Monday, July 6, 2015

Marx’s Capital, Volume 1, Chapter 5: A Critical Summary

Chapter 5 of volume 1 of Capital is called “Contradictions in the General Formula for Capital,” and is a brief chapter that describes what Marx sees as problems with the general formula M–C–M′. The primary problem is: where does surplus value come from and how is it created? (Brewer 1984: 35; Harvey 2010: 92). In essence, Marx in this chapter argues that it does not originate within the process of circulation (that is, the sphere of exchange of commodities through money).

The circuit of capital M–C–M′ contradicts Marx’s earlier laws, because the C–M′ exchange is not one of equivalent value (Marx 1990: 258). Marx also notes that the circuit of capital M–C–M′ is experienced properly only by the capitalist himself who engages in it (Marx 1990: 258).

For Marx, a “pure” commodity exchange is one where a commodity exchanges for another of equal labour value, so that the exchange is one of equivalent embodied socially-necessary labour time. If neither side gets more embodied labour value in exchange for the thing given up, then the circuit of capital M–C–M′ would be reduced to M–C–M (where all are equivalent) (Brewer 1984: 36).

Now, in terms of use values, both parties can get more in return for what they give up:
“So far as regards use-values, it is clear that both parties may gain some advantage. Both part with goods that, as use-values, are of no service to them, and receive others that they can make use of. And there may also be a further gain. A, who sells wine and buys corn, possibly produces more wine, with given labour time, than farmer B could, and B, on the other hand, more corn than wine-grower A could. A, therefore, may get, for the same exchange value, more corn, and B more wine, than each would respectively get without any exchange by producing his own corn and wine. With reference, therefore, to use-value, there is good ground for saying that ‘exchange is a transaction by which both sides gain.’ It is otherwise with exchange value.” (Marx 1906: 175).
Marx invokes the idea of comparative advantage in trade here too.

But, as we have seen, in the “pure” simple circulation of commodities C–M–C, there is no change in the quantitative labour values in each step:
“Abstractedly considered, that is, apart from circumstances not immediately flowing from the laws of the simple circulation of commodities, there is in an exchange nothing (if we except the replacing of one use-value by another) but a metamorphosis, a mere change in the form of the commodity. The same exchange value, i.e., the same quantity of incorporated social labour, remains throughout in the hands of the owner of the commodity first in the shape of his own commodity, then in the form of the money for which he exchanged it, and lastly, in the shape of the commodity he buys with that money. This change of form does not imply a change in the magnitude of the value. But the change, which the value of the commodity undergoes in this process, is limited to a change in its money form. This form exists first as the price of the commodity offered for sale, then as an actual sum of money, which, however, was already expressed in the price, and lastly, as the price of an equivalent commodity. This change of form no more implies, taken alone, a change in the quantity of value, than does the change of a £5 note into sovereigns, half sovereigns and shillings. So far therefore as the circulation of commodities effects a change in the form alone of their values, and is free from disturbing influences, it must be the exchange of equivalents. Little as Vulgar-Economy knows about the nature of value, yet whenever it wishes to consider the phenomena of circulation in their purity, it assumes that supply and demand are equal, which amounts to this, that their effect is nil. If therefore, as regards the use-values exchanged, both buyer and seller may possibly gain something, this is not the case as regards the exchange values. Here we must rather say, ‘Where equality exists there can be no gain.’ It is true, commodities may be sold at prices deviating from their values, but these deviations are to be considered as infractions of the laws of the exchange of commodities, which, in its normal state is an exchange of equivalents, consequently, no method for increasing value.” (Marx 1906: 176–177).
It is important to note here how Marx refers to “law of the exchange of commodities” that is defined as “in its normal state ... an exchange of equivalents.”

So here Marx recognises that if commodity exchanges occur at a deviation from the labour values, then one party will receive more embodied labour value in return for that embodied in the commodity he sells. Marx elaborates on this issue later in the chapter.

What follows is one of Marx’s confused polemics, when he refers to √Čtienne Bonnot de Condillac’s subjective utility theory. Using subjective value theory, Condillac had observed that when two individuals engage in a trade, each person will generally trade something which for him has a lower subjective value than the thing he receives (which will have a higher subjective value for him).

Marx attacks Condillac. Marx denies that in the pure exchange of commodities one party will receive a value greater than that of the commodity given up (Marx 1990: 261). But, since Marx never makes clear that subjective value is the proper concept used by Condillac, the whole passage is little more than a fallacy of equivocation. Marx cites Condillac, refuses to engage with Condillac’s own concept of subjective utility, and then simply invokes his own definition of value as “labour value” in his critique. Marx also accuses Condillac of confusing use value with exchange value (Marx 1990: 261), but Condillac was not confused. Condillac was thinking of subjective utility, not objective use values (an error made by Harvey 2010: 93 as well). Marx has not refuted Condillac, and his own economic theory is grossly deficient by not acknowledging the reality of subjective value.

Marx goes on and denies that simple commerce can produce surplus value (Marx 1990: 262).

He has an extended discussion of this:
“If commodities, or commodities and money, of equal exchange-value, and consequently equivalents, are exchanged, it is plain that no one abstracts more value from, than he throws into, circulation. There is no creation of surplus-value. And, in its normal form, the circulation of commodities demands the exchange of equivalents. But in actual practice, the process does not retain its normal form. Let us, therefore, assume an exchange of non-equivalents.

In any case the market for commodities is only frequented by owners of commodities, and the power which these persons exercise over each other, is no other than the power of their commodities. The material variety of these commodities is the material incentive to the act of exchange, and makes buyers and sellers mutually dependent, because none of them possesses
the object of his own wants, and each holds in his hand the object of another’s wants. Besides these material differences of their use-values, there is only one other difference between commodities, namely, that between their bodily form and the form into which they are converted by sale, the difference between commodities and money. And consequently the owners of commodities are distinguishable only as sellers, those who own commodities, and buyers, those who own money.

Suppose then, that by some inexplicable privilege, the seller is enabled to sell his commodities above their value, what is worth 100 for 110, in which case the price is nominally raised 10%. The seller therefore pockets a surplus value of 10. But after he has sold he becomes a buyer. A third owner of commodities comes to him now as seller, who in this capacity also enjoys the privilege of selling his commodities 10% too dear. Our friend gained 10 as a seller only to lose it again as a buyer. The net result is, that all owners of commodities sell their goods to one another at 10% above their value, which comes precisely to the same as if they sold them at their true value. Such a general and nominal rise of prices has the same effect as if the values had been expressed in weight of silver instead of in weight of gold. The nominal prices of commodities would rise, but the real relation between their values would remain unchanged.

Let us make the opposite assumption, that the buyer has the privilege of purchasing commodities under their value. In this case it is no longer necessary to bear in mind that he in his turn will become a seller. He was so before he became buyer; he had already lost 10% in selling before he gained 10% as buyer. Everything is just as it was.

The creation of surplus-value, and therefore the conversion of money into capital, can consequently be explained neither on the assumption that commodities are sold above their value, nor that they are bought below their value.” (Marx 1906: 178–179).
There are two important points here. Frist, Marx’s explanation of how nominal prices of commodities supposedly rise to correct the real relation between commodity labour values is deeply unclear and problematic.

Secondly, the upshot of this passage is that, even when a commodity exchanges for a price above its labour value, this process does not create surplus value, but merely redistributes it:
“A may be clever enough to get the advantage of B or C without their being able to retaliate. A sells wine worth £40 to B, and obtains from him in exchange corn to the value of £50. A has converted his £40 into £50, has made more money out of less, and has converted his commodities into capital. Let us examine this a little more closely. Before the exchange we had £40 worth of wine in the hands of A, and £50 worth of corn in those of B, a total value of £90. After the exchange we have still the same total value of £90. The value in circulation has not increased by one iota, it is only distributed differently between A and B. What is a loss of value to B is surplus-value to A; what is ‘minus’ to one is ‘plus’ to the other. The same change would have taken place, if A, without the formality of an exchange, had directly stolen the £10 from B. The sum of the values in circulation can clearly not be augmented by any change in their distribution, any more than the quantity of the precious metals in a country by a Jew selling a Queen Ann’s farthing for a guinea. The capitalist class, as a whole, in any country, cannot over-reach themselves.

Turn and twist then as we may, the fact remains unaltered. If equivalents are exchanged, no surplus-value results, and if non-equivalents are exchanged, still no surplus-value. Circulation, or the exchange of commodities, begets no value.” (Marx 1906: 181).
Marx even refers to this process when sellers sell commodities above their labour values as “swindling” (Marx 1990: 264). For Marx, as we have seen in Chapter 3, the market has a tendency to make individual commodities, via money as a produced commodity, exchange for their true labour values, since the socially necessary labour time embodied in them is an anchor for their exchange value.

Marx is now aware of a problem: if the formula M–C–M′ describes the activities of merchants/commodity speculators and moneylenders, then they can create no real surplus value if their exchanges are of equivalents. That is, they cannot be using capital in Marx’s sense of the term, which is value embodied in the capital circuit M–C–M′ increasing itself (Marx 1990: 266).

For Marx, advanced capitalism has at its heart an industrial mode of production (Harvey 2010: 97). Marx now poses a puzzle: how can merchant capital and moneylenders’ capital be derivative but at the same time appear before the “primary” industrial form of capital? (Marx 1990: 267).

Surplus value cannot be created in circulation, but happens in some process beyond circulation. A commodity owner might have created labour value embodied in the commodity but he cannot add surplus value to the commodity simply by selling above its true value (Marx 1990: 268).

Marx ends the chapter with his paradox:
“The commodity owner can, by his labour, create value, but not self-expanding value. He can increase the value of his commodity, by adding fresh labour, and therefore more value to the value in hand, by making, for instance, leather into boots. The same material has now more value, because it contains a greater quantity of labour. The boots have therefore more value than the leather, but the value of the leather remains what it was; it has not expanded itself, has not, during the making of the boots, annexed surplus value. It is therefore impossible that outside the sphere of circulation, a producer of commodities can, without coming into contact with other commodity owners, expand value, and consequently convert money or commodities into capital.

It is therefore impossible for capital to be produced by circulation, and it is equally impossible for it to originate apart from circulation. It must have its origin both in circulation and yet not in circulation.

We have, therefore, got a double result.” (Marx 1906: 184).
This paradox is resolved in Chapter 6, and the answer lies in the sphere of production.

However, since the labour theory of value on which Marx founds his economic theory is wrong, we can now see how Marx’s Capital quickly degenerates into pseudo-problems derived from the initial foundational error.

Brewer, Anthony. 1984. A Guide to Marx’s Capital. Cambridge University Press, Cambridge.

Harvey, David. 2010. A Companion to Marx’s Capital. Verso, London and New York.

Marx, Karl. 1906. Capital. A Critique of Political Economy (vol. 1; rev. trans. by Ernest Untermann from 4th German edn.). The Modern Library, New York.

Marx, Karl. 1990. Capital. A Critique of Political Economy. Volume One (trans. Ben Fowkes). Penguin Books, London.

Saturday, July 4, 2015

Marx’s Capital, Volume 1, Chapter 4: A Critical Summary

Chapter 4 of volume 1 of Capital is called “The General Formula for Capital,” and begins Part 2 of that work (which consists of Chapters 4, 5, and 6). Chapter 4 presents Marx’s theory of the essence of commodity production under capitalism: the desire for money as expressed in the formula money–commodity–money (M–C–M), which is the circuit of capital (Brewer 1984: 34).

Capitalism involves the production and circulation of commodities, and these are its “starting-point” and historical foundations (Marx 1990: 247). World trade, according to Marx, dates from the 16th century and this is when the modern history of capitalism commences (Marx 1990: 247).

Next, Marx comes to a point which is one of his genuinely important and profound insights into capitalism, and which anticipated Keynes. The object of capitalism, Marx rightly argues, is monetary profit:
“If we abstract from the material substance of the circulation of commodities, that is, from the exchange of the various use-values, and consider only the economic forms produced by this process of circulation, we find its final result to be money: this final product of the circulation of commodities is the first form in which capital appears.

As a matter of history, capital, as opposed to landed property, invariably takes the form at first of money; it appears as moneyed wealth, as the capital of the merchant and of the usurer. But we have no need to refer to the origin of capital in order to discover that the first form of appearance of capital is money. We can see it daily under our very eyes. All new capital, to commence with, comes on the stage, that is, on the market, whether of commodities, labour, or money, even in our days, in the shape of money that by a definite process has to be transformed into capital.

The first distinction we notice between money that is money only, and money that is capital, is nothing more than a difference in their form of circulation.

The simplest form of the circulation of commodities is C–M–C, the transformation of commodities into money, and the change of the money back again into commodities; or selling in order to buy. But alongside of this form we find another specifically different form: M–C–M, the transformation of money into commodities, and the change of commodities back again into money; or buying in order to sell. Money that circulates in the latter manner is thereby transformed into, becomes capital, and is already potentially capital.” (Marx 1906: 163–164).
Capital in the form of money buys a commodity in the first stage M–C (the advance of capital) and realises a profit in C–M (the realisation of capital) (Brewer 1984: 34).

Ultimately, the capitalist starts with money and desires to earn more money at the end of his enterprise (whether simple commodity speculation or production, as Marx later makes clear):
“Now it is evident that the circuit M–C–M would be absurd and without meaning if the intention were to exchange by this means two equal sums of money, £100 for £100. The miser’s plan would be far simpler and surer; he sticks to his £100 instead of exposing it to the dangers of circulation.” (Marx 1906: 164–165).
So there is a distinction between the two circular paths C–M–C and M–C–M (Marx 1990: 248):
“In the circulation C–M–C, the money is in the end converted into a commodity, that serves as a use-value; it is spent once for all. In the inverted form, M–C–M, on the contrary, the buyer lays out money in order that, as a seller, he may recover money. By the purchase of his commodity he throws money into circulation, in order to withdraw it again by the sale of the same commodity. He lets the money go, but only with the sly intention of getting it back again. The money, therefore, is not spent, it is merely advanced.” (Marx 1906: 165–166).
This idea that modern capitalism is a monetary production economy where capitalists’ main aim is to earn more money was also held by Keynes (Rogers 1989: 165–167; see also Torr 1980 and Dillard 1984). Thus both Keynes and Marx rejected the Classical “real” analysis that attempted to model capitalism as if it were a barter economy (Rogers 1989: 165).

There is also another very important point here: for Marx money (M) in the formula M–C–M, describing the capitalist mode of production, is defined as capital (Marx 1990: 250). As Marx says, there is “a palpable difference between the circulation of money as capital, and its circulation as mere money” (Marx 1906: 166). Capital is a type of “value in motion” that is used by capitalists to create more value, but the “value in motion” can appear in the form of either money or commodities (Harvey 2010: 90).

To return to Marx’s analysis, the circuit M–C–M has a different goal from C–M–C:
“The circuit C–M–C starts with one commodity, and finishes with another, which falls out of circulation and into consumption. Consumption, the satisfaction of wants, in one word, use-value, is its end and aim. The circuit M–C–M, on the contrary, commences with money and ends with money. Its leading motive, and the goal that attracts it, is therefore mere exchange value.” (Marx 1906: 167).
That is, the point of the circuit C–M–C is a use value, or consumption or satisfaction of needs as a final goal (Marx 1990: 250; Harvey 2010: 85). But the goal of M–C–M is more money and so it should properly be written M–C–M′ (where M′ = money plus an increment) (Marx 1990: 251). The increment in the money is the surplus value (Marx 1990: 251). So surplus value is M′ minus M.

The circuit of capital M–C–M is the process that generates surplus value (Brewer 1984: 34). It is the desire for quantitative expansion of monetary value and may have no limits (Brewer 1984: 35). Marx describes what he thinks is the mentality of the capitalist:
“The simple circulation of commodities—selling in order to buy—is a means of carrying out a purpose unconnected with circulation, namely, the appropriation of use-values, the satisfaction of wants. The circulation of money as capital is, on the contrary, an end in itself, for the expansion of value takes place only within this constantly renewed movement. The circulation of capital has therefore no limits. Thus the conscious representative of this movement, the possessor of money becomes a capitalist. His person, or rather his pocket, is the point from which the money starts and to which it returns. The expansion of value, which is the objective basis or main-spring of the circulation M–C–M, becomes his subjective aim, and it is only in so far as the appropriation of ever more and more wealth in the abstract becomes the sole motive of his operations, that he functions as a capitalist, that is, as capital personified and endowed with consciousness and a will. Use-values must therefore never be looked upon as the real aim of the capitalist; neither must the profit on any single transaction. The restless never-ending process of profit-making alone is what he aims at. This boundless greed after riches, this passionate chase after exchange-value, is common to the capitalist and the miser; but while the miser is merely a capitalist gone mad, the capitalist is a rational miser. The never-ending augmentation of exchange-value, which the miser strives after, by seeking to save his money from circulation, is attained by the more acute capitalist, by constantly throwing it afresh into circulation.” (Marx 1906: 169–171).
According to Marx, the “restless never-ending process of profit-making alone is what he [sc. the capitalist] aims at” (Marx 1906: 170).

Also, as we have seen above, for Marx, money or commodities can function as capital or, in other words, as value in motion to produce more value (Marx 1990: 255). It is very important to note that Marx’s definition of capital is quite different from that of neoclassical economics, as noted by Brewer (1984: 35). For Marx, capital is a certain sum of value repeatedly “being transformed from money to commodities and back again” to produce more value (Brewer 1984: 35).

Marx describes this as follows:
“The independent form, i. e., the money-form, which the value of commodities assumes in the case of simple circulation, serves only one purpose, namely, their exchange, and vanishes in the final result of the movement. On the other hand, in the circulation M–C–M, both the money and the commodity represent only different modes of existence of value itself, the money its general mode, and the commodity its particular, or, so to say, disguised mode. It is constantly changing from one form to the other without thereby becoming lost, and thus assumes an automatically active character. If now we take in turn each of the two different forms which self-expanding value successively assumes in the course of its life, we then arrive at these two propositions: Capital is money: Capital is commodities. In truth, however, value is here the active factor in a process, in which, while constantly assuming the form in turn of money and commodities, it at the same time changes in magnitude, differentiates itself by throwing off surplus-value from itself; the original value, in other words, expands spontaneously. For the movement, in the course of which it adds surplus value, is its own movement, its expansion, therefore, is automatic expansion. Because it is value, it has acquired the occult quality of being able to add value to itself. It brings forth living offspring, or, at the least, lays golden eggs.

Value, therefore, being the active factor in such a process, and assuming at one time the form of money, at another that of commodities, but through all these changes preserving itself and expanding, it requires some independent form, by means of which its identity may at any time be established. And this form it possesses only in the shape of money. It is under the form of money that value begins and ends, and begins again, every act of its own spontaneous generation. It began by being £100, it is now £110, and so on. But the money itself is only one of the two forms of value. Unless it takes the form of some commodity, it does not become capital.” (Marx 1906: 171–172).
The whole process is summed up Marx:
“Value therefore now becomes value in process, money in process, and, as such, capital. It comes out of circulation, enters into it again, preserves and multiplies itself within its circuit, comes back out of it with expanded bulk, and begins the same round ever afresh. M–M′, money which begets money, such is the description of Capital from the mouths of its first interpreters, the Mercantilists.

Buying in order to sell, or, more accurately, buying in order to sell dearer, M–C–M′, appears certainly to be a form peculiar to one kind of capital alone, namely, merchants’ capital. But industrial capital too is money, that is changed into commodities, and by the sale of these commodities, is reconverted into more money. The events that take place outside the sphere of circulation, in the interval between the buying and selling, do not affect the form of this movement. Lastly, in the case of interest-bearing capital, the circulation M–C–M′ appears abridged. We have its result without the intermediate stage, in the form M–M′, ‘en style lapidaire’ so to say, money that is worth more money, value that is greater than itself.

M–C–M′ is therefore in reality the general formula of capital as it appears prima facie within the sphere of circulation.” (Marx 1906: 173).
So whether the capitalist is an industrialist, merchant or usurer who lends money at interest, his activity can be summed up by the “general formula” M–C–M′ which describes his ceaseless search for surplus value in the sphere of circulation.

Now there are two problematic aspects of this chapter, as follows:
(1) does mere speculation (buying commodities cheap and selling dear) count as capitalist production and can value arise in circulation of commodities? How does speculation produce labour value?

(2) does Marx think that capitalists really aim at increasing labour value?
First, there is the interesting problem about the nature of speculation. If a capitalist buys commodities for $100 and sells them for $110 has he created surplus value by his labour? It would seem that Marx merely thinks that the initial $100 is only “circulating money capital” and any surplus obtained in this way is done so “by trickery, or by speculation on the oscillation of commodity prices” (letter, Marx to Engels, London, 30 April 1868; elsewhere Marx sees gambling in a comparable way). Though the transaction can be explained as M–C–M′, the surplus value is not created by the labour power of the speculator.

To illustrate the second problem: Marx says that the point of M–C–M′ is to increase value:
“The value originally advanced, therefore, not only remains intact while in circulation, but adds to itself a surplus-value or expands itself. It is this movement that converts it into capital.” (Marx 1906: 168).
But “value” usually means labour value for Marx, so that Marx can be interpreted as saying that capitalists’ real aim is to increase the labour value embodied in the money they receive from production. This is absurd and empirically false. Capitalists and business people are interested in money profits, not Marx’s labour value concept.

In conclusion, there are interesting insights in Chapter 4, but they are quickly contaminated by Marx’s dogmatic and untenable labour theory of value. None of the good insights about the monetary nature of production taken up by Keynes should blind us to the fact that Marx’s Capital is a deeply flawed work and his overall theory is wrong, since it is founded and the erroneous and untenable labour theory of value.

Brewer, Anthony. 1984. A Guide to Marx’s Capital. Cambridge University Press, Cambridge.

Dillard, Dudley. 1984. “Keynes and Marx: A Centennial Appraisal,” Journal of Post Keynesian Economics 6.3: 421–432.

Harvey, David. 2010. A Companion to Marx’s Capital. Verso, London and New York.

Marx, Karl. 1868. Letter, Marx to Engels, London, 30 April

Marx, Karl. 1906. Capital. A Critique of Political Economy (vol. 1; rev. trans. by Ernest Untermann from 4th German edn.). The Modern Library, New York.

Marx, Karl. 1990. Capital. A Critique of Political Economy. Volume One (trans. Ben Fowkes). Penguin Books, London.

Rogers, C. 1989. Money, Interest and Capital: A Study in the Foundations of Monetary Theory. Cambridge University Press, Cambridge.

Torr, C. 1980. “The Distinction Between an Entrepreneur Economy and a Co-operative Economy,” South African Journal of Economics 48.4: 429–434.