How Capitalism Work Chaps 6 - 10

7/31/2019 How Capitalism Work Chaps 6 - 10

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How Capital ism WorksPierre Ja lee

Translated by Mary Klopper

Monthly Review PressN ew York an d London

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38 How Capitalism Workshowever, a subjective reality based on the consciousnessevery member acquires of being a unit of the class as awhole and of being able to define him or herself onlywithin its context. For instance, the common experienceof exploitation is the subjective condition for the appear-ance of proletarian solidarity, bu t this can only reach itsfull development when every proletarian deliberately willsit and recognizes solidarity as a weapon. That is a roughdefinition of class consciousness.H ow does class consciousness arise and grow within thework ing class? D uring daily labor class consciousness stirsas workers conceptualize the exploitation experienced incommon with their companions, and as they begin to an-alyze the system which gives rise to it. But class con-sciousness develops most clearly when the permanent an-tagonism between exploiter and exploited is reflected inconcrete acts and, more especially, when it leads to sharpconfrontationsthat is, to class struggle and open con-flicts between proletarians and capitalists in the factoryor workers and the bourgeois state outside it. When th eworkers become fully aware of the nature of the capitalistmode of production and of capitalist society as a wh ole,the class struggle becomes infinitely more effective. Whenthis awareness permeates the mass of the working classit becomes the ideology of the proletariat, that is, a total,coherent conception of society and its possibilities for thefuture. This ideology of the proletariat is, on the one hand ,the product of class struggle and, on the other, relies onthat same class struggle as the only means of resolvingthe co ntradiction between bourgeo isie and proletariat. W eare brought back to the dialectic.Thus class struggle is at the same time a collective con-frontation with a concrete purpose and the developmentof consciousness for the benefit of the community in strug-gle. It is in every way conducive to progress. It is classstruggle and the victories of exploited and subordinatedclasses which alone made it possible to overcome the con-tradictions between antagonistic classes in the past. Andit can do so again in the future, giving rise to a new andbetter society: class struggle is the engine of history.

6Profit:The Roll ing Stonethat Gathers MossWe have seen that surplus value is created only in thecontext of the production of material goods for the purposeof exchange, that is , commodities: without such produc-tion there is no surplus value.W e strove to unco ver the real, basic nat ure of surplusvalue: unpaid surplus labor. This real nature is usuallyhidden. If a worker did not ferret it out he or she mighttoil at bench or machine for another twenty years withoutsurplus value becoming manifest and obvious. On theother hand, it is clear and even obvious that the capitalistfactory owner makes a profit which is only the visible,monetary form of surplus value. To throw light on it weneed to devote some time and attention to the process ofcirculation of capital.W e have already seen that the formula M C ^ M ' is thegeneral formula of capital. This capital first takes a mone-tary form (M ), then the capitalist turns money into a com-modity-means of production in order to manufacture com-modities fo r sale (all this is represented by C). And, final-ly, the sale of these commodities transforms them in theirturn into money (M'). This circulating movement of capi-tal can be seen in the figure.In the inner circle money capital is seen transforming it-self into productive capital (buildings, tools, raw materi-als, supplies, labor power); the impact of labor turning

this productive capital into com modity capital; and , fi-39


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40 How Capitalism Works

Moneycapital

-VProductivecapital Commodity /capital '

nally, the sale of the commodities turning it once more intomoney capital so that the circle can start again.Th e outer circle shows the circulatory movement dividedinto tw o different phases:1. A phase of production (transformation of productivecapital into commodity capital), taking place entirelywithin the factory;2. A phase of circulation as such, taking place outsidethe factory in the course of which the sale of commoditiesproduces money which is immediately reinvested in com-modities to be used for new production.Th e movementis continuous and less schematic than inour Figure 1. Th e movement from on e part of the cycle toanother is continuous, but it cannot depart from the pre-

Profit 41scribed path. As for the productive phase and the circula-tory phase, they are inseparable and are in a dialecticalrelationship: if one loses speed it slows down the other,and vice versa. It is in the interests of the capitalists thatthe cycle be completed as rapidly as possible. Foremenpass the instructions of the bosses down the productionline: the factory must ru n smoothly without hindrance ordelay s o much for the phase of production.With regard to the phase of circulation, the owner triesto sell the commodities immediately upon production.There is no time to lose, for the greater the speed of cir-culation of capital the greater will be the surplus valueor profit which accrues to the capitalist in a given time,since there is in each cycle only so much surplus labor tocreate it. This explains the need to rely on specialistsin trade and distribution for the disposal of products in anincreasingly complex capitalist society. It is true that theentrepreneur has to divert part of the potential profit tothese specialists, but this is more than recouped in higherprofit which follows the increased speed of circulationof capital brought about by their services. W e shall lookat this in greater detail when we investigate trade.Here we must make a digression. During the metamor-phoses of capital (money into goods and goods intomoney), capitalists incur special costs, expenses not di-rectly involved in production proper, and so not themselvesproductive. Even when using special commercial channelsfor the distribution of products, capitalists need a purchas-ing and sales service, they need administration and ac-counts departments, they must meet bank charges and thecosts of conserving their means of production (mainten-ance of plant an d buildings, insurance, the stockpiling ofsupplies, etc.); there are also packing and handlingcharges, etc. In brief, entrepreneurs must meet these costsof circulating capital, which ad d nothing to the value ofcommodities coming out of the factory but are nonethe-less necessary to the realization of the value of commodi-ties, that is, the conversion of their value into money.These costs must be charged against surplus value and


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42 H ow Capitalism Worksdeducted from profi t . Since their impact on the totalvolume of profit is , however, no t significant, we shall dis-regard them in our further analysis.Finally, a word o n transport costs, which are not partof the costs of circulating capital. It is not usually possiblefo r a com m odity to be consum ed where it is prod uced.Iron ore is of no m o r e use at the shaft head than do wnthe mine. The use value of any product can only be real-ized if it is put within the user's reach. Thus transport addsto the value of the commodity and must be regarded asan extension of production.

Let us now address ourselves to the prob lem of the tran s-format ion of surplus value into profi t, first reviewingsome facts we have learned. There are three elements inthe value of a comm odity:1. A small proportion of the value of the instrumentsof production (buildings, tools, equipment) equivalent totheir depreciation is transferred to the com mo dity.2. The whole value of the materials of production con-sumed (raw materials an d supplies) is transferred to thecommodity.3. The labor power of the labor force, on the otherhand, creates new value, part of which (necessary labor)is paid for in wages an d part of which (surplus labor) isappropriated by the capitalist and called surplus value.The value in items (1) and (2) does not change during theprocess of product ion , as it is simply transferred. Th e capi-tal invested under (1) and (2) is called fixed capital, rep-resented as "c."O n the other hand, the capital invested under (3), that is,in wages, is that part which varies during the process ofproduction since it is increased by surplus value. It is calledvariable capital or "v." Weshall now designate as "pi" thene w value created and not paid for, that is, surplus valueor the product of surplus labor. Thus if "M" is the valueof a given commodity th e following equation applies:

M = c + v + pi

Profit 4 3which is merely a schematic, algebraic expression of thelaw of value.Let us now consider a capitalist who has invested atotal cap ital o f 850 uni ts (this could be in mill ions o f francsor dollars) and let us suppose it to be divided as follows be -tween the three elements w e have ju st described:1. Seven hundred and fif ty units are invested in instru-m e n t s o f production (buildings, equipment, machines,tools, etc.). We will suppo se, quite arb itrarily , that theseinstruments would be worn out in ten years, that is, depre-ciation at 10 percent per annu m or seventy-five units. Thiscapital of seventy-five represents the value transmitted tothe commodities produced in one year. These f igures areshown in the first line of Table 1.2. Our capitalist decides to allocate 50 units for the p ur -chase of materials of production (raw materials, supplies,etc.). This could be the cost of requirements fo r fourm onths, and such m aterials wou ld have to be replacedthree times a year using the proceeds of sales of c o mmo -dities f rom the previous cyclethat is, a transmitted valueof 3 X 50 = 1 50 for the who le year. These figures are sho wnin the second line of the table.3. Our capitalist also decides to allocate fifty units topaym ent of wor kers covering three mo nths' wages. Thesale o f comm odit ies produced dur ing the first t h r ee m on t hsprovides for replacement of the capital advanced, so thatthere will be four replacements a year, or a value trans-mitted to a year 's production of commodit ies of 50 X 4 =200. These figures are shown in line three of the table.4. We m ust, how ever, also take into account thesurplus v alue prod uced in a year. If we estimate that work-er s carry o ut three hours o f unpaid surplus labor fo r everytw o hours o f necessary labor fo r wages, then surplus valueto wages will be in a ratio of 3:2, giving in a year thefigure of 300, which we enter at the bottom of the table.Ou r capitalist has invested a total of 850 units but hastransmitted only part of this to o ne year 's production ofcommodi t ies . This transmitted value is 75 + 150 = 22 5 offixed capital"c"+ 2 00 of variable capital"v" giving a


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44 H ow Capitalism Works

1. Ins truments ofproduction2. Materials3. WagesTotal capital investedCost of product ion ofcommodities produced in1 yearSurplus value producedin 1 yearValue of 1year'sproduction

Totalcapital Circulationinvested time7505050850

10 years4 months3 months

Valuetransmittedin 1 year75

150200

425300

725total of 425 units which the capitalist sees as the cost ofproduction or prime cost of the commodities produced ina year. But the value of these commodities is greater:M = 225c + 200v + SOOpl = 725

If, as is usually the case, the capitalist has sold commod-ities at their value of 725 he or she will say, "I have anannual profi t of 725, less my outlay or prime costs of pro-duction of 425, that is, 300": and will be correct. Profi t isequal to surplus value, but surplus value is incorporated inthe value of the commodities whether they be sold or not,whereas profi t appears only at the moment of salesurplusvalue becoming profi t only when it is realized and trans-formed into money or capital. Our interest is centered onsurplus value because it expresses the exploitation charac-teristic of the system, but the capitalist is concerned withthe money pro f i t which goes into his or her coffers. AsMarx put it:Surplus value an d rate o f surplus value are, relatively, th einvisible and unknown essence that wants investigatingwhile th e rate of profit an d therefore th e appearance of sur-

Profit 45plus value in the form of profit are revealed on the surfaceof the phenomenon.1It will be remembered that the ratio of surplus value isequal to the ratio between the v alue of surplus labor andthat of necessary labor, that is , "pi" which, in our ex-

ample, gives: 300pl200v = 150%

However, in order to calculate the rate of profit, ho w willthe capitalist reckon profit? By considering the total capi-tal "put into" the interprise, in our exam ple 850, he or shewill conclude that the rate of profit is :300850 = 35.3%

Thus the rate of profit is very different from the rate ofsurplus value. The latter measures the degree to which theworker is exploited and the former th e return on investedcapital. Y et without surplus value there would be no prof-it. In the above reckoning: Q^. is the surplus value. Ifthis were absent, the ratio of ^22 would be " and 0 di-850 850vided by 850 equals 0. Thus if we symbolize total capitalinvested as "C" the rate o f profit is obtained by the form ula"7T-" But we saw earlier that total capital invested fallsinto two parts: one of fixed capital or "c," and one of vari-able capital or "v," so the fo rmula for the rate of profit isbetter expressed as: .c + vWe have also seen that there is a direct relationship be-tween "pi" and "v," that is, between the value or durationof surplus labor and the value or duration of necessary la-bor. In 1962 it was possible to calculate that in France onan average in every eight hours of work there were fivehours of surplus labor and three hou rs of necessary labor.O f course, this ratio can and does vary, bu t only slowly


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46 How Capitalism Worksand within limits. For convenience we will take it as fixed5and so replace our earlier example with the formula ~r

C ~T ~ ofor the rate of profit. This peculiar formula contains thefigures 5 and 3 and the letter "c," that is, an unknownquantity representing fixed capital. Common sense and ob-servation tell us that "c" will vary considerably from oneenterprise to another. In a capital-intensive industry likethose producing automobiles or airplanes, for example,the machinery and equipment is very much more valuablethan in, say, a quarrying enterprise. One might take "c"to be worth 12 units in the one case and 2 in the other,which gives us the following rate of profit:= = 33.3%and

This shows that if "v" is constant (and hence also "pi"),the rate of profit may vary considerably as a function ofthe value of "c" fixed capital. Thus within the total capitalof an enterprise it is important to consider the relation be-tween that portion invested in fixed capital and that invariable capital; that is, "the payment of wages." Thisrelationship is called the organic composition of capitalcexpressed in the formula: -.

Still assuming "pi" and "v" to be constant, it would seemthat the rate of profit would vary greatly as between enter-prises or even more between branches of industry becauseof their very different organic compositions of capital. Bu tthe general impression of the lay person is quite to thecontrary, and it is generally believed that the profit de-rived by capitalists from, say, steel mills does not differgreatly from that accruing to those in the chemical, metal-lurgical, or electrical industries. This idea is not erro-neous: but how can this be?First, let us recall the importance of the speed of circu-lation of capital or, to put this another way, the numberofcycles of production that can be completed within a giventime. Some industries may complete three cycles in six

Profit 47months and others ten or even twenty. This can oftencounterbalance the effect of the organic composition ofcapital on the rate of profit.This relative equalization of the rate of profit, whichcan be empirically observed, depends, however, most ofall on competition between different fields of capital in -vestment. Let us suppose that the average rate of indus-trial profit is 20 percent at one particular time and arisesfrom rates of 30 percent in one industry and 10 percent inanother. This will give food fo r thought to capitalists re -ceiving only 10 percent and those who have fresh capitalto invest. Both will be inclined to turn away from the in-dustries with a 10 percent rate of profit to invest their cap-ital in those offering a return of 30 percent. Productionin the first group will fall even to the point where there is ashortage of the commodities they produce; there will thenbe a rise in those prices and thus increased profits. Thereverse will occur in the industries which were at first mostfavored as the capital flowing into them produces a drop inprices and profit.Much more could be said on this subject, but that woulddivert us considerably from our main purpose. It is impor-tant to remember that comparisons between different in-dustries as avenues of investment for capital brings abouta general rate of profit or average rate of profit to whichvarious separate rates of profit constantly tend to approxi-mate. Rates of profi t are never exactly the same through-out an economy, but the tendency for them to equalizeis an observed feature of capitalism in conditions of freecompetition.It must be added that in any particular country the sumof capitalist profi t can only be the same as that of the na-tional total of surplus value appropriated, since all profitis no more than surplus value realized in money.It followsthat capitalists whose rate of profit is above the averageare really appropriating more than their share of nationalsurplus value. Similarly, capitalists whose rate of profit isbelow the average are actually appropriating less thantheir share of national surplus value. The one group can


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48 How Capitalism Worksgain only at the expense of the other. W e shall find thisobservation very useful when we look at monopoly capi-talism as it is today and the contradictions it engenderswithin the capitalist class as a whole.

Profit in Various Guises:Industrial, Commercial, Interest,' and Bank Rates

Up to now we have thought of profit only in its industrialform. This w as justified by the fact that industrial profit isthe greatest in vo lume and because it plays a fundamentalrole, since industrial capital is the only sector in which theappropriation of surplus value occurs. But capital an dprofit take other forms, the most important of which arecommercial capital and commercial profit, which areconstantly on the increase.Earlier on we stressed the importance for capitalists ofthe speed of circulation of capital, and noted that capital-istsusually try to accelerate thiscirculation byentrusting thedisposal of their products to specialists in commerce anddistribution and by feeding part of their profits to thesespecialists in remuneration fo r their services.This can easily be understood by turning to the formulaand definition of annual circulation of profit which is equal

to: ^-, when "C" represents total capital invested, com-(_ /posed of constant capital ("c") and variable capital ("v"),the latter devoted to meeting the wage bill. Hence the rateof profit: ;.c + vIn this context let us compare two different but equalcapital sums, C' and C", assuming that they carry the

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50 How Capitalism Workssame rate of surplus value, say, 10 0 percent, an d have thesame organic composition. For example:

C' = C" = 80c + 20v = 100.C', however, circulates twice in one year and C" onlyonce; thus in a single year C' will have produced surplusvalue equal to twice 20v or 40pl while C" will have pro-duced surplus value equal to only once 20v or 20pl. The40rate of profit of capital C' will be: = 40% and that of20 10C":- = 20%. All else being equal, the rate of profit will betwice as high if the speed of circulation of capital is twiceas fast. Not only does a faster rate of circulation of capitalmake it possible to realize su rplus va lue more rapidly, butit also increases its absolute value within a given time .If industrial capitalists try to distribute their own prod-ucts and sell them to consumers they will encounter allsorts of difficulties that will take up a lot of time and finan-cial resources; they will soon decide that it is no use try-ing to be jacks of all trades. Experience shows them thatselling to entrepreneurs with multiple outlets and goodfinancial backing or to specialists in large-scale mail orderdistribution enables their competitors to "get their moneyback" more quickly, thereby greatly increasing their prof-its. The capitalists realize that the considerable benefit tobe gained from more rapid circulation of capital can beenjoyed while conceding only a reasonable share to thecommercial sector. This applies especially to all con sum ergoods industries and to a lesser extent to capital goodsindustries, which are in any case less numerous.Thus, in advanced capitalist economies a vast commer-cial sector has been established and developed, with atendency to spread its tentacles throughout theeconomy.H ow are we to analyze this commercial capital?The commercial capitalist is a specialist who buys all orpart of the industrial capitalists' production at an agreedprice and resells these commodities at a higher price, al-though they have not been transformed in any way. This

Profit in Various Guises 51means that at the price agreed upon between th e indus-trialist and the middleman th e commodity realizes onlypart of the surplus value contained in it. This is the partappropriated by the industrial capitalist. The other part isleft to the middleman as payment for his or her servicesan d is realized only when the commodity is finally sold tothe consumer. The commercial capitalist believes that hisor her operations create new value and is not alone in be-lieving or pretending this, since the state defines both com-mercial and industrial profit as "added value." This is onlyan illusion; commercial profit is really a value preemptedor extracted from total value for the b enefit of commer-cial capital. N o value is created outside the prod uctivesector. This means that there is, in one sense, an objec-tive conflict of interest between industrial and commer-cial capital, since they shar e a give n amoun t of surp lusvalue. At the same tim e it is in their com mon interest tomaximize surplus value, which entails increasing exploi-tation of labor. Within the capitalist class there is a con-tradiction b etwe en industrial and comm ercial capital, butthis is secondary to the principal contradiction betweenthe capitalist class as a whole and the proletariat.Moreover, in practice the secondary contradiction be -tween indu strial and comm ercial capital is in general re-solved by the fact that th e rate of commercial profit can-not for long diverge fa r from the average rate of profitpreviously defined. If the rate of commercial profit wereactually to rise much above the industrial rate, it wouldthen be to the interest of industrial capitalists to investin the comm ercial sector and distribute their own productsto the consum ers. Com petition betwe en forms of capitalistinvestment operates no t only within each sector, but be-tween the various sectors. The resulting average rate ofprofit is a trend applicable to the economy as a whole.Industrial and commercial capitalists rarely operatesolely on their own ca pital; they borrow mo ney on whichthey pay interest. Major companies issue shares, that is,lOUs, issued to many savers, large or small, in exchangefor an interest-bearing loan. A saver with 3,000 units of


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52 How Capitalism Worksmoney can subscribe to 30 shares of 100 units in a particu-lar company, which undertakes to return the 3,000 unitsin 15 or 20 years and to pay 7 or 8 percent annual interestfor the duration of the loan. The industrial giants also oftenreceive loans (many of them at low interest) from thestate. Banks often give m edium-term loans to companieswhich ar e their customers, an d discount the bills of ex-change or drafts which they receive; that is , they advanceto their clients sums equivalent to these bills of exchangefor the period until the bills fall due (usually three to sixmonths) and charge a discount or interest for this service.What we have described are different forms of interest-bearing money loans (long-, medium-, or short-term) allof which enable the capitalist who receives them to expandoperations.H ow can we explain the return or interest received bythose who lend mon ey? We know money does not have theinherent property of generating money. Mo n ey does not"breed." If, howeve r, mo ney takes the form of capital in-vested in a process of prod uctio n, it appropriates surplusvalue and brings in a profit. The sum of 3,000 units ofmoney predicated above as savings does not generateanything while hidden in a cupboard . It began to bring inan interest of 8 percent only when invested in shares, be-cause the company in turn invested that mon ey in a pro-ductive process which generated profit. The interest paidat the end of the ye ar is simply par t of the surplus valuegenerate d by the original sum applied as produc tive capi-tal. It follows that the interest rate must be lower than therate of profit. If the capitalist who borrows the 3,000 know sthat by putting it with m any other sums he o r she can cre-ate a profit of 20 percent, he or she can offer 8 percent tothe investor and retain a net profit of 12 percent.Surplus v alue is created only in the prod uctive process,bu t the industrial capitalist can allocate a share to thecom-mercial capitalist, or another share called interest to theholder of cash which can be used to create additional sur-plus value (this last point is important, since share issuesare on the increase). All this amoun ts to a shared surplus

Profit in Various Guises 53value between the interested parties. As we shall see, thereare more of these interested parties than the commercialcapitalist and the lender of m one y.Now let us turn to those whose sole occupation is themanipulat ion of money: the bankers. How is it that thesepeople in particular ca n realize profit at a rate equal tothe average general rate of profit (otherwise there wouldbe no bankers), although their sole function is to lendmoney at a rate of interest which is, by definition, lowerthan the average rate of profit? This paradox is, of course,illusory, *Our first inquiry relates to the source of banking capi-tal. More precisely, what do the bankers use for their op-erations? At the start, they certainly invest their own cap-ital to set up a head office, branches, customer counters,etc. Suppose that a large bank thus invests the sum of100 units of its own capital. Across its counters it will soonattract deposits far in excess of its own capital. It is not un-realistic to postulate that these deposits will soon reach afigure of 1,000. Th e bank pays no interest on small an dmedium deposits in current accounts. On some very largedeposits, fixed deposits, and savings accounts it pays avariable but never very high rate of interest. Let us sup-pose that the average rate paid on various deposits is 3percent, that is, 30 on 1,000. The ban k, in its turn , will lendpart of the money received in deposits, keeping only aminor part in liquid form to meet withdrawals. Let us sup-pose that the ban k holds 2 00 in liquid form and lends 800in various forms at an average interest rate of 8 percentwhich gives 64. At the year's end the bank's profit will be:64 (interest received) - 30 (interest paid out) = 34. Like theindustrial capitalist, the banker will relate this profit to the100 originally invested. The gross rate of profit is thus:O AJ Q Q = 34%.The rate of profit is calculated on the capital of

the capitalist, but the money the banker puts to work ascapital is other peoples' money. "In interest-bearing capi-tal," in Marx's words, "this automatic fetish, self-expand-ing value, money generating money . . . is potentially


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54 H ow Capitalism Worksself-expanding value and is loaned out as such . . . . itbecomes a property of money to generate value and yieldinterest. . . ." Behind this facade, however, the mystifica-tion of capital pro ducing interest "much as it is an attrib-ute of pear trees to produce pears"1lies the essentialthough not immediately visible reality that all capital is nomore than the embodiment ofpast labor and that the valueof such past labor can be transmitted and integrated intone w value only by contact with living labornew produc-tive labor.The fetish of interest-bearing capital is only a fantasy,yet it is so deeply implanted in the mind of all capitaliststhat they quite naturally distinguish two separate elementsin the profit of any type of enterprise, in the belief thattheir capital is in itself capable of creating interest. Thefirst part is the interest on the capital; the second is thesurplus of profit (total profit less the interest on the capi-tal), which is called the entrepreneurial profit.If , in a given year, a capitalist makes a net profit of20 percent on capital, and this capital loaned to otherscould have brought in 7 percent in interest over the sameperiod, the capitalist willfirmlyandmistakenlyconcludethat capital brought in 7 percent interest and 13 percententrepreneurial profit or remuneration for managerialwork. In the mind of the capitalist this return orremuner-ation is justified by the fact that a well-managed enter-prise m akes more profit than one that is mismanaged.It is beyond question that no enterprise can survive andflourish without the contribution of administration an dmanagement, which merits remuneration like any otherwork. Similarly, there can be no doubt that this work mustbe regarded as productive. Just as a skilled conductor isnecessary to the best performance of an orchestra, so onlycompetent managem ent can efficiently coordinate the multi-plicity of different tasks in a single enterprise. On thescale of a large enterprise, work is not so much the sumof individual inpu ts of labor as the intergated activity ofa collective worker , from laborer to director, who createssurplus value indivisibly.

Profit in Various Guises 55Thus no f und am enta l, eternal p rinciple make s the man-agement function inseparable from that of the capitalist.The functions of management an d administration are,moreover, often entrusted to salaried personnel, howeverprivileged these may be, and, in the United States, theseeven set the tone in the capitalist world. The economist

John Kenneth Galbraith has observed that managementand administration of the giant corporations is, more andmore, detached from financewhich finds it advantageousto delegate them to a collective of high-powered techni-cians. This Galbraith describes as a "technostructure."This does not, howWer, prevent finance capital from gain-ing the famous entrepreneurial profit.Above all it must not be forgotten that we are analyzinga system based on class antagonismspecifically betweenthose workers who are direct producers and the ownersof the means of production. In this situation the func-tions of management and administration are inseparablefrom those of oversight an d oppression, which becomerepression pure and simple as soon as the co nfronta tion ofclasses becomes sharper or more widespread. Mana ge-ment and administration in this context bear no relationto the organization of labor within a peaceful homogene-ou s collective worker. Th e entrepreneurial profit is thusno more justifiable than interest on capital. Both aremen tal constructs of a class masking the fu nda me ntal real-ity of the exploitation of labor by capital.It remains to say a word about that other form of profit,rent on land. This will be described mainly fo r historicalreasons since issues of agricultural landholding have de-clined, certainly in the advanced capitalist societies, withthe decrease in the number of workers concerned (andmany of these part time), in relation to the increasing num-ber of industrial workers.First, we must recall that working the land producesmaterials useful to society and generates value, and hencealso surplus value, when it is performed within the capi-talist mode of production and labor power is purchasedfor wages. La nd itself is a produc tive factor which has no


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56 How Capitalism Worksmore inherent value than air or water and could only beassimilated by capital at the point where al l usable clearedland had been privately appropriated. From that timein history land produced rent if rented or leased in a man-ne r roughly similar to that by which money lent to an in-dustrialist brought in interest. Thus rent on land is a spe-cial case of profit.

8The Subdivision of Surplus Value:

An Apparent Paradox?W e saw earlier that in France out of eight hours' laborsomething like five hours goes to produce surplus value,which must, therefore, be enormous. If industrial capital-

ists were to keep the whole of surplus value fo r themselvestheir profits would be of a quite different order from thosethey actually realize.Industrialists are, in fact, constrained to share this sur-plus value with others, and among these the state andcom-mercial capital take the lion's share.W e have seen why the industrial capitalists have re-cou.'se to commercial capital for the distribution of theirproducts and how this benefits them. Obviously, they haveto pay for this service, which they do by relinquishing partof the surplus value in the same way as the owners of abuilding relinquish part of the price as commission to theproperty agent who sells it. The matter is, however, morecomplicated than that.In practice, industrial capitalists often entrust the dis-tribution of their products to general agents who, in turn,sell it to wholesalers who again pass it on to retailers,sometimes directly an d sometimes through more special-ized wholesalers. At the retail stage the commodities aresold at their value, but at every stage a share of the valuehas been levied by the relevant handler. Let us recall thatthe value of a commodity is expressed as c + v + pi and

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58 How Capitalism Workssuppose that the part of fixed capital transfered in thecommodity (c) comes to two, that the variable capital (v )or wages comes to three and that surplus value (pi) comesto five. In this arbitrary example th e value of the commod-ity will be 2c + 3v + 5pl = 10. At the nnal retail stage thecommodity will be sold at this value an d this cannot gen-erally be otherwise. If the industrial capitalist sells thegoods straight from th e factory fo r eight, then the com-mercial agents at the various stages in the process of dis-tribution will share two; two is therefore that part ofsurplus value (5 ) which th e industrial capitalist has to re-linquish to commercial capital as a whole. This sectortakes it s share of surplus value, bu t does no t create an yof it.At the present time there is a tendency for the steps inthe distribution process to decease owing to the growth ofchain stores, large-scale outlets, and specialists in sales bymail order, all of which could reduce commercial capital'sshare of surplus value. On the other hand, commercialcapi-tal has expanded into market analysis, advertising agen-cies, etc., which have grown enormously. When all itsclaims are met, the commercial sector is certainly overallthe greediest private claimant to that portion of surplusvalue which the industrial capitalist is obliged to relin-quish.The public sectorthe statehowever, is voracious too.The state ha s become th e collector of a considerable vol-um e of resources, since national budgets attract as muchas one-fifth to one-fourth of the national income. Lessthan 10 percent of its receipts derive from taxes on com-pany profits, so that the direct levy on the total nationalsurplus value is modest. Bu t some three-fourths of statereceipts ar e derived from direct taxation of earnings an dindirect taxes such as sales taxes, excise duties on liquor,tobacco, etc.At first sight it would appear that such receipts are lev-ied on the incomes of those concernedthat is, the wagesand salaries of workers. Earlier we saw that a wage isequivalent to the value of labor power, that is , equal to

Th e Subdivision of Surplus Value 59the value of goods enabling this labor power to maintainan d reproduce itself. We may recognize that certain stateserviceshealth and educationcontribute to the trainingand maintenance of the labor power of the workers in gen-eral an d conclude that th e fraction of taxes required fo rthe operation of these services is levied on the value oflabor power.No one, however, will believe that the army, the courts,the police, or many other facets of public administrationare instruments of the state directed to the maintenancean d reconstitution of the labor force. Neither their func-tions nor their costs have any connection with the value oflabor power or with wages, although they seem to belevied on the latter. Thus we find that wages and salaries,as they are currently defined, fall into two parts: the wagesor salaries proper, as we have scientifically defined them,with th e addition of a portion of surplus value appro-priated by the capitalists, which they have been con-strained to add to real wages with a view to their transferto the state in taxes. Thus both productive and nonpro-ductive workers see a considerable volume of surplus valuefrom all sorts of capitalist enterprises pass through theirwages and salaries to the state. These can be seen to havethe same basis as the costs of circulation referred to earlieran d they can, therefore, only be ultimately derived fromsurplus value. Just as the part of surplus value transferredto the commercial sector provides it with the means foractivity designed to increase total surplus value, so thatpart transferred to the bourgeois state provides the meansto conduct th e affairs of the nation in the interests of theclass which has appropriated the surplus value and re-linquished part of it to the state.There are, however, other transfers of surplus value.W eshould remember that when industrial capitalists pay in-terest to banks or savers w ho have lent them money they ar esimply transferring part of the new surplus value whosegeneration has been facilitated by this money. In thesedays of increasingly complex economic life, enterprisesof al l sorts proliferate: for finishing, recycling, organiza-


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60 How Capitalism Workstion, management, research, etc., al l used by capital an dremunerated by a levy on surplus value.There are yet others, often forgotten, who share in thebenefits of surplus value and who present an especiallyinteresting example because of their social repercussions.In every enterprise there ar e quite a number of managersan d other senior staff who receive a variety of paymentsand perquisites, making them relatively very comfort-ably o f f .When the workers in a factory or group of factories pre-sent demands or go on strike, they do not directly con-front the owner or top officials, bu t some member of thesenior staff specifically delegated fo r that task. They soonrealize that such a person is almost always on the otherside of the barricades and is the spokesperson and repre-sentative of capital. Part of this individual's high remuner-ation is in return for an effective contribution to the pro-duction of the enterprise, and the other part fo r servicesas representative an d executive of the authority of the em-ployer and agent of oppression and repression. This secondpart of the remuneration cannot in any way be treated asa salary and is levied on surplus value.This analysis may apply not only to senior staff. Themurder of a worker in a French Renault factory in 1972drew attention to the fact that many enterprises employsuch people as former military or police personnel, not totake part in production, but for supervision, espionage,and repression of one kind or another. The wages of suchcompany police can only be explained as a levy on surplusvalue. These preliminary observations will be of help to ourlater analysis of social classes.To summarize, industrial capital first appropriates allsurplus value, but can only keep part, as it has to hand overthe remainder to various persons and agencies. Commer-cial capital, banking capital, the bourgeois state, privatesaversall who contribute to the enlargement of total sur-plus valueparticipate in the division of spoils. Thus theyall have an interest in the growth of total surplus value

Th e Subdivision of Surplus Value 61which can only be brought about by increasing the exploi-tation of the working class or, more generally, all wageand salary earners. However, once maximum total surplusvalue has been generated, all compete for a larger sliceof the cake. There are, for example, rivalries between in-dustrial capital, finance capital, and commercial capital,and thus internal contradictions within thecapitalist class.Such contradiction between sectors is tempered by the ten-dency fo r rates of profit to equalize, and can never be morethan secondary to the fundamental contradiction betweenthe entire, united, capitalist class and the proletariat andits allies. All capitalists have a necessary interest in in-creasing exploitation; it is in the interests of all workers tooppose it.In general the number of workers employed in an enter-prise tends to be stable or to grow very slowly; in somesectors, automation has led to declining numbers. Wagesnever rise at breakneck speed, but on the other handmachinery and industrial supplies are increasingly num-erous, effective, and costly thanks to advances in scienceand technology. The industrial world is thus characterizedby constant and rapid growth in the value of the equip-ment an d supplies of enterprises while there are onlysmall increments in the general wage level.Let us recall our formula for the rate of capitalist profit:pi , in which "pi" is surplus value, "c" fixed capital an dC. I V"v" variable capital. As a result of the trend we have dis-covered, "c" in the formula tends to increase much morerapidly than "v," a movement we have described as an in-crease in the organic composition of capital.Le t us suppose, for example, that in a particular enter-prise in 1930 c = 200 and v = 50. For the sake of argument,we will assume the currency to have remained stable. Itwould then not be an exaggeration to suggest that by 1970"c" would have risen to 850 (more than fourfold) and "v"from 50 to 150 (threefold). What, then, of "pi"? W e knowthat surplus value is directly related to the value of labor


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62 How Capitalism Workspower, that is to "v," and we can fairly hypothesize thatin 1970, surplus va1930. This gives us:in 1970, surplus value was worth twice "v" as it was in

rate of profit in 1930 =rate of profit in 1970 = 30P*t^850c + 150v = 30%

The rate of surplus value remaining constant, the mark-edly greater increase in fixed capital over variable capitalcaused a considerable fall in the rate of profit. The unin-terrupted progress of science and technology leads to thegeneral phenomenon of an increasing organic compositionof capital throughout the economy. Th e tendency of theaverage rate of profit to fall is , therefore, fundamental tothe capitalist economy.Why, then, is this law defined as a "tendency"? Be-cause like all economic laws, it arises from contradictoryelements.The struggle between opposites is universal, so that thephenomenon fundamental to this tendency is opposed byothers which counteract it with more or less effect accord-ing to time and circumstances. Thus th e falling rate ofprofit is a general tendency which is manifested withgreater or lesser force as the pressure of scientific and tech-nological innovation varies and meets with stronger orweaker counterpressures.What are the counterpressures, what are the opposingfactors? In our example above we postulated a constantrate of surplus value. In reality this is unlikely. Suppos-ing that between 1930 and 1970 the rate of surplus valuehad risen from 2v to 2.5v, instead of remaining stablewe would have the following equation for the rate of profit:

375pl850c + 150v =37.5%The rise in the rate of surplus value would have taken upmost of the fall in the rate of profit due to the rising organiccomposition of capital. Thus the classic defense of the cap-

Th e Subdivision of Surplus Value 63italists against a fall in the rate of profit lies in the manyforms of intensification of exploitation of labor which in-crease th e rate of surplus value.Trade with the underdeveloped countries is another fac-tor operating in the same direction. Such trade enablesthe enterprises of the industrialized world to obtain rawmaterials such as oil and minerals at low prices, and so toreduce that part of constant capital required for theirpurchase. Moreover, th e importation of certain majoritems of consumption tends to reduce the value of laborpower, for it is certain that some increase in wages wouldensue if coffee, cocoa, bananas, oranges, peanuts, etc.,grew in industrial countries where they would cost more toproduce. Finally, industrial products are usually sold tosuch countries at enhanced prices, providing superprofits.However, these opposing factors have a limited effect onthe tendency of the rate of profit to fall.

Nowadays many economists lay greater stress on certaindevelopments of modern capitalism which Marx obvious-ly could not have taken into account. On the one hand,we have state intervention in economic life and, on theother, the expansion of many unproductive sectors usuallydescribed as the "tertiary sector." The latter may be un-productive and appear useless when judged by noncapital-ist standards, yet they enhance the capitalist rate of profit.We will not at this point discuss this difficult and complexsubject, but we can observe that the modern state putsvarious powerful restraints on the tendency of the rate ofprofit to fall. Am ong these ar e state pressure for the re-structuring of industries and monopolistic concentrations,nationalization of sectors bringing little or no return(transport, communications) and ever increasing militaryan d civil state orders on terms highly favorable to the in-dustries concerned. The commercial sector is the founda-tion of the entire tertiary sector and, as we have seen, ac -celerates the circulation of capital, enabling industrialcapital to produce more surplus value in a given time, an dthus constitutes a major obstacle to the tendency of therate of profit to fall.


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64 H ow Capitalism WorksFinally, we must not forget that the rate of profit whichtends to fall is the "general" or average rate of profit, thatis, the rate of profit for the whole economy. Wide varia-tions may occur around the average rate depending on thenature of the industries concerned and, most of all, upontheir size. Large firms and especially the giants (monop-

olies) are able to resist the tendency of the rate of profitto fall by more effective and varied means than are avail-able to small and medium companies. This has been shownby experience and can even be demonstrated statistically.It follows that the giant corporations have a far greatercapacity to accumulate capital than do small or mediumundertakings. This gap tends to widen, thereby increas-ing opportunities for monopolies to take over or controlsmaller undertakings which cannot survive alone but arepreserved by amalgamation. The differential operation ofthe law of the tendency of the rate of profit to fall ulti-mately facilitates the accumulation and concentration ofcapital. Monopolies benefit by this trend and, fo r them, w emust consider not only the rate of profit but also the vol-um e of capital on which it is calculated, finding that thegrowth of the latter can compensate, or more, for the ero-sion of the former. Let us postulate a monopoly earning,in 1970, a rate of profit of 15 percent on $10 billion,giving a profit of $1.5 billion. Let us suppose that by 1974its capital has been brought up to $20 billion though itsrate of profit has fallen to 12 percent: it will realize aprofit of $2.4 billionfar greater than that of 1970.The law of the tendency of the rate of profit to fall hascontradictory effects in conditions of monopolistic capital.By facilitating the concentration of capital it enablesgreater profits to be realized by monopolies even if thegeneral rate of profit has fallen.

The Ups and Downs of Money:From Credi t to InflationW e begin, once again, with a brief retrospect. Earlierwe saw that the value of a commodity only becomesapparent when it is exchanged for another. Barter, that

most primitive form of exchange, has long since beenabandoned. When our ancestors were faced with largenumbers of commodities to exchange, they soon discov-ered a convenient measure for all values in a particularcommodity or "general equivalent": money. From thenon the value of a commodity was expressed in the numberof units of the general equivalent fo r which it could beexchanged. Suppose the general equivalent to be gold andthat a pair of shoes, for example, can be exchanged forten grains of gold; the price of the shoes is then ten unitsof money. The price is simply the monetary expressiono f value.The primary function of money is to be a general mea-sure of value, in other words, a standard of prices. It has,however, other functions, of which the most important isthat of facilitating circulation: Susan uses money to buy acoat from Paul; Paul uses the cash received to buy a tran-sistor radio from Karen who, in turn, buys a case of cannedfrui t from Harry, etc. Some months or years later thetransistor, the coat, and the canned frui t will have beenused up. The sum of money originally put into circulationhas facilitated the exchange and subsequent consumption

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66 How Capitalism Worksof these and many other commodities but the money it-self has not been consumed. The money commodity per-forms the task of moving, passing from hand to hand, andthus facilitating the exchange of commodities.Money does, however, sometimes stop circulating.There is the miser who amasses it for pleasure, but mostlyit is people like Susan, who save when they want to buy agood coat but cannot afford it out of one month's salary;they therefore put aside a certain amount each month un-til they have saved the price of the desired garment. Every-one does this for a whole range of things, including thecapitalists who put part of their profit into reserve accounts,amortization funds, or fu tu re investments. Money is thusalso a means of hoarding. Circulation and hoarding arethe two contradictory functions of money, yet they arelinked in a dialectical manner. For it is hoarding or sav-ing which enables a larger sum of money to be put intocirculation at a particular time for the purpose of an ex-change of greater value.It may be objected that credit makes all this avoidable.That is illusory, for if Susan gets credit to enable her tobu y her coat at once that very credit will be money savedby others. Credit is a system or series of processes where-by money hoarded by all kinds of savers can be mobilizedin the service of the capitalist mode of production, and itmatters little whether it was saved toward an ultimategoal or without a special purpose.For instance, nowadays all big banks offer their cus-tomers fixed-term savings accounts. I deposit a large sumof money for an agreed period (often from one to threeyears) and at the end of that period the bank returns mydeposit plus interest at a rate higher than that availablefo r short-term deposits. Why does my bank so kindly paythis extra interest? Banks are only kind when it profitsthem. Because it knows that I will not withdraw my de-posits until the agreed time, in the intervening period thebank can use the money for short-term loans on which itcharges a higher rate of interest than it is paying me. These

The Ups and Downs of Money 67credits will, therefore, be based on my savings or hoarding.There are three major forms of credit, divided accordingto their purposes:One form is circulation credit, which is usually short-term, as, for example, when a wholesale operation getsan advance on goods awaiting sale in its warehouse. Asteel mill may have sold and delivered a large quantityof special steel to a metallurgical undertaking, but haveobtained the order only by accepting payment threemonths later by means of bills maturing in ninety days.Fortunately, its bank will "discount" these bills, will payo ut the value at oncecharging a retainer or discountandcollect on the bills when they fall due. Circulation creditis always given in anticipation of expected payments andso accelerates the rate of circulation of capital, which aswe know causes surplus value to increase. It is often ef-fected by discounting commercial bills, as in the above ex-ample. It is also done by extending advances on currentaccount, banking accounts being openedin the expectationthat they will be overdrawn and then, quite properly, in-terest will be paid on the overdraft.A second form o f credit, industrial or investment credit,is long-term and usually concerns large sums, enablingenterprises to expand further and faster than their owncapital would permit. A recent example was the amalga-mation of two French iron foundries, bringing togetherthe biggest iron founders of one industrial nation. The totalcost of the combine was estimated at 7 billion francs, butthe two participants were not worth more than 1 billionfrancs. The vast balance required was raised from thebanks (4.1 billion francs), and the state (2.65 billionfrancs). This kind of credit is fundamentally an anticipa-tion of the accumulation o f productive capital, enablingtotal surplus value to be increased. Most banks insist onbeing able to oversee the operations of the management ofborrowing firms, or even on holding share capital. Thispractice was a major factor in the growth of investmentbanks during the nineteenth century. These financial es-


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68 How Capitalism Workstablishments specialize in investing in numerous an d vari-ous undertakings and in gaining control over many ofthem.Everybody knows about th e third form, consumercredit, which has expanded at so fantastic a rate in recentyears. "Impulse buying," as it is called, created a realboom in the production of consumer durables by suddenlymaking potential and fairly distant demands materializetoday or tomorrow. Such credit also gives rise to antici-pated demand an d shortens the time required for the cir-culation of capital.To sum up, in all its forms credit is an instrument inthe service of capital. It operates by seeking out all re-serves of liquid money, great or small, an d rounding themup for the coffers of private an d public finance houses(commercial banks, savings banks, deposit accounts,etc.), and by so doing builds them into money capital on aspecial scale for the benefit of the capitalist mode of pro-duction. Circulation credit, investment credit, or con-sumer credit all operate to accelerate the cycles an d eco-nomic processes of capitalism, thus increasing th e volumeof surplus value. It follows that credit must be put on thelist of factors operating against the tendency of the rate ofprofit to fall an d added to those other factors briefly de -scribed in the preceeding chapter.Let us return to money. We saw that th e precious metalsgold an d silver quickly established themselves as commod-ity-money. To facilitate their us e states allocated to them-selves the right to strike them into coins worth a certainnumber of monetary units. These were of certain value an dcirculated easily. With th e conquest of distant lands an dthe discovery of America, individuals w ho owned manygold or silver ingots began to deposit them in a bank fo rsafety. In exchange the bank would give them a paperacknowledging the deposit, known as a "bank note."Then, fo r convenience, instead of issuing a note for a totaldeposit of gold worth say, 5,380 units of money, the bankwould hand over ten notes worth 500, three worth 100,one worth 50, and three 10s. This facilitated the transfer

The Ups and Downs of Money 69of these notes from hand to hand, and any person holdinga 100-unit share knew that th e bank would exchange it for10 0 units of gold at any time.Later the custom was gradually established that banksen-titled to issue money would issue paper notes backed bytheir ow n stock of gold in addition to metal coins. Thesenotes became fiduciary money (from a Latin world for con-fidence), because their effectiveness depended on confi-dence in the issuing institution which guaranteed theirconvertibility into precious metal. W e know, however,that one should never have too much confidence in thosewhose business is the manipulation of money. In fact,the national banks issuing money soon realized that in-dividuals were less and less often trying to change theirbank notes into gold coins. At the same time the totalvolume of trade ha d grown so much (money having lostmuch of its power) that the gold reserves of a nationwould have been insufficient for it all. So the national banksstopped striking gold coins and began to print notes far inexcess of the value of the gold in their vaults and then theyall, at some point in time, simply abandoned the converti-bility of notes into gold. Money had ceased to be a com-modity and become a symbol or sign without intrinsicvalue.While money as such was changing in this way, othermonetary forms appeared and flourished. Some of thesearose from the credit system an d were mentioned in dis-cussing that topic. Thus a credit note or bill of exchange,which is an undertaking to pay a certain sum at a certaintime, can be endorsed from on e person to another severaltimes and so circulate like a bank note.Above all it was the check which came into widespreadus e and grew into a substitute for money. I sign a check for10 0 units in favor of a store from which I have made apurchase. The owners will not go to my bank to collecttheir 100 units, for they have their own bank account, inwhich they can deposit my check. The two banks settle thematter by simply writing the transaction into their ac-counts. There has been a money settlement, but it has not


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70 H ow Capitalism Worksbeen through the medium of any bank notes. Checks, billsof exchange or credit, advances on current account (over-drafts), and settlements by endorsement on accounts areall forms of money other than cash.In modern times the total means of payment in circula-tion in a country is composed partly of bank notes issuedby the appropriate institution, and for the rest, all theother forms of money we have mentioned. There is farmore money involved in the latter group. In any case, thetotal volume of means of payment of all kinds has the so-cial function of enabling the exchang e, at their va lue, of allcommodities offered on the market, taking into accountthe average rate of circulation of the various forms ofmoney. If these change hands on average five times ayear they should amount to approximately one-fifth of thetotal value of goods exchanged during the year. It mayhappen that the total value of money (o r forms of money)in circulation seems to be insufficient. In such cases it iseasy to create more money. It happ ens much mo re fre-quently that there is a persistant excess of moneyandthis situation is described as inflation.Th e state is often directly responsible for such a situa-tion. Since it controls the issue of bank notes it is greatlytempted to m ake the mo ney process work faster when it isshort of resources for what it judges to be necessary ex -penditure. When this happens the volume of money growswithout a correspond ing growth in the volum e of com-modities available for exchange. Th e overall value of com-modities produced remains the same, bu t will be ex-pressed in prices through a larger quantity of money.There follows a general rise in the level of prices, a fall inthe purchasing power of bank notes, or even a de factodevaluation of the currency.The depreciation of mon ey caused by an un wa rran tedissue of bank notes may lead to rising prices. The reverse ,however, has occurred much more frequently in recenttimes; that is, a rise in prices causes an increase in thevolume of money and its depreciation. This can be de-scribed as the fundamental cause of an inflationary situ-

The Ups and Downs of Money 71ation which tends to become permanent and coterminouswith the cap italist mode of production.The protagonists of this mode of production attributeinflation following price increases to wages rising fasterthan productivity. Let us recall that we represented thevalue of a com modity by the formula M = c + v + pi . If allconditions of production remain unchanged, it is obviousthat wage increases will cause "v" to rise, followed by"M," and that this will work through to the price which isthe monetary expression of value. This argument assumesthat surplus value (pi) is unalterable and sacred. If this as-sumption is rejected, wages can rise even faster than pro-ductivity without causing prices to rise, on condition thatthere is a corresponding fall in surplus value. Howeversimplified it may be, this reasoning is sound and servesonly to highlight a fundamental truth: inflation in general,and more especially the curren t variety set off by priceincreases, is not really a technical problem but is an ex-pression of the essen tial class struggle. When the effortsof the workers bring about any appreciable increase intheir purchasing power, and other conditions are un-changed, the capitalists cannot maintain, and still lessim-prove, the rate of surplus value unless they raise pricesan d bring about inflation. Moreover, they us ually get infirst: prices are increased withou t economic justification,while wages are not allowed to rise faster than productiv-i tyall this for the sole purpose of increasing surplu svalue.This has become one of the basic problems of monopolycapitalism and merits further discussion. It is, however,more appropriate to specialized works.


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10The Uncontrolled Accumula t ionof Capita l and Economic CrisesEarlier we described the process of the circulationofcapital as follows: the capitalist's original money capitalis first transformed into productive capital which, by the

end of the productive phase, has given rise to commoditycapital. Finally, through exchange, this latter reproducesmoney capital, enabling the cycle to begin again, and soon and so on.It follows that the process of commodity production isalso a process of reproduction of capital. The amount ofmoney which appears at the end of the cycle is, however,greater than the amount put in at the beginning: it hasbeen increased by surplus value, that is, the value gener-ated by the surplus labor of the proletariat and appro-priated by the capitalist.Two hypotheses can be constructed on these facts: (1)The capitalist consumes the whole surplus value, which isthus transformed into income and dissipated by personalor family spending. In this case the capital put back intoproduction is exactly the same as that put in at the begin-ning of the cycle. The capital has simply been reproduced,value for value, and production can continue only on ex-actly the same scale as before. This is called simple re-production.(2 ) The capitalist uses only part of surplus va lue asrev-

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The Uncontrolled Accumulation of Capital 73enue to be consumed, and devotes the rest to increasingproductive capital. In this case production can continueon a larger scale. This is called enlarged reproduction.It is obvious that competition between capitalists turnsthem away from simple reproduction and leads to a pref-erence for enlarged reproduction, since the latter aloneenables capitalist development. Enlarged reproduction is,therefore, the general rule and leads to the phenomenonof the accumulation of capital.Marx used the term concentration of capital as a moreprecise term for the accumulation of capital within an en-terprise by the internal operations of enlarged reproduc-tion. This concentration of capital varies from enterpriseto enterprise: some develop and concentrate capital fasterthan others, and then tend to buy out or take over weakerenterprises in order to accelerate and consolidate theirlead. This movement creates a trend for the greater toabsorb the smaller and for weak capital to be swallowedup to enlarge the strong. Marx called this the centraliza-tion of capital into fewer and fewer hands. Nowadays theterm concentration is preferred to describe both thesemovements of capital which are, moreover, dialecticallyrelated: concentration leads to centralization which, inturn, facilitates internal accumulation since large under-takings usually enjoy a higher rate of profit than smallones.The trend toward the amalgamation of enterprises andthe centralization of capital is not always furthered by bigfirms buying up and taking over smaller ones; two enter-prises of similar size may also amalgamate by agreementthe better to face competition. In this case neither canbe said to dominate or absorb the other. It is, however,very common for a large or very large enterprise to besatisfied with "taking control" of one or more smallerenterprises, allowing them to continue as legal entities,rather then buying them up outright. Taking control of anenterprise entails acquiring as much of its capital as isnecessary to be its unquestioned master and make it play

- r


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74 H ow Capitalism Worksits part in the expansionist strategy of the entire monopo-listic group. The proportion of capital necessary for suchcontrol varies widely from case to case.At this stage it should be stressed, however, that ac-cumulation does not only constitute the reproduction of theproductive process and re production of capital on a greaterscale, bu t also the reproduction of capitalist social rela-tions. The repro duction of capital pu ts the w orkers backinto precisely those conditions which enabled this repro-duction: as sellers of the same labor power for the bene-fi t of the same capital which extracts from them surplusvalue. C apital accu m ulates more rapidly than th e prole-tarian class increases and is constantly concentrating intofewer an d fewer hands, thus increasing its effectiveness inthe class struggle. Finally, it is strengthening its stranglehold on the state as monopolization progresses. All thesedevelopments aggravate productive relations and, more

generally, social relations between classes.Accumulation of capital is, however, one of the mos tfundamenta l characteristics of present-day capitalism. Attimes when capital investment is increasing faster thanproduction, some people actually speak of surplus accum-ulation of capital. Ac tually the e nlarged pro duction of cap-ital does no t progress with the regularity of clockwork.The accumulation of capital has its ups and dow ns; wehave all heard of recessions, crises, and the oppositephenomenon of "booms." Capitalism developed enor-mously in the nineteenth century and yet crises (ordepres-sions) occurred at about ten-year intervals. The twentiethcentury has not escaped; th e deepest and the last, ofglobal extent, was the Great Depression of 1929-1933.The periodic occurence of depressions gave rise to thenotion of the "econom ic cycle": capitalism is suppose d todevelop not in a straight line but in a fluctuating move-ment with more or less regular rhythm . The cycle can bebroadly described (but no t explained) as follows: a periodof prosperity is suddenly followed by rapid decline ac-companied by bankruptcies, unem ployment, falling prices,and vanishing profits. Then the crisis is followed by a de-

The Uncontrolled Accumulation of Capital 75pression: the economy cruises along in a state of generalparalysis with production at a very low level. Finally, arecovery begins, not suddenly, like the beginning of thecrisis but slowly progressing in the reverse direction. Thisrecovery usually gains speed an d ends up in a fresh boomcharacterized by rapid growth of production, exch ange ,investment, etc. Activity generally reaches a higher levelthan before the depression, for the latter generates theconditions for a rise in the average rate of profit. Thisgoes on until the economy becomes what is sometimescalled "overheated": the engines of the econom y race,overproduction appears, the economic machine breaksdown, and crisis has come again.O f course, the above is a sketch in very broad strokesand no two crises are, in practice, exactly alike. However,the fe atures com m on to all crises im pel us to ask the fol-lowing questions: (1) What is the general cause of eco-nomic crises, that is, the breakdown of the mechanism ofthe accumulat ion of capital? (2) How can we explain theabsence of a general crisis since 1933?Both questions are difficult to answer. O ne cannot answerthe first without turning to Marx's own analysis, in whichhe observes that all production of material goods is neces-sarily divided into two main parts:Section 1 serves to produce the means of production,or productive goods (productive installations and equip-ment, machinery , raw materials and supplies, etc.); inother words, all the goods which are used in the produc-tion of other goods.Section 2 serves to produc e consu m er goods; that is, allth e various products which hu m an beings consume, slowlyor quickly, to satisfy their needs.For exam ple, there is machinery (smelters, rolling mills,and so on) for the m anufac ture of alum inum . Alu m inum isthe product of a certain m eans of productio n, yet is itselfa means of production, for instance in the manufacture offood cans. But these cans are not further transform ed:they are simply filled with baked beans or frankfurters,whereupon they and their contents become consumer


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76 How Capitalism Worksgoods as in Section 2. We could take endless examplesand see that, quickly or slowly, directly or indirectly, theproducts of Section 1 are transformed into Section 2 prod-ucts, and reach their final destination in consumption byhuman beings.Hum an beings d o not produce things a t random, butcreate objects to satisfy their needs and desiresin th efinal analysis in order to consume them. Thus the require-ments of Section 2 order the development of Section 1.However, innovations occurring in Section 1 may lower theprices of some goods in Section 2, thus leading to an ex-pansion in their consump tion. To put i t another way, thereis a close and reciprocal relationship between the devel-opment of Section 1 and that of Section 2. The accumula-tion of capital could no t proceed smoothly if these re-spective developments were not in harmony.Marx laid down the conditions required and rules to beobserved if the reproduction of capital was to be crisis-free. His algebraic for mu lae are too complex to discuss indetail, but the following is a general outline of their con-tent.The m aterial pro ducts of hum an labor are classified inSection 1 or 2 according to their use value or actual use.It is use value w hich motivates the exch ange of goods.(I only buy a given product because it is of use to me orI believe it to be so.) But, on the other hand, it is the ex-change value, expressed as price, which determines theconditions of this exchange and is sometimes a necessarycondition for it: I cannot buy a commodity I need if I donot hav e the necessary purchasing power. Marx foundedhis analysis and descriptions on a consideration of thereciprocal relations of use value and exchange value.For the p rodu cts of both Sections 1 and 2 there must bea correlation between the quantity of goods offered for ex-change and what is called "effective demand." Purchasingpower capable of bringing about an exchange of all thegoods offered on the market must also be immediatelyavailable purch asing power. In practice purchasing poweravailable at a given time rarely corresponds with that ef -

The Uncontrolled Accumulation of Capital 11fectively distributed (wages), or realized (surplus value),at that same time, because credit and saving anticipateor hold back the point in time at which purchasing powerwill be used. All this is said to illuminate the fact that aclose correspondence between a certain amount of avail-able goods and a certain amount of equally availablemonetary resources can only be obtained by playing cor-rectly within certain rules and by the maintenen ce of cer-tain equilibria (economic, financial, monetary). Theequilibrium between Sections 1 and 2 is fundamental .Within the capitalist mod e of production, production isprivate and regulated by the laws of conflict an d compe-tition. The search for maximum profit leads to unequaldevelopment (within sectors and between them, betweenregions and between countries), which is a constant fea-ture of the system. Th e engine of production is profit fo rthe industrial entrepreneur, and not the harmonious de-velopment of the economic system as a whole. On theother hand, the rules whose observation could maintainthe necessary balance relate to the economy as a whole andnot only to industrial enterprises. How ever forma lly suchrules might be enacted in law, they could never be strict-ly applied in a competitive economy. In fact they are noteven enacted, for the classical bourgeois state which alonecould do this is a class state, an expression of capital andby its very nature at the service of capital and not in theservice of the general economy. Given these conditionsthe state can, at best, ensure a compromise between theprimordial needs of capital and the necessity to maintainthe engine of the general economy, failing which the inter-ests of capital itself would be at risk. Prom day to day ittries to juggle the imbalances which appear. Up to theSecond Wo rld W ar, howe ver, they reg ularly did occur andoften crossed the threshold into crisis.This seems to contradict the sense of the second ques-tion: How can we explain the absence of a general crisissince 1933? Let us be clear: since the Second World W arthere has been no really deep crisis affecting the wholeor a great part of the capitalist world. However, many


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78 How Capitalism Workscountries have experienced more or less serious recessions,followed or preceded by periods of rapid growth. TheUnited States has had its economic "booms," Germanyand Italy their "miracles" (sandwiched between more orless deep recessions). France has experienced similar, ifless marked, fluctuations. The United Kingdom is in a fair-ly settled depression, while Japan, on the contrary, has hada long, relatively stable period of growth. It could, there-fore, be postulated that world capitalist development hascontinued unequal in time and space.The recessions and depressions described have notreached the full proportions of a true crisis because theimbalances inherent in capitalist development constitutea tendency which can be counteracted by certain otherfactors. The m ost outstanding of these is the new role ofthe state. Until the Second World War capitalist stateswere no t equipped with adequate means of economic in -tervention but have, since then, acquired such means:credit, m oney , prices, direct and indirect econom ic sub-sidies, foreign trade, differential tax policies, etc., whichthey have learned to use more or less effectively. The im-perfect instrume nts of economic plannin g have in themedium term been applied in an effort to create conditionsin which the inevitable imbalances will be less dangerous.Some states have become the employers and directors ofessential public productive sectors (energy, transport).They can to some extent influence economic and socialphenomena and cushion the economy against certainshocks. They can use various means to act directly on themovement, investment, an d concentration of capital , an don the restructuring of industry. It is hard to underesti-mate the effect of a state budget of more than one-fifthof the nationa l product and the val ue of civil and militaryexpenditure, in staving of f crises. Vast accumulations ofcapital are one of the characteristics of present-day capi-talism and one of its major problems is the profitableutilization of new capital. Powerful armaments industriesoffer direct outlets to such capital and stimulate the open-ing up of others. The customer being the state"their"

Th e Uncontrolled Accumulation of Capital 79state, in factprices are paid w hich allow superp rofits tobe made and work against the tendency for the rate ofprofit to fall. Finally, through the wages and salaries theydistribute such industries create additional purchasingpower not balanced by a corresponding increase in con-sumer goods.

There are certain new aspects of capitalist developm entitself which act as a defense against crises over and abovethe role of the state. The new technological revolutioncombined w ith fierce competition leadin g to monop oliza-tion makes the replacement of equipm ent and suppliesmuch more rapid than in the past. This shortens the eco-nomic cycle an d prevents depressions from developingto full crises and also creates continuing expansion inthe production of Section 1. This expansion requires alarger labor force, increasing the purchasing pow er dis-tributed by Section 1 which, in turn, generates develop-ment of the production of Section 2. The development ofthe latter is further accelerated by new features of what iscalled the "consumer society": endless modifica tions ofproducts themselves or their presentation; various modelsof al l kinds of equipment; ne w products an d slight vari-ants, under new bran d names; the extension of the use ofgadgetsall conspiring to turn human beings into con-sumer robots through the degrading effects of pervasiveadvertising and the diversification of forms of credit de-signed to hasten or create potential effective demand.This consume r society inevitably inflates w hat is calledthe tertiary sector and more especially the commercialsector in its widest sense. Thus, excess capital can be in-vested outside the productive sector and there emp loyextra w orkers whose purchasing power leads to expansionin the production of Section 2. All this contributes to therealization of increasing surplus value and the consequentpursuit of capital accumulation.Whether these factors and direct actions against crises de-rive from the state or from ne w forms of capitalist devel-opment, they in no way affect the central nature of thesystem, or the fundamental effect of the law s that control


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80 How Capitalism. Worksit. They may accelerate or slow down certain tendenciesbu t cannot transform such tendencies and imbalances intotheir opposites. The inherent contradictions are still pres-ent in the system.Most of the defenses against crises have attendant dan-gers: they have inflationary effects. Expenditure on arma-ments creates effective demand without a proportionateincrease in the quantity of commodities available for ex-change, and the expansion of the tertiary sector can onlybring about a corresponding increase in commodity pro-duction in the long run. Credit aggravates these infla-tionary effects. Th e phase of capitalism which ha s suc-ceeded in juggling with various imbalances has in theprocess itself created a new and considerable danger:permanent and general inflation. Together with the col-lapse of the international monetary order, this conditionis one of great peril for the system.

11Monopoly Power:The New Face of ImperialismW e have seen that the accumulation of capital does notbenefit all capitalists through equal distribution, butrather leads to the concentration of capital in the handsof

a privileged minority. Concentration is the outcome ofcompetition. In the practice of competition, certain enter-prises are proved stronger than others. The powerful ab-sorb or subordinate the weak and thus remove competi-tors. The new giants, however, meet even more intensecompetition, at a higher level, from enterprises which havealso grown by concentration. Competition gives rise toconcentration and the latter leads back to competition.Again we find the dialectical movement governing the de-velopment of economies and societies.Lenin made a special study of the first great movementtoward concentration in the capitalist world, which oc-curred at the end of the last century. The concentration ofcapital finds its most notable expression in the tendencyto monopoly. A monopoly, in the ful lest sense, would bean industry which has absolute control of an entire market.Such enterprises are extremely rare in the real world andth e term monopoly is used for large-scale corporationswhich control a significant slice of a particular market andstrive to expand to dominate the whole. In Western Eu-rope, during the last third of the nineteenth century, suchmonopolies grew so rapidly that national markets soon81

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How Capitalism Work Chaps 6 - 10