Economic Systems

Lecture Notes


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down  up  With emergence of capitalism, worker is separated from the owner of capital. Labor market arises, on which workers sell their 'labor power', i.e. their ability to produce goods (and value) for capitalists. Note that the worker cannot use his labor power on his own, because he does not have the necessary capital to buy 'means of production' (material inputs, buildings, equipment, land etc.) needed for production. As with all other commodities the commodity 'labor power' has its own value (essence) and its price (appearance). The price of labor power is wage and it appears to us (wrongly as dialectical approach asserts) that it is determined just by an interplay of supply and demand on the labor market. In fact - Marxists tell us - wage is determined (in the long run) by the value of the labor power, i.e. by the amount of labor that is needed to produce and daily reproduce the workers ability to work.

This is an elaboration of the Ricardian theory of 'subsistence wage'. Take all the goods the worker and his family need to consume on average per day and calculate the labor 'embodied' in these goods, this will give you the (labor) value of the daily labor power of the worker. As it happens - with high enough labor productivity - the worker can produce in one day more than the value of his labor power. In other words the worker can produce during a day more goods than he needs for maintaining his own body and mind in working conditions. 

Read about the class struggle for the length of working day directly from Das Kapital!


down  up That part of his daily product that the worker needs for the reproduction of his labor power is called the 'necessary product' (do not confuse it with the concept of 'socially necessary' labor defined before) and whatever is produced above it is called the 'surplus product'. Value of the surplus product is then called the 'surplus value'. Because workers work for capitalists, they do not own products of their own labor. Capitalists appropriate all the output and return to workers only the 'necessary' parts of their products, that is they pay only the value of workers' labor power. The surplus product, or its value - the surplus value - remains in hands of capitalists. This is the way how capitalists exploit workers: they appropriate the whole product of labor but pay back only as little as is needed for the subsistence.


To illustrate this ideas we shall continue with the preceding numerical example. Suppose that the subsistence amount of goods the worker and his family need to consume per day is 1 pound of corn and 2/3 of a yard of cloth. The value of one day of labor power is therefore


value of labor power = 2.6667 + .6667(3.50) = 5 hours


This means that the worker needs to work 5 hours a day to reproduce his labor power. If the actual work day is 10 hours, then the worker works 5 hours for himself ('necessary labor') and 5 hours for the capitalist ('surplus labor') producing 5 hours of 'surplus value'. The ratio of the surplus labor to the necessary labor or the ratio of surplus value to the value of labor power is called 'the rate of surplus value' or the 'rate of exploitation'. In our example it happens to be 5/5 or 100 per cent.

Read about
views about income distribution under socialism




downupThe surplus value produced by workers is the source of capitalist profits. The 100 per cent rate of surplus value can be also interpreted to mean that in the long run from each produced one hour of value one half goes to the worker as his wage and one half to the capitalist as a profit. In the dialectical interpretation profit is only a form of appearance of the surplus value (essence). But it fools us, because it seems that the profit is produced by capital, while in fact - Marxists tell us - it is the product of labor appropriated by capitalists.
Going back to the example with corn and cloth, we can now say that out of the 1 hour of the new ('live') labor contained in one pound of corn 1/2 hour is the necessary labor and 1/2 hour is the surplus value. Similarly out of 2 hours of the 'live' labor contained in 1 yard of cloth 1 hour goes to the worker for the reproduction of his labor power and 1 hour is a source of the capitalist profit.





It is standard in the Marxian literature to use the following notation and terminology:


'embodied labor'

value of 'means of production'

cost of material

'constant capital'


'necessary labor'

value of 'labor power'

wage cost

'variable capital'


'surplus value'

value of 'surplus product'



Note: c is called 'constant capital', because it represents the amount of capitalist's investment in purchasing material inputs for production; it is said to be 'constant' because material inputs are not supposed to produce surplus value. v is then called 'variable capital' because investment into hiring workers bring the increase of capital in the form of profits.




Summary of labor-value calculations

(in hours per pound or yard)





embodied labor




necessary labor




surplus value





c + v + s




c + v



(in per cent)

rate of surplus value




rate of profit







down  up  Marxist claim that because profits are generated only by labor the rate of surplus value s/v should be the relevant measure, however, capitalists are interested in the rate of profit, i.e. in measure of return per unit of invested capital s/(c+v) which obscures the essence of capitalist exploitation.

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One thing is clearly visible from the labor-value calculations: the rate of surplus value is the same in the production of   both commodities but the rate of profit is not. Why not? Because the ratio c/v - the so called 'organic composition of capital' - is different for the two products. By simple mathematical manipulation we get:


It follows that under identical rate of exploitation (s/v) the rate of profit [s/(c+v)] is smaller where the organic composition of capital c/v is larger. But c/v is similar to the concept of capital-labor ratio. This implies that under the labor-value pricing the profit rates would be low in highly capital intensive industries and high in labor intensive industries. It was recognized already by David Ricardo that this conclusion is at variance with real world observations, but Ricardo brushed this problem away as not very important. Because of the enormous changes in capital intensity of production during the time of industrial revolution Marx could not disregard this problem any more.


























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