I’m currently enamored with the economic arguments of the nineteenth century economist Karl Marx. As an American, this makes me a bit of a weirdo–though less so as an American living in the Great Recession.
My interest in Marx began as a search for alternatives to classic liberalism. I have some background with the social contract theorists (Hobbes, Locke, Rousseau, the Federalists), whose narrative of human social life is widely accepted. It basically construes society as composed of individualized agents who recognize that their long-run self-interest is better served by cooperation under social constraints (e.g. property law) than by constant competition. Originally, this narrative was opposed to the theory of the divine right of kings. The social contract is seen as a solution to the prisoner’s dilemma, AKA the free-rider problem.
Out of classic liberalism emerged classical economics, whose most notable figures include Adam Smith, Thomas Malthus and David Ricardo. These thinkers were concerned with the mechanisms by which the economy operated. Smith, for instance, famously showed how the ‘invisible hand of the market’ allowed disparate agents pursuing selfish interests to, through division of labor and trading, increase overall social welfare.
It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their self-interest. We address ourselves, not to their humanity, but to their self-love, and never talk to them of our necessities, but of their advantages.
Acute readers will note that this is basically the social contract argument applied to resource distribution. The idea is that everyone wants to profit, and the way to profit is to produce stuff that other people want, so self-interest causes individual actors in the market to scramble to please one another. If I’m producing widgets, they’d better meet the desires of my customers or they won’t get bought. In this way, the market functions to deliver quality products that people actually want. Moreover, Smith shows how prices, in the long run, cannot be more than the cost of production: if it costs $5 to produce a shirt and I try to sell shirts for $6 apiece, a competitor will undercut my price and no one will buy my shirts. So market competition also guarantees that products will be sold as cheaply as possible, i.e. at cost.
Most educated Americans know these arguments; I was introduced to them not through Smith, but just by hanging out with libertarians.
Labor is a commodity like any other in the sense that it can be bought at cost, i.e. you pay a worker what it costs to keep her alive and functioning during the period of her employment. But labor is a unique commodity in the sense that its cost is less than its yield. Suppose, for simplicity, that $10 = 1 hour of labor. Suppose it costs $40 per day to keep a worker alive and functional. Suppose, finally, that I hire a worker for 8 hours. The cost (to me, the capitalist) of employing that worker is $40, but the worker produces $80, leaving me with $40 in profit (what Marx calls “surplus value”). This is the technical meaning of exploitation: the difference between what the worker costs vs. what the worker produces.
Why doesn’t the worker just go start her own firm, where she can pay herself her full value? Because capitalists control the means of production (e.g. factories). Why do capitalists control the means of production? Because, basically, it takes money to make money: if I’m poor then I have to spend all my money on consumption, i.e. food, rent, clothing, etc. But if I’m rich, I can invest most of my money into a firm, where poor employees will work for $40 and produce $80. In this way, my money will expand itself. Marx calls this “self-valorization,” and the definition of capital is money & commodities that are in the process of self-valorization. In this way, capitalism has a tendency toward the concentration of wealth into fewer and fewer hands.
All of this is shown with much more rigor and clarity in Marx’s writings (which I had always heard were terribly turgid and difficult, but his economic texts, at least, are remarkably clear and elegant). I recommend Wage Labor and Capital and/or Value, Price, and Profit, which are shorter essays designed to explain exploitation to lay readers. But anyway, this is why I’m interested in Marx: because he provides a robust alternative to free-market worship, because he can explain why inequality exists, and because he does all of this within the framework created by Smith himself. I don’t know that Marx has the final word about the structure and fate of capitalism, and I’m certainly suspicious of many self-identified Marxists, but it’s clear to me that Marx has made a fundamental contribution to understanding how the capitalist economy works.
*Caveat: Marx, like the Physiocrats, acknowledges that nature is necessary to produce value. But he claims that while nature produces lots of use values (e.g. oxygen), it’s only labor (activity) + nature (object of activity) that creates exchange value on the market. In other words, labor is the “hidden law” which regulates commodity prices.
**Marx distinguishes between labor per se vs. “labor power,” i.e. the capacity or potential for labor. The capitalist pays for the latter and receives the former; hence the difference between cost and output.