is an objective social condition; its reflection in human consciousness is commodity fetishism, a distorted view of the economic world in which historically contingent social relations are seen as the natural properties of things.

All pre-modern legal, political, religious and cultural constraints on competition are progressively eliminated as capitalism develops, and the pressure on individual capital­ists intensifies. Machine production drives out the earlier technology of manufacturing (literally, making things by hand), so that the economic advantages of large-scale pro­duction are increasingly evident and the processes of concentration and centralisation of capital accelerate. Individual units of capital become larger and the number of capitalists able to survive in any branch of industry diminishes. Peasants, petty traders and small handicraft producers disappear as the polarisation of society between large capitalists and propertyless wage labourers becomes more and more extreme. Increasingly this occurs on a global scale, as capitalists pursue a world market for their commodities.

Hours of work increase, as do the intensity of labour and the workers’ experience of alienation. Real wages may fall, remain constant or even rise somewhat, but relative to profits they continually decline, and the insecurity of proletarian existence grows. This is the material basis for increasingly acute class conflict, which is accentuated by the socialising effects of the factory system. Working-class radicalism is further provoked by periodic economic crises, which throw many of them out of work and demonstrate that capitalism has itself now become a fetter on the development of the productive forces. Its own technology and social organisation point unerringly towards the socialist/communist future that will be realised, sooner rather than later, through proletarian revolution.

Marx attempted to formalise his vision of capitalism into a systematic model of accumulation and crisis. For this he needed a theory of value so that the fundamental relationships could be expressed in a clear and coherent manner. The qualitative dimen­sion of Marx’s value theory expresses the profound but frequently neglected truth that a social division of labour underpins each individual act of market exchange.

Marx distinguished dead from living labour, where dead labour is contained in the produced means of production (machinery and raw materials) that are used in the course of production. Only part of the workers’ living labour is paid for; their unpaid or surplus labour is what produces surplus value (s), which is in turn the source of profit, inter­est and rent. Capital has two components. The first is constant capital (c), the value of which is merely transferred from the means of production to the final product without increasing in quantity. The second is variable capital (r), embodied in the wage-goods consumed by the workers, which expands its value during production because of the performance of surplus labour. Thus the value of any particular commodity has three components, c, r and s, and the same is true of the total product of society as a whole.

Some of the difficulties with this quantitative labour theory of value were acknowl­edged by Marx himself, in particular the problems associated with the payment of rent, the distinction between productive and unproductive activities, the application of the law of value to the market for labour power, and the continuing diversity of the working class in terms of its skills and capabilities. Even more troublesome was the transforma­tion problem, which required Marx was to distinguish the labour value of a commod­ity from the price of production at which it was actually sold, and also to distinguish the profit accruing to individual capitalists from the surplus value produced by their workers.

In volume II of Capital, Marx used his value categories to set out a formal model of capital accumulation and to explain why the process of accumulation necessarily involved cyclical crises. He distinguished two sectors, one producing capital goods and the other consumer goods; sometimes he drew a further distinction between wage-goods and luxuries. His models of simple reproduction (zero growth) and expanded reproduc­tion (positive growth) reveal that the rate of accumulation depends on the proportion of surplus value that capitalists decide (or are compelled) to devote to accumulation, and also on the rate of profit. Marx’s objective here was not to demonstrate that smooth growth was likely but precisely the opposite: to show why it is not likely to occur. In volume III of Capital he developed a model of the falling rate of profit in which rising productivity in industrial production was reflected in a tendency for the organic compo­sition of capital (c/v) to increase more rapidly than the rate of exploitation (s/v). This, he argued, would eventually result in a falling rate of accumulation, and this would vindi­cate the fettering thesis that is central to historical materialism.