Introduction to Marxist Economics

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Many workers are concerned about the present crisis of U.S. capitalism and how it affects them.  Therefore, Socialist Appeal thought it might be helpful to explain some basics about capitalism and why we believe that socialism is the only solution to the crisis.

All Value is Created by Labor

It is not the capitalist that creates value but the worker.  The first point we must understand is that the worker sells his labor power – his ability to work  – to the capitalist.  Over the course of the working day, the worker produces value for the capitalist. Out of these values the boss pays the expenses related to the productive process, including the worker’s wages and benefits, and keeps the rest as profit.  Capitalists do not create jobs to help the community or because they want to help people.  They create jobs in order to make profits.  If there is no profit, there are no jobs.  This is why in an economic downturn, the bosses shut down factories, lay off workers and cut hours for their remaining workers, while also attacking wages, benefits and conditions.


The value of an item is determined by the amount of socially necessary labor time incorporated in its production.  Whether or not the labor is socially necessary or not is validated by the market. If a commodity is not sold, then we can assume it is not wanted (at the price offered) and the labor expended on it was therefore wasted. If it is produced by inefficient means, then too much labor is expended upon it. The capitalist will have to sell it at the usual market price, in effect having wasted labor on its production. The prevailing price, corresponding to the socially necessary labor time at the existing technology level, is determined by competition among capitalists. This labor includes extracting raw materials and delivering the goods.

For  example, the value of a car comes from the labor used to assemble it, plus the labor put into the manufacture of the various parts.  Some of the value of the car is transferred from the production machinery and the factory itself, which deteriorates over time.  It should be understood that the factory, the machinery and extracted raw materials were also the result of previously expended labor. They are called constant capital because they pass their value unchanged to the final product. The capital that goes to pay for labor power is called variable capital.

Value and Price

The price of a commodity is determined by supply and demand.  Over time, the average price of items sold by various capitalists should approach an item’s value.  Prices fluctuate.  If the price of an item at any one time is equal to its value, this is a coincidence

Surplus Value

Factory WorkersThe capitalist pays the worker wages and benefits, the money for which comes from part of the wealth created by the worker during the working day.  When the commodities are sold, the rest of the value added by the worker at work, corresponding to the rest of time the worker spends at work, is pocketed by the boss as surplus value. Other sections of the capitalist class also help themselves to some of it, for instance by charging the capitalist firm rent or interest.

What happens to the rest of the money that the boss makes off the worker?  Historically, most of this surplus value was reinvested, with some spent on himself and his family. These days, however, much of the money is used for speculation on the market, not productive reinvestment. Capitalists reinvest in order to improve their machinery and technology, in order to reduce the costs of production, so they can make more commodities with the same or less labor embodied in them.

This allows them to sell more and at a cheaper price than their competitors, all in the pursuit of greater profits. They are forced to do so by competition between individual capitalists. In the longer term, the capitalists send investment money to where they think they will make the greatest profit.  As less labor is needed, on average, to make a given product, the value of this product will be reduced.  Over time, in real terms (after inflation is factored in), prices for these products tend to drop.  However, if wages drop even faster (again, we must take inflation into account), goods will still seem more expensive to the average worker.

What Are Wages?

Wages hover around the value of labor power, which as Marx explained, is determined by “the amount of socially necessary labor requisite for the production of labor power of a particular quality.”  This means the worker must be able to sustain himself and his family, so the next generation of workers can exist.  This is different for different countries and in different periods of history.  For example, workers in Mexico have a different requirement for sustainability than workers in France.  In the USA in the 1920s, many workers lived close to work (i.e. mill houses in New England) and could commute by walking.  Now, most workers need a car to get to and from work and this becomes part of the “socially necessary labor requisite.”

Wages are the price of labor power and their level is largely determined by the state of the class struggle in the given country.  The state of the class struggle between workers and the bosses includes factors such as the supply and demand of labor, the class consciousness of the working class, and the existence of unions and workers’ parties, etc.  The existence of a labor party would affect this as it could put laws on the books that regulate labor or provide social benefits such as a living wage, universal health care coverage and retirement benefits for all.

Tendency for the rate of profit to fall

Let’s say the capitalist invests a million dollars.  He gets back $1,100,000.  This is a 10 percent rate of profit.  We figure out this rate by dividing the surplus value ($100,000) by the total capital advanced ($1,000,000).  As production of a given commodity increases, prices will tend to fall over time.

Even though total profit may increase, total capital advanced increases in proportion to the money laid out on labor power (i.e. variable capital).  Eventually, as there continues to be more machinery (i.e. constant capital), there is proportionally less direct labor incorporated in each commodity, and the rate of profit goes down because only living labor in the production process adds new value and thereby produces surplus value.

As an example, let us look at the automobile industry.  After World War II, the rivals of the U.S. capitalists were in a weak position, as their countries had been ravaged by the war.  The continental U.S. was untouched by bombs during this war.  GM, Ford and Chrysler were able to take advantage of the situation and run their American rivals out of business and got huge rates of profits as competition from abroad was limited.

The huge rates of profits in the automobile industry led capitalists in other countries such as Germany and Japan, to invest in this field.  Why should GM, Ford and Chrysler make all the money?  They built state-of-the-art factories which would increase productivity.  The U.S. auto industry had to re-invest in its factories as well.  Eventually, this reduced the value of the cars, and competition dropped the price (not in absolute amounts, but adjusted for inflation).  Korean car manufacturers also joined the industry.  There was a fall in the rate of profit in this industry.

It is therefore doubtful at this time that a capitalist is going to start a new car company unless and until the situation changes; i.e. the rate of profit in the auto industry increases.

Two points about the tendency for the rate of profit to fall:

First, given the fall in the rate of profit, the capitalist is therefore pressured into wanting to increase the rate of profit, which means reducing the workers’ pay and benefits and/or getting them to do more work for the same pay or less.

Secondly, the capitalist tends to direct his reinvestment / new investment into other areas. If profitable opportunities in production are unavailable, capital then goes more toward speculation and bubbles, and less into production of real goods and services.

Overproduction & overcapacity

The expansion of production and productive capacity eventually produces so many commodities that to clear out the market, the price may need to go down to a point where the capitalists are not making a profit.

“Boom and bust” is the normal business cycle of capitalism.  However, over time, there are larger downward or upward trends in the cycles of capitalism.  Recessions allow the destruction of capital in order to “reset” the overproduction of the system and restore the rate of profit as rivals are driven out of business. Of course, millions of working people have to suffer the brunt of these “corrections.”

Depression of the 1930s

Great Depression UnemployedThe last period of general decline in world capitalism led to the world wide slump of the 1930s.  In the U.S., unemployment reached 25 percent and there was a huge drop in production.  June, 1929 was the peak of the boom, but it wasn’t until March, 1933 that the economy hit bottom.  This led to somewhat of a recovery in May, 1937 and unemployment was “only” 15 percent. However, a new downturn beginning in June, 1938 sent the unemployment level back up to 20 percent.  The New Deal, which was a policy of Keynesian deficit spending, did not resolve “the Great Depression.”  It was actually World War II that finally brought the unemployment down to 2.3 percent at one point. Afterward, the post-war boom set U.S. and world capitalism on a general upswing for thirty years.  Let us remember that war production was based on massive state intervention and that the destruction of the war led to the post-war boom. Again, it was the working class that suffered during the Depression and millions of workers, peasants and poor people around the world who were killed during the war.


Keynesianism is the school of thought that if the government borrows and spends money on government projects and programs, this will “pump money” into the economy, and as formerly unemployed workers get jobs and start spending, the economy will expand. However, in the long run, this does not work.  If more money is artificially injected into the economy, it means you have more money chasing fewer goods, leading businesses to raise prices. In other words, it is a recipe for inflation. In addition, the money that the government pumps into the economy under Keynesianism is borrowed money, which means that government expenses related to debt servicing and interest on the debt increase over time.  This means that sooner or later, the government must cut other spending or raise taxes, which counters the effect of the stimulation.  Meanwhile, the capitalists still do not invest to expand production unless the rate of profit in the various industries goes up.

In practice, as was mentioned above, Keynesianism did not solve the problem of the Great Depression.  In the 1960s and 1970s, Keynesianism led to rapid inflation, at one point in double digits in the U.S.  Then Democratic President Jimmy Carter appointed Paul Volcker to head the Federal Reserve.  Volcker started implementing monetarist policies in order to reduce inflation in the U.S. and he was replaced by Alan Greenspan by then President Ronald Reagan, who continued the monetarist policies of the last three decades.

The end of the boom

The 1973-1976 recession was the end of the post war boom.  The 1982-1983 downturn was also a bad recession.

Since then, debt has been used as a way to prop up the system and increase purchasing power while wages and benefits fell.  There was much profit made by issuing credit cards, second mortgages, lines of credit and in housing / property speculation.  This kept the economy moving forward and tended to mask what was happening to the living standard of many workers. However, this has now come to an end.

The property values have plummeted.  Bonds and securities based on property values did not reflect a rise in real values.  Now we see tremendous destruction of capital and unprecedented government intervention to prop up banks and investment companies.  The only thing we can predict with 100 percent accuracy is that the standard of living of the working class will continue to drop.

Socialist Solution

The WIL believes that the only solution is socialism here in the USA and around the world.  Socialism is a system where the largest 500 U.S. companies, including banks and insurance companies, will be taken over by a workers’ government.  The resources and production facilities will be linked up into a planned economy, democratically run by the workers themselves, where everyone will have a job, education and health care will be free, and housing will be cheap and available to all.  The world clearly has the resources and technology to do this.  What is missing is that the working class needs leadership in the form of a mass party of labor standing for socialist policies.  The members and supporters of the WIL are working to bring this about.  If you want to fight for this socialist solution to the present crisis, contact the WIL and help us to build this party.

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