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Where do capitalist profits come from?

This article is over 16 years, 11 months old
In the second part of our series Bob Fotheringham looks the origins of Marx’s economic ideas
Issue 2041
David Ricardo
David Ricardo

Karl marx spent much of his life analysing how capitalism works.

His legacy is a multitude of articles, books and pamphlets, of which the three volumes of Capital are the most important – providing socialists today with essential tools to understand the economic system we live under.

Capital was subtitled A Critique of Political Economy. By this Marx means a critique of British political economy as developed at the end of the 18th century and the beginning of the 19th century by capitalist economists, in particular Adam Smith and David Ricardo.

It is not difficult to understand why the first real attempts to understand capitalism took place in Britain.

Due to the industrial revolution Britain was the first place in the world to develop large scale industrial capitalism.

Thinkers such as Smith and Ricardo set about trying to understand capitalism with a view to making it work better or, to be more precise, work in way that was more beneficial to the capitalist class which they were champions of.

These early theoreticians did not have the constraints placed on them by later apologists for capitalism who try to present it in a benign and positive light.

Smith and Ricardo could be ruthlessly honest about the workings of capitalism. This provided Marx with a useful starting point.

The most important concept Marx took from the British political economists – especially from Ricardo – is the labour theory of value.

This states that the value of a commodity is equal to the amount of labour required for its production.

The motivation for Ricardo was to gain a greater understanding of the cost of production and therefore a more accurate prediction of the price of a commodity.

Marx picked up Ricardo’s insight and built on it to extend his own understanding of how the value of a commodity could be calculated.

Marx’s labour theory of value differs from Ricardo in a number of ways.

For Marx the value of a commodity is equal to the amount of “socially necessary labour required for its production”.

To understand what Marx means you only have to think how much less time is necessary for a worker to produce a car now, in comparison with how long it took 50 years ago.

Workers do not sell their labour but their “labour power” – literally their ability to work.

The consequence for workers is massive. No longer in control of their life, their own labour power becomes a commodity, just like any other, to be bought and sold on the market.

If the value of a commodity is equal to the amount of labour used in its production, how do capitalists make a profit?

They do this by paying the worker less than the value of the commodity.

The worker is paid the minimum to live on and support his or her family. The rest goes into the pocket of the capitalist in the form of profit.

Marx called this surplus value.

The economic relation of capitalism – the exploitation of workers by capitalists – therefore has conflict built into it at a very basic level.

In other words class struggle is part of the economic foundation of capitalism.

Of course competition between capitalists and workers is not the only form of competition that takes place under capitalism.

The capitalists are also in competition with each other – for a greater share of the surplus value, for markets and for power and control.

It is this which gives capitalism both its dynamic and its destructive nature.

Someone living 150 years ago would not recognise the modern world with its computers, electronic goods cars and planes.

However capitalism has also brought with it poverty, starvation, imperialism and war.

One of Marx’s greatest contributions to our understanding of how capitalism works is to locate at the heart of the system a struggle that can lead to a better world.

Of course class struggle goes up and down.

But you can be sure that the requirement of the capitalist class to exploit workers to pay for their power and profits forces workers to fight back.

This can take a number of forms.

But class struggle is part and parcel of capitalism – that is a fact.

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