How capitalism works

Capitalist firms produce commodities, that is a good or service produced for sale only. Every commodity has a use-value for people. That means they are useful to someone otherwise they could not be sold.

They also contain a value. What is it and how can it be shown?
If we leave the use of money out for the time being, commodities, when they are exchanged, fall into certain proportions.

For example: A pair of shoes = 10 meters of cloth = 1 watch = 3 bottles of whisky.
This simple example shows that the exchange value of different commodities expresses something contained in them. But what makes a pair of shoes = 10 yards of cloth = 3 bottles of whisky?

The only thing in common is they are all products of human labour.

The amount of human labour contained in a commodity is expressed in time: weeks, days, hours, minutes.To go back to the example: all these commodities can be expressed in terms of their common factor, labour-time.
5 hours (labour) worth of shoes
5 hours (labour) worth of watches
5 hours (labour) worth of cloth

Average labour

The value of commodity is determined by the amount of average labour used in its production. Naturally, this average labour time is continually changing as new techniques and methods of work are introduced. Competition drives the inefficient to the wall. If factories produce a pair of shoes in, say half an hour, they will contain less labour (and therefore less value) and will be sold cheaper.

A thing can be a use value without having any value, i.e. a useful thing that has had no labour time spent on its production: air, rivers, virgin soil, natural meadows, etc. Therefore labour is not the only source of wealth, i.e. use values, but nature too is a source.

An increase in productivity will increase the amount of things produced (material wealth), but can reduce the value of the things concerned, i.e. the amount of labour in each commodity is less. Increased productivity therefore results in an increase in wealth. With two coats two people can be clothed, with one coat only one person. Nevertheless, the increase in the quantity of material wealth may correspond with a fall in the magnitude of its value.


As a result of the difficulties in exchange by using the methods of barter, more frequently a common article was used as ‘money’. Over the centuries one commodity–gold–became singled out to play this role as the ‘universal equivalent’.

Instead of saying a good is worth so much butter, meat, cloth, etc., it became expressed in terms of gold. The money expression of value is price. Gold was used because of its qualities. It concentrates much value in a small amount, can easily be divided into coins, and is also hard wearing.

Prices of commodities

In theory, the value is equal to its price. Yet, in reality, the price of a commodity tends to be either above or below its real value. This fluctuation is caused by different influences on market price, such as the growth of monopoly. The differences of supply and demand also have a great effect.

Labour power

The worker sells to the boss not their labour but their ability to work. This Marx calls their labour power. Labour power is the ability of the worker to work. It is ‘consumed’ by the capitalist in the actual labour-process.

The labour-time necessary for the worker’s maintenance is the labour-time it takes to produce the means of subsistence for him/her: food, clothing, fuel, etc. The amount of this varies in different countries, different climates, and different historical periods. Nevertheless, in any given country, at any particular stage of historical development, the ‘standard of living’ is known.

Not cheated!

Unlike most commodities, labour power is paid for only after it has been consumed. The workers thus philanthropically extend credit to their employers! As with all other commodities, equivalent values are exchanged: the worker’s commodity, labour power, is sold to the boss at the ‘going rate’. Everybody is satisfied. And if the worker is not, then they are free to leave and find work elsewhere – if they can!

Where does the capitalist make his profits? The answer is that the worker sells the capitalist not their labour (which is realised in the work process), but their labour power – their ability to work.

Having purchased this as a commodity, the capitalist is free to use it as he pleases. As Marx explained: “From the instant he steps into the work shop, the use-value of his labour power, and therefore also its use, which is labour, belongs to the capitalist”. This is also reflected in capitalist law by the expression ‘master-servant’ when describing the relationship between employer and employee and the political use of the term wage slave.

Surplus value

We will see from the following example that the capitalist purchases labour power because it is the only commodity which can produce new values above and beyond its own value.

Let us take a worker who is employed to spin cotton into yarn. They get paid $2 per hour and works an 8 hour day.
After 4 hours the worker had produced 100lbs of yarn at a total vale of $40. This value of $40 is made up from the following:
Raw materials $22 (cotton, spindle, power)
Depreciation $2 (wear and tear)
New value $16

The new value created is sufficient to pay the workers’ wages for the full 8 hours. At this point the capitalist has covered all his costs (including his total wage bill). But as yet no surplus value (profit) has been produced.

During the next 4 hours another 100lbs of yarn is produced valued again at $40. And again $16 of new value is created, but this time the wages have already been covered. Therefore this new value ($16) is surplus value. From this comes rent (to the landlord), interest (to the moneylender) and profit (to the industrialist). Thus surplus value or profit, in the words of Marx, is the unpaid labour of the working class.

The working day

The secret of the production of surplus value is that the worker continues to work longer after they have produced the value necessary to reproduce the value of their labour power (their wages). “The fact that half a day’s labour is necessary to keep the labourer alive does not in any way prevent him from working a full day.” (Marx).

The worker has sold their commodity and cannot complain about the way they are used, any more than the tailor can sell a suit and then demand that their customer must not wear it as often as they like. The working day is therefore so organised as to give the maximum benefits from the labour power he/she has bought. In this lay the secret of the transformation of money into capital.

Constant capital

In production itself, machines and raw materials lose their use value, they become burnt up and become absorbed into the new product. They transfer their value into the new commodity.

The depreciation of machinery, its daily loss of use value, is calculated on this basis and added on to the cost of the article produced. Thus, the means of production add to the commodity their own value in proportion as the deterioration of its use value unfolds. The means of production, therefore, cannot transfer to the commodity more than that value which they themselves lose in the process of production. It is thus called constant capital.

Variable capital

While the means of production add no new value to the commodities produced, but only deteriorate, the labour of the worker not only preserves, but adds new value to his product by merely working. If the process of work were to stop at that moment when the worker had produced articles to the value of their own labour power, e.g. in 4 hours ($16) this is the only bit of new value created.

But the work process does not stop there. This would only cover the expenses of the capitalist in hiring the worker. The capitalist does not hire workers for charity but for profit. Having ‘freely’ entered into a contract with the capitalist, the worker must labour on, producing extra value and beyond that sum agreed on as his wage.

Money Commodity Money

The labour performed by the working class can be divided up into two parts:
(1) Necessary Labour: This is the part of the labour process which is needed to cover the cost of wages.
(2) Surplus Labour: This is the extra labour performed in addition to labour, which produces the profits.
To increase his profits, the capitalist is constantly attempting to reduce their wages bill. They do this by attempting to (1) lengthen the working day, introduce new shift patterns, etc., (2) increase productivity to cover wages more quickly, (3) resist wage rises or attempt to cut them.

Rate of surplus value

This struggle over the surplus constitutes the class struggle. What concerns the capitalist is not so much the amount of surplus value produced but the rate of surplus value. For every dollar they lay out in capital they expect a big return. The rate of surplus value is the rate of exploitation of labour by capital. It may be defined as V/S or necessary labour/surplus labour.

The rate of profit

Under the pressure of competition at home and abroad, the capitalist is compelled to constantly revolutionise the means of production and to increase productivity. The need to expand compels them to spend a larger and larger proportion of their capital on machinery and raw materials and less on labour power, thus diminishing the proportion of variable capital to constant capital. Side by side with automation goes the concentration of capital, the liquidation of the smaller concerns and the domination of the economy by giant monopolies.

But since it is the variable capital (labour power) alone which is the source of surplus value (profit), the bigger amounts invested in constant capital results in the tendency for the rate of profit to fall, although with new investments profits can increase enormously they do not rise proportionately to the much greater capital outlay.

The capitalists have continually attempted to overcome this contradiction by the increased exploitation of the working class, to increase the mass of surplus value and therefore the rate of profit, by means other than investment. They do this in a number of ways by raising the intensity of exploitation, increasing the speed of the machinery and the lengthening of the working day. Another method to restore the rate of profit is to cut the real wages of the workers below their real value. The very laws of capitalism gives rise to enormous contradictions. The capitalists’ constant striving for profits gives the impetus for investment, but new technology forces more workers on the scrap heap. Yet paradoxically the only source of profit is from the labour of the working class.

Export of capital

The highest stage of capitalism – imperialism – is marked by the enormous export of capital. In their search for increased rates of profit, the capitalists are forced to invest huge sums of money abroad in countries of cheaper labour. Eventually, the whole world, as Marx and Engels explain in the Communist Manifesto becomes dominated by the capitalist mode of production.

One of the major contradictions of capitalism is the obvious problem that the working class as consumers have to buy back what they have produced. But as they do not receive the full value of their labour, they have not the resources to do this. The capitalists solve this contradiction by taking the surplus and reinvesting it in developing the productive forces further. Also they seek to sell the remaining surplus on the world market in competition with the capitalists of all the other different countries. But there are also limits to this as all the capitalists of the world are playing the same game.
In addition, the capitalists resort to credit, via the banking system, to provide the necessary cash for the mass of the population to buy the goods. But this also has its limits as the credit eventually has to be paid back, with interest.

That explains why periodically, the booms are followed in regular succession by periods of slump. The feverish struggle for markets end up in a crisis of overproduction for capitalism. The destructiveness of the crisis, which are met with the wholesale writing-off of accumulated capital, are a sufficient indication of the impasse of capitalist society.

Only by overthrowing the anarchy of capitalist production can humanity prevent the chaos, wastage and barbarism of capitalism. Only by eliminating private owenership of the means of production, can society escape the laws of motion of capitalism and develop and blossom in a planned and rational way.

Eradicating the contradiction of the development of the productive forces and the nation state and private ownership, will provide the basis for an international plan of production.

Using the powers of science and technology, the whole of the planet could be transformed in the space of a decade. The socialist transformation of society remains the most urgent and burning task facing the world’s working class.


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