Marx has now answered the question, Why are there profits in a capitalist economy? Profit is the money representation of the surplus labor extracted from the workers in the process of production, and then realized in the sphere of circulation, when the output is sold. Since I am trying to bring this tutorial to a close before the 2012 presidential election [ :) ], I am simply assuming that all of you are capable of going back to the equations of our little system and checking that the labor value of the physical surplus equals the surplus labor extracted in the system, and the price of the price of the physical surplus equals the total profit appropriated in the system. If anyone is having trouble doing that, speak up and I will spend a moment showing you how to do it.
It would seem natural, at this point, to move on to the second big question, which was left pending by Ricardo, namely, What happens in the general case when unequal organic composition of capital results in the deviation of prices from labor values? [This is, strictly speaking, the Transformation Problem.] But there is an enormous amount to be said before we get to that problem. Indeed, what remains to be said constitutes most of the content of Volume One of CAPITAL. So for the next several days, I will be rapidly summarizing the high points of Marx's brilliant socio-historical-anthropological-psychological analysis of capitalism.
Let us start with the little matter of the wage. Recall that in order to introduce the concept of surplus labor, and with it the central concept of surplus value, Marx [and we] must specify a real wage. A real wage, for those of you unfamiliar with the jargon of economists, is the actual market basket of goods and services that the worker buys with his or her money wage. For purposes of simplicity of exposition, we are assuming that all workers spend their money wages for the same market basket of goods. This is not a wildly implausible assumption in an economy, like that of mid-nineteenth century England, in which industrial workers are getting subsistence wages and living very near the edge.
Ricardo was powerfully influenced by Thomas Malthus, whose ESSAY ON THE PRINCIPLE OF POPULATION, first published in 1798, took the dismally pessimistic view that any increase in the well-being of workers would lead to an increase in population that would press against available food resources and drive the wage down to subsistence. A lowering of the wage below subsistence [as a result of desperate competition among unemployed men and women for scarce jobs] would simply cause a dying off of the starving, until the supply of labor had adjusted itself. Ricardo concluded that the wage would always be at subsistence level, leaving the entire annual physical surplus to be divided between entrepreneurs and landowners.
But in a move of profound theoretical significance, Ricardo argued that what constituted subsistence has a cultural, or historical, or habitual component. Here is the crucial passage from Chapter V of the PRINCIPLES, "Of Wages":
"It is not to be understood that the natural price of labour, estimated even in food and necessaries, is absolutely fixed and constant. It varies at different times in the same country, and very materially differs in different countries. It essentially depends on the habits and customs of the people. An English labourer would consider his wages under their natural rate, and too scanty to support a family, if they enabled him to purchase no other food than potatoes, and to live in no better habitation than a mud cabin; yet these moderate demands of nature are often deemed sufficient in countries where "man's life is cheap", and his wants easily satisfied. [n.b. Ricardo has in mind the Irish.] Many of the conveniences now enjoyed in an English cottage, would have been thought luxuries at an earlier period of our history."
In this brief but pregnant passage is encapsulated the entire history of the labor movement and the struggle for a living wage. At each stage in history, workers organize and strike for an improvement in their conditions -- enough money to buy meat once a week, enough money to have sugar for their tea, enough money to buy new clothing for their children when they go to school, enough money for indoor plumbing, for medical care, for a vacation once a year. Their employers condemn this demand for luxuries, and say that their workers are making demands that will drive them out of business. When the workers are successful, for a while they treat their improved conditions of life as a windfall. But eventually, they succeed in establishing that improvement as a component of their subsistence, as necessary to them. And then the struggle moves on. Always, they are demanding some portion of the annual surplus, and then redefining the concept of surplus so that it does not include that portion now allocated to them as wages.
Ricardo understood this, almost three hundred years ago, even if our modern economists do not. When General Motors reneges on its commitment to provide health care for its retired workers, it is redefining downward the market basket of goods and services that constitutes subsistence. When corporations outsource jobs, they are searching for a labor force that defines its subsistence wage more restrictedly, and so are willing to leave a larger share of the annual surplus to the capitalists. Everything I have just said can of course be said, in one way or another, in the language and conceptual framework of neo-classical economics. But Classical Political Economy makes these sorts of insights natural and immediate. It pushes them to the fore, so that anyone reading their writings sees them easily. That is one of the great strengths of the Classical school.
Marx understood everything that I have just attributed to Ricardo, but he went a very great deal further in analyzing the historical and institutional changes that are embodied in, and hidden beneath, Ricardo's laconic observations. Marx showed us that a long historical process is necessary to produce a standardization of produced goods that fits them for the role of "commodity' in a capitalist economy. A parallel process of de-skilling and regimentation is necessary before it makes any sense to speak, as we do in our little equations, of so and so many units of labor required for the production of one unit of corn or iron. Only when traditional craft labor has been destroyed, and replaced by industrial labor, are the units of labor plausibly interchangeable. Yet another process of routinization must take place in the processes of production, through the introduction of machines. All of these historical processes, interacting on one another, eventually bring about a state of affairs in which it is possible, meaningfully, to speak of quanta of "socially necessary labor" as embodied in standardized commodities.
One small point, among the scores that Marx makes so brilliantly, will perhaps help to explicate these remarks. Imagine, if you will, two workers employed in automobile assembly plants. John works in a Toyota plant; Mary works in a General Motors plant. They are both averagely efficient, work at the same speed, work on roughly comparable machines, and embody the same amount of labor each hour in the cars that they help to assemble. Now suppose that, thanks to the bumbling incompetence of a GM executive overseeing a product line OTHER than the one on which Mary works, the entire division that he oversees operates in a sub-standard manner, inefficiently producing sub-standard cars that GM cannot sell. This reduces the profitability of GM as a whole, of course. The net result is that Mary, whose work process has been entirely unaffected by the screw-up in the other division, ends up embodying LESS socially necessary labor in the cars she is assembling than does John, working for Toyota. Nothing has changed in Mary or John's behavior, but the logic of embodied labor calculations, based as they are on quanta of socially necessary labor, results in their generating and embodying quantities of Labor Value that diverge from one another. If Bob has the misfortune to be employed in a buggy whip factory, still being operated by a demented capitalist despite the total lack of demand for buggy whips, then Bob will, from a systemic perspective, embody no socially necessary labor at all in a product. He might just as well be digging holes and filling them up. It is for this, and other reasons, that Marx describes the commodity as "a very queer thing, abounding in metaphysical subtleties and theological niceties." [Once again, I urge you to read my little book, MONEYBAGS, where all of this is gone into at much greater length.]