Let us step back for a moment from the equations to remind ourselves of the core of Marx's understanding of capitalism. Every social formation, every stage of history, he claims, is determined fundamentally by who owns or controls the means of production -- the material factors of production without which human beings cannot live and reproduce their conditions of being. In a feudal society, the land is the premier means of production, and it is controlled by the landed aristocracy, who compel others to work as peasant farmers on that land, and to yield up a portion of the annual product as a surplus, which the lords then use as they wish. Land continues to be essential to life in a capitalist economy, but it is joined by other factors of production, including machinery, raw materials, factories, technical knowledge, and also the money capital that entrepreneurs use to buy the factors of production.
The central fact of capitalism is the dispossession of the vast majority of working men and women, their exclusion from access to and control over any means of production. Propertyless, the great mass of people are forced to sell their labor to those who control those means, on terms dictated by the owners of the means of production. Despite the surface appearance of bargaining between legal equals in a market free of all coercion, the sale of labor for wages is in reality an unequal bargain, forced on the workers by their need for food, clothing, and shelter.
The distinction between labor and labor power was Marx's attempt to capture a fundamental structural feature of capitalism, in such a manner as to solve the Ricardian problem of price determination while also identifying the precise quantitative and qualitative origin of the profits that, year by year, swell the wealth of the entrepreneurs and cement their control over the eternally propertyless working class. Thus it was that Marx sought to prove, rigorously and quantitatively, the fundamental proposition of his critique of capitalism, which is that CAPITALISM RESTS ON THE EXPLOITATION OF THE WORKING CLASS.
But Marx's idea, ingenious as it is, proves not to be satisfactory, as we have seen, because it does not succeed in building his insight unambiguously into the formal structure of his theory. Every one of the propositions he advances concerning labor and labor value, many of which, as it turns out, are formally correct, can be replicated for any other input into production that is directly or indirectly required in all lines of production -- what Sraffa, in a different analytic context, calls Basic Commodities.
Now I am convinced that Marx's fundamental insight about capitalism is completely correct, so quite naturally, I am led to ask this question: Is there some other way of capturing Marx's insight in the formal structure of the equations that represent the determination of prices in a competitive capitalist market equilibrated by a system-wide rate of profit and a consistent system-wide set of relative prices? Because I was so powerfully impressed and persuaded by Marx's complex literary and sociological interpretation of what he calls the mystifications of capitalism [an interpretation that I analyzed at length in MONEYBAGS], I wondered whether the formal device by which we capture Marx's economic insight might also, somehow, build the irony and mystification into the equations, if indeed that is even imaginable, so that instead of two interpretations of CAPITAL, one economic and mathematical, the other literary and sociological, we would have a single integrated representation of the full complexity of Marx's thought.
Reflecting on this question for a while, I was led to the following train of thought. According to bourgeois ideology and economic theory, the market is a site of voluntary, uncoerced, mutually advantageous exchanges. The cobbler makes more pairs of shoes than he can wear, the farmer grows more wheat than he can eat. They meet in the market and agree to exchange shoes for wheat, to each one's benefit. Once money has replaced barter, the circulation of commodities is a bit more indirect, but no less free and uncoerced. The cobbler sells his shoes for money, and with his money buys wheat from a retail merchant, who in turn has bought the wheat from the farmer, who in her turn buys the cobbler's shoes from a stall in the marketplace. All of these purchases and sales are motivated solely by self-interest, and the only requirement, imposed fairly and universally, is that contracts for the purchase or sale of commodities be honored fully.
Like the cobbler, the farmer, the coal monger, and the clothier, bourgeois law and ideology would have it that the worker too is an independent entrepreneur who buys his raw materials in the market [food, clothing, shelter] in order to bring a commodity back into that market for sale. The worker's commodity is a service, not a physical object, but in that respect he is no different from the plumber or the electrician. Like them, and all other commodity producers, the worker enters freely into a contract for the sale of that service, a contract that is enforced impartially by the law.
By a long historical process of development leading to the full instantiation of capitalism, the worker has been freed from all legal and traditional constraints on the sale of his or her labor. The worker can go to whichever buyer offers the best price for the labor, anywhere that the law of the land reaches, be it London, Manchester, Liverpool, or Bath. Nor are there any constraints on what sort of labor the worker contracts to provide. She is free to work in a blacking factory, a cloth factory, a coal mine, or on a wheat farm. And she is entirely free to walk away from any place of employment for a higher wage or an easier job. It is this complete freedom of entry and exit that creates what we come to call a "labor market," precisely analogous in its functions to the market for coal, iron, or wheat.
The buyer too, the employer, is bound by no traditional obligations to a particular group of workers. He can hire them at will, and fire them the moment it is in his interest to do so, just as no law requires him to continue to buy coal from a coal monger if his furnaces have been banked or even allowed to cool because of a shortfall in demand in the market for his goods. If the worker, or the coal monger, or the tool and dye maker protests that he needs to sell his goods or services, the buyer, the entrepreneur, replies that that is none of his concern. They were not compelled to enter into a bargain with him, and inasmuch as he has paid for the goods and services for which he contracted, at the price he contracted to pay, his obligations have been met.
Now, the free movement of buyers and sellers throughout the entire national or international market over time produces a stable system of prices, so that a quarter of wheat or a ton of coal sells for no more, and no less, in one place than in another [taking account of transportation costs.] What prompts this movement is the ceaseless search on the part of all the producers for the highest possible rate of return on their invested capital. There are rigidities, of course -- once a cloth manufacturer has purchased his machinery and built his factory, he has some economic interest in continuing to make cloth, at least until he can extract his capital [by selling the factory to another entrepreneur and the machinery on the second-hand market, perhaps] and transfer it to a more profitable line of production. Capitalism, as a twentieth century economist would eventually observe, is a process of "creative destruction." [Joseph Schumpeter, for those who are wondering.]
Precisely at this point, as Marx is at great pains to make clear, the whole superstructure of liberal bourgeois philosophy and political theory and law is introduced to justify the treatment of labor power as a commodity. Workers are treated in law, in ideology, and in philosophy as small producers, petty entrepreneurs who bring their product, like any other capitalists, to the market and exchange it for the products of other capitalists' enterprises. Their fixed capital is their bodies, which, according to classical liberal philosophy and jurisprudence, they own. Their circulating capital is the fund they spend for food and clothing. Assuming that they live at the level of bare subsistence, the worker-capitalists are not likely to hire labor services (although they may be forced to go to a doctor from time to time). Hence, all their capital will be constant capital, none of it will be variable capital, to use Marx's terminology. Why are the workers unable to move their capital freely to sectors paying a higher rate of return? The simple answer, once more, is that their fixed capital is their bodies and their circulating capital is the food they eat to stay alive. A steel producer who finds the return in steel declining can, given a long enough period of time, cash in his investment and shift his capital to clothing, rental housing, or luxury appliances. The worker who notices the absence of any significant rate of return on her capital investment, and who, like any prudent capitalist, wishes to shift to a more profitable line, will find it necessary to separate herself ("alienate herself," to use the technical legal term) from her body. And by a quite unfortunate metaphysical accident -- which, however, can scarcely be blamed on capitalism itself -- she is unable to survive that particular liquidation of her investment.
It will be objected that workers are not really petty capitalists. Just so. But the objection entirely misses the point of Marx's analysis. The workers must be made to appear as petty capitalists, in law, in political philosophy, and in the formal theory of political economy. A political economy that fails to model the essential mystification and ideological self-deception of capitalist economic, political, and legal relationships will be an inadequate theory of capitalism. An adequate political economy must capture that feature as false, in order to be true to the reality and to the appearance of capitalism. We have here a very strange requirement indeed. We need a formal model of an ironic, dialectical relationship between appearance and reality. The trouble with other attempts to capture Marx's meaning is that they are either literary renderings, which preserve the irony and the intricate interrelation between appearance and reality, but without the formal structure that will allow us to calculate the magnitudes of the relevant variables; or else they are formal models, like the Sraffa model, that lose entirely the element of mystification and self-deception. If we agree with Marx that capitalism has its own mad logic, then we will search for a model that embodies both the logic and the madness of capitalism. I suggest that the correct way to begin this process is to treat the workers as though they were petty entrepreneurs, producers, producing a commodity -- labor power -- for the market, and then capture the inner madness of this way of thinking of them by stipulating that they, alone among all capitalists, are unable to shift their capital about from sector to sector.
To repeat, since this is a strange way of thinking, all of the entrepreneurs are ceaselessly searching for more profitable lines of production in which to invest their capital -- SAVE FOR ONE GROUP, THE WORKERS. The workers have what might, with full and deliberate ironic intent, be called a metaphysical problem. Their capital is not factories or mines or farms or money but their bodies. The inputs they must obtain to enable them to produce their labor services are the food, clothing, and shelter they need to continue to live. If the return on labor services sinks so low that the labor producer, the worker, barely makes enough to pay for her inputs, offering virtually no rate of profit whatsoever, the only way she can cash in her capital, so as to shift it to a more profitable investment, is -- to cash it in -- to die. She is trapped in her condition as provider of labor, and has no choice, if she would live, but to sell that labor in the market at whatever price she can get.
This is the bitter reality that lurks beneath the bourgeois ideological surface of equal uncoerced exchange. The status of the cloth manufacturer is precisely equal to that of the machine tools manufacturer. That is why they find it easy and natural to frequent the same clubs, buy homes in the same gated community, and send their children to the same public [i.e., private] schools. It is the structure of the underlying reality that explains the ever-increasing wealth of the entrepreneurs and the perpetual penury of the workers.
So I asked myself, how can I capture this complex situation, this contrast between surface appearance of equal exchange and underlying reality of relentless exploitation, in a system of equations that will express formally the bitter irony of construing workers as free and equal small commodity producers and at the same time yield a satisfactory account of the determination of equilibrium prices in an economy exhibiting a uniform rate of return on invested capital? The result of my ruminations was a revision of the corn/iron/tools model, which is readily generalizable to an economy with any finite number of sectors of production.
Tomorrow, I will set the revised model before you and discuss some of the conclusions we can draw from it [and from its generalization to any number of sectors of production].