Economics Politics

Understanding Marx: A Basic Introduction to Marxist Economics

If we want to understand a Marxist analysis of capitalism, we have to go back to the beginning of human society and civilization.

Early human societies existed under subsistence-level conditions, with relative social equality and the absence of divided labor. The aim of human beings who lived in those societies was simply survival, producing the bare minimum needed to live and reproduce. As primitive societies began to evolve and develop, there emerged excess production, a “surplus product” of food. This allowed for some groups to diversify their contributions, and no longer participate in the production of agriculture (instead becoming nobles, warriors, priests, scribes, and so on- comprising a ruling class or classes). The emergence of the division of labor and social class in human societies was thus a natural result of the existence of “surplus product.”

There have been many variations of class stratification, since the beginning of civilization. The system of stratification that preceded capitalism was feudalism. In a feudal society, serfs would work the land (usually) six days a week. Three days were to provide food for the serf and his family. The other three days of production were for the lord of the manor (surplus product). For the first three days, the serf would be “compensated” with the food needed for his family to survive. For the last three days, the serf would not be compensated at all (the social surplus product being entirely for the sake of his lord). Hence, the surplus product was the result of “uncompensated” labor.


As feudal society developed, there emerged new processes at work, changing its social and economic fabric. The seeds of capitalism had their start, their origin in the slow death of feudalism: increasing commodity production and the increasing importance of exchange values. Marx delineates between two different kinds of value. In the subsistence societies referred to at the beginning, and under feudalism, the harvested agriculture made into food (as well as other necessities) possessed use-value or utility. Products made today also have use-value. Simply, products are made for a specific purpose. Even though all products have use-value, only commodities have exchange-value i.e. the amount at which one product trades for the amount of another product (usually expressed as a ratio).

There is only one property which relates all commodities to all other commodities, the amount of labor time used to produce each. For example, say it takes one group of workers on average an hour to make a keychain, and another group of workers three hours to make a bracelet. The exchange value between the two products could be expressed as 3 keychains to 1 bracelet. The average “socially necessary” amount of labor-time provides the means by which to compare commodities; it is the foundation of their exchange value. This, concept, widely believed by classical economists (though considered dubious and/or tautological by many of Marx’s modern detractors) is known as the “labor theory of value.”

Evidence for the labor theory of value comes directly from the historical records of feudal societies. During the middle ages, in Japan for example, village communities precisely measured work through an accounting system of labor hours. Japanese agriculture was cooperative in nature: a household would perform a certain amount of labor on their neighbor’s field, in exchange for the same amount of labor performed on their behalf by the neighboring household. At the end of the year, labor balances between households had to equal each other. Hence, a certain amount of labor time traded for a certain amount of labor time, allowing for commodity exchange.

In Europe, the labor theory of value is revealed by the transformation of surplus labor (the corvée) into rent-in-kind, and then into financial or money rent. Under the corvée, the peasant would give his lord his labor time (the three days mentioned previously) in order to produce surplus product. The corvée system transformed into a rent-in-kind system in which peasants would give up a fixed amount of agriculture rather than a fixed amount of labor time to their lords (livestock, grain, etc.). So that the lords did not lose their compensation through this transformation process, they tried to ensure the amount of labor-time contributed by the peasants remained consistent. The same concern applied with a transition from rent-in-kind to purely monetary compensation (though in the end, price changes would severely diminish and erode the power of the feudal class).

Evidence of the labor theory of value also comes from interactions between various trades and crafts within medieval Europe. Before the emergence of capitalism, it was a relatively easy process for an individual to “switch” between one occupation and another. For example, an ell of cloth would be traded for 10 lbs of butter (based on the equivalence between the average amounts of labor-time needed to produce each). If say, somehow the amount of labor-time needed to produce butter was reduced, it would become more advantageous for peasants to engage in butter production. Peasants would then “switch” to producing butter from producing cloth. As a capitalist system emerged, the increasing division of labor made it less and less possible for individuals to make these kinds of changes.

The feudal societies which measured labor-time were generally in a state of small-scale commodity production, meaning that peasants and artisans would bring their commodities to the market in order to receive monetary compensation (by selling) to acquire a good they considered to be more desirable. This relationship is referred to by Marx as “commodity-money-commodity” or C-M-C. But, alongside this primary relationship, another relationship emerged: merchants taking money to the market in order to purchase commodities and resell them for an even higher return– what Marx referred to as M-C-M’, M being capital and M’ being equal to M+m (with m being referred to as surplus value which I will define later). The emergence of capitalism out of small-scale commodity production occurred when capital penetrated into the sphere of production. In other words, when the M-C-M’ relationship and commodity production became central to the economic system, displacing the traditional feudal order, as well as the C-M-C relationship of exchange that existed along with it.

A number of factors brought about the decline of the feudal system and the emergence of capitalism: the separation of the producing class from the “means of production,” the monopolization of the means of production in the hands of a newly enriched “bourgeoisie,” and the emergence of a new exploited class (whom Marx refers to as the proletariat).

Under the feudal order, peasants and serfs, despite their legal obligations to provide unpaid labor to their lords, possessed land to call their own, land which allowed them to meet their basic needs. With the development of the enclosure movement and the severing of serfs from their land, those of the former feudal underclass moved en masse to urban areas, seeking work. Compelled to work in factories and industries owned by the bourgeoisie, not themselves. The bourgeoisie emerged with a centralized grip over the means of production due to technological development and an increasingly complex economy. Developing industry became increasingly costly for individuals without large pools of capital to purchase and own, removing the ability to own the means of production from most of the population. The peasants, now landless and compelled to sell their labor power to the bourgeoisie for survival, constituted a new exploited class, the proletariat.


Just as in the previous feudal system, those in the underclass of laborers had to work to fulfil their basic needs. For a portion of the working day, proletarians work to produce the “necessary product,” covering the cost of their wages. For another portion of the working day, proletarians work to produce “surplus product” for the capitalist, which in financial terms is referred to as surplus value.

In a capitalist system, the labor theory of value applies just as it does for an economy engaged in small-scale commodity production. Despite being obscured by prices, the concept of exchange value based on socially necessary labor-time is made evident by a number of proofs: analytical, logical, and proof by absurdity.

If one looks at the prices of commodities, they can be “boiled down” into their constituent parts: the amortization of fixed capital (like buildings and machines), the cost of labor (wages), the cost of natural resources, and some sort of markup for profit, rent (surplus value). The portion of the price of a commodity that is attributable to wages, as well as surplus value is directly tied back to labor. The value of amortization is also highly tied to labor (nearly 40 percent on average). If one looks at the cost of natural resources (say the mining of coal for instance), a large percentage (50-60 percent) is attributable to labor costs. If each constituent part is boiled down into even tinier parts, the percentage of price comprised by labor increases to where price is determined by labor alone.

The “logical” proof is perhaps the most abstract and is the one classically featured in Marx’s Das Kapital. Marx begins by comparing commodities, recognizing that qualities such as length, color, and shape are not held in common by commodities. Instead, the only value that is held in common between them is the human labor used to produce them, hence labor is what gives them their exchange value when they are sold on the market.

The final proof is proof by absurdity. Imagine for a moment that all of the production processes in a capitalist economy became fully automated. In a fully automated economy, could products still possess exchange value expressed in the form of a price? With what means would those without jobs purchase their products? Without an income produced by their labor power, it would be impossible for them to do so. Without a laboring class to consume, capitalists would be unable to accrue the surplus value that defines their standing as a class. Hence, a capitalist economy is contingent upon the value produced by labor power.

Now, that we are able to see that the labor theory of value still holds in a capitalist economy, we need to analyze what makes the capitalist system distinctive (besides its class distinctions), what drives the system, and what will ultimately (in Marx’s view) cause the system to become unstable and break down.

Competition is vital to the functioning of a capitalist economy. The basis of capitalist competition comes from the existence of an unlimited market for commodities and a multiplicity of decision-making centers (for investment, as well as production). Companies engaged in commodity production try to accrue for themselves greater surplus value against their competitors. Some companies, those who produce commodities at the average level of productivity, will receive an average level of surplus value in return. Companies that produce under the average level of productivity, waste social labor time and therefore will tend to receive a lower amount of surplus value than their competitors. Companies engaged in production that exceeds the average level of productivity, accrue what the Marxist economist Ernest Mandel refers to as “superprofits” for themselves. In other words, surplus value above the norm. Investment tends to flow to companies which have superprofits, those which exceed the average rate of profit.

In this way, the capitalist system tends to progress towards monopoly and centralization. Technologically advanced enterprises will out-compete and “gobble up” their inferior competition, leading to fewer and fewer enterprises engaged in commodity production. This is basic law of capitalist development. In the Communist Manifesto, Marx and Engels elegantly destroyed the notion that the capitalist system serves to preserve decentralized private ownership of the means of production. Instead, capitalism, through its development, destroys small enterprise and rewards the growth of increasingly larger and more powerful companies, companies which attain a greater and greater share of surplus value (leading to a “monopoly capitalist” economy). We can see this in a number of industries, particularly in the production of automobiles or even coal, where hundreds of companies in the late 19th century had consolidated to a handful by the late 20th century.

In its beginnings, capitalism had an opposite tendency to the one we now observe: the tendency towards increasing the multiplicity of centers of production, towards reducing the prices of commodities. During the commercial revolution of the 16th century, the development of an unlimited market for commodities, unfettered by guild regulations and laws of feudal society, allowed for commodities that had once been luxury items to come into the hands of ordinary people. The consistent reduction in value of products and rising productivity, allowed for an expansion of the capitalist system. But, this could not be sustained.

Here’s why. In a capitalist system, we can delineate between two kinds of capital: fixed or constant capital (machinery, buildings, and other items which allow for the bourgeoisie to increase their surplus value) and variable capital (labor, since labor is what allows the capitalists to have surplus value in the first place). We can represent constant capital with the letter C, and variable capital with the letter V. Constant capital is essentially embodied labor- it is representative (like any other commodity produced under capitalism) of the average amount of socially necessary labor time used to produce it. V is living labor. Living labor is used both to maintain the current capital stock (C), and to provide the source of value for surplus value as well as wages paid to the workers. All capitalist production can be represented by the expression of C+V+S.

The capitalist drive towards technological innovation, rewarding enterprises which perform above the social average, results in an increase in constant capital relative to the amount of variable capita. Therefore, in a capitalist system, we say that the organic composition of capital represented by C/V has a tendency to increase.

What does this mean? The only way in which capitalists can attain greater constant capital is by the capitalization of his or her surplus value. In other words, a capitalist engaged in some sort of commodity production (like the manufacture of automobiles) must sale those automobiles on the market, in order to receive the surplus value needed to purchase greater constant capital. The expansion of constant capital is therefore contingent upon the expansion of surplus value. And this process can only take place among those enterprises which attain “superprofits,” those with the ability to purchase greater capital- which become, due to competition, fewer and fewer in number (as stated previously).

If we want to know the average rate of profit for the economy as a whole, the simplest way to do so is to divide surplus value over constant and variable capital added together: S/(C+V), also known as the rate of surplus value or the rate of exploitation of the working class. Considering that there is a tendency for the organic composition of capital to increase, it would seem that over time, the rate of profit would fall. This can be counteracted with an increase in surplus value in the short-run, but since surplus value is contingent upon living labor, this cannot continue indefinitely. V has a theoretical limit of zero (if say the entire capitalist system was automated), while C has no limits. So, over time, there will be a tendency of the rate of profit to fall in capitalist economies. This tendency is what, in Marx’s view, would bring the capitalist system to full-blown crisis, giving an opportunity to its working-class to establish a system that replaced class antagonism (a socialist economy), or ending in the eventual ruin and degradation of both the proletarians and the bourgeoisie.


Capitalism is an economic system, which hell-bent on expansion and growth, has penetrated and enveloped the entire world, bringing about a greater socialization of nations, cultures, and production (all good things), but under the senseless reign of a smaller and smaller bourgeoisie whose rule faces a fatal contradiction, a contradiction which they have tried to suppress. Working people across the world continue to put up with senseless crises of overproduction: goods unable to find buyers on markets result in slumps or recessions, placing millions out of work, and forcing millions to starve and suffer in the face of abundance. This is why those of us who understand its contradictions and its unjust foundations must work towards the development of a socialist society in which class struggle is no more, where surplus product becomes the rightful property of those who produce it and depend upon it, not the bourgeoisie or capitalist class.


To the reader:

I am highly indebted to Ernest Mandel’s work, An Introduction to Marxist Economic Theory for this very condensed, short, (and probably inadequate) introduction of my own. Many of the examples and terminology have been taken straight from his work. I wish to give credit where credit is due.

This is the end of “Understanding Marx.” Hopefully this has given you a rough and rudimentary understanding of a Marxist analysis of capitalism. It is by no means a complete and thorough analysis of capitalism, especially in regards to modern monopoly capitalism, the role of the state, imperialism and colonialism, trade unions and the welfare state, etc. My second piece will be entitled “Neocapitalism and Neoliberalism” and I hope to address many of these issues in it, along with my own personal view of what can be expected or surmised from a synthesis of the insights of modern monetary theory and Marxist economics. Thanks for taking the time to read, and please give me feedback!