Rate of Profit

Rate of profit is a term introduced by Marx in Volume III of Capital for the ratio of profit
to total capital invested in a given cycle of reproduction, or the proportion of value in any
given commodity which constitutes profit for the capitalist.
In bourgeois economics, rate of profit means the proportion of the total capital invested
accruing to the capitalist as profit per annum.
For a given period of circulation, or cycle of reproduction, the two definitions are
equivalent. The circulation time of capital is the time that elapses between a capitalist
making an initial investment and when the products are sold and the original capital plus
a profit are recovered. This cycle of reproduction is a major factor in the development of
capitalism, and much of Volume II of Capital is concerned with circulation of capital and
the problems of Realisation.
Keeping in mind the distinction between the Marxist and conventional uses of the term
rate of profit, the following issues are of importance.
Surplus Value and Profit
If a certain quantity of constant and variable capital are invested in a productive
process, then at the end of a cycle of reproduction these values will have renewed
themselves, but in addition, if the labour power of the employees has used to at least
the social average of usefulness, there will a surplus-value.
Marx expresses this symbolically: c + v -> c + v + s, where c is the constant capital, v
the variable capital (wages) and s is the surplus value, and the value of every product
can be seen as composed of these parts.
On the basis of this conception, the rate of profit for the individual capitalist who got into
the game of profiteering by investing (c + v) at the beginning of the cycle of
reproduction, makes a profit of s and therefore the rate of profit is s/(c + v). The
individual capitalist is unlikely to see this surplus value in its entirety however, for the
landlord, the state, the bank and everyone else will all demand a cut of this surplus: the
productive worker must maintain not only their own capitalist, but all manner of
hangers-on as well.
This rate of profit, s/(c + v), which is the ratio which affects the individual unit of capital,
is different from the rate of surplus value, s/v.
The rate of surplus value expresses the proportion of unpaid labour that workers donate
to the capitalist (s) over to the necessary labour time, v, that the workers spend
reproducing their own needs, and is paid as wages, or variable capital.
Tendency of Rate of Profit to Fall
Marx believed that there was an historic tendency for the rate of profit to fall as a result
of the growing socialisation and complexity of the labour process, and the growing
productivity of labour. Each capitalist employs less labour and spends more on
machinery and materials to produce the same value. Marx characterised this process as
an increasing organic composition of capital. Since employing workers is the only
source of profit, Marx believed that the rate of profit would fall.
The tendency of the rate of profit to fall, Marx believed is one of the main contributors to
the historic crisis of capitalism.
Formation of General Rate of Profit
All political economists have begun from the fact that a single, general rate of profit
applies in every industry across an economy, even though it fluctuates from year to year
and may achieve higher or lower levels in different countries. Marx differed in his
approach from all the political economists in that he began with the concepts of
necessary and surplus labour time, concepts which actually contradict the existence of
a general rate of profit, and only came to rate of profit later.
The formula for the rate of profit, (s/v)/(c/v + 1), leads to the result that the rate of profit
is higher in those industries where the organic composition of capital is lower, i.e.,
labour intensive industries. This contradicts the empirically given fact that the rate of
profit is constant across all industries. Marx had to explain how this phenomenon of the
general rate of profit comes about.
One of the achievements of bourgeois society is that capital provides the means by
which a greater or lesser proportion of the social labour may be devoted to this or that
task by a seemingly objective process, independently of the opinion of any individual,
via the Stock Exchange for example. The free movement of capital from one industry
to another is a vital part of the labour process in bourgeois society.
The movement of capital from one industry to another is driven by differing rates of
profit, which depends, among other things, on the organic composition of capital and
varies from industry to industry.
It is a simple question of supply and demand: if at any given moment, for whatever
reason, there is a super-profit to be made in a particular branch of industry, then capital
flows into that industry. Companies engaged in the given branch of industry may enjoy a
rise in the price of their stock, or capitalists in other industries may shift capital into the
new area. Workers employed in the given industry find themselves much in demand,
overtime is abundant and their wages rise, and more workers flood to work in the new
trade. The rush of capital into the newly profitable activity leads to an oversupply of
capital, the flood of workers to fill the shortfall eventually brings wages down again.
Overproduction of the commodity brings about a fall in its price, with the result that the
higher rate of profit which arose as a result of the lowering of the organic composition of
capital (e.g., cheaper materials) disappears and the average rate of profit is restored. A
recent example of this process has been seen in the boom in IT shares: the highest
rates of profit attract high wages and high investment, but once everyone and their dog
has set up in the IT business, over-inflated share prices crash, bankruptcies and
unemployment follow.
Rate of Profit vs. Rate of Surplus Value
Thus, a general rate of profit and a general rate of surplus value may coexist in a given
society, despite the fact that the two measures appear incompatible. The rate of surplus
value reflects the proportion of the total social product appropriated by the capitalist
class, and the rate of profit reflects the proportion of any given product appropriated by
an individual capitalist producer.

Rate of Surplus Value
The rate of surplus value is ratio of the surplus labour time, which the producing class
works without pay, to the necessary labour time, that they need to maintain their
standard of living.
Expressed algebraically, if v is the necessary labour time (or value of labour power),
and s is the surplus labour time, then the rate of surplus value is s/v.
Extending the surplus labour time is called absolute surplus value, while reducing the
necessary labour time is called Relative surplus labour.
The rate of surplus value reflects the overall rate of exploitation of labour in a given
society, and is distinct from the general rate of profit.
The rate of surplus value is a concept whose sense is not limited to capitalist
production. For example, a serf may be required to work for a certain number of days
per annum on land belonging to the nobility, making the proportion of surplus to
necessary labour-time quite explicit.

Surplus Value
Surplus-value is the social product which is over and above what is required for the
producers to live.
The measure of value is labour time, so surplus value is the accumulated product of the
unpaid labour time of the producers. In bourgeois society, surplus value is acquired by
the capitalist in the form of profit: the capitalist owns the means of production as Private
Property, so the workers have no choice but to sell their labour-power to the capitalists
in order to live. The capitalist then owns not only the means of production, and the
workers labour-power which he has bought to use in production, but the product as
well. After paying wages, the capitalist then becomes the owner of the surplus value,
over and above the value of the workers labour-power.
In all societies in which there is a division of labour, there is a social surplus; what is
different about bourgeois society is that surplus value takes the form of capital, and
surplus value is in fact the essence of production in capitalism. Only productive work,
i.e., work which creates surplus value, is supported. All unproductive labour is
eliminated.
The capitalists may increase the amount of surplus value extracted from the working
class by two means: (1) by absolute surplus value extending the working day as long
as possible, and (2) by relative surplus value by cutting wages.
Attempts by individual capitalists to increase their profits by introducing machinery or
speeding-up production by technique fail as soon as their competitors copy the new
technique and restore their market share. The end effect of these improvements in
production may be to increase the productivity of labour, but unless the rate of surplus
value is increased proportionately, the rate of profit will actually fall.
Having been accumulated as capital, surplus value must then be distributed to
landlords, bankers and other parasites, and expended via taxes on the various
expenses of maintaining the social fabic.

The Labor Theory
The "labor theory of value" -- the idea that the value of a thing is a function of the labor
expended in creating it -- was a tenet of the classical economists, especially David
Ricardo. It was Karl Marx, however, who most thoroughly developed the theory, and
made it influential. According to Marx, the value of a commodity tends to be the "amount
of labor time socially necessary" to produce it. This is most clearly seen in the mode of
production called capitalism, under which commodities are produced, by unskilled
laborers, for sale in the market. The laborers exchange their labor time for wages, and
the "capitalists" own both the means of production and the products.
What does "socially necessary" mean? It is defined as the amount of labor required to
produce a thing under the normal conditions of production at a given time. In the
capitalist mode of production, the "labor value" of a thing is made up of three parts:
Constant capital (the equipment and location needed) Variable capital (the workers'
wages) and Surplus value (the parasitical "cut" taken by the Capitalist class). All of the
items in turn that go into the category of Constant capital (commodities themselves,
such as a truck, a printing press or a factory) likewise have a labor value composed of
these three elements, as does every single part that comprises each capital good. (If
you think for a moment, youll realize the mind-bending complexity of these
calculations.)
Under capitalism, there exists at any given time a general rate of profit -- which is simply
an average of all the rates of profit in the various micro-markets. If the rate of profit in
the market for a certain commodity equals the general rate of profit, then the surplus
value of that commodity equals its profit to the capitalist, and its market price tends to
equal its labor value. Of course, some commodities bring higher- or lower-than-average
profits. In such cases, the commodity's labor value will not match its "price of
production" -- and comparing the two will be helpful to the economic planner (who will,
once capitalism is superseded, have to determine optimum production levels, without
the helpful feedback of prices).
According to Marxist analysis, capitalists invest in production in order to collect surplus
value. However, competition for market share will put a downward pressure on profits.
To keep their profits up, capitalists will have to reduce wages (which will, in turn, reduce
demand for commodities, leading to "overproduction" and depressions). The
deterioration of conditions for workers will inflame class antagonism and lead to
revolution. Then, the workers themselves, coming together to seize the means of
production, will use the efficiency of modern industrial production for their own benefit
(the "dictatorship of the proletariat").
The division of "labor value" into its three components gives us a glimpse of how a
socialist economy could ever hope to function efficiently. Surplus value is merely the
value of exploitation in a capitalist society; it is over and above the costs of Labor
(Variable capital), and Land + Capital (Constant capital). If -- according to Marxist
theory-- this exploitative surcharge were not imposed on the cost of every commodity
produced, there would be a vast fund available for raising wages, providing social
services, and "scientifically planning" an efficient socialist economy.
However, under the capitalist mode of production, decisions about "what?" "how many?"
and "for whom?" are made with the invaluable aid of the invisible hand of a (more or
less) free market. The market, though, is precisely what leads to surplus value and (to
Marxists) all the structural failings of capitalism. Under the next phase of history --
socialism -- allocation decisions would not be made by the "higgling of the market", but
by some form of objective planning. This is where the labor theory of value comes in
very handy.
If value is not inherent in the commodity, but is a subjective determination of the
buyer(s), then socialist "scientific planning" has no basis. For an efficient planned
economy to be possible at all, value must be inherent in things. If the amount of labor
embodied in a thing is a quantity that can be observed and measured, then it becomes
possible for "scientific planning" to achieve efficient production patterns.
Marxist theory, then, in its requirement that class struggle lead society past capitalism
into a socialistic mode of production, depends on a labor theory of value.
Contrary to popular belief, Marx does not base his LTV on what he dismisses as
"ascribing a supernatural creative power to labor", arguing in the Critique of the Gotha
Program that:
Here Marx is drawing a distinction between exchange value (which is the subject of the
LTV) and use value.
Marx uses the concept of "socially necessary abstract labor-time" to introduce a social
perspective distinct from his predecessors and neoclassical economics. Whereas most
economists start with the individual's perspective, Marx starts with the perspective of
society as a whole. "Social production" involves a complicated and interconnected
division of labor of a wide variety of people who depend on each other for their survival
and prosperity.
"Abstract" labor refers to a characteristic of commodity-producing labor that is shared by
all different kinds of heterogeneous (concrete) types of labor. That is, the concept
abstracts from the particular characteristics of all of the labor and is akin to average
labor.
"Socially necessary" labor refers to the quantity required to produce a commodity "in a
given state of society, under certain social average conditions or production, with a
given social average intensity, and average skill of the labour employed."
[32]
That is, the
value of a product is determined more by societal standards than by individual
conditions. This explains why technological breakthroughs lower the price of
commodities and put less advanced producers out of business. Finally, it is not labor
per se, which creates value, but labor power sold by free wage workers to capitalists.
Another distinction to be made is that between productive and unproductive labor. Only
wage workers of productive sectors of the economy produce value.
[33]

Exploitation
Marx uses his LTV to derive his theory of exploitation under capitalism.
Unlike Ricardo or the Ricardian socialists, Marx distinguishes between labor power and
labor. "Labor-power" is the potential or ability of workers to work, given their muscles,
brains, skills, and capacities. It is the promise of creating value possessed by human
labor that has not yet been expended. "Labor" is the actual activity of producing value.
The profit or surplus-value arises when workers do more labor than is necessary to pay
the cost of hiring their labor-power.
To explain the normality of exploitation, Marx describes Capitalism as having an
institutional framework in which a small minority (the capitalists) oligopolize the means
of production. The workers cannot survive except by working for capitalists, and the
state preserves this inequality of power. In normal role of force is structural, part of the
usual workings of the system. The reserve army of unemployed workers continually
threatens employed workers, pushing them to work hard to produce for the capitalists.
The Labor Theory of Value
This essay was first submitted to Economics 201-400, at the Community College of
Denver, on 6 Dec. 2010.
What determines what quantity of one thing will fetch some quantity of another
thing? Why is the price of a pair of ordinary shoes, a shirt, or a loaf of bread the same in
every store? Why should bread be 2.50aloafandshoes25 a pair and not vice-versa?
Philosophers since Aristotle have inquired into economic value and prices. Beginning
with Adam Smith and David Ricardo, economists have tried to understand the exchange
value of commodities in terms of the embodied human labor, the Labor Theory of Value.
Karl Marx improved the Labor Theory of Value, identifying the source of non-wage
factors in surplus labor, and making explicit the fundamentally statistical character of the
theory. There are issues with Marxs theory, however. The most serious issue, the
transformation problem, demonstrates that Marxs theory conflicts with the assumption
that capitalists will allocate their capital to achieve a uniform rate of return across all
industries, including those that produce both final and intermediate goods. The
transformation problem, however, itself requires assumptions that are at best suspect,
especially under global equilibrium conditions. While these issues render Marxs theory
insufficient to predict money prices in the short term, we can look at the Labor Theory of
Value in a paradigmatic sense, to make issues of political economy explicit and inform
normative economics.

Marx himself did not first propose the Labor Theory of Value. In The Wealth of
Nations, Adam Smith connects labor to price. According to Smith, The value of any
commodity, therefore, to the person who possesses it, and who means not to use or
consume it himself, but to exchange it for other commodities, is equal to the quantity of
labour which it enables him to purchase or command. Labour, therefore, is the real
measure of the exchangeable value of all commodities (par. 1). Although Smith
identifies labor as the source of value, he fails to identify the historical labor indirectly
embodied in commodities, such as the labor necessary to make a workers tools and
equipment. To Smith the exchange value of a commodity is the immediate labor saved
by the exchange; if buying a commodity will save one person two hours of labor, the
exchange value would be two hours of labor, or the equivalent in money. While a useful
approximation, the immediate exchange value becomes too imprecise and variable to
construct a quantitative theory.

David Ricardo performs a more thorough accounting in Principles of Political
Economy: The exchangeable value of the commodities produced [is] in proportion to
the labour bestowed on their production; not on their immediate production only, but on
all those implements or machines required to give effect to the particular labour to which
they were applied (par. 19). But Engels still observes that traditional economics fails to
give a satisfactory explanation for the distinction between wages and actual labor: If the
exchange value of an hour of labor is an hour of labor, then how can wages just the
value of labor in money form afford the owner of capital any opportunity for profit? If
wages are less than the actual value of labor, why are they less? How do we calculate
how much less?

In Capital, Karl Marx improves the Labor Theory of Value by formally separating
the notions of labor and labor power. Labor is the actual labor performed by a worker;
labor power is the cost to make that labor available, essentially the cost to feed, clothe,
house, and entertain the worker, as well as providing for the next generation of workers.
In any economy generating a surplus, the cost of labor power, i.e. the labor necessary
to feed a worker, will be less than the labor made available by that labor power. Wages
are therefore a function of labor power, but the exchange value of a commodity is a
function of the actual labor required to produce that commodity (ch. 6). We can
conclude then that the difference between labor and labor power, the surplus value of
labor, is the ultimate source of profit.

Marx also makes clear that the exchange value of a particular instance of a
commodity is not related to the total amount of labor embodied in that instance. Some
people might think that if the value of a commodity is determined by the quantity of
labour spent on it, the more idle and unskilful the labourer, the more valuable would his
commodity be, because more time would be required in its production (Capital pt. 1
ch. 1 par. 14). The exchange value is instead related to the socially necessary labor
embodied in the commodity as a class, which Marx clearly describes as a statistical
property: The individual unit of labor is the same as any other, so far as it has the
character of the average labour-power of society, and takes effect as such; that is, so
far as it requires for producing a commodity, no more time than is needed on an
average, no more than is socially necessary (Capital pt. 1 ch. 1 par. 14). For
example,

The introduction of power-looms into England probably reduced by one-half the labour
required to weave a given quantity of yarn into cloth. The hand-loom weavers, as a
matter of fact, continued to require the same time as before; but for all that, the product
of one hour of their labour represented after the change only half an hours social
labour, and consequently fell to one-half its former value. (Capital pt. 1 ch. 1 par. 14)

It is thus clear that the exchange value derives from some statistical property of the
actual labor embodied in all the instances of a commodity as a class.

Finally, Marx introduces the two distinct notions of abstract labor. The first notion
is human labor abstracted from the particular task a worker performs. Neither can [a
commodity] any longer be regarded as the product of the labour of the joiner, the
mason, the spinner, or of any other definite kind of productive labour. . . . All are
reduced to one and the same sort of labour, human labour in the abstract (Capital pt.
1 ch. 1 par. 10). But Marx also realizes that even in this sense of abstraction, not all
labor is created equal. One man is superior to another physically, or mentally, and
supplies more labor in the same time, or can labor for a longer time; and labor, to serve
as a measure, must be defined by its duration or intensity, otherwise it ceases to be a
standard of measurement (Gotha pt. 1). Environmental factors also affect intensity. It
seems obvious that ceteris paribus an hour doing physical labor standing in a sewer
would be more intense than an hour sitting in an air-conditioned office.

The Labor Theory of Value has considerable philosophical appeal. Smith and
Ricardo seem to treat other factors of production profit, rent and interest as sui
generis, having their own distinct character and contribution to exchange value
unrelated to human labor. While these factors contribute to immediate prices, it is
difficult to understand how mere ownership distinct from the administrative or
supervisory labor the capitalist, landlord or banker might perform can itself create
value in the same sense that labor creates value. In a society without a class structure,
without a distinct class or group of owners, the same competitive forces that equalize
prices would ensure that no individual as owner of the equipment, land or money he
used directly in his own production could say that the ownership by itself contributed
more than just his own labor to the exchange value of the product. All individuals have
to trade is their individual time and effort, either directly (I scratch your back; you
scratch mine) or indirectly by embodying their labor in commodities. The non-wage
factors of production would seem, philosophically, to be just social constructions to
allocate the surplus value of labor.

As philosophically appealing as Marxs Labor Theory of Value might be, it suffers
from considerable problems as a descriptive theory. A good descriptive theory,
especially a reductive theory, requires that the reduced elements be independently
determinable. Marxs Labor Theory of Value fails to the extent that it purports to reduce
the competitive market price of a commodity including labor power as a commodity
to any independently determinable quantity of embodied labor. In this sense the Labor
Theory of Value predicts that the market discovers the exchange value of a
commodity, the socially necessary abstract labor embodied in that commodity.
However, the market itself directly affects the socially necessary abstract labor
embodied in the commodity in a number of ways.

Unlike any other commodity, labor power is instantiated in human beings. A
shoe or a steel girder as a commodity has no preferences, needs or wants of its own; it
thus cannot object to being sold at cost. Human beings, on the other hand, do indeed
have preferences, needs and wants; they are strongly motivated to act on those
subjective properties. Hence the cost of labor power feels a force tending towards
disequilibrium not present in any other commodity. As Marx notes:

The number and extent of [the labourers] so-called necessary wants, as also the
modes of satisfying them, are themselves the product of historical development, and
depend therefore to a great extent on the degree of civilisation of a country, more
particularly on the conditions under which, and consequently on the habits and degree
of comfort in which, the class of free labourers has been formed. In contradistinction
therefore to the case of other commodities, there enters into the determination of the
value of labour-power a historical and moral element. (Capital pt. 2 ch. 6 par. 10)

Although Marx does go on to say, In a given country, at a given period, the average
quantity of the means of subsistence necessary for the labourer is practically known
(Capital pt. 2 ch. 6 par. 10), we cannot expect the price of labor power to move toward
equilibrium with the same alacrity as other commodities.

Another problem is that market prices do not just emerge from the socially
necessary abstract labor time embodied in a commodity; market forces directly affect
the labor embodied in a commodity. Marxs simplistic formulation, The labour-time
socially necessary is that required to produce an article under the normal conditions of
production (Capital pt. 1 ch. 1 par. 14), requires substantive revision. Even absent
non-wage factors, we see that a shift in just the demand curve, with no changes to
technology, individual efficiency, or any other specific characteristics of supply, still
changes the statistical properties of the cost of supply, and therefore changes the
socially necessary labor time necessary to supply the commodity. When demand falls,
the incentive is not to arbitrarily eliminate suppliers of a commodity, but rather to
eliminate the suppliers with the highest marginal cost. Similarly, when demand rises, we
do not add average suppliers; we must add new suppliers with a higher marginal cost.
Thus while the socially necessary labor time is still strictly meaningful regardless of
the demand, the marginal cost of supply at equilibrium and the average cost of supply
are real costs we cannot determine the socially necessary labor time independently of
market forces.

This characteristic means that the efficiency of labor, a component of abstract
labor, is also dependent on demand. The only way to compare efficiency across
different forms of labor is to compare an individual laborers productivity to the socially
necessary labor time for the commodity as a class. If the socially necessary labor time
for producing a widget is 10 hours, and a particular laborer can produce a widget in 8
hours, then her productivity is 10/8 x 100% = 125%. But if the socially necessary labor
time falls to 9 hours, then her productivity falls to 10/9 x 100% ~ 11% even though
nothing about the quality of her own work has changed.

Furthermore, while its intuitively appealing that the environmental conditions of some
labor can affect the intensity or desirability of the labor, it is difficult to independently
measure these factors quantitatively. Yes, working in a sewer might obviously be less
desirable than working in an air-conditioned office, but by how much? One tenth as
desirable? One half? Ten percent? We have to rely on market forces to quantify these
subjective factors. We cannot predict the market price based on the environmental
conditions; we must, rather, infer the environments effect from the market prices.

The transformation problem is perhaps the most serious problem affecting the Labor
Theory of Value. Succinctly, the capitalist mode of production consists of using the
production of commodities to convert money into commodities, and commodities into
more money. The capitalist wants to realize a profit on the total amount of money he
invests in an enterprise, regardless of what that money is spent on. If the surplus value
of labor is the only true source of profit, then the capitalist could realize a profit only
from the direct labor inputs to production; the surplus value of labor embodied in the rest
of the inputs, especially physical capital and intermediate goods, has already been
extracted by the suppliers of those inputs. Samuelson notes that Marxs Labor Theory of
Value predicts that profit should act like a value-added tax; the added value consists of
the surplus labor at each stage of production. But in the capitalist mode of production
profit actually acts like a turnover tax, where each stage of the production process
incurs a tax on the entire value transmitted, not just the value added. Samuelson
shows that these different ways of looking at profit result in different slopes for the wage
component of the production possibility frontier (p. 409). It is mathematically impossible
to model a constant turnover tax as a constant value-added tax; they might have the
same total cost, but their allocation cannot be transformed to individual industries. The
transformation problem alone thus decisively renders the Labor Theory of Value
insufficient as a short-run predictor of market prices in a capitalist economy.

It is not clear, however, that the transformation problem decisively rebuts the
fundamental premise of the Labor Theory of Value.

Wikipedia attempts an analysis of the transformation problem using the Deer-
Beaver-Arrow model, but the analysis has several flaws; it simply assumes a constant
rate of return on capital, with no deeper justification. A more careful analysis is required.

Let us first consider a very simple two-product economy, consisting of the
production of Deer and Beavers, each of which require only direct labor. We can
assume that all labor is homogenous: Any person may turn her hand equally effectively
to the production of Deer or Beavers, and she is free to do so. We can also assume that
supply curves are horizontal, perfectly elastic; the marginal cost remains constant and
demand determines only the quantity supplied. We can make these assumptions
without loss of generality: All the properties that complicate microeconomic analysis
comparative advantage, rising marginal cost of supply, land allocation affect the
equilibrium price, a real labor cost that (absent non-wage factors) determines the
socially necessary labor time for the production of a commodity. We can assume that to
reach some equilibrium, the individuals have made all available Pareto optimizations,
and we have settled on some definite socially necessary labor time necessary to meet
demand. It is clear in this case that the relative price of Deer and Beavers is the relative
socially necessary labor time embodied in their production. Changes in demand curves
will change only the relative quantities of Deer and Beaver produced at that relative
price.

To this model, we will add a capital good, Arrows, which make the production
of both Deer and Beavers more efficient. As a capital good, we might conjecture that
Arrows would earn a rate of return, over and above their labor cost. But where does this
rate of return come from? If we hold to our original assumption, that labor is
homogenous and each individual can freely allocate her labor, then a rate of return
implies that labor spent making Arrows returns more than labor spent hunting Deer and
Beavers, even using Arrows. In this case everyone will bid for the privilege of making
Arrows until each individual becomes indifferent to how she spends her time, implying a
zero rate of return over and above the labor cost. Far from disproving the Labor Theory
of Value, simple equilibrium analysis under free market assumptions seems to disprove
the capitalist mode of production!

Samuelson concludes from a more sophisticated analysis of the Labor Theory of
Value and the transformation problem that the Labor Theory of Value is essentially a
restatement of bourgeois money-based economics:

Although Capitals total findings need not have been developed in dependence on
Volume Is digression into surplus values, its essential insight does depend crucially on
comparison of the subsistence goods needed to produce and reproduce labor with what
the undiluted labor theory of value calculates to be the amount of goods producible for
all classes in view of the embodied labor requirements of the goods. The tools of
bourgeois analysis could have been used to discover and expound this notion of
exploitation if only those economists had been motivated to use the tools for this
purpose. (p. 422)

Even though the Labor Theory of Value fails as a short-term predictor of prices in a
growing capitalist economy, it does put at the forefront the fundamental dependence of
economics on the particular characteristics of labor and labor power. By making labor
central, the Labor Theory of Value actually does discover what Samuelson implies
traditional analysis could have discovered but did not. Taking a labor-centric view of
economics thus has significant implications for not only how economics affects our
political decision-making, but also how we should actually conduct economic analysis.

An important consequence of a labor-centric view of economics is that
profitability is not intrinsically good. Profit is not real; it is, rather, a disguised form of
surplus labor. To determine whether some profit is good, we have to look at where it
comes from and where it goes. Profit that comes from a real increase in labor
productivity is better than profit that comes from a reduction in the price of labor power.
Profit that goes to expanding our physical, human and technological capital is better
than profit that goes to the extravagant consumption of the capital-owning class. A
money-centric view of economics does not make clear the source, destination or
justification of profit; a labor-centric view puts these characteristics in plain sight.

Although labor power has unique historical and moral characteristics, it is still in
many important senses a commodity, one that workers exchange with capitalists in a
competitive market. As a commodity, labor power is subject to the same market forces
as any other commodity, forces that tend to move the price of any commodity to its
socially necessary cost. Thus we cannot count on the invisible hand to raise the price
of labor power and distribute the productivity of society to those who do the actual work;
raising the price of labor power if we choose to do so must therefore be a social
decision. In just the same sense allowing the invisible hand to lower the price of labor
power is just as much a social decision. Money-centric economics, however, allows us
to obscure the social nature of this decision, making it seem the outcome of inexorable
economic forces.

Finally, the Labor Theory of Value argues that the principal efforts of economists
should be turned to understanding and measuring the role of labor in the economy.
Statistics about the labor embedded in individual products, the labor available to the
economy as a whole, as well as the price of labor power should receive as much or
more attention as the Dow Jones Industrial Average and nominal Gross Domestic
Product. The Labor Theory of Value implies that every measurement of real economic
activity should be stated somehow in terms of labor and labor power. Indeed the Labor
Theory of Value suggests that money itself, i.e. nominal economic measurement,
should explicitly refer to some property of labor.

The tools are there; we need a shift in emphasis. In 1845, Marx wrote, The
philosophers have only interpreted the world, in various ways; the point is to change it
(Feuerbach). What we do not measure, we cannot optimize; what we do not discuss,
we cannot change. We must explicitly discuss and make central the role of labor and
labor power in our economy if we want to improve the conditions of the billions of people
who spend their time working.

The Theory of Alienation and How it Applies to Modern Society
The reality of alienation in the modern world is prevalent and can be seen everywhere.
Alienation simply stated means separation from that which is desired or desirable. It
floods the news channels and is seen in day to day life in our interactions with others.
But Karl Marx's slant on the idea comes from his understanding in the context of
capitalist modes of production for profit. It is this focus that allows us to see the source
of alienation in its true context in society and how all other forms of alienation are rooted
in this prime cause.
Marx identified the process of people finding useful things in nature and then taking
them as they were freely available and changing these resources to something of
greater use value by working on them to improve their usefulness. An example that
Marx used frequently, is the taking of raw resources like cotton, wool and hemp and
turning them into woven cloth. This was then taken and worked on to produce clothing.
Other examples are mining for raw ore and then turning this into cutlery, ships, cars and
railroads. Wood was cut from trees, converted into chips and lumber to make paper and
houses. Plant seeds were sown and mature plants harvested for food and animals kept
and raised for the same purpose. Some animals were trained to help in the production
process. As long as people were in direct contact with nature and created all that was
useful directly there from, there was no alienation. Everyone knew exactly where all that
was necessary and useful for life came from. They had to work well with each other in
order to survive. There was as a result, an awe and respect for nature and one another
that dominated their stories and even their architecture. Alienation has as its roots, the
production of surplus value that was over and above basic and immediate need.
Surplus value meant wealth and it became a commodity when some realized that it
could be used as exchange for something there was a shortage of. As surplus value
allowed for the emergence of specialization, succeeding generations lost touch with the
way things were done on the solid basis of material nature. Specialization in one
direction means that other knowledge and ways of doing things are forgotten over
successive generations and the specialist must depend on those who are still in contact
with that reality to support them. But they must offer something in value in exchange. No
one likes to work for someone else who contributes nothing; there must be some sort of
fair exchange as we all have the same basic needs to live.
The production of surplus value meant that some people could now be freed up for
other activities, such as defence against marauders, developing of the sciences such as
sky watching-astrology-astronomy, alchemy, and the forerunner of modern chemistry,
invention, engineering and all other activities that eventually wound up in the
contemporary, complex industrial societies in the modern world. These co-exist with
societies that are not as developed. The world's societies exist in a condition of
combined and unequal development. This leads to alienation between cultures and the
possibility exists for the unfolding of permanent revolution in less developed regions and
societies. The evolution of society away from subsistence living meant that changes in
the structure of society was inevitable. Marx was aware of this and described it in great
detail. He was also aware of how the toiler became alienated from nature and the very
thing he now works to produce. This has a lot to do with how the idea of money evolved
to act as a medium of exchange in the form of what he called a universal commodity.
The existence of a universal commodity meant the end of strict barter trading and made
trade more fluid and dynamic. Barter was often cumbersome and inconvenient, so
various items became the medium of the universal commodity. These were items like
wampum beads, gold, precious and semi-precious stones, cattle, art objects and the
like. As most of these had no real use value in of themselves, they became a tool-
medium of exchange to obtain the desired real values that were necessary for life. This
is how barter evolved in a qualitative leap. At the same time, one form of alienation
crept in as the producer of value was not necessarily the one who consumed or used it.
Another aspect of the theory of alienation is the separation of the means of production
from the ones who produce. This entailed a number of steps that ended in the
contemporary world. The principle idea behind this is the acquisition of the means of
production by an owner class, such as the aristocracy, a theocracy or the contemporary
bourgeois industrialist and bankers. In nature there is no such thing as ownership. If
anything is true, nature owns us and not we own nature. Somewhere in history and for
some causative reason, some societies decided to act as marauders to other societies
and appropriate what they had produced for themselves. Thus a question of ownership
developed. The foundation idea is that whatever a person works to create becomes
their property. They can then trade with others, or worse, have it taken by theft through
force. With the development of states in ancient times, wars of conquest were fought for
the means of production, whether land, fishing areas, mines, trees, slaves and so on.
The concept of money existed alongside of this and became a focus of attention. As
people were for one reason or another, removed from access to the means of
production, they became alienated. This alienation continued through history to the
present. Alienation became a real problem with the removal of the peasants from the
land within the multitude of kingdoms and principalities then existent in the world. Land
was expropriated for the purpose of growing cash crops for the landlords, prince, kings
and the courts. This burgeoning business of cash crops was assisted by money,
managed by emerging banks. Banks made loans with the idea that they would be paid
back with interest and/or a service fee for the use of the money to assist in
manufacturing expansion.
The landless peasants wound up in growing cities, where trade was done and
manufacturing was concentrated and developing. Now lacking everything except their
ability to labor, they were forced to work in order to survive and they worked for money,
the universal commodity that increasingly became a fetish of adoration due to its
seeming magical power to convert into anything else of use. Money of itself cannot be
eaten of worn, nor can it keep you sheltered on its own. For the most part, what was
produced in the manufacturing centers was a single commodity and the typical landless
labourer became alienated from what they produced. As they did not own the means of
production as given under royal or bankers entitlement by defined laws, this also
served to sever relations between the labourer and what was produced creating deeper
alienation. It also severed direct relations between the owner of the means of production
from the producer using those means but having no say in their use. Often they could
not afford what they produced from the wages they received. Various developments in
production beginning with the industrial revolution, assisted by the banks, allowed things
like mechanically enhanced production and the assembly line. These developments
constantly challenged those who laboured and there have been hundreds of years of
cycles between nearly full employment, engineering changes, over-production,
economic collapses, unemployment, re-education, employment and more changes and
so on in complex repeated cycles. Each round creates further alienation.
Laborers have been encouraged to accept script money as wages and as script money
is subject to devaluation and inflation, it becomes what is known as fictitious value,
where the real value part decreases and the fictitious part increases over time. Initially
script was backed by gold, but this "limitation" was removed. A classic example of
expanding fictitious value is the collapse of the Reich mark in pre WWII Germany,
where inflation was so intense that everyone had to have wheel barrows full of rapidly
devaluing script money to buy a single loaf of bread. It was so bad toward the end that
labor had to be paid every hour and then run out to spend it before it lost even more
value. Thus most of what they had was fictitious value as a billion fold more was
required to by the same items that cost a tiny fraction of the amount a year earlier. This
is one of the realities, triggered both by the Versailles Treaty and depression that
assisted Hitler into power. This devaluation was triggered by war reparation payments
for war damages to Europe from WWI under the Versailles treaty.
We live in a culture of consumerism where things like planned obsolescence, boring,
dirty, dangerous and underpaid work is the norm on a world scale. Our focus has been
turned almost totally to the acquisition of money and this no longer backed by traditional
value fetishes like gold. We live isolated from and alienated from nature. If we took
away the mega-cities, the massive production facilities, our power, transportation,
people for the most part would not know how to handle the new environment, which
would be what's left of a ruined nature. Pol Pot did something like this with disastrous
consequences for his people. He removed the whole population forcibly from the cities
for his agrarian reform. People who have been trained virtually from the cradle to
function in an industrial mega-city have little or no knowledge of agriculture, nature and
skills to deal with these new realities. When the specific job one does disappears, such
as going on now in the current cycle of economic collapse, the person who is thus
alienated from the now gone job has to retrain or relearn the old ways.
Alienation also exists in the form that many of us have highly specialized functions on
the assembly line and none can do the full job. To make a car requires a host of skills
that no person is capable of learning them all in a single life time. Further, the amount of
collected skills in each finished commodity prices it out of the immediate reach of most
labourers. They then turn to the banks who exploit this with loans and credit for houses
and cars, charged at interest. When the job is lost, the bank, that holds the legal title,
claims the house or car and keeps all the payments made to that point. This forms one
of the most prevalent forms of alienation of labor from what they make in modern
society. What we see now is lots filled with the over-production of mega-factories that
no one can afford to buy due to unemployment. Homes are lost to foreclosure and
labourers who struggled so hard to gain title lose the house and all payments to the
mortgage held by the bank and end up homeless. The bank then holds the empty
houses that bring in no income and become toxic assets. Governments have to
intervene to prevent further disaster, which often is not successful. Whole insurance
companies and banks have collapsed due to this. This is modern alienation on a mass
scale.
Banks and governments have another trick and that is to nationalize. The government
takes ownership until times are good enough again to allow privatization. This cycle
goes back and forth in lockstep to the health of the economy. In each round, the weaker
businesses are destroyed and the assets are taken over by the survivors. The alienated
laborer is left with the struggle for money, continual re-training, consumerism and the
distractions aplenty of the modern world. Alienation from nature, the means of
production, the product that is manufactured, from employment and by the atomization
of the work force by skill and shift work defines the modern state of alienation.
Karl Marx and His Theory of Alienation: How it Can Be Applied to Modern Society
According to Karl Marx, alienated labor is when you no longer see yourself in your labor.
He believed that in capitalism a worker was forced to work to live. However, in
communism a worker would live to work. The important differences are that the former
are wage earning slaves and the latter are free men. For example, David makes ten
hats and has to sell nine in order to sustain his existence on earth. On the other hand, in
communism Mike makes one hat and enjoys the fruits of his craft. Consequently, Marx
would claim that David is alienated from his labor, but Mike's hat would bring meaning to
his life. Marx's reasoning is that David creates nine extra hats to sell to others and it
adds nothing to the meaning of his life. Neither can be called an achievement of a labor
that results in an end in itself. Marx states, " -- for when the product, the object of labor,
pays for the labor itself, wages are only a necessary consequence of the alienation of
labor .In wages labor appears not as an end in itself but as the servant of wage"(67). In
contrast, Marx would claim that Mike would be achieving his life activity by his work.
Mike would be one with his work, therefore making his life activity into an object of will
and consciousness (Marx 63).
Marx is pointing to the fact that life is activity. Since work is an activity, if that activity is
obligatory in anyway a man is losing himself to that object. He believed a man's activity
should belong to himself otherwise it would result in self-alienation. As Marx states, " --
for what else is life but activity-as activity turned against him, independent of him, and
not belonging to him." For Marx, communism allows a man to realize his life activity.
Man will no longer be alienated from his labor because there will be no private property.
According to Marx, private property was a key factor that leads to alienation of labor and
an inability to be a species-being. A species being is a conscious being whose own life
is an object for him (Marx 63). Marx believed that communism would provide a human
being with the ability to perform activities that bring meaning to their life. In contrast,
capitalism causes a human being to sell himself which results in an existential crisis.
I believe that Marx's depiction of capitalism is correct. Life is like a chess game, you
need to make your next move your best move. What I mean by my previous statement
is that a man should try to do things that will improve who he is as a thinking being.
Aristotle once wrote that a human being's greatest degree of happiness could be
reached only by intellectual activity. It was by intellectual activity that was an end in itself
that could allow a man to be very happy. In capitalism, a species-being works for others
while exploiting his beings. However, it can be conceded that to work allows a man to
survive, but if a system was in place where he could live to work, his species-being
would be better achieved. The bible states, "That man shall not live by bred alone". This
means that there is more to life than just working to live. Life is determined by how you
live your life. Capitalism takes advantage of a man by making supply and demand the
determination of human being's life activity. For example, Bob made 30 dollars an hour
at his construction job.
However, as a result of a migration of illegal immigrants willing to work for lower pay,
the boss decided to lower his pay to ten dollars an hour. So because of capitalism, he
now earns less for the same amount of labor which is an exploitation of his labor. In
addition, many people are underemployed which means they are capable of doing more
fulfilling and intellectually challenging jobs. But because of the job market they have to
take a job below their ability. For example, Britney a hedge fund manger, is fired from
her job because of a recession. This results in Britney working at Starbucks becoming
underemployed which is a clear example of the exploitation of the capitalist system. As
species-beings, human beings have the right to perform activities that are for an end in
itself. John F. Kennedy stated, "Ask not what your country can do for you, but what you
can do for your country". Therefore, a man should not ask what work can do for him as
in wages, but what he can gain for himself by working as in achieving life activity that is
not alienated from him.