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Karl Marx’s ‘Critique of Political Economy’

riccardo bellofiore

Introduction.

Karl Marx’s “critique of political economy” is grounded in his value theory. Critique
has to be distinguished from criticism: Marx was not only interested in pointing
out the errors of political economy, but also to learn from its scientific results: here
the key names are Quesnay, Smith, and Ricardo. Marx was also interested in
assessing the conditions and the limits of the knowledge provided by Classical
Political Economy. At the same time, the critique of the “science” of political
economy was the means to provide a critique of capitalist social relations.

The uniqueness of Marx is that his value theory is the only one consistently put
forward within a monetary analysis: that is, it introduces money in the very initial
deduction of value. In fact, Marx’s object of inquiry is capital understood as a
“social relation of production”, characterised by two main defining traits: the
exploitation of labour within a monetary commodity-producing economy; an
internal tendency to crisis. The connection between money and class exploitation,
on the one side, and the endogeneity of crisis, on the other side, is related to the
view that, in a capitalist economy, the “value added” (a monetary magnitude)
newly produced within the period has its exclusive source in “abstract labour” as
an activity – more precisely, in the living labour of the wage workers.

In a nutshell, Marx’s reasoning may be easily captured in a macro-monetary theory

of capitalist production. In the capitalist labour process, the totality of wage
workers is reproducing the means of production employed and producing a net
product. The net product is expressed on the market as a new money value that is
added to the money value attached to the means of production, historically
inherited from the past. This value added is the monetary expression of the living
labour time that has been objectified by the wage workers in the period. The value
of the labour power (for the entire working class), which is exhibited in money
wages, is regulated by the labour-time required to reproduce the capacity for
labour, and hence by the labour time required to reproduce the means of
subsistence bought on the market. Accordingly, the surplus value (value added less
value of labour power) originates from a surplus labour, defined as the positive
difference between, on the one hand, the whole of living labour spent in producing
the total (net) product of capital and, on the other, the share of that living labour
which has been necessary to devote to reproducing the wages, which Marx labels
as necessary labour.

Marxian critique of political economy is inseparable from the meaning Marx gave
to the “labour theory of value”, which in his case was rather a value theory of
labour. The issue is how the production and circulation relations are affected by
the fact that labour takes the capitalist social form of being productive of a value
and surplus value embedded in “things”, in commodities. In the following I will

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look at Marx’s value theory from five perspectives: (i) as a monetary value theory;
(ii) as a theory of exploitation; (iii) as a macro-monetary theory of capitalist
production; (iii) as a theory of individual prices; (v) as a theory of crises.

The theory of value as a monetary value theory

Marx’s starting point is that capitalism is an economy where commodity circulation

goes on through universal monetary exchange. The analysis of exchange as such is
given priority relative to the analysis of capitalist exchange, and money is
introduced before capital. In exchange “as such”, individual commodity producers
are separate and in competition with each other. The labour of these asocial
individuals is immediately private and “becomes” mediately social on the market.
Socialisation of labour goes on indirectly, through the selling of commodities. Each
commodity is shown to be equal to the other commodities in certain quantitative
ratios. The commodity has a use value, but it also possesses an exchange-value:
though invisible in the commodity, it is externally exhibited in money as the
“universal equivalent”.

At this stage of Marx’s original argument money has to be a (special) commodity

with universal purchasing power, gold, as a result of a historical process of
selection and exclusion sanctioned by the State. The equal “validity” of products
sold on the market is in fact an a posteriori equalisation of the labours producing
them. Thus, labour is not social in advance, but only in so far as its true output will
be money: “generic” or “abstract” wealth. Individual labour, which is concrete
labour producing an object with some utility for some other agent (a social use-
value), counts for the producer as its opposite, as abstract labour. Abstract labour
is a portion of the total labour exhibited in the money value of output: it is then
also a portion of the gold-producing concrete labour, this latter being the unique
immediately social labour. The “value of money” is fixed when gold first enters
monetary circulation, in the originary exchanges with the other commodities.

Though it is only through money as universal equivalent that private labour

becomes social labour, it is not money that renders the commodities
commensurable. On the contrary, commodities possess an exchange value because,
even before the final exchange on the commodity market, they have already
acquired the ideal property of being universally exchangeable, so that they have
the form of value. This property, so to speak, grows out from objectified labour as
the substance of value: the form of value in the individual commodity is a ghostly
entity, but it materialises taking possession of the body of money as a commodity;
the internal duality is now “redoubled” in the external duality commodity-money.
Money is nothing but value made autonomous in exchange, divorced from
commodities and existing alongside them: and as such it is the outward necessary
exhibition of abstract, indirectly social labour.

This qualitative analysis of exchange as such has a quantitative counterpart. The

magnitude of value of a commodity is determined by the socially necessary labour-

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time needed for its production. “Socially necessary labour-time” has two meanings:
production must be run according to average techniques and intensity (determined
by intra-industry competition), but it is also driven by the paying social need (what
Marx calls “ordinary demand”). In a particular branch of production each
commodity of a given type and quality is sold at the same money price. Hence, the
magnitude of value is ruled not by the “individual” labour-time actually spent by
the single producer (i.e. by its individual value) but by the labour-time that has to
be expended under “normal” conditions (i.e. by its social, or market, value). The
magnitude of value is inversely related to the productive power of labour (the
labour time required to produce the commodity, given the intensity). Commodity
values are necessarily manifested as money prices. The quantity of money that is
produced by one hour of labour, in a given country and in a given period, may be
defined as the monetary expression of labour: the magnitude of value of a
commodity multiplied by the monetary expression of labour gives the so-called
simple or direct price.

On this outlook, it is always possible to translate the external monetary measure of

the magnitude of each commodity’s value (ideally anticipated by producers before
exchange) into the immanent measure in units of labour-time. Note, however, that
value is not identical with price defined as any arbitrary relative ratio between
commodity and money fixed on the market. Value expresses a necessary relation
with the (abstract) labour-time spent in the production of commodities. To be
effective in regulating market prices, value implies a coincidence between
individual supply and demand. In that case the spontaneous allocation of the
private labours of the autonomous producers affirms itself a posteriori on the
market as a social division of labour. Price is the money-name taken by
commodities, and since there may well be divergences between individual supplies
and demands, price may exhibit a labour amount that differs from the socially
necessary labour contained in the commodity. The whole mass of the newly
produced commodities is a homogeneous quantity of value whose monetary
expression is necessarily equal to their total money price. The divergence between
values and prices simply redistributes among producers the total direct labour, i.e.
the content hidden behind the money form taken by the net product.

This approach to value theory, where value eventually “comes into being” in
money, may be characterised as Marx’s monetary value theory. In it, value and
money cannot be divorced. It is formulated most clearly in the opening pages of
Capital, where Marx moves from exchange value to value, from value to money,
and from money to labour. It may be attacked on several grounds.

Böhm-Bawerk failed to notice the essential monetary side of Marxian value theory,
and looked only at what he saw as a linear deduction in the direction exchange
value-value-abstract labour. Quite reasonably (from this limited reading of Marx),
he observed that abstracting from specific use-values does not mean abstracting
from use value in general. Moreover, an exchange value is also attached to non-
produced commodities. It follows, then, that the common properties that allow for
exchange on the market, and that are hidden behind the notion of value, are utility

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and scarcity. A more recent criticism stresses that, while the backward connection
from money to value is convincing, less so is Marx’s idea of an absolute or intrinsic
value, justifying the inverse movement, from the inner dimension of value to the
outer dimension of money. Marx himself shows that the social equalisation among
labours is effected only when commodities are actually sold in circulation: before
that, in production we meet only concrete labours, which are heterogeneous and
non-additive.

The theory of value as a theory of exploitation

All these positions ignore that for Marx commodity exchange is universal only
when the capitalist mode of production is dominant - that is, only when workers
are compelled to sell their labour power to money as capital, i.e. as self-valorising
value. As a consequence, labour is for him the content of the value-form because of
a more fundamental sequence going from money(-capital) to (living) labor to
(surplus-)value. The private “individuals” distinct and opposed on the commodity
market, where they eventually become social through the metamorphosis of their
products into money, are now to be interpreted as the collective workers
organized by particular capitals in mutual competition.

To explain the origin of the value added, and thereby of the surplus value
contained in it, Marx begins from two assumptions: supply meets a demand of the
same amount; commodities are sold at prices proportional to the labour required
to produce them (“simple” or “direct” prices). The argument is based on a two-
steps comparison. In the first step he sketches a hypothetical situation (but which
expresses something very real and significant in capitalism) where the living
labour extracted from wage workers is equal to the necessary labour needed for the
production of the historically given subsistence. It is a situation of simple
reproduction without surplus value, akin to Schumpeter’s circular flow, where the
rate of profit is absent. In the second step he imagines a (or rather, reveal the
actual) prolongation of the working day beyond necessary labour imposed by the
capitalists. The prolongation of the working day beyond the necessary labour time
originates a surplus labour and its monetary expression, surplus value.

In this argument some points must be noted. First, Marx does not abstract at all
from circulation. Account must be taken, before the capitalist labour process, of the
buying and selling of labour power on the labour market, and of the way in which
the subsistence is determined. He also has to assume that the potential (latent)
value within the commodities produced will be confirmed as a ‘social use value’ in
circulation: the metamorphosis of the commodities into real money must happen
according to sale expectations. Moreover, in order to make transparent that
abstract living labour is the only source of value, Marx must abstract from the
tendency towards the equalisation of the rate of profit between the branches of
production. Throughout the first and second volumes of Capital, Marx ignores
“static” (Ricardian) competition as the tendency towards the equality of the rate of
profit among industries. Already in the first volume, however, he cannot avoid to

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consider “dynamic” (Schumpeterian) competition, the intra-industry struggle to

obtain an extra surplus value. The diversification and stratification of the
conditions of production is determined by innovation and spreads the rate profit
within the sector.

The “generativity” of the surplus is an endogenous variable, influenced by the

social form taken by production as production for a surplus value to be realized on
the market. With given techniques, and assuming that competition on the labour
market establishes a uniform real wage, necessary labor is constant. Surplus value
is extracted by lengthening the working day. Marx calls this method of raising
surplus value the production of absolute surplus value. When the length of the
working day is legally and/or conflictually limited, capital may enlarge surplus
value by the production of relative surplus value, that is through technical
innovations or by speeding up the pace of production (greater intensity of labour).
Technical change, which increases the productive power of labour, lowers the unit-
values of commodities. To the extent that the changing organization of production,
directly or indirectly, affects the firms that produce wage-goods, necessary labour
falls and so the value of labour power. This makes room for a higher surplus
labour, and thus a higher surplus value.

Changes in production techniques leading to relative surplus value are a much

more powerful way of controlling worker performance than is the simple personal
control needed to obtain absolute surplus value. Moving from “cooperation” to the
“manufacturing division of labour” to “the machine and big industry” stage, a
specifically capitalist mode of production is built up. In this latter, labour is no
longer under a formal subsumption to capital (with surplus value extraction going
on within the technological framework historically inherited by capital) but it is
under a real subsumption to capital (enforced by “technology”, i.e. a capitalistically-
designed system of production). Workers (the human bearers of labour power)
become mere “appendages” of the means of production as means of “absorption”
of labour power in motion (living labour). The concrete “qualities” possessed by
labourers spring from a structure of production incessantly revolutionized from
within, and designed to command living labour. At this point of the argument
labour does not only “count” but really “is” purely abstract, indifferent to its
particular form (which is dictated by capital), in the very moment of activity, where
it has lost the nature of the active element but has become the passive object of
capitalist manipulation in the search for profit. This stripping away from labour of
all its qualitative determinateness and its reduction to mere quantity encompasses
both the historically dominant tendency to de-skilling and the periodically
recurring phases of partial re-skilling.

A moment of reflection is needed to appreciate the special features of this unique

social reality where labour is made abstract – namely, ‘pure and simple’, because
other-directed - already in production. Profit-making springs from an
“exploitation” of workers in a double sense. There is exploitation because of the
division of the social working day, with labourers giving more (living) labour in
exchange for less (necessary) labour. The perspective here is that of the traditional

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notion of exploitation, which considers the sharing out of the quantity of social
labour contained in the new value, added within the period. Its measure is surplus
labour over and above necessary labour. This, however, is the outcome of a more
basic “exploitation” of workers as the use of workers’ labour power. Capitalist
wealth is created only if this “consumption” of workers’ bodies and minds, which
perverts the nature of labour, is going. The quantitative measure of this
“productive” notion of exploitation, which refers to the formation rather than the
distribution of the fresh “value added”, is the social working day in its entirety.
From this second perspective, exploitation ends up to be identified with the whole
working day, and the abstract (living) labour of wage workers. This is the ultimate
ground of tracing back value to labour, because of the value form taken by labour.

Marx shows that abstract labour reflects an inversion of subject and object (the
philosophers would say, a “real hypostatisation”), which is deepened in the
theoretical journey back from the commodity-output market to the labour market
and the production process. Within commodity exchange, objectified labour is
made abstract because the products of human working activity, as long as they are
commodities, manifest themselves as an independent and estranged reality
divorced from their origin in living labour. The consequent “alienation” of
individuals is coupled by “reification” and “fetishism”. Reification, because in a
commodity-capitalist economy production-work relations among people
necessarily take the shape of an exchange among “things”. Fetishism, because, as a
consequence, the products of labour seem endowed with social properties as if
these latter were bestowed upon them by nature. These characteristics reappear in
the other two moments of the capitalist circuit. On the labour market, human
beings become the personification of the commodity they sell, labour-power (or
“potential” labour). Within production, living labour (or labour “in becoming”) is
shaped by capital as abstract labour, and embedded in a definite technique and
organisation specifically designed to enforce the extraction of surplus value.
Abstract labour in motion (as the activity producing value and money as its result)
is the true subject of which the single concrete workers performing it are the
predicates. In this way, Marx’s capital as self-valorising value is akin to Hegel’s
Absolute Idea seeking to actualize itself and reproducing its own entire conditions of
existence: but it is exposed to the limit that workers may resist their
“incorporation” as internal moments of capital.

At this point, it is possible to understand that behind the anarchic “social division
of labour”, carried out independently of one another by private producers, and
effected a posteriori via the market, a different “technical division of labour” within
production is going on. In the latter, inasmuch as it is subjected to the drive of
valorisation, an a priori despotic planning by capitalist firms leads to a
technological equalisation and social pre-commensuration of the expenditure of
human labour power, tentatively anticipating the final validation on the
commodity market. This process imposes on labour - already within direct
production and before exchange - the quantitative and qualitative properties of
being abstract labour spent in the socially necessary measure. Even though
capitalist production is for exchange - and therefore single capitals in competition

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do not have any guarantee to find an outlet for their production - individual
workers are immediately socialised in production.

Capitalist production is the paradox of dissociated firms, which production is “in

common”, but have yet to show to be part of total social labour in the eventual
validation on the commodity market. This pre-commensuration of labour and
socialisation within production, in its turn, is conditional on a monetary ante-
validation expressed by the finance to production that money-capitalists grant to
industrial capitalists. For Marx, once capitalism has reached its full maturity in
large-scale industry, the subjection of wage-workers’ to capital, with the
consequent (ex ante) abstraction of living labour already in production, and hence
the theory of exploitation, must be seen as the foundation of the monetary value
theory.

The theory of value as a macro-monetary theory of capitalist production

I have surveyed until now three meanings which may be attributed to Marx’ value
theory: as a monetary theory of value and as a theory of capitalist exploitation. In
the present section I summarise a contemporary interpretation that somehow may
connect together these two: Marx’ value theory as a macromonetary theory of
capitalist production. This interpretation has been put forward by Augusto Graziani
as part of his contemporary version of the theory of the monetary circuit, and it
has the advantage to reveal how a “hidden Marxian stream” has been running
through the ‘bourgeois’ monetary heretics of Neoclassical theory (Wicksell,
Schumpeter, Robertson, Keynes’ Treatise on Money).

According to the Marxian view and the monetary heretics the capitalist “cycle”, or
circuit, is logically split into a sequence of “successive phases”: to begin with, the
initial buying and selling of labour power on the labour market (where money
wages are bargained); then, immediate production, where the use of labour power
goes on; eventually, the final selling of commodities in the moment of circulation
(where real wages are eventually fixed), leading to the reconstitution of the money
capital which has been advanced. If we distinguish the money-capitalists and the
capitalist-entrepreneurs, it follows the tripartite separation of Graziani’s macro-
agents in the most basic abstract picture of the monetary circuit: “financial capital”,
“industrial capital”, and the working class. Means of production circulate only
within the firm-sector, out of reach of wage-workers, whose purchasing power
could only materialise in buying the means of consumption that the capitalist class
makes available to them.

The defining features of Marx’s value theory are characterised as the following.
Marx’s is, first of all, a class macroscopic analysis, which leads directly to a
description of the capitalist economic process as a monetary circuit. In the cycle of
money capital, money is initial finance from the banking system, allowing the firm-
sector as a whole to purchase labour power from the working class. Money, before
being the universal equivalent in circulation (the “social relation” in circulation), is

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what put capitalists in a specific “social relation” with workers in production. The
possibility of crisis arises when money is held as hoards, because of the pessimistic
prospects of capitalist-entrepreneurs or money-capitalist, and brings with it
unsold commodities and involuntary unemployment. Crisis is a “break” in the
circuit: a point which encompasses both Keynes’ view of the crisis as due to a rise
in liquidity preference (failure to “close” the circuit), and circuitists’ view of the
crisis as due to capitalist-entrepreneurs unwillingness invest (failure to “open” the
circuit).

“Valorisation” means an enlargement of abstract wealth. In a truly macro-

monetary perspective, no exchange internal to the firm sector can contribute to
valorisation. If we assume Marx’s macro-social, monetary and class point of view, it
is clear that surplus value (gross profits) cannot have origin from the internal
exchanges within the capitalist class: inter-firms transactions could only give way
to “profits upon alienation”, cancelled out at the level of the firm sector as a whole.
The genesis of surplus value can be found in the only external “exchange” for
capital as a whole, the one between capitalist firms (financed by banks) and the
living bearers of labour power. Following Kalecki’s revision of Luxemburg’s
argument, the level, composition, and distribution of output can be easily
determined. The “autonomous” capitalists’ expenses for investment and their own
consumption fix the amount of their profits; their market power (expressed in the
“degree of monopoly”) defines the profit share on income; from here it is
straightforward to derive the level of output, income and employment. In this view,
in a capitalist economy, the totality of the means of production must go to
capitalist-entrepreneurs. Thus, the entrepreneurs must be able to buy all the new
means of production which have been produced. The profit margin must be set at a
level such that the mass of profits is equal to realised investments.

It is noteworthy that in this reconstruction of Marxian theory what the working

class actually get are the consumption goods that firms put on the market for them,
even if there is a household saving. Financial wealth allows individuals to modify
the time shape of their consumption stream over time, but it is irrelevant for the
aggregate. A reduction of saving is followed by higher workers’ real consumption
only if the firm sector autonomously decides to increase the supply of wage goods.
Even shares represent a fictitious ownership, as long as decisions over real
production escape the control of workers. This does not mean that distribution is
immutable. However, the influence of workers on firms’ (or on government’s)
decisions about the real composition of output pass through non-market actions:
either conflict in production, or struggles in society, or political interventions.

On the Marxian theory of money, Graziani also provides some original insights. We
have to distinguish “money” (Geld in Marx’s original German) and “currency”
(Münze in Marx’s original German). Geld is what exhibits abstract “wealth in
general”; Münze is the universally accepted intermediary of exchange, and is one
among many representatives of wealth in general. If one endorses this distinction,
the valorisation process is defined as money-commodity-more money, M-C-M’, while
the monetary circuit allowing its reproduction is defined as currency-commodity-

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currency. It follows that the specific end of the capitalist is to acquire money in the
sense of abstract wealth, not to accumulate money as currency. When Marx
discusses the nature of gross profit, he makes it clear that it is acquired by the
capitalists, taken collectively, solely in the form of commodities.

While Marx stresses that currency as “means of circulation” in commodity market

is a commodity, currency representing money as a form of capital must be a form
of credit, and more specifically bank credit ex nihilo. The reason why the fact that
currency is bank credit ex nihilo is not explicit in Capital is due to the fact that,
when Marx writes of money and currency, especially in Volume III, he does not
present a “pure” theory of the monetary circuit but only an inquiry about what we
nowadays call the practice of the money markets. Moreover, he assumes an open
economy and the presence of the State. It has been questioned if assuming that
money is a sign (like in the monetary heretics) does not put in danger Marx’s
theory of exploitation, since money as capital may seem to be valueless. It is not so.
The problem of the value of money as capital is reduced to the problem of
determining wages, because in a class macro-monetary approach the only
purchasing power of the advanced currency is the number of workers hired:
following the general principle of the theory of value, the value of the real wages of
workers is equal to the given (subsistence) real wage.

The theory of value as a theory of individual prices

The macro-monetary reconstruction, just like the other points of view on Marx’s
value theory I have presented before, deflate the theoretical drama which has been
going on for a century, or more, about the so-called transformation problem. In the
transformation debate the perspective is on Marx’s value theory as a theory of the
determination of (relative) prices: the conclusion many drew from the discussion
was that Marx failed to transform the “simple” or “direct” prices (proportional to
the labour contained in the commodities exchanged, sometimes labelled as
“labour-values”) into the “prices of production” (containing an equal rate of profit,
and systematically diverging from simple prices).

The reason is easy to understand. In Volume I, Marx’s focus is on the rate of surplus
value (identical to the rate of exploitation). The rate of surplus value is the surplus
value divided by the money capital spent in buying labour power, that Marx calls
variable capital. This ratio is identical to the ratio between surplus labour and
necessary labour. The rate of surplus value is positively related to the length of the
working day and the intensity of the working day. It also rises with the increases in
the productive power of labour, which is positively affected by the capital
composition: the ratio between the money capital advanced to buy means of
production (labelled by Marx constant capital) and variable capital. Surplus value
springs only from the use of labour power bought with variable capital, and not
from the means of production bought with constant capital – hence, the respective
names.

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The rate of surplus value explains the origin of gross profits for total capital,
confronted with the working class as a whole. Total capital extracts the new value
exhibiting in money the living labour of the working class, and pays back the value
of labour power, exhibiting the necessary labour. However, for the individual
capital, the success of an investment is rather measured by the rate of profit: the
ratio between total surplus value and total capital (the sum of variable capital and
constant capital). Because of inter-industry, “static”, competition, the rate of profit
tends to be equal among branches of production. Here the problem is said to
emerge. The rate of profit is positively related to the rate of surplus value, and it is
negatively related to capital composition. The rate of surplus value tends to be
equal in every industry, but there is no reason for the equality of capital
compositions among industries: commodities, including the elements of constant
and variable capital, cannot be evaluated at labour-values when inter-industry
competition is introduced. Thus, the need to transform the labour-values in prices
of production, with the rate of profit entering the determination of the elements of
variable and constant capital.

I will not go into the intricacies of the debate. The point of all the perspectives I
have surveyed before is that, whatever the opinions on the technical details about
the transformation, the problem simply cannot exist as such: it is a pseudo
problem. If the core of Marx’s value theory is taken to be the a posteriori
socialisation of labour on the market against the universal equivalent, the
argument may be put forward that there are no actual “labour-values” before the
eventual validation on the final market. There is only a single system of prices, and
the assumption of simple or direct prices is just a “law of exchange” to be removed
at a lower level of abstraction. The vision according to which Marx’s value theory is
a theory of capitalist exploitation, tracing back surplus value to the extraction of
living labour from human beings as bearers of labour power, is even more radical:
the point here is that valorisation is accounted for by the social relation of capital
and workers in the capitalist labour process as a contested terrain, where class
struggle in production is going on. Because of that, the extraction of living labour
meets specific social difficulties for the buyers, because the labour power sold by
workers (and hence the living labour to be extracted from them) are attached to
the sellers, who in capitalism are supposed to be “free” and “equal” individuals. On
this account, the new value produced in the period cannot but be the monetary
expression of living labour alone: whatever the “rule of prices”, the ratios by which
commodities exchange cannot but redistribute the new value. By definition gross
profits appropriates a share of workers’ living labour.

The macro-monetary theory of capitalist production complements this argument,

giving a more fundamental role to the labour-values hidden behind simple or
direct prices as a price rule. In fact, it is maintained that in the macro-social
argument, in Volume I, the relevant price between class macro-agents is the rate of
surplus value, adequately expressed through simple or direct prices. The reason is
easy to see. The new value added by current production is identical to the
monetary expression of living labour; and the value of labour power is the
monetary expression of the labour contained in the real wage of the working class.

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This is independent of saving behaviour: and, we may add, it remains true

whatever the ruling price system. As Graziani argues, in a quite extreme but
effective fashion, Marx’s theory of value has nothing to say directly about the
phenomenon of the prices in final commodity-circulation, since valorisation has
been accounted for in the macroscopic class analysis covering the buying and
selling of labour power and immediate production.

The macroeconomic inquiry over valorisation is prior to the microeconomic

determination of individual prices. In this latter, what are at stake are not the
relations between total capital and working class but the exchange-relations of
single firms. The determination of prices of production may well give way to a
disparity between the labour commanded (in exchange) by gross profits and the
labour contained (in production) within surplus value, and between the labour
commanded (in exchange) by the money wage bill and the labour contained (in
production) within the real wage for the working class. However, this “unequal
exchange” can only obscure the process of valorisation, not erase it. The new value
(and, then, the living labour extracted by total capital from workers) and the value
of labour power (and then the necessary labour required to produce the given real
wage of the working class) remains what they are.

The Marxists, and their (Neoricardian or Neoclassical) critics who dealt with the
determination of prices of production within a simultaneous exchanges
perspective were unfaithful to Marx, because they obliterated the process
constituting the equilibrium position. In fact, Marx’s value theory as has been
depicted here is a non-equilibrium theory: this is something intrinsic in the view
that value eventually comes into being with money as its phenomenal form (the
monetary value theory), as well as in the view that class struggle and intra-
capitalist competition affect the extraction of living labour (the theory of
exploitation), as well as in the view of the essential monetary ante-validation of
labour power as potential labour through the financing of production (the macro-
monetary theory of capitalist production). “Non-equilibrium” refers to the
constitution of the economic magnitudes, allowing to distinguish, afterward, of
equilibrium and disequilibrium. This is not a “temporal” but a “logical” re-reading
of Marx’s value theory.

The theory of value as a theory of crises

Another controversial area in Marxian critical political economy is the theory of

crises. According to Marx, accumulation - i.e. the conversion of some portion of
surplus value into additional (constant and variable) capital, to produce more
surplus value - is a contradictory process. Crises are, at once, necessary explosions
of the contradictions, and temporary solutions to them.

The instability-prone nature of capitalism is already evident from its being a

monetary economy, where commodity-exchange is universalised. For some of the
separate and autonomous firms the anarchy in capitalist social division of labour

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may easily lead to an incomplete “realisation” in circulation of the value potentially

produced in immediate production. The presence of money dissociates sales from
subsequent expenditures, so that hoarding may break the smooth sequence of
supply finding its own outlet on the market as the incomes are spent. Most of
Marx’s inquiry in the three Volumes of Capital, however, is laid out on the
assumption that commodities are sold on the market at their “social values” (in
Volumes I and II) or at “prices of production” (in Volume III) - something akin to
Keynes’ General Theory basic model of fulfilment of short-term expectations.

In Volume II of Capital, drawing on an original insight by Quesnay, Marx constructs

his schemes of reproduction which demonstrate that a balanced growth path
independent of the level of consumption demand is a theoretical possibility. Marx
divided social output into two departments, the first producing capital goods and
the second consumption goods (which may be subdivided in wage-goods and
luxury-goods). The value output of both sectors is looked upon as the sum of its
three component parts, i.e constant and variable capital and surplus value. In
simple reproduction, capitalists unproductively consume the entire surplus value,
so that there is zero growth. In enlarged reproduction, they more or less completely
invest surplus value in new constant and variable capital, allowing for
accumulation. What the schemes clarifies is that each value component of the
output is also a component of demand for its own or the other sector. Equilibrium,
which is always a chance, depends on some balance between inter-sectoral trades.
Against Malthus and Sismondi, Marx affirms that capital may expand over time
without meeting a barrier in effective demand, because it is the mainspring of its
own demand. Nevertheless, against Ricardo and Say, Marx also states that, since
equilibrium needs exchange in definite, “right” proportions – and not only in value,
but also in use value and money terms - a balanced long-run accumulation is not a
guaranteed outcome, and it rather materializes by “accident” (a point which was
taken up again in the Harrod-Domar growth models).

The likelihood of departures from equilibrium because of the absence of planning,

simply provides the possibility of crises happening in a market environment. Marx
is in search of an explanation for the necessity of crises arising from the capitalist
class relation itself. In his view, effective demand failures issue from a fall in
investments, and this latter proceeds from a profitability crisis. Thus, the question
shifts to that of understanding the systemic recurring causes for a profit squeeze. A
first argument is described in the “general law of capital accumulation” at the end
of Capital, Volume I. Assuming a constant composition of capital, a sufficiently rapid
growth of the value invested exhausts the supply of labour-power and tightens the
labour market. Wage increases outdo the rise in the productive power of living
labour, the rate of profit starts falling, and then, as a consequence, accumulation
and the demand for labour slow down. A more long-term solution to this difficulty,
located in distributive struggles over the partition of the new value added, is the
introduction of labour-saving, capital-intensive methods of production. For a given
capital, mechanisation reduces the share of variable capital and thereby the
demand for labour to produce the same output: it displaces workers, replacing
them with machines.

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Theoretically, a rise in the rate of accumulation may enhance or reduce employment

according to the relative weight of the two forces, the increase in the size of capital
and the change in its composition. Through the cycle, the pace and structure of the
accumulation of capital, which is the independent variable, constantly vary to
reproduce an industrial reserve army of potential workers ready to be included in
the valorisation process, and exerting a downward pressure on wages, which is the
dependent variable. A permanent downward pressure on the real wage, i.e. an
“absolute” impoverishment of the workers, is among the possible outcomes. All the
same, the normal situation is very different. Capitalist accumulation is propelled by
the production of relative surplus value, which presupposes a positive dynamics of
the productive power of labour. The real wage, then, has room for improvement
(without impairing the tendency to a greater share of the surplus value in the new
value added going to the capitalist class) as long as the higher workers’
consumption is expressed in a lower value of labour power. This is what Rosa
Luxemburg called the tendency to a fall in the relative wage, i.e. a contraction in
wages as a proportion of national income. A relative, not an absolute,
impoverishment. On the other hand, with trade unions and a more militant
working class, wage struggles can become partially independent from the labour
market, break the tendential fall in the “relative” wage, and develop into an
independent cause for capitalist crises.

Mechanisation of production is also an autonomous drive for capital to control

living labour and to remove workers from the point of production. If mechanisation
is a powerful lever to regulate both the exchange value and the use value of labour
power, it nevertheless creates a further difficulty. The rise in what Marx calls the
technical composition of capital – the “physical” ratio of the number of means of
production relative to the number of workers employed - is a factor contributing to
the expulsion of workers from the productive process: but workers’ living labour,
we know, is the exclusive source of value and surplus value. According to Marx, the
consequent rise in the composition of capital expressed in value terms brings into
action a tendency of the rate of profit to fall. It must be noted, however, that Marx
expresses the “law” with reference to the rise in what he calls the organic
composition of capital (in which the elements of constant and variable capital are
evaluated at the prices before the diffusion of innovation), and not in the value
composition of capital (in which the elements of constant and variable capital are
evaluated at the prices after the diffusion of innovation). The latter definition fully
reflects the revolution in the evaluation of constant and variable capital produced
by mechanisation, whereas the former definition measures inputs at their original
prices. The “organic” composition follows the increase in the “technical”
composition: but the trend in the profit rate depends on the “value” composition.

The tendency of the rate of profit to fall has been interpreted by some authors not
only as a cause of cyclical crises but also as accounting for capitalism’s long waves,
and by others as the reason for a secular downward trend in profitability. There is
some justification for this view. The application of greater quantities of constant
(and especially, fixed) capital per unit of output is the most effective means to

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propel surplus value extraction from workers. Marx thought that the increase in
the rate of surplus value could not compensate in the long run for the negative
influence on the rate of profit of the higher (value) composition of capital, and so
he downgraded it as a mere counter-tendency. Marx’s strongest argument in favour
of the “law” is by appeal to an absolute limit to the surplus labour that may be
pumped out from a given working population.

To understand what is involved here, it is best to look at the composition of capital

as an index of the ratio between, on the one hand, the dead labour contained in the
means of production and, on the other, the living labour expended in the period:
that is, to represent it as the ratio between constant capital and the sum of variable
capital and surplus value. Assuming that variable capital is tending to zero, and
thus that the whole social working day is objectifying itself as surplus value, the
(value) composition of capital becomes the reciprocal of the maximum rate of
profit. This latter can be seen as the ceiling for the upper movements of the actual
rate of profit. Marx is suggesting that the numerator of the maximum rate of profit
meets a “natural” constraint in the amount of living labour that can be extracted
from workers, while, on the contrary, its denominator is free to grow without
limits. At the ruling social values, individual capitalists are willing and/or forced to
introduce more capital-intensive methods of production. In this way, they lower
unit costs to gain excess temporary profits, but the longer-run effects of their
behaviour force a reduction of the social values of commodities and depress the
average rate of profit.

This notwithstanding, to deduce a necessary fall in the rate of profit would be

invalid because progress in the productive power of labour, accelerated by
mechanisation, ends up reducing the values (i.e., prices) of all commodities, and
thereby also those of the means of production. It cannot be excluded a priori that
the devaluation of constant capital might even be strong enough to raise the
maximum rate of profit, removing the barrier to the actual rate of profit. The actual
rate of profit is both a positive function of the rate of surplus value and a negative
function of the composition of capital: so, another criticism is that there is no
reason to exclude that the rise in the rate of surplus value can offset the (possible,
not necessary) rise in the value composition of capital.

It is interesting to observe that the higher the rate of surplus value soars, and
thereby the more the tendency for the rate of profit to fall is repressed, the more
likely the system is to run into a third type of crisis, i.e. the realisation crisis. Some
Marxists have indeed suggested that the rate of profit falls because actual (or
expected) effective demand is insufficient for the system as a whole to buy
commodities at their full value (including the average rate of profit). Two
conflicting positions have been dominant in this group of theories. One approach
(e.g., Hilferding) stressed that disproportionalities, i.e. sectoral imbalances between
supply and demand, were an impending feature in a spontaneous, chaotic market
economy. If excess supply persistently affects important branches of production,
this can spread into other sectors and easily degenerate into a general glut of
commodities. This kind of difficulty, however, depends on the speed of price-and-

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quantity adjustment to disequilibrium, and may disappear in a more “organised”

form of capitalism. Some of its proponents (e.g., Tugan-Baranovski) even ended up
endorsing the view that, being “production for production’s sake”, capitalism
encounters no true barrier in effective demand, and in principle can be stable on a
balanced growth path with declining consumption. The other approach (e.g., Rosa
Luxemburg) is sometime wrongly labelled “underconsumptionist”, though in fact it
stresses under-investment. It maintains that net investment could not compensate
for insufficient consumption forever, since the long-term profitability of new
machine-goods depends on future outlets, and these latter are less and less
predictable with a decreasing share of consumption in total demand. The same
reproduction schemas prove that the equilibrium inter-sectoral trade proportions
required for expanded reproduction are precarious and unsteady. An increasing
extraction of relative surplus value - which is needed to overcome the tendency for
the rate of profit to fall, and which strengthens the tendency for the relative wage
to fall - shifts them continuously and worsens the odds of their being met for long.

For some of their supporters, these kinds of realisation crisis are of increasing
severity and lead to a final breakdown, when the “external” factors mitigating them
(such as the net exports to non-capitalist areas) are exhausted. Other writers in the
same tradition, as Kalecki, objected that the insufficiency of effective demand may
be solved by what he dubbed domestic exports, i.e. governments’ budget deficits
financed by the injection of new money: something of this kind was already hinted
in Luxemburg’s original argument under the heading of military expenditures on
armaments. A similar role may be played by the unproductive consumption
coming from “third persons”, drawing their incomes from deductions from total
surplus value. To be compatible with a smooth accumulation of capital, these
“solutions” call for the continuation of the pressure on living labour. This confirms
the role of the rate of surplus value as the pillar of capitalist development, and of
the outcome of the class struggle within the capitalist labour process as the crucial
determinant of its dynamics.

A re-reading of Marx’s theory of crisis looks at the tendential fall in the rate of
profit as a meta-theory of crises, incorporating within it the different kind of crises
which can be derived from Marx, and extending it into an historical narrative of the
evolution of capitalism. From this point of view, the tendential fall in the rate of
profits due to a rising value composition of capital was confirmed during late 19th
century Long Depression. The increasing rate of exploitation, needed to overcome
the tendency for the rate of profit to fall, was implemented by Fordism and
Taylorism, which jointly strengthened the tendency for the relative wage to fall.
The rise in the rate of surplus value, however, created the conditions of a
realization crisis, the Great Crash of the 1930s. The so-called Golden Age of
capitalism was predicated on a higher pressure on productive workers to obtain
enough living labor and gain higher and higher surplus labour. This opened the
way to a social crisis of accumulation, because of the struggles within the
immediate valorization process: a key factor of the Great Stagflation of the 1970s.

From this point of view, the Great Moderation leading to the current Great

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Recession (if not Lesser Depression) must be interpreted as capital’s reaction to a

crisis originating from a rupture in the same capital-labor “social relation” within
production. Neoliberalism is best captured as a real subsumption of labour to
finance and debt within a Minskyian “money manager capitalism”: the reference is
to the subordinated integration of households into the stock exchange market, and
their going deeper and deeper into bank indebtedness. The other side of the coin
was the “deconstruction” of labour in the new phase of capitalist accumulation,
characterized by new styles of corporate governance leading to a centralization
without concentration, and then to a weakening of workers in the labor market and
in the labor process. This form of capitalism was based on a capital market
inflation, which, though stabilizing the system for a while, proved to be eventually
unsustainable.

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