The relationships between value creation through production & the distribution of values in the forms of wages, profits, interest, rent, etc., have never been easy to pin down.
Adam Smith was contradictory, on the one hand holding that the value of commodities is set by labour, on the other that wages, profits & rent were “the three original sources of revenue as well as of all exchangeable value”.
Ricardo spotted the contradiction & rejected the latter in favour of the labour theory of value.
J.S. Mill thought distribution was the result of a social process independent of that ruling production.
Distribution was seen largely as being dependent upon human will.
For Marx the notion that rents could somehow grow out of the soil was nothing but a ‘fiction without fantasy, a religion of the vulgar’, which presented reality in terms of ‘an enchanted perverted, topsy-turvy world, in which Monsieur le Capital & Madame la Terre do their ghost-walking as social characters & at the same time directly as mere things’ (Theories of Surplus Value, pt 3, pp. 453-540; Capital, vol. 3 ch. 48)
Separating land, labour & capital as independent & seemingly autonomous factors of production had a double advantage for the ruling classes since it permitted them to proclaim ‘the physical necessity & eternal justification of their sources of revenue’ at the same time as it suppressed any notion of exploitation since the act of production could in principle be portrayed as the harmonious assembly of separate & independent factors of production.
The essence of the neo-classical argument is that competition for productive factors – land, labour & capital – forces entrepreneurs to pay an amount equal to the value that the marginal (last employed) unit of each factor creates. Given a particular technological state & relative factor supplies (scarcities), then competition ensures that each factor ‘gets what it creates’, that ‘exploitation of a factor cannot occur’. It is then a short step to infer that the distributive shares are socially just fair shares. Government intervention is largely confined to ensuring perfect competition.
For Marx, it ‘is not that production, distribution, exchange & consumption are identical, but that they all form members of a totality, differences within a unity’ & that the ‘reciprocal effects’ between these different ‘moments’ have to be understood in the context of the capitalist society considered as an ‘organic whole’.
For Marx the forms of distribution are reflections of social relations of production. That distribution relations are ‘merely the expression of the specific historical production relations’ (Capital, vol. 3, p. 882)
Both production & distribution relations are a product of the same historical process which depended upon the separation of the labourer from the instruments of production as well as upon the expropriation of the direct producers from the land’.
Distribution should not be thought of simply as the distribution of product or value among the social classes, but also as the distribution of the instruments of production, of land & the distribution of individuals (usually by birth) among the various class positions.
Production cannot therefore be considered apart from the ‘distribution included in it’.
The labourer does not claim a share of the product by virtue of his contribution to the value of the product. He gives up rights to control over the process of production, to the product & to the value incorporated in the product in return for the value of labour power. And the latter has nothing directly to do with the contribution of labour to the value of the product.
The labourer receives the value of labour power & that is that. Everything else is appropriated as surplus value by the capitalist class as a whole. The manner in which this surplus value is then split into the different forms of profit on industrial capital, rent on land, interest on money capital, profit on merchants’ capital & so on is set by quite different considerations.
When Marx insists that we focus on production in order to uncover the secrets of distribution, he does so because it is there that the fundamental relation between capital & labour becomes very clear.
But it is one thing to show the origin of profit in surplus value & quite another to determine the magnitude of that profit, & to come up with the rules that fix the division of the total social product into wages, profit, rent, interest & so on.
The ‘reduction problem’ – can heterogeneous labour be reduced to simple labour?
The ‘transformation problem’ – values into prices.
The Share of Variable Capital in Total Social Product, the Value of Labour Power & Wage Rate Determination
Total social product = C + V + S
C = constant capital ( machines, raw materials, energy, etc)
V = variable capital, labour power
S = surplus value
C is the labour power expended to replace the value equivalent of the means of production used up. Therefore, not an important category in distribution theory.
Distribution theory is concerned with the newly created value & how it is divided between labourers (V) & capitalists (S).
Total wage bill = number of labourers (n) & average wage rate (w)
Total variable capital = v.n (where v is a magnitude called the value of labour power)
The wage system masks the difference between abstract human labour as the substance of value & the value of labour power which, like any other commodity, is fixed by its costs of production.
The wage form extinguishes every trace of the division of the working day into necessary labour & surplus labour because all labour appears as paid labour.
The value of labour power is set by the value of the commodities necessary to maintain & reproduce labouring individuals in their ‘normal state’.
The particular commodity bundle required will vary according to occupation & to ‘climate & other physical conditions’.
It includes the cost of raising children, & to the degree that special skills take time & effort to acquire & maintain.
There also enters ‘a historical & moral element’
They trade their use value of the only commodity they possess in return for a money wage. They then convert this money into commodities sufficient to reproduce their own existence.
As holders of money, labourers are free to buy as they please.
This gives the illusion of freedom of choice.
If the exchange value of the fixed bundle of use values falls (given the increasing productivity of labour), then the value of labour power can fall without any detrimental effect upon the standard of living of labour.
This is the primary source of relative surplus value.
S increases because V declines.
- The Subsistence Wage
Marx vigorously opposed LaSalles’s doctrine of the supposed ‘iron law’ of wages.
He did not see wages as being inexorably tied to the requirements of pure physiological reproduction.
He only spoke on a minimum value of labour power set by the commodities physically indispensible to the renewal of the labourer’s vital energies.
He saw tendencies pushing both ways.Arguably Marx caused confusion by defining the value of labour-power in three different ways:
– the cost of production of labour-power under given historical conditions
– the traditional standard of life to which workers are accustomed
– the standard of living which prevails in non-capitalist modes or forms of production (this fixes the minimum wage required to induce people to seek work or remain working in the capitalist sector)There is though a common-thread, that if the minimum wage is not met then there are very serious consequences: either the supply of good quality labour-power declines, as workers fail to maintain or reproduce themselves properly, or leave the capitalist sector altogether; or else there is conflict & disruption as workers fight for what they consider is their just reward.
The unifying thread is further accumulation is put at threat.
- Supply & Demand for Labour Power
The idea that the wage rate varies in response to supply & demand conditions is not at all hard to accept. But Marx firmly rejects the argument that supply & demand dictate the natural price of labour power.The forces that fix the value of labour power must, in the end, be expressed through the market process.What determines supply & demand in labour markets in the first place?Demographics are very important on the supply side.
Primitive accumulation (forced proletarianization), mobilization of latent sectors of the industrial reserve army (women & children), migration (rural to urban).
Capital can reorganise, restructure & change technologically.
Money can move globally.
‘Capital works on both sides at the same time’ (Capital, vol. 1, p.640)
Scarcities can arise for reasons that are entirely outside of the influence of capital.
Marx says wages may be ‘above value’ & that they may so remain for extended periods of time (Capital, vol. 1, p.613)
In this he is entirely consistent with his overall strategy: to see value as an expression of social necessity under the class relations of capitalism & to assert that values (including that of labour power) become the regulators of economic life only to the degree that the capitalist mode of production becomes hegemonic within a social formation.
- Class Struggle Over the Wage Rate
‘Profit-squeeze’ hypothesis of capitalist crisis – A successful struggle on the part of labour raises wages & diminishes profit. This results is slow accumulation & stagnation. Capital responds by disciplining labour, reducing real wages & revives profits.Marx readily concedes that the shifting magnitudes of wages & profit limit each other, & that the balance between them ‘is only settled by the continuous struggle between capital & labour, the capitalist constantly tending to reduce wages to their physical minimum, & to extend the working day to its physical maximum, while the worker constantly presses in the opposite direction. The matter resolves itself into a question of the respective powers of the combatants’ (Wages, Price & Profit, p.74)But Marx also argues that a rise in the real wage meant a fall in the profit rate only under the supposition of no changes in the productive powers of labour, no expansion in the amounts of capital & labour power employed & no expansion of production. Real wages & profit rates could rise or fall together or move inversely. (Theories of Surplus Value, pt 2, p.408)
The real wage can rise provided the rise ‘does not interfere with the progress of accumulation’ (Capital, vol.1, p.619)
Could organised labour keep the real wage from rising even when that would threaten accumulation?
Failing the transition to socialism, Marx denies such a possibility as a long-run proposition.
To interpret the share of labour in the total social product as a result of a pure power relation in the market place between capital & labour is an inadmissible abstraction.
And so Marx reduces class struggle over distributional shares to the status of an equilibrating device, rather like supply & demand.
If, as a result of strong labour organisation, wages remain above value for the extended period, then this is because it does not interfere with accumulation.
Marx therefore explicitly warns the workers ‘not to exaggerate to themselves the ultimate working of these every-day struggles’ & ‘not to be exclusively absorbed in these unavoidable guerrilla fights’. Instead of the ‘conservative motto, “A fair day’s wage for a fair day’s work!” they ought to inscribe on their banner the revolutionary watchword, “Abolition of the Wages system!” ’ (Wages, Price & Profit, p.78)
By focusing on the realm of use-values & human needs (e.g. health care instead of military equipment), such struggles can form the basis for a truly revolutionary movement, which has as its aim the abolition of a system founded on the ultimate irrationality of accumulation for accumulation’s sake.
- The Accumulation Process & the Value of Labour PowerMarx rejects outright all formulations that immutably fix the value of labour power, such as the physiological subsistence wage.What are the fundamental forces which fix the value of labour?There is an equilibrium distribution between variable capital & surplus value determined in relation to the rate of accumulation & the overall structure of production & consumption.
If there is a general rise in the standard of living of labour (measured in use-values commanded), & if these become part of the ‘historical & moral element’ encompassed in the value of labour power, it is because the laws of accumulation are indifferent with respect to the specific forms of use-value produced.
At first blush it appears that, the less for labour, the more for capital. But when we look at the accumulation process as a whole we see, first, that ‘the maintenance & reproduction of the working class is, & must ever be, a necessary condition to the reproduction of capital’ (Capital, vol. 1, p.572)
Capital must itself limit its own ‘boundless thirst after riches’ to the extent that it destroys the capacity to reproduce labour power of a given quality.
The value of labour power & the share of labour in newly created value cannot be understood outside of the general process of production & realisation of surplus value.
The Reduction of Skilled to Simple Labour
We are faced with heterogeneous labour powers that are differentially rewarded.
This is regarded by some as the Achilles heel of Marx’s theory of value.
The process whereby heterogeneous skills are reduced to simple labour must be independent of the processes of wage rate determination in the market place.
If, as Bohm-Bawerk (1949) insists, the only social process that can do the job is the exchange of the products of that labour power in the market, then ‘we have the very compromising circumstance that the standard of reduction is determined by actual exchange relations’ when the exchange relations are supposed to be explicable in terms of the social labour they embody.
There is, it seems, a ‘fundamental & inescapable circularity’ in Marx’s value theory.
Values, it is then said, cannot be determined independent of market prices, & the latter, not the former, are fundamental to understanding how capitalism works.
Abstract labour becomes the measure of value to the degree that labour power exists as a commodity capitalists can freely command in the market.
Skills that are monopolizable are anathema to capital.
To the degree that they become a barrier to accumulation they must be subdued or eliminated by transformation of the labour process.
The reduction from skilled to simple labour is more than a mental construct; it is real & observable process, which operates with devastating effects upon the labourers.
Marx therefore pays considerable attention to the destruction of artisan skills & their replacement by ‘simple labour’.
That is not to say that capital has everywhere been successful in forcing such reductions.
The reduction to simple labour could not occur in any other kind of society – petty commodity producers, artisans, peasant, slave, etc.
Values form as the regulators of social activity only to the degree that a certain kind of society, characterised by specific class relations of production & exchange, come into being.
Bohm-Bawerk considers the example of exchange between a sculptor & a stone-breaker in order to show that labour as value is indistinguishable from the value of the different labour powers as determined through the exchange of their products. His example is not wrong. But it is the kind of particular & individualised form of labour that ceases, in Marx’s view, even to be ‘thinkable’ in a well developed totality of exchanges. Furthermore, both labourers in Bohm-Bawerk’s example are self-employed, while one – the sculptor – possesses special monopoly skills. The condition that Marx is interested in is one in which both labourers are employed by capitalists producing commodities – statues & roads – while neither has any monopolisable skill, even though the labour imparted may be of differing productivity.
Bohm-Bawerk abstracts entirely from capitalist relations of production – hardly an adequate basis to fashion a valid critique of Marx.
The circular reasoning he thought he spotted is a product of tearing the reduction problem free from its roots in real historical processes, which reshape the labour process & generalise commodity exchange.
Put back into this broader context, the reduction problem disappears into insignificance.
The Distribution of Surplus Value & the Transformation from Values into Prices of Production
The theory of surplus value explains the origin of profit in the exploitation of labour within the confines of the production process under the social relation of wage labour.
The theory of distribution has to deal with the conversion of surplus value into profit.
Surplus value originates in the production process by virtue of the class relation between capital & labour, but is distributed among individual capitalists according to the rules of competition.
In considering how surplus value is distributed among capitalist producers in different sectors, Marx shows that commodities can no longer exchange at their values – a condition that he assumed to hold in the first two volumes of Capital.
They must exchange according to their ‘prices of production’.
These prices of production are still measured in values & are not to be confused with monetary prices realised in the market.
Marx still holds to socially necessary labour time as a measuring rod.
What he now shows is that commodities no longer exchange according to the socially necessary labour time embodied in them.
Production period – the time taken to produce a completed commodity
Circulation time – the time taken to realise the value embodied in the commodity through the exchange process
Turnover time of capital – the time taken for the value of a given capital to be realised through production & exchange, i.e. the sum of the production period & circulation time.
Capital consumed – the total value of raw materials & instruments of production used up in the course of one production period; which will be equal to or more likely less than the capital employed (fixed capital)
Constant capital – either the capital consumed or the capital employed, depending upon what we are seeking to show
Variable capital – the value of the labour power consumed in a production period
Rate of surplus value/exploitation – ratio of surplus value to variable capital
Value composition of capital – c/v
Rate of Profit – a/(c+v) = s/v / (c/v) + 1
All measures are expressed in values
Assumption – a competitive process which equalises the rate of profit across all industries & sectors.
We can then see that exchange ratios are affected by differences in value composition of capital.
For example, an economy has two industries.
Industry I – 80c + 20v + 20s
Industry II – 20c + 80v + 80s
The total capital advanced is the same in both, i.e. the costs of production c + v.
The rate of exploitation is the same s/v.
Assumption – identical production period.
But the rate of profit in industry I is 20%, while in industry II it is 80%.
The rate of profit is not equalised.
Assumption – the two industries are of equal weight so that the average rate of profit is 50%.
The effect of equalising the rate of profit is to change the exchange ratios of the two commodities.
Each commodity now exchanges according to the ratios indicated by
c + v + p (the price of production) instead of c + v + s
Measured in values not money prices.
Under competition we can expect commodities to exchange according to their prices of production rather than their values.
The same applies to capitals having different turnover times.
Since the capitalist is interested in profit over an average period of time, capital that turns over many times in a year will earn a much higher rate of return.
Capital & labour will tend to be reallocated from sectors with lower turnover times to those with higher returns.
Relative prices will be affected.
Production determines distribution but the former cannot be considered independently of the distribution included in it.
It is the distribution of the capital among the different industries in accordance with the general rate of profit that leads to the formation of prices of production, which have the effect of distributing the surplus value differentially according to the value compositions & turnover times of the different capitals.
Each capitalist contributes to the total aggregate surplus value in society according to the labour power each employs, & draws upon the aggregate surplus value according to the total capital each advances.
‘from each capitalist according to his total workforce & to each capitalist according to his total investment’.
Industries with low value composition (‘labour-intensive’ industries) or rapid turnover time produce greater surplus value than they get back in the way of profit.
Marx makes some errors in trying to explain the relation between surplus value & profit.
In Capital Vol. 3, Ch. 9 he assumes that capitalists purchase commodities at their values & sell them according to their prices of production.
Rather they must buy them at their prices of production as well.
Secondly, as capital is redistributed from sectors with low to high value composition, so the total output of surplus value changes & this alters the rate of profit.
The price of production analysis in the third volume has no necessary logical relation to the value theory proposed in the first volume.
The fact that profit has its origin in the exploitation of labour power is no longer self-evident but becomes opaque to both capitalist & labourer alike.
Such a mystification is dangerous for capital because the reproduction of the capitalist class depends entirely upon the continuous creation & re-creation of surplus value.
Even if they could understand what is going on, competition forces them to allocate social labour & to arrange their production processes so as to equalise the rate of profit.
What Marx has shown is that this has nothing necessarily to do with maximising the aggregate output of surplus value in society.
We find a material basis for the systematic misallocation of social labour that leads capitalism into periodic crises.
Competition necessarily leads individual capitalists to behave in such a way that they threaten the very basis for their own social reproduction.
They so behave because the logic of the market forces them to respond to prices of production rather than to the direct requirements for the production of surplus value.
Interest, Rent & profit on Merchants’ Capital
The theory of surplus value stands on its own independently of any theory of distribution apart from the most fundamental of all distributional arrangements, which separates labour from capital.
Surplus value is converted into profit through the social process of competition.
Profit is in turn split into the components of profit on merchants’ capital, interest on money capital, rent on land & profit of enterprise.
The task of any theory of distribution is to explain the social necessity for, & the social processes that accomplish, this distribution of surplus value.
Production cannot be considered apart from the distribution included in it.
We, therefore, have to consider the very real possibility that rent & interest play important roles as conditions of production.
Distribution relationships affect the conditions of production.
The circulation of capital:
M – C (LP & MP)…P…C’ – M’ etc
Money is laid out to purchase labour power & means of production, which are together shaped through production into commodities to be sold on the market.
The two phases M – C & C’ – M’ are transformations brought about through buying & selling, whereas P, the production process, involves a material transformation in the product & the embodiment of socially necessary labour.
But the process is a never ending circuit.
It can be dissected in a number of ways.
We can then see that the conditions & concerns regulating the circulation of money capital are rather different from those that govern capital tied down as productive capital to a specific production process, & that both are different again from those regulating the circulation of commodity capital.
Merchant capitalists take on specific responsibility for capital in commodity form & specialise in transforming commodities into money.
Bankers & financiers are the money capitalists who assume command of the general use of money as capital & receive interest.
This leaves the productive capitalists in command only over the production of surplus value itself.
- Merchants’ Capital
When capital is held in commodity form it exists as commodity capital.But since capital remains capital only as value in motion, it follows that commodity capital must continuously be transformed into money capital.The speed & efficiency of this transformation is of great importance to the capitalist.
The circulation time (the time during which capital assumes the commodity form) affects the turnover time & thereby the rate of profit.
The transformation incurs certain costs which are necessary deductions out of surplus value produced – marketing a commodity realises value but does not create it.
The merchant assumes all of the costs & responsibility for marketing in return for a slice of the surplus value produced.
With the equalisation of profit, the merchant should receive exactly the same rate of profit on the capital advanced as does the producer.
In value terms, this means producers sell below value to the merchants, who then sell the commodity at its value.
On the one hand, the relationship is parasitic in the sense that the merchant creates no value but merely appropriates it. On the other hand, merchants’ capital can expand the surplus value realised by the producer through accelerating the turnover of capital & reducing the necessary costs of circulation.
- Money Capital & Interest
When capital takes on the money form & becomes money capital, it manifests itself as capital in its purest form – as exchange value divorced from specific use value.But it cannot retain its character as capital without being put into circulation in search of profit.The use value of money capital is that it can command labour power & means of production, which can then be used to produce greater value than that money originally represented.
The capacity to produce surplus value then appears to be a power of money capital itself.
Money capital becomes a commodity like any other.
It possesses a use value & an exchange value.
This exchange value is the rate of interest.
Marx observes, “Interest-bearing capital is the consummate automatic fetish…money making money, & in this form it no longer bears any trace of its origin” (Theories of Surplus Value, pt 3, p. 455) “To the vulgar economist who desires to represent capital as an independent source of value, a source which creates value, this form is of course a godsend, a form in which the source of profit is no longer recognisable.”
The difference between capital in money or productive form ultimately leads to the separation between interest on money capital & profit of enterprise.
- Rent on Land
The monopoly power that accrues to landowners through the private ownership of land is the basis of rent as a form of surplus value.Land is an indispensable condition of production in general.
In agriculture it is an integral part of the production process.
The circulation of capital encounters a barrier in the form of landed property.
The landowner can exact a tribute – appropriate a portion of surplus value – in return for the use of the land as a condition or means of production.
- Distribution Relations & Class Relations in Historical PerspectiveAll forms of capital – merchants’ capital, money capital & rent on land – have an historical existence which predates industrial capital.These different forms of capital had to rendered subservient to a circulation process dominated by the production of surplus value by wage labour.There are differentiations within the bourgeoisie – fractions or classes:
- rentiers who live entirely off interest on their money capital,
- industrial capitalists who organise production of surplus value,
- merchant capitalists who circulate commodities,
- landlords which live off the rent of the land
It is the study of the production process itself that reveals the secrets of distribution.
To pretend otherwise is to fall victim to the world of appearance, which is clouded with fetishisms, & fail to penetrate the inner essence & inner structure…behind its outer appearance.