VIII. Outlines of socialist economic theory

• • Prefaces
  • I. Introduction
  • II. Robert Owen and the Utopian Spirit
  • III. The "Communist manifesto" and the scientific spirit
  • IV. The materialistic conception of history
  • V. Capitalism and the law of concentration
  • VI. The class struggle theory
  • VII. Karl marx and the economics of socialism
  • VIII. Outlines of socialist economic theory
  • IX. Outlines of the socialist state
  • X. The means of realization

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I

The geist of social and political evolution is economic, according to the Socialist philosophy. This view of the importance of man's economic relations involves some very radical changes in the methods and terminology of political economy. The philosophical view of social and political evolution as a world-process, through revolutions formed in the matrices of economic conditions, at once limits and expands the scope of political economy. It destroys on the one hand the idea of the eternality of economic laws and limits them to particular epochs. On the other hand, it enhances the importance of the science of political economy as a study of the motive force of social evolution. With Marx and his followers, political economy is more than an analysis of the production and distribution of wealth; it is a study of the principal determinant factor in the social and political progress of society, consciously recognized as such.

The sociological viewpoint appears throughout the become a house only in certain circumstances, when they bear a given ordered relation to each other. "A negro is a negro; it is only under certain conditions that he becomes a slave. A certain machine, for example, is a machine for spinning cotton; it is only under certain defined conditions that it becomes capital. Apart from these conditions, it is no more capital than gold per se is money; capital is a social relation of production."

This sociological principle pervades the whole of Socialist economics. It appears in every economic definition, practically, and the terminology of the orthodox political economists is thereby often given a new meaning, radically different from that originally given to it and commonly understood. The student of Socialism who fails to appreciate this fact will most frequently land in a morass of confusion and difficulty, but the careful student who fully understands it will find it of great assistance. Take, as an illustration, the phrase "the abolition of capital" which frequently occurs in Socialist literature. The reader who thinks of capital as consisting of things, such as machinery, materials of production, money, and so on, finds the phrase bewildering. He wonders how it is conceivable that production should go on if these things were done away with. But the student who fully understands the sociological principle outlined above comprehends at once that it is not proposed to do away with the things, but with certain social relations expressed through them. He understands that the "abolition of capital" no more involves the destruction of the physical things than the abolition of slavery involved the destruction of the slave himself. What is aimed at is the social relation which is established through the medium of the things commonly called capital.

II

In common with all the great economists, Socialists hold that wealth is produced by human labor applied to appropriate natural objects. This, as we have seen, does not mean that labor is the sole source of wealth. Still less does it mean that the mere expenditure of labor upon natural objects must inevitably result in the production of wealth. If a man spends his time digging holes in the ground and filling them up again, or dipping water from the ocean in a bucket and pouring it back again, the labor so expended upon natural objects would not produce wealth of any kind. Nor is the productivity of mental labor denied. In the term "labor" is implied the totality of human energies expended in production, regardless of whether those energies be physical or mental. In modern society wealth consists of social use-values, commodities.

We must, therefore, begin our analysis of capitalist society with an analysis of a commodity. "A commodity," says Marx, "is, in the first place, an object outside us, a thing that by its properties satisfies human wants of some sort or another. The nature of such wants, whether, for instance, they spring from the stomach or from fancy, makes no difference. Neither are we here concerned to know how the object satisfies these wants, whether directly as means of subsistence, or indirectly as means of production." But a commodity must be something more than an object satisfying human wants. Such objects are simple use-values, but commodities are something else in addition to simple use-values. The manna upon which the pilgrim exiles of the Bible story were fed, for instance, was not a commodity, though it fulfilled the conditions of this first part of our definition by satisfying human wants. We must carry our definition further, therefore. In addition to use-value, then, a commodity must possess exchange-value. In other words, it must have a social use-value, a use-value to others, and not merely to the producer.

Thus, things may have the quality of satisfying human wants without being commodities. To state the matter in the language of the economists, use-values may, and often do, exist without economic want of some one else. So, unless a use-value is social, unless the object produced is of use to some other person than the producer, it will have no value in the economic sense: it will not be exchangeable.

A commodity must therefore possess two fundamental qualities. It must have a use-value, must satisfy some human want or desire; it must also have an exchange-value arising from the fact that the use-value contained in it is social in its nature and exchangeable for other exchange-values. With the unit of wealth thus defined, the subsequent study of economics is immensely simplified.

The trade of capitalist societies is the exchange of commodities against each other, through the medium of money. Commodities utterly unlike each other in all apparent physical properties, such as color, weight, size, shape, substance, and so on, and utterly unlike each other in respect to the purposes for which intended and the nature of the wants they satisfy, are exchanged for one another, sometimes equally, sometimes in unequal ratio. The question immediately arises: what is it that determines the relative value of commodities so exchanged? A dress suit and a kitchen stove, for example, are very different commodities, possessing no outward semblance to each other, and satisfying very different human wants, yet they may, and actually do, exchange upon an equality in the market. To understand the reason for this similarity of value of dissimilar commodities, and the principle which governs the exchange of commodities in general, is to understand an important part of the mechanism of modern capitalist society.

This is the problem of value which all the great economists have tried to solve. Sir William Petty, Adam Smith, David Ricardo, John Stuart Mill, and Karl Marx developed what is known as the labor-value theory as the solution of the problem. This theory, as developed by Marx, not in its cruder forms, is one of the cardinal principles in Socialist economic theory. The Ricardian statement of the theory is that the relative value of commodities to one another is determined by the relative amounts of human labor embodied in them; that the quantity of labor embodied in them is the determinant of the value of all commodities. When all their differences have been carefully noted, all commodities have at least one quality in common. The dress suit and the kitchen range, toothpicks and snowshoes, pink parasols and sewing-machines, are unlike each other in every other particular save one—they are all products of human labor, crystallizations of human labor-power. Here, then, say the Socialists, as did the great classical economists, we have a hint of the secret of the mechanism of exchange in capitalist society. The amount of labor-power embodied in their production is in some way connected with the measure of the exchangeable value of the commodities.

Stated in the simple, crude form, that the quantity of human labor crystallized in them is the basis and measure of the value of commodities when exchanged against one another, the labor theory of value is beautifully simple. At least, the formula is simplicity itself. At the same time, it is open to certain very obvious criticisms. It would be absurd to contend that the day's labor of a coolie laborer is equal in productivity to the day's labor of a highly skilled mechanic, or that the day's labor of an incompetent workman is of equal value to that of the most proficient. To refute such a theory is as beautifully simple as the theory itself. In all seriousness, arguments such as these are constantly used against the Marxian theory of value, notwithstanding that they do not possess the slightest relation to it. Marxism is very frequently "refuted" by those who do not trouble themselves to understand it.

The idea that the quantity of labor embodied in them is the determinant of the value of commodities was held by practically all the great economists. Sir William Petty, for example, in a celebrated passage, says of the exchange-value of corn: "If a man can bring to London an ounce of silver out of the earth in Peru in the same time that he can produce a bushel of corn, then one is the natural price of the other; now, if by reason of new and more easy mines a man can get two ounces of silver as easily as formerly he did one, then the corn will be as cheap at ten shillings a bushel as it was before at five shillings a bushel, cæteris paribus."

Adam Smith, following Petty's lead, says: "The real price of everything, what everything really costs to the man who wants to acquire it, is the toil and trouble of acquiring it. What everything is really worth to the man who has acquired it, and who wants to dispose of it or exchange it for something else, is the toil and labor which it can save to himself, and which it can impose on other people.... Labor was the first price, the original purchase money, that was paid for all things.... If among a nation of hunters, for example, it usually costs twice the labor to kill a beaver which it does to kill a deer, one beaver would naturally be worth or exchange for two deer. It is natural that what is usually the produce of two days' or two hours' labor, should be worth double of what is usually the produce of one day's or one hour's labor."

Benjamin Franklin, whose merit as an economist Marx recognized, takes the same view and regards trade as being "nothing but the exchange of labor for labor, the value of all things being most justly measured by labor." From the writings of almost every one of the great classical economists of England it would be easy to compile a formidable and convincing volume of similar quotations, showing that they all took the same view that the quantity of human labor embodied in commodities determines their value. One further quotation, from Ricardo, must, however, suffice. He says:—

"To convince ourselves that this (quantity of labor) is the real foundation of exchangeable value, let us suppose any improvement to be made in the means of abridging labor in any one of the various processes through which the raw cotton must pass before the manufactured stockings come to the market to be exchanged for other things; and observe the effects which will follow. If fewer men were required to cultivate the raw cotton, or if fewer sailors were employed in navigating, or shipwrights in constructing, the ship in which it was conveyed to us; if fewer hands were employed in raising the buildings and machinery, or if these, when raised, were rendered more efficient; the stockings would inevitably fall in value, and command less of other things. They would fall because a less quantity of labor was necessary to their production, and would therefore exchange for a smaller quantity of those things in which no such abridgment of labor had been made."

It is evident from the foregoing quotations that these great writers regarded the quantity of human labor crystallized in them as the basis of all commodity values, and their real measure. The great merit of Ricardo lies in his development of the idea of social labor as against the simple concept of the labor of particular individuals, or sets of individuals. In the passage cited, he includes in the term "quantity of human labor" not merely the total labor of those immediately concerned in the making of stockings, from the cultivation of the raw cotton to the actual making of stockings in the factory, but all the labor indirectly expended, even in the making and navigating of ships, and the building of the factories. One does, indeed, find hints of the social labor concept in Adam Smith, but it is Ricardo who first clearly develops it. Marx further developed this principle, and all criticisms of the labor-value theory in Marxian economic theory which are based upon the assumption that quantity of labor means the simple, direct labor embodied in commodities fall of their own weight.

Thus, if we take any commodity, we shall find that it is possible to ascertain with tolerable certainty the amount of direct labor embodied in it, but that it is equally as impossible to ascertain the amount of the indirect expenditure of labor power which entered into its making. In the case of a table, for example, it may be possible to trace with some approximation to accuracy the labor involved in felling the tree and preparing the lumber out of which the table was made; the labor directly spent in bringing the lumber to the factory, and the direct labor expended in making out of the lumber a finished table; allowance may also be made for the labor embodied in the nails, glue, stain, and other articles used in making the table. So we have a fairly accurate statement of the direct labor embodied in the table. But what of the labor used to make the tools of the men who felled the trees and prepared the lumber? What of the coal miner and the iron miner and the tool maker? And what of the numerous and incalculable expenditures of labor to make the railroads, the railway engines, and to provide these with steam-power? What, also, of the machinery in the factory, and of the factory buildings themselves, and, back of them, again, the tool makers and the providers of raw materials? It is obvious that no human intellect could ever unravel the tangled skein of human labor, and that in actual exchange there can be no calculation of the respective labor content of commodities. If the law of value holds good, it must operate mechanically, automatically. And this it does, through the incidence of bargaining and the law of supply and demand.

We have noted elsewhere the variations in human capacity and productiveness. Superficial critics still frequently charge Marx with having overlooked this very obvious fact, whereas it has not only been fully treated by him, but was actually covered by Smith and Ricardo before Marx! With these writers and their followers it is the law of averages which solves the difficulties arising from variations in individual capacity and productivity. It is the average amount of labor expended in killing the beaver which counts, not the actual individual labor in a specified case. Nor did these writers overlook the important differentiation between simple, unskilled labor and labor that is highly skilled. If A in ten hours' labor produces exactly double the amount of exchange-value which B produces in the same time devoted to labor of another kind, it is obvious that the labor of B is not equal in value to that of A. Quantity of labor cannot, therefore, be measured, in individual cases, by time units. Despite a hundred passages which, detached from their context, seem to imply the contrary, Adam Smith recognized this very clearly, and attempted to solve the riddle by a differentiation of skilled and unskilled labor in which he likens skilled labor to a machine; and insists that the labor and time spent in acquiring the skill which distinguishes skilled labor must be reckoned.

Another frequent criticism of the Marxian theory has not only been answered by Marx himself—is, in fact, ruled out by the terms of the theory itself—but was amply replied to by Ricardo. The criticism in question consists in the selection of what may be called "unique values," or scarcity values, articles which cannot be reproduced by labor, and whose value is wholly independent of the quantity of labor originally necessary to produce them. Such articles are unique specimens of coins and postage stamps, autograph letters, rare manuscripts, Stradivarius violins, Raphael pictures, Caxton books, articles associated with great personages—such as Napoleon's snuffbox—great auks' eggs, and so on ad infinitum. No possible amount of human labor could reproduce these articles, reproduce, that is to say, the exact utilities in them. Napoleon's snuffbox might be exactly duplicated so far as its physical properties are concerned, but the association with Napoleon's fingers, the sentimental quality which gives it its special utility, is not reproducible. But the trade of capitalist society does not consist in the manufacture and sale of these things, which, after all, form a very insignificant part of the exchange-values of the world.

III

Marx saw the soul of truth in the labor-value theory, as propounded by his predecessors, especially Ricardo, and devoted himself to its development and systematization. He has been accused of plagiarizing his theory from the Ricardians, but it is surely not plagiarism when a thinker sees the germ of truth in a theory, and, separating it from the mass of confusion and error which envelops it, restates it in scientific fashion with all its necessary qualifications. This is precisely what Marx did. He developed the idea of social labor which Ricardo had propounded, disregarding entirely individual labor. He recognized the absurdity of the contention that the value of commodities is determined by the amount of labor, either individual or social, actually embodied in them.complex to be unraveled. Of the fact, however, there can be no doubt.

The real law of value, then, according to Marx, is as follows: Under capitalism, in free competition, the value of all commodities, other than those unique things which cannot be reproduced by human labor, is determined by the amount of abstract labor embodied in them; or, better, by the amount of social human labor power necessary, on the average, for their production. We may conveniently illustrate this theory by a concrete example. Let us, therefore, return to our coat-makers. Now, always assuming their equal utility, no one will be willing to pay twice as much for the coat produced by the slow worker with poor tools as for the other. If the more economical methods of production employed by the man who makes his coats in half the time taken by the other man are the methods usually employed in the manufacture of coats, and the time he takes represents the average time taken to produce a coat, then the average value of coats will be determined thereby, and coats produced by the slower, less economical process will command only the same price in the market, the fact that they may embody twice the amount of actual labor counting for nothing. If we reverse the order of this proposition, and suppose the slower, less economical methods to be those generally prevailing in the manufacture of coats, and the quicker, more economical methods to be exceptional, then, all other things being equal, the exchange-value, of coats will be determined by the amount of labor commonly consumed, and the fortunate producer who adopts the exceptional, economical methods will, for a time, reap a golden harvest. Only for a time, however. As the new methods prevail, competition being the impelling force, they become less and less exceptional, and, finally, the regular, normal methods of production and the standard of value.

It is this very important qualification, fundamental to the Marxian theory, which is most often lost sight of by the critics. They persist in applying to individual commodities the test of comparing the amounts of labor-power actually consumed in their production, and so confound the Marxian theory with its crude progenitors. In refuting this crude theory, they are quite oblivious of the fact that Marx himself accomplished that by no means difficult feat. To state the Marxian theory accurately, we must qualify the bald statement that the exchange-value of commodities is determined by the amount of labor embodied in them, and state it in the following manner: The exchange-value of commodities is determined by the amount of average labor at the time socially necessary for their production. This is determined, not absolutely in individual cases, but approximately in general, by the bargaining and higgling of the market, to adopt Adam Smith's well-known phrase.

Now, this theory applies to those things, exclusive of the category of "unique values," which cannot be made by labor and are commonly supposed to owe their value to their rarity. For example, we may take diamonds. A man walking along the great wastes of the African karoo comes across a little stream. As he stoops to drink, he sees in the water a number of glittering diamonds. To pick them out is the work of a few minutes only, but the diamonds are worth many thousands of dollars. The law of value above outlined applies just as much to them as to any other commodity. The value of diamonds is determined by the amount of labor expenditure necessary on an average to procure them. If the normal method of obtaining diamonds were simply to go to the nearest stream and pick them out, their value would fall, possibly to zero:—

"When we have nothing else to wear But cloth of gold and satins rare, For cloth of gold we cease to care— Up goes the price of shoddy."

IV

Most writers do not distinguish between price and value with sufficient clearness, using the terms as if they were synonymous and interchangeable. Where utilities are exchanged directly one for another, as in the barter of primitive society, there is no need of a price-form to express value. In highly developed societies, however, where the very magnitude of production and exchange makes direct barter impossible, and where the objects to be exchanged are not commonly the product of individual labor, a medium of exchange becomes necessary; a something which is generally recognized as a safe and stable commodity which can be used to express in terms of its own weight, size, shape, or color, the value of other commodities to be exchanged. This is the function of money. In various times and places wheat, shells, skins of animals, beads, powder, tobacco, and a multitude of other things, have served as money, but for various reasons, more or less obvious, the precious metals, gold and silver, have been most favored.

In all commercial countries to-day, one or other of these metals, or both of them, serves as the recognized medium of exchange. They are commodities also, and when we say that the value of a commodity is a certain amount of gold, we equally express the value of that amount of gold in terms of the commodity in question. As commodities, the precious metals are subject to the same laws as other commodities. If gold should be discovered in such abundance that it became as plentiful and easy to obtain as coal, its value would be no greater than that of coal. It might, conceivably, still be used as the medium of exchange, but it would—unless protected by legislation or otherwise from the operation of economic law, and so given a monopoly-price—have an exchange-value equal to that of coal, a ton of the one being equal to a ton of the other—provided, of course, that its utility remained. Since the scarcity of gold is an important element in its utility valuation, creating and fostering the desire for its possession, that utility-value might largely disappear if gold became as plentiful as coal, in which case it would not have the same value as coal, and might cease to be a commodity at all.

Price, then, is the expression of value in terms of some other commodity, which, generally used for that purpose of expressing the value of other commodities, we call money. It is only an approximation of value, and subject to a much greater fluctuation than value itself. It may, for a time, fall far below or rise above value, but in a free market—the only condition in which the operation of the law may be judged—sooner or later the equilibrium will be regained. Where monopoly exists, the free market condition being non-existent, price may be constantly elevated above value. Monopoly-price is an artificial elevation of price above value, and must be considered separately as the abrogation of the law of value.

Failure to discriminate between value and its price-expression, or symbol, has led to endless difficulty. It lies at the bottom of the naïve theory that value depends upon the relation of supply and demand. Lord Lauderdale's famous theory has found much support among later economists, though it is now rather unpopular when stated in its old, simple form. Disguised in the so-called Austrian theory of final utility, it has attained considerable vogue. The theory is plausible and convincing to the ordinary mind. Every day we see illustrations of its working: prices are depressed when there is an oversupply, and elevated when the demand of would-be consumers exceeds the supply of the commodities they desire to buy. It is not so easy to see that these effects are temporary, and that there is an automatic adjustment going on. Increased demand raises prices for a while, but it also calls forth an increase in supply which tends to restore the old price level, or may even force prices below it. In the latter case, the supply falls off and prices find their real level. The relation of supply to demand causes an oscillation of prices, but it is not the determinant of value. When prices rise above a certain level, demand slackens or ceases, and prices are inevitably lowered. Prices may and do fall with a decreased demand, but it is clear that unless the producers can get a price approximately equal to the value of their commodities, they will cease to produce them, and the supply will diminish or cease altogether. Ultimately, therefore, the fluctuations of price through the lack of equilibrium between supply and demand adjust themselves, and prices must tend constantly to approximate values.

Monopoly-price is, as already observed, an artificial price in the sense that the laws of free market exchange do not apply to it. The "unique utilities," things not reproducible by human labor, command what might be termed natural monopoly-prices. There are many other commodities, however, the price of which is not regulated by the quantity of social human labor necessary to produce them, but simply by the desire of the purchasers and the means they have of gratifying it and the power of the sellers to control the market and exclude effective competition. Since Karl Marx wrote, the exceptions to his law of value have become more numerous, as a result of the changes in industrial and commercial conditions. The development of great monopolies and near-monopolies has greatly increased the number of commodities which, for considerable periods, are placed outside the sphere of the labor-value theory, their price depending upon their marginal utility, irrespective of the labor actually embodied in them or necessary to their reproduction. It may, in the opinion of the present writer, be said in criticism of the followers of Marx that they have not carried on his work, but largely contented themselves with repeating generalizations which, true when made, no longer fit all the facts. But that is not a criticism of Marx, or of his work. What he professed to make was an analysis of the methods of production and exchange in competitive capitalist society. His followers have largely failed to allow for the enormous changes which have taken place, and go on repeating, unchanged, his phrases.

Professor Seligman has pointed out that Ricardo's contention that value is determined by the cost of production, and the contention of Jevons that value is determined by marginal utility, are not mutually exclusive, but, on the contrary, complementary to each other. The present writer has long contended that the marginal utility theory and the Marxian labor-value theory are likewise not antagonistic but complementary. This is not the place to enter into the elaborate discussion which this contention involves. Only a brief indication of the argument for the claim is here and now possible. First, as we have seen, Marx is very careful to insist that utility is essential to value, and that the utility must be a social utility. But social utility does not come of itself, from the skies or elsewhere. It is, so far as the vast majority of commodities is concerned, the product of labor. It is true that the value of a thing is never independent of its social utility; it is likewise true that this is determined by the social labor necessary to the reproduction of that utility. To regard the two theories as antagonistic, it seems to be necessary to say either (1) that the quantity of social labor necessary to produce certain commodities determines their value, utterly regardless of the amount of their social utility, or (2) that we estimate the social utility of commodities, estimate what we are willing to pay for them, utterly regardless of the labor necessary, on an average, for their reproduction. The latter contention would be absurd, and the former would involve the abandonment of the initial premises of the Marxian theory, contained in his definition of a commodity. In so far as the basis of social utility is the social labor necessary for its production, the labor-value theory of Marx may be said, I think, to include the marginal utility law, as one of the forms in which it operates.

V

Labor, the source and determinant of value, has, per se, no value. Only when it is embodied in certain forms has it any value. If a man labors hard digging holes and refilling them, his labor has no value. What the capitalist buys is not labor, but labor-power. Wages in general is a form of payment for a given amount of labor-power, measured by duration and skill. The laborer sells brain and muscle power, which is thus placed at the temporary disposal of the capitalist to be used up like any other commodity that he buys. The philosopher Hobbes, in his "Leviathan," clearly anticipated Marx in thus distinguishing between labor and laboring power in the saying, "The value or worth of a man is ... so much as would be given for the Use of his Power." The power to labor assumes the commodity form, being at once a use-value and an exchange-value. At first sight it appears that piecework is an exception to the general rule that the capitalist buys labor-power and not labor itself. It seems that when piece-wages are paid it is not the machine, the living labor-power, but the product of the machine, labor actually performed, that is bought. Superficially, this is so, of course, but it does not affect the principle laid down, because, as a matter of fact, the piecework system is only one of the means used to secure a maximum of labor-power. The average output of pieceworkers in a trade always tends to become the standard output for the time-workers, and, on the other hand, the average wage of pieceworkers tends to keep very near the standard of time-wages.

Now, as a commodity, labor-power is subject to the same laws as all other commodities. Its price, wages, fluctuates just as the price of all other commodities does, and bears the same relation to its value. It may be temporarily affected by the preponderance of supply over demand, or of demand over supply; it may be made the subject of monopoly in certain cases. There is, therefore, no such thing as an "iron law" of wages, any more than there is an "iron law" of prices for other commodities. Lassalle took the Ricardian law of wages and, by means of his characteristic exaggeration, distorted it out of all semblance to truth. Says Ricardo: "The natural price of labor, therefore, depends on the price of the food, necessaries, and conveniences required for the support of the laborer and his family. With a rise in the price of food and necessaries, the natural price of labor will rise; with the fall in their price, the natural price of labor will fall." This Lassalle made the basis of his famous "iron law," according to which 96 per cent of the wage-workers were precluded from improving their economic position. Lassalle's chief fault lay in that he made no allowance whatever for either state interference, or the organized influence of the workers themselves. He also attaches too little importance to what Marx calls the traditional standards of living. It is nevertheless true that the price of labor-power, wages, tends to approximate its value, just as the price of all other commodities tends, under normal conditions, to approximate their value.

And just as the value of other commodities is determined by the amount of social labor necessary on an average for their reproduction, so the value of labor-power is likewise determined. Wages tend to a point at which they will cover the average cost of the necessary means of subsistence for the workers and their families, in any given time and place, under the conditions and according to the standards of living generally prevailing. Trade union action, for example, may force wages above that point, or undue stress in the competitive labor market may force wages below it. While, however, a trade union may bring about what is virtually a monopoly-price for the labor-power of its members, there is always a counter tendency in the other direction, sometimes even to the lowering of the standard of subsistence itself to the minimum of things required for physical existence.

To class human labor-power with pig iron as a commodity, subject to the same laws, may at first sanitary conditions, and so on, tends to raise the standard of living. Finally, the fluctuations in the price of labor-power due to the operation of the law of supply and demand are much more important than Lassalle imagined.

This living commodity, labor-power, differs in one remarkable way from all other commodities, in that when it is used up in the process of the production of other commodities in which it is embodied, it creates new value in the process of being used up, and embodies that new value in the commodity it assists to produce. In the case of raw materials and machinery this is not so. In the manufacture of tables, for example, the wood used up is transformed into tables, embodied in them, but the wood has added nothing to its own value. The same is true of machinery. But with human labor-power it is otherwise. The capitalist buys from the laborer his labor-power at its full value as a commodity. But the laborer, in embodying that labor-power in some concrete form, creates more value than his wages represents. For the commodity he sells, his power to labor, he has been paid its full value, namely, the social labor-cost of its production; but that power may be capable of producing the equivalent of twice its own cost of production. This is the central idea of the famous and much-misunderstood Marxian theory of surplus-value, by which the method of capitalism, the exploitation of the wage-workers, and the resulting class antagonisms of the system are explained. This theory becomes the groundwork of all the social theories and movements protesting against and seeking to end the exploitation of the laboring masses. To understand it is, therefore, of paramount importance.

VI

As we have seen in an earlier chapter, Marx was not the first to recognize that the secret of capitalism, the object of capitalist industry, is the extraction of surplus-value from the labor-power of the worker. Nor was he the first to use the term. By no means a happy term, since it adds to the difficulty of comprehending the meaning and nature of value, Marx took it from the current economic discussion of his time as a term already fairly well understood. What we owe to the genius of Marx is an explanation of the manner in which surplus-value is extracted by the capitalist from the labor-power of the worker, and the part it plays in capitalist society.

The essence of the theory can be very briefly stated, but its demonstration involves, naturally, a more extensive study. Under normal conditions, the worker will produce a value equivalent to his means of subsistence, or to the wages actually paid to him, in a very small number of hours. If he owned andreceives the product of ten hours. This balance represents the surplus-value (Mehrwerth).

This takes place all through industry. If the capitalist employs a thousand workers under these conditions, each day he receives the product of five thousand hours over and above the product actually paid for. This constitutes his income. If the capitalist owned the land, machinery, and raw materials, absolutely, without incumbrances of any kind, the whole of that surplus-value would, naturally, belong to him. But as a general rule this is not the case. He rents the land and must pay rent to the landlord, or he works upon borrowed capital and must pay interest upon loans, so that the surplus-value extracted from the laborer must be divided into rent, interest, and profit. But how the surplus-value is divided among landlords, moneylenders, creditors, speculators, and actual employers is a matter of absolutely no moment to the workers as a class. That is why such movements as that represented by the followers of Henry George fail to vitally interest the working class. The division of the surplus-value wrung from the toil of the workers gives rise to much quarrel and strife within the ranks of the exploiting class, but the working class recognizes, and vaguely and instinctively feels where it does not clearly recognize, that it has no interest in these quarrels. All that interests it vitally is how to lessen the extent of the exploitation to which it is subjected, and how ultimately to end that exploitation altogether. That is the objective of the movement for the socialization of the means of life.

Such, briefly stated, is the theory. We may illustrate it by the following example: Let us say the average cost of a day's subsistence is the product of five hours' social labor, which is represented by a wage of $1 per day. In a factory there are 1000 workers. Their labor-power they have sold at its exchange value, $1 per day per man, a total of $1000. They use up $1000 worth of labor-power, then. They also use up $1000 worth of raw material and wear out the plant to the extent of $100 in the course of their work. Now, instead of working five hours each, that being the amount of time necessary to reproduce the value of their wages, as above described, they all work ten hours. Thus, in place of the $1000 they received as wages for the labor-power they sold, they create labor products, valued at just twice that sum, $2000. According to our suppositions, therefore, the gross value of the day's product will be $3100, the whole of it belonging to the capitalist, for the simple and sufficient reason that he bought and paid for, at their full value as commodities, all the elements entering into its production, the machinery, materials, and labor-power. The capitalist pays,—

For labor-power	$1000
For materials	1000
For repairs and replacement of machinery	100
		———
He receives, for the gross product	3100	$2100
The surplus-value is, therefore	1000

and this sum is the fund from which rent, interests, and profits must be paid.

It will be observed that there is no moral condemnation of the capitalist involved in this illustration. He simply buys the commodity, labor-power, at its full market price, as in the case of all other commodities. No ethical argument enters into it at all. It is very evident, however, that the interest of the capitalist will be to get as much surplus-value as possible, by buying labor-power at the lowest price possible, prolonging the working day, and intensifying the productivity of the labor-power he buys, while the interest of the workman will be equally against these things. Here we have the cause of class antagonism—not in the speeches of agitators, but in the facts of industrial life.

This is the Marxian theory of surplus-value in a nutshell. Rent, interest, and profit, the three great divisions of capitalist income into which this surplus-value is divided, are thus traced to the exploitation of labor, resting fundamentally upon the ownership by the exploiting class of the means of production. Other economists, both before and since Marx, have tried to explain the source of capitalist income in very different ways. An early theory was that profit originates in exchange, through "buying cheap and selling dear." That this is so in the case of individual traders is obvious. If A sells to B commodities above their value, or buys commodities from him below their value, it is plain that he gains by it. But it is equally plain that B loses. If one group of capitalists gains what another group loses, the gains and losses balance each other; there is no gain to the capitalist class as a whole. Yet that is precisely what occurs—the capitalist class as a whole does gain, and gain enormously, despite the losses of individual members of that class. It is that gain to the great body of capitalists, that general increase in their wealth, which must be accounted for, and which exchange cannot explain. Only when we think of the capitalist class buying labor-power from outside its own ranks, generally at its natural value, and using it, is the problem solved. The commodity which the capitalist buys creates a value greater than its own in being used up.

The theory that profit is the wages of risk is answerable in substantially the same way. It does not in any way explain the increase in the aggregate wealth of the capitalist class to say that the individual capitalist must have a chance to receive interest upon his money in order to induce him to turn it into capital, to hazard losing it wholly or in part. While the theory of risk helps to explain some features of capitalism, the changes in the flow of capital into certain forms of investment, and, to some small extent, the commercial crises incidental thereto, it does not explain the vital problem, the source of capitalist income. The chances of gain, as a premium for the risks involved, explain satisfactorily enough the action of the gambler when he enters into a game of roulette or faro. It cannot be said, however, that the aggregate wealth of the gamblers is increased by playing roulette or faro. Then, too, the risks of the laborers are vastly more vital than those of the capitalist. Yet the premium for their risks of health and life itself does not appear, unless, indeed, it be in their wages, in which case the most superficial glance at our industrial statistics will show that wages are by no means highest in those occupations where the risks are greatest and most numerous. Further, the wages of the risks for capitalists and laborers alike are drawn from the same source, the product of the laborers' toil.

To consider, even briefly, all the varied theories of surplus-value other than these would be a prolonged, dull, and profitless task. The theory of abstinence, that profit is the just reward of the capitalist for saving part of his wealth and using it as a means of production, is answerable by a priori arguments and by a vast volume of facts. Abstinence obviously produces nothing; it can only save the wealth already produced by labor, and no automatic increase of that saved-up wealth is possible. If it is to increase without the labor of its owner, it can only be through the exploitation of the labor of others, so that the abstinence theory in no manner controverts the Marxian position. On the other hand, we see that those whose wealth increases most rapidly are not given to frugality or abstinence by any means. It may, certainly, be possible for an individual to save enough by practicing frugality and abstinence to enable him to invest in some profitable enterprise, but the source of his profit is not his abstinence. That must be sought elsewhere. Abstinence may provide him with the means for taking the profit, but the profit itself must come from the value created by human labor-power over and above its cost of production.

Still less satisfactory is the idea that surplus-value is nothing more than the "wages of superintendence," or the "rent of ability." This theory has been advocated with much specious argument. Essentially it involves the contention that there is no distinction between wages and profits, or between capitalists and laborers; that the capitalist is a worker, and his profits simply wages for his useful and highly important work of directing industry. It is a bold theory with a very small basis of fact. Whoever honestly "a special kind of wage laborer.... The work of supervision becomes their established and exclusive function." Socialists, contrary to Mr. Mallock, have not overlooked the function exercised by the directing few, but they have pointed out that when these have been paid, their salaries being sometimes almost fabulous, there is still a surplus-value to be distributed among those who have not shared in the production, either as mental or manual workers. As Mr. Algernon Lee says:—

"The profits produced in many American mills, factories, mines, and railway systems go in part to Englishmen or Belgians or Germans who never set foot in America, and who obviously can have no share in even the mental labor of direction. A certificate of stock may belong to a child, to a maniac, to an imbecile, to a prisoner behind the bars, and it draws profit for its owner just the same. Stocks and bonds may lie for months or years in a safe-deposit vault, while an estate is being disputed, before their ownership is determined; but whoever is declared to be the owner gets the dividends and interest "earned" during all that time."

It is an easy task to set up imaginary figures labeled "Marxism," and then to demolish them by learned argument—but the occupation is as fruitless as it is easy. It remains the one central fact of capitalism, however, that a surplus-value is created by the working class and taken by the exploiting class, from which develops the class struggle of our time.