The Thought of Karl Marx

Part One
Today I launch what will undoubtedly be a many part tutorial on the thought of Karl
Marx. Since there may only be a handful of folks out there who actually want to read such a
tutorial, I will intersperse these segments on my blog with my usual commentary on the passing
scene. If anyone wishes to take this tutorial really seriously and supplement it with readings, let
me begin with a few suggestions. The most important thing, of course, is to read Marx himself.
The essential texts are The Economic-Philosophic Manuscripts of 1844, The Communist
Manifesto, and Volume One of CAPITAL. Among the early works, Part One of THE GERMAN
IDEOLOGY is also useful. Serious students will want to read all of CAPITAL -- the three
volumes, plus the so-called "fourth volume" -- the three volumes of THEORIES OF SURPLUS
VALUE -- but as that comes to five thousand pages of discussion of economics, I will understand
if you give it a pass.
This will be a tutorial on the thought of Karl Marx, not on Marxism, as it has come to be
called. There will be no discussion of Lenin, Stalin, Mao, Max Schachtman, Rosa Luxembourg,
the First, Second, Third, or Fourth Internationals, or even of the Sunnyside Progressive School,
which I attended until age six. If there is anyone for whom this multi-part tutorial is not enough
Wolff, there are always my two books on Marx: UNDERSTANDING MARX and
MONEYBAGS MUST BE SO LUCKY. Some years ago, Jerrold Siegel, a Professor at
Princeton, published a magnificent biography of Marx called MARX'S FATE. I recommend it
most warmly.
So, enough throat clearing. Let us begin.
Marx was born in 1818, in a small town near what is now the border of Luxembourg.
Although he came from a long line of rabbis, his father had made a pro forma conversion to
Christianity so that he could pursue his career as a lawyer. Marx was a brilliant student, and his

parents had great hopes for him, perhaps as a professor. At seventeen he went off to university,
studying first at Bonn [if my memory serves me -- I am doing this from memory, rather than
spending time checking things in books] and then at Berlin. He earned a doctorate in philosophy
with a dissertation on the ancient Greek atomists. I have actually read Marx's doctoral
dissertation, and you can trust me that it is not the very first thing by Marx you would want to
read. Its significance for his later development is that it dealt with philosophers who espoused
materialism, not -- as was then the philosophical rage in German speaking Europe -- idealism.
To understand Marx's life and thought, it is essential to call to mind, at least in its broad
outlines, what was happening in Europe when Marx was growing up. There were two great
upheavals underway, both of which had a profound effect on Marx, and, indeed, on every other
important thinker of that time. The first was the political upheaval triggered in the late
eighteenth century by the overthrow of the ancien regime in France, and then by the series of
military and political revolutions that were carried across Central and Southern Europe by
Napoleon's armies.
It is difficult for us, at this remove, to appreciate just how deeply the French Revolution
shook the European world. France was the wealthiest and most powerful nation in Europe. The
court at Versailles was the wonder of the European world, its wealth and elegance the model for
every lesser ruler, from Prussia to Russia. Continental Europe had not been much troubled by
the overthrow and eventual restoration of the Stuarts in England a century earlier, but when the
head of Europe's most powerful monarch fell into a basket, people took notice.
Napoleon's brief conquests broke up the old Hapsburg Empire and set free cultural and
political forces that transformed Central Europe. One can see the effects in the music of Chopin
and Liszt, and even in the collection of folk tales in local languages assembled by the Brothers
Grimm. Politically, Europe was aflame. In 1830, when Marx was a boy of twelve, the Paris
Commune brought the existing monarchy to an end, and though a new monarchy was quickly

installed, the lesson of those three glorious days was that direct action in the streets by the
common people could have dramatic revolutionary effects.
All of this must be kept in mind when one reads THE COMMUNIST MANIFESTO,
written by Marx in 1848 shortly before another round of political upheavals. The optimism
Marx exhibits in that early work is a direct consequence of the lessons of the previous sixty
years. If the Old Regime in France could be toppled, if the Hapsburg Empire could be shattered,
if street riots could bring down kings, how unreasonable was it to suppose that dedicated
communists could bring into existence the next stage of history?
The second great upheaval was less dramatic, but Marx eventually concluded that it was
much more important, and indeed was the cause of the political transformations -- I refer, of
course, to the explosive rise and expansion of capitalism. Unlike the political revolutions, this
transformation matured first in England. Even France, whose highly developed and rationalized
economy was still largely agricultural, did not experience the capitalist transformation as early as
did England, and in the part of Europe in which Marx was growing up, the economy was still for
the most part in a late feudal stage of development.
Marx devoted his life to analyzing capitalism, and we shall have a great deal to say, later
on, about his insights and conclusions. In these opening remarks, I want to deal, as it were, with
surfaces, appearances, rather than with the underlying structure of the economy. There were four
or five ways in which capitalism thrust itself into the consciousness of social observers both in
England and, somewhat later, on the continent. First of all, there was an explosion of output.
Goods were spewed from the new factories in astonishing quantities. In his great work, THE
CONDITION OF THE WORKING-CLASS IN ENGLAND IN 1844, Friedrich Engels, Marx's
lifelong collaborator and friend, describes the shop windows filled with goods, like a great
cornucopia overflowing with the bounties of industry. Marx chooses to begin the very first
paragraph of CAPITAL by saying, "The wealth of those societies in which the capitalist mode of

production prevails, presents itself as 'an immense accumulation of commodities.'" [He is

quoting himself here from an earlier work.] This sudden expansion of the scope of output
worked profound changes in English, and later in continental, society.
The second striking consequence of the advent of capitalism was the phenomenon of the
"new men," factory owners who had begun life in modest circumstances as apprentices or
journeymen, and made money so rapidly that in their own lifetimes they were able to marry their
daughters off to impecunious aristocrats or buy themselves titles. European society was
accustomed to enormous disparities in wealth, but rich families and individuals by and large
derived their wealth from ownership of land, which had been inherited from previous
generations. There were, of course, times of great trouble in the history of Europe when fighting
men, by force of arms, seized great estates and catapulted themselves into the ranks of the
nobles, but the newly wealthy capitalists were not buccaneers, aggrandizing themselves at the
point of a sword. Indeed, it really was not clear how they were able to become so rich so fast.
The third great change in English society was the transformation of cities. Huge slums
sprouted up, inhabited by landless, propertyless people whose sole source of food and shelter
was day labor in the new factories. Many of these were former peasants, driven off the land by
country squires who enclosed their land and turned it into sheep pastures to feed the new cloth
factories' demand for wool.
The fourth great change was the erosion of the traditional authority and position of the
landed aristocracy and the clergy. This is a complex story going back to the late Middle Ages,
and it would take too long even to sketch here. Suffice it to say that capitalism truly was, as
Marx was among the first to observe, the most revolutionary force ever let loose upon society.
Finally, it is worth mentioning that among the byproducts of the explosive growth of
capitalism was the emergence, in the late eighteenth and early nineteenth centuries, of a large,
literate class of businessmen, merchants, and their families, who became not only a market for

the novel, as literary historians have noted, but also a powerful class demanding a real voice in
the affairs of government, and prepared to call into question the traditional authority of king,
noble, and cleric.
All of this was taking place as the young Karl Marx went off to university in 1835.
Tomorrow, we shall have to talk about what he found when he got there.

Part Two
As one might expect, the young Marx was powerfully shaped by the intellectual climate
of the German university world in which he found himself. The leading influence was the
German idealist philosopher Georg Hegel. Even though Hegel had died in '31, four years before
Marx first went off to university, his thought remained the framework within which everyone,
acolyte and critic, functioned. Hegel had been a deeply conservative political thinker, viewing
the Prussian state as the high point and fulfillment of the onward march of Reason in History, but
there was a rebel group of young men who featured themselves Left Hegelians, and Marx very
quickly became an important part of that informal circle. The intellectual world was in as much
of a ferment as the political and economic spheres. In 1835, David Strauss published his LIFE
OF JESUS, which created a storm of protest and controversy. What Strauss did was to bring to
bear on the Gospels the new techniques of textual interpretation and historiography then being
developed by German scholars, concluding that the accounts of the miracles were mythological
and could not be treated as reports of genuine events. Six years later, as Marx was completing
his doctoral dissertation, Ludwig Feuerbach stunned the philosophical and theological world
with his ESSENCE OF CHRISTIANITY, in which he argued that the standard Christian account
of Man as having been created in the image of God was exactly backwards. Man, he said, had
created God in his own image, taking the best characteristics of human beings -- their power of
reason, their capacity for benevolence, etc. -- and, by raising these human characteristics to the

highest conceivable level, had forged a conception of an omniscient, omnipotent, benevolent

deity.
This was heady stuff, and Marx was not alone in thinking that the world of ideas was
undergoing a revolution quite as dramatic as that taking place in the palaces of government and
the cathedrals of religion.
Faithful readers of this blog will know that I do not like Hegel's philosophy, but there is
no denying its profound influence on every branch of intellectual activity in the nineteenth
century. Marx took over from Hegel the structure or framework within which he conceptualized
the stages of economic development -- indeed even the very notion of stages of development
came from Hegel. In order to lay the groundwork for my later exposition of what Marx and
Engels eventually named Historical Materialism, therefore, I must spend some time
summarizing, or sketching the outlines, of Hegel's rather powerful idea. [Yesterday evening I
watched Rachel Maddow interviewing a Republican operative, and the generosity and good
spirit with which she treated this man, with whom, as she observed, she had virtually no
agreement on any matter of politics, set an example for me. So I shall acknowledge Hegel's
importance, and the originality and usefulness of his ideas, for all that I do not like him. As they
say in the self-help world, I am trying to be a better person. :) ]
What Hegel did, if I can put it this way, was to immanentize and secularize the Christian
story. The Christian story, in its outlines, recounts the succession of metaphysical or theological
stages through which human beings move on their way from the beginning to the end of history.
History begins with the Creation, which includes the creation of Man in the Garden of Eden.
The second stage begins with The Fall, which results in mortality and the expulsion from Eden.
The third stage commences with God's compact with Abraham, repeated and deepened by the
renewal of the compact [or Testament] with Noah and Moses. God gives to Man His Law, in the
form of the Ten Commandments and their elaboration, and promises that if Man will keep this

Law, God will make him to multiply and flourish. The entire period of the Old Testament is the
period of The Law. But man repeatedly shows that he cannot keep God's Law, which, since it is
eternal and divine law, must be obeyed to the last jot and tittle if at all. So God in His infinite
mercy makes The Law flesh in the Person of His only begotten son, Jesus Christ. With the
Incarnation there begins a new metaphysical stage in the history of Man, the stage of the Word
Made Flesh. Jesus offers Man salvation if he will but have faith, which is to say believe in the
truth of this Divine Promise. But this too is impossible for Man, so God confers upon some men,
despite their not deserving or having earned it, the ability to have Faith, which is to say Grace.
Jesus promises to return from beyond the grave, at which time the Final Judgment will determine
who is saved and who damned. And Time itself will end.
The crucial point to note here -- and this will, I promise, become central to Marx's
Historical Materialism -- is that the relationship of Man to God is absolutely different from one
stage of history to the next. Old Testament farmers may cultivate their crops and tend their sheep
in much the same way as New Testament farmers; Kings of Israel may resemble Medieval kings
in their styles of rulership. Hence, early modern painters will portray the characters of the Old
Testament as wearing clothing appropriate to sixteenth century Holland. But none of that matters
at all. All that is important is whether one lives before or after the Fall; whether one lives under
the Law or after the Law has been made Flesh. Everything is to be understood theologically, not
sociologically or anthropologically.
What on earth does this have to do with capitalism and communism? Everything, as it
turns out. The logical structure of the Christian story is this: A sequence of stages, each one
utterly different from the others by virtue of its unique relation to God and His Law. The
Creation, the Fall, the Old Testament, the Incarnation, the Crucifixion, the Resurrection, the Last
Judgment, and the End of Time are defined by that relationship. There is, notice, no other order

in which these stages could possibly occur. Nor is it possible to skip a stage [begin to sound
familiar?]
Hegel took this story and translated it into a story about the unfolding in history of Geist
or Spirit. Each of the stages of human history, in his account, was defined by the degree to
which reason had unfolded itself and embodied itself in thought and society. And each stage of
human history could be understood as the unfolding throughout a society of this stage of
Reason's coming to know itself. [I have no idea what that means, so let us move on.] Thus, an
entire society could be seen as the expression, or embodiment, of a unified Idea -- the Classical
era, the Medieval era, the Baroque era, the Romantic era. Hegel taught us to see the painting,
architecture, sculpture, politics, even the styles of personality, as expressions of the same style or
form or Idea. Thus, when Jacob Burckhardt wrote, in his classic work, THE CIVILIZATION OF
THE RENAISSANCE IN ITALY, of "the Renaissance man" whose individuality extended even
to his designing his own distinctive mode of dress, he was drawing on an idea that had originated
in Christian eschatology and had been secularized and generalized by Hegel.
Very early in his intellectual development, the young Marx had the brilliant, though
rather simple-minded, idea of inverting Hegel's story [inversion is another of Hegel's favorite
categories]. Instead of construing the material elements of human life -- the wresting of a living
from nature -- as reflections of, or embodiments of, one stage in the unfolding of the Idea, Marx
undertook to construe the art, law, politics, and religion of each stage of social evolution as
reflections of the way in which human beings get their food, clothing, and shelter. This is the
sense in which Marx considered himself a Materialist rather than an Idealist. Marx retained
Hegel's secular Christian notion of stages of history, and he kept too the notion that the
succession of stages was necessitated, not random.
At first, when Marx really knew very little about the actual development and functioning
of a capitalist economy, he seized on Adam Smith's seminal idea of the Division of Labor and

with a great rhetorical and logical flourish made that the key to the succession of stages of
history. The nice thing about division of labor is that if one does not think too deeply about it, it
seems to be a unidimensional measure with natural endpoints. One starts with a society in which
there is no division of labor. Everyone simply gets a living from nature as best as he or she can.
This stage Marx calls Primitive Communism. With each major step forward in the division of
labor, one moves on to a new stage in history. Relying on his knowledge of European history [no
one in Europe knew much about any other history at that point], and passing rather lightly over
the exact ways in which division of labor advances, Marx then identified Slave Economies,
Feudal Economies, Capitalist Economies, Socialist Economies, and Communist Economies as
the necessary forms of the progressive further division of labor. Just as the starting point is
Primitive Communism, in which there is no division of labor, so the end of history [but not of
human existence] is Communism, in which the division of labor has been carried to so complete
an unfolding that no one is bound to a particular form of work. In one of his most famous
pronouncements, Marx wrote: . ." as soon as the distribution of labour comes into being, each
man has a particular, exclusive sphere of activity, which is forced upon him and from which he
cannot escape. He is a hunter, a fisherman, a shepherd, or a critical critic, and must remain so if
he does not want to lose his means of livelihood; while in communist society, where nobody has
one exclusive sphere of activity but each can become accomplished in any branch he wishes,
society regulates the general production and thus makes it possible for me to do one thing today
and another tomorrow, to hunt in the morning, fish in the afternoon, rear cattle in the evening,
criticise after dinner, just as I have a mind, without ever becoming hunter, fisherman, shepherd or
critic."
This passage has been much quoted and commented upon, but almost nobody notices that
Marx clearly meant it as a joke. The "critical critics" were a small group of Marx's fellow Left

Hegelians, led by the Bauer brothers, Bruno and Edger. Marx thought they were pompous
airheads, and he and Engels excoriated them in their very early work, THE HOLY FAMILY,
written in 1844 when Marx was twenty-six.
But be that as it may, Marx built Hegel's notion of stages of social development into the
theory of economic development that he called Historical Materialism. We shall have a good
deal to say about it a bit later on.
Next part: The Economic-Philosophic Manuscripts of 1844.

Part Three
Marx became involved in the founding and editing of a new journal [the RHEINSICHE
ZEITUNG], got himself bounced out of Prussia by the police for his troubles, and by 1844 was
living in Paris [there is a lot of history here that I am sliding over, since it would be tedious to
recount it. Check Wikipedia or Siegel's biography if you want to know the details]. He was by
this time connected with Engels, an association that would last until his death in 1883. It was in
Paris that the two of them wrote both THE HOLY FAMILY and THE GERMAN IDEOLOGY, in
which, among other things, they settled scores with the Bauers, Feuerbach, and other German
thinkers very close to them in political and philosophical orientation. But for our purposes, the
most important of Marx's many writings from the period was a curious document that did not see
the light of day until eighty years later -- the working or study notes usually labeled THE
ECONOMIC-PHILOSOPHIC MANUSCRIPTS OF 1844 but also sometimes referred to as the
Paris Manuscripts. These notes were in the form of a lengthy document in which Marx worked
out ideas that he was puzzling over having to do with the economic organization of society.
What he did was to draw vertical lines dividing each page into three columns, which were
headed Land, Labor, and Capital, the three fundamental categories of the Classical Political
Economy of Adam Smith, David Ricardo, and their lesser fellow economists. The column that
has, quite deservedly, drawn most of the attention is the one labeled "Labor." The long series of

paragraphs that Marx inscribed in this column have come to be referred to as "Alienated Labor,"
and they constitute the fullest and most carefully thought out discussion of this topic that Marx
ever wrote.
I have a good deal to say about Marx's theory of alienated labor, but before I begin, I
want to take just a moment to explain why this document became so politically important in the
20th century, more than a hundred years after it was written. Briefly [and, inevitably,
tendentiously], Lenin and Stalin and the Russian revolutionaries hijacked Marx's theories and
used them as the justification for a brutal and dictatorial State Capitalism that they instituted in
the Soviet Union. The sheer geopolitical success of the Soviet regime, both before and during
the Second World War, all but stifled the objection that this was not at all what Marx had had in
mind when he talked about socialism or communism. Marx's writings were elevated to the status
of Revealed Truths, and were taught in Russian schools in roughly the way that the Koran is now
taught in Madrassas. So rigid and doctrinaire was the slavish adherence to the supposed
doctrines of Marx that when the young Wassily Leontief approached the state economic planners
with his newly conceived mathematical system of Linear Programming, which he thought
[correctly] would be of use to them in planning the Soviet economy, he was told that Stalin
himself had decreed that since Marx only used addition, subtraction, multiplication, division, and
the taking of averages, the Soviet Union's economy was to be planned using nothing more.
Leontief emigrated to the United States and spent the rest of his career teaching at Harvard,
eventually winning the Nobel Prize. One of the delicious intellectual ironies of this subject is
that Leontief's mathematical methods became the means by which scores of modern economists
demonstrated the fundamental mathematical coherence of the theories that Marx set forth in
CAPITAL [I have already written about this on my blog, and will not repeat myself].

During the Second World War, the Yugoslav partisans, led by Marshal Tito, succeeded in
driving the Germans out of their lands without the help of the Red Army, with the result that in
the post-war period, the newly formed Yugoslavia was able to maintain a quasi-independence. A
number of Yugoslav philosophers and political theorists were eager to find some way of
embracing Marx's theories without toeing the Stalinist line. Casting about for writings by Marx
on which they could erect an independent, humanist Marxism, they came upon the Paris
Manuscripts, which had first been published in Russia in the 20s, but had then been all but
ignored by the Stalinist theoreticians. In the writings of the Young Marx, they heard a voice that
called to them and inspired them. To justify their concentration on these juvenalia, they
developed the theory of a "break' between the young Marx and the mature Marx. I will argue a
bit later on that there is in fact no such break as they claimed to discover. There is, actually, a
break or fundamental reversal in Marx's thinking, and it is important enough so that I shall spend
some time talking about it. But it does not have to do with alienated labor.
Well, let us at last turn to the teaching of the essay on alienated labor, and see what we
can learn from it. I shall begin, perhaps surprisingly, by talking about the Romantic conception
of artistic creativity. The painters, sculptors, poets, and composers of the medieval and classical
period were thought of as artisans, skilled craftsmen who worked for patrons or for entire
communities, decorating castles or churches and memorializing military victories and the
marriages of princes. But a different conception of artistic creativity emerged in the early
nineteenth century period that we now call the Romantic era. Artists began to be thought of -and to think of themselves -- as lonely creators, inspired by their muses to tear works of great art
bleeding from their breasts [think Beethoven rather than Bach.] Thus understood, the act of
artistic creation has the following structure: First, the artist is inspired to form an idea in his or
her mind, an idea of a sculpture, a painting, a poem, a sonata, an idea of beauty. Then, by

exercising great skill with chisel and mallet, with canvas and brush, or with pen, the artist makes
the idea real, externalizes it, embodies it in some medium, thereby producing the work of art.
This self-externalization [or selbstentausserung -- it always sounds better in German]
may be achieved with great effort, leaving the artist exhausted, spent, drenched in sweat. Or it
may be accomplished with blinding speed and seemingly little or no effort at all. But in either
case, the completion of the act is, for the artist, a moment of triumph and fulfillment. The Idea
has truly been made Flesh. The labor is a fulfilling labor, the fatigue a good fatigue. There it
stands, on the page, or on the canvas, or on the podium -- what had begun as an idea in the
artist's mind is realized, made real, before him or her. And the work of art is now available to all
of us to see, to hear, to read, to experience and enjoy. Even those of us incapable of the act of
creation can derive great enjoyment from the work, and even inspiration.
But this act of creation has a dark side, a negative dimension, for what originally
completely and indisputably belonged to the artist alone, as an idea in mind, now takes on a life
of its own. The artist ages, but the work of art does not [think THE PICTURE OF DORIAN
GRAY]. At the moment of creation, the object, the embodied idea, belongs to the artist, but it
may -- indeed, it most probably will -- be sold, to someone whose intentions and appreciation
may be antithetical to those of the artist. There is no way that the artist can control how the
public experiences the work of art, what the experts choose to say about it, what uses it may be
put to, whether for the greater glory of a God whom the artist does not worship, a State to which
the artist owes no allegiance, or a collector for whose vulgar tastes the artist has only contempt.
Eventually, the artist may have to ask permission or pay an entry fee to view the work that he or
she has created. Is it any wonder that Emily Dickenson resisted publishing her immortal poems?
What began as an act of fulfilling and satisfying self-externalization runs the risk of
becoming an act of self-alienation [selbstentfremdung]. The term "alienation" has a double
meaning on which, as we shall see, Marx plays endlessly. To make alien, to alienate, means to

make an other, an enemy, something that stands over against oneself [gegen-stand]. But to
alienate also means to sell, to transfer title from one owner to another. In this sense, the word is
routinely used in the law. By alienating the work of art, by selling it, the artist becomes alienated
from it. The work of art becomes not simply other than him or herself, but perhaps even
inimical, hurtful, an enemy.
[May I be permitted a brief moment of narcissistic self-absorption? When I am writing -indeed, as I have been writing these paragraphs this morning --I feel fully alive. My stubby
fingers fly over the keys, hitting wrong letters now and again but charged nevertheless with an
energy that I feel at no other time in my life. The words come as fast as I can get them onto the
screen, and I know, with utter certainty, that what I am saying is right. I never revise, and I never
show what I have written to another person before externalizing it, publishing it, either in print or
in cyberspace. Once I have published a book, I am finished with it. I move on, perhaps I write
another book. But what I have published now exists independently of me, and I cannot control
how it is construed, or the uses to which it is put, by persons I have never even met. Now, I
know all too well that these subjective feelings of mine do not correspond to any objective
greatness. When I see AMADEUS, after all, it is Salieri and not Mozart with whom I identify.
But I can at least imagine what it would be like to be Marx writing CAPITAL, or Hume writing
the TREATISE. Oh well.]
Marx, with what I consider a stroke of sheer genius, takes the Romantic conception of
artistic creativity and generalizes it to all of us, arguing that all human beings are capable of,
indeed must engage in, an act with the same fundamental structure -- the act of production. [I am
here conflating ideas taken from both the ECONOMIC-PHILOSOPHIC MANUSCRIPTS OF
1844 and THE GERMAN IDEOLOGY, which were, after all, written at roughly the same time.
It would take too long and be too tedious to sort this all out textually.] Human beings, unlike

animals, live by purposefully transforming nature in accordance with ideas in their minds, so as
to make it into goods that can satisfy their needs. [Marx did not know about tool use in animals,
but that really does not matter here.] They too first form an idea in mind -- of a stone shaped to
be a tool, of a field of grain, of a stick bent to form a bow -- and then externalize it, embodying
the idea in an object that can serve our needs, helping us to gain food, clothing, shelter, and other
humanly satisfying goods. But unlike the act of artistic creation, the act of production is
collective, social. We struggle with nature together, not alone. This act of collective selfexternalization, of production, is labor.
Marx here sets himself against a long tradition in Western thought, going all the way back
to the Book of Genesis, that sees labor as an evil, a painful necessity, a curse laid upon us by God
for our disobedience. Recall the words of GENESIS, Chapter 3, verses 16-19:
"Unto the woman he said, I will greatly multiply thy sorrow and thy conception; in sorrow thou
shalt bring forth children; and thy desire [shall be] to thy husband, and he shall rule over thee.
And unto Adam he said, Because thou hast hearkened unto the voice of thy wife, and hast eaten of
the tree, of which I commanded thee, saying, Thou shalt not eat of it: cursed [is] the ground for
thy sake; in sorrow shalt thou eat [of] it all the days of thy life;
Thorns also and thistles shall it bring forth to thee; and thou shalt eat the herb of the field;
In the sweat of thy face shalt thou eat bread, till thou return unto the ground; for out of it wast
thou taken: for dust thou [art], and unto dust shalt thou return."
So it is that man must labor painfully for his bread, as a curse for his disobedience. And so it is
that woman's bearing of children is called labor, for it too is painful, and a curse laid upon her
for her disobedience.
Well, enough for today. I shall continue with this after I have prepared my lecture for
Wednesday.

Part Four
In the essay on estranged, or alienated, labor can be found some of the most powerful
lines Marx ever penned. I will not try to summarize the entire essay. My summary would too
long, and inevitably would be like a prose summary of a poem -- never a good idea. Please read
it for yourself if you have not already done so. The central idea is captured in this phrase from
the very beginning of the essay: "the object which labour produces -- labour's product -confronts it as something alien, as a power independent of the producer." Marx is here, and
elsewhere throughout the essay, trying to get some conceptual clarity about one of the most
puzzling aspects of the new capitalism, namely the fact that as capital becomes ever more
productive, spewing out goods in enormous quantities, the workers who produce those goods
remain impoverished and ever more powerless. Capital -- the factories, machines, farms, mines,
and also the techniques embodied in the machines -- is, after all, brought into existence by the
effort, the labor, of the workers. How can it be that they become more and more enslaved by
what they themselves have produced? It had not always been this way. In previous stages of
human history, an especially good harvest, a boom year, resulted in better times for all, if only
momentarily. While the rich remained rich, the poor enjoyed some measure of the success of
their efforts. But under capitalism, strong profits simply enlarge the power of accumulated
capital to fire adult workers and substitute children, to bargain down the wage, to entrap the
workers in endless penury.
Marx does not yet have a theoretical understanding of how this happens. For that we
must wait for CAPITAL, twenty-three years later. But he understands perfectly the human cost
of the capitalist mode of production. The alienation is multi-dimensional. First of all, the
worker, as we have seen, is alienated from the product of her labor, which appears to her as an
enemy controlling her and depriving her of freedom. The worker is also alienated from fellow

workers who are, or ought to be, colleagues and comrades in a collective undertaking. Since
jobs are scarce and there is an endless pool of men and women desperately seeking jobs [the
"reserve army of the unemployed," as Marx famously called them], each worker sees the others
as enemies, threatening to take one of the scarce jobs. The capitalist, who is the real enemy, is
misperceived as a benevolent figure graciously offering a subsistence job and allowing the
worker to survive for another day. The worker is alienated, as well, from the labor process,
which becomes mechanical, painful, constricting, enslaving, rather than fulfilling, graceful,
natural, human. And finally, the worker is alienated from herself, from her true nature or, in the
language of the day, her "species being." In what is surely one of the most moving passages in
the entire socialist literature, Marx writes:
"The worker only feels himself outside his work, and in his work feels outside himself. He is at
home when he is not working, and when he is working he is not at home. His labour is therefore
not voluntary, but coerced; it is forced labour. It is therefore not the satisfaction of a need; it is
merely a means to satisfy needs external to it. Its alien character emerges clearly in the fact that
as soon as no physical or other compulsion exists, labour is shunned like the plague."
Each time I read this passage, I am reminded of a scene in that wonderful old Peter
Sellars movie, I'M ALL RIGHT JACK. Sellars plays a British communist union leader of the
old school. The union has successfully protected some of its members from being fired as
superfluous, and the men thus kept on spend their day sitting behind a stack of wooden pallets
playing cards. At one point, Sellars calls a strike, and the men at the factory down their tools and
walk off the job,. The four men playing cards suddenly realize that everyone is on strike,
whereupon they drop their cards in the middle of a hand and rush off. One can only assume that
when they get home they will -- play cards!
Over the next several years, Marx made several efforts to return to Germany before
finally going into exile in London with his wife, Jenny, and their young family. In 1848, while

still on the continent, he and Engels published the most famous political tract ever written: THE
COMMUNIST MANIFESTO. I am going to assume that everyone reading this tutorial has read,
or will now immediately read, the MANIFESTO. Like Plato's REPUBLIC and WAR AND
PEACE, it is one of those documents familiarity with which is the mark of literacy. In the
MANIFESTO, we see Marx beginning to develop the theories of economic development that we
know as Historical Materialism. The economic theory is still rudimentary, but the theory of
stages of development, and the crucial thesis that the law, politics, culture, and philosophy of an
age are a reflection of the way in which the economic activities of the society are organized, is
beginning to be worked out.
The MANIFESTO, in its ebullient, aggressive optimism, is very much the statement of
young men. "A spectre is haunting Europe -- the spectre of Communism," it begins ominously.
Immediately, the authors announce the central thesis of their doctrine: "the history of all hitherto
existing society is the history of class struggles." And off they go. In my opening remarks to
this tutorial, I tried to sketch the political situation in Europe when Marx and Engels were young,
as a way of explaining why they were so optimistic about the near-term prospects for a
communist revolution. They were not, after all, deluding themselves. In 1848, the year the
MANIFESTO appeared, Europe exploded into workers' uprisings, most prominently in Paris
itself. We know, with the benefit of a century and a half of hindsight, that the hopes of Marx and
other revolutionaries were doomed to be dashed, but it cannot have looked like that to them at
the time.
The failure of the 1848 uprisings had an interesting theoretical effect on Marx, I believe.
I observed earlier that there was indeed a break between the young Marx and the mature Marx.
It concerns the theoretically very significant issue of mystification. Originally, Marx took the
typical enlightenment position that in the Middle Ages, the real roots of clerical and monarchical

power were mystified by religious superstition and the fiction of the divine right of kings, but
that under capitalism, the clouds of mystery had been blown away by the cool breezes of reason,
so that it was immediately apparent to nineteenth century Europeans that the power of church,
state, and capital rested upon force alone. But the failure of the revolutions seems to have
persuaded Marx that Capital's power was itself mystified, by the doctrines of laisser-faire and
free trade, so that it was not at all easy to understand how the ever-greater productivity of
industrial capital served to strengthen its ability to defeat all challenges. By contrast, feudalism
was relatively transparent. It was obvious even to the peasants themselves that the wealth of
their feudal masters came from the days of labor service that they were forced to provide on the
lord's lands.
There is a great deal more to be said about Marx's writings in the period leading up to the
production of CAPITAL. My English translation of the Complete Works of Marx and Engels
runs to twenty thick volumes BEFORE the publication of Volume One of CAPITAL, for
heaven's sake! But the economic theory is the heart of his entire life's work, and there are limits
to how many blog posts I can get all of you to read, so I am going to stop here, and tomorrow
begin my discussion of Marx's mature economic theory.

Part Five
We come now to the heart of this tutorial, Marx's economic theories. It is worth noting
that the subtitle of CAPITAL is "A Critique of Political Economy." Marx's work is as much a
critique of previous economic theories as it is an analysis of the economic reality of capitalism.
Karl Marx was, at one and the same time, the greatest of the classical political economists,
bringing to completion more than a century of brilliant theorizing, and also the greatest critic of
classical Political Economy, devastatingly exposing the inner contradictions and inadequacies of
the classical tradition. In order to understand what he is talking about in CAPITAL, therefore,
we must spend a little time tracing the evolution of classical Political Economy from its origins

in France in the middle of the eighteenth century to the work of its greatest exponents, Adam
Smith and David Ricardo, against whom and in continuation of whom, Marx wrote.
Political Economy begins with the effort of Turgot and Quesney to understand the French
economy in the eighteenth century. These two theorists, who, with their fellows, have come to
be referred to as the Physiocrats, conceived agriculture as central to the wealth of Old Regime
France, so much so that they disparaged the productive efforts of artisans and craftsmen. Their
great contribution to the field, and to subsequent theorists, was their recognition that the ongoing productive economic activities of a nation must be conceptualized as an endless cyclical
process of REPRODUCTION. The output of the nation at one point in time becomes the input
of the productive process at a later point in time, so that there is a cycle of inputs and outputs, a
cycle of reproduction. This season's harvest provides the seed corn for next season's planting.
The iron ore dug from the mines this year becomes the shovels used to dig iron ore next year,
and so on. [This is the origin of the title of Piero Sraffa's seminal little book, PRODUCTION OF
COMMODITIES BY MEANS OF COMMODITIES.] There are, of course, some goods that are
by their nature not reproducible -- old master paintings, for example, whose value lies not only in
their beauty but also in their scarcity. Somewhat more importantly, one essential input into
production -- land -- is not in general reproducible [although it is of course possible, on the
margins, to carry out landfill operations that increase the available land, such as the project that
created the ile St. Louis in the Seine in the middle of Paris.] This latter element in the process of
production set for the classical theorists the problem of providing an adequate analysis of land
rents, a problem that was solved by Ricardo in one of the most brilliant achievements of the
classical school.
Although the Phsyiocrats did not themselves call attention to it, the concept of
reproduction can be usefully applied even to that input into production on which we shall focus

most of our attention, namely labor, for this generation's output of the production process [the
children] becomes the next generation's inputs [the parents], thus justifying the use of the word
"reproduction" to apply to that process as well. There is even a third sort of reproduction of
which we shall have to take account eventually as our exposition goes forward, namely the
reproduction of the social relationships and cultural institutions and ideological formations that
constitute a society. But we are getting ahead of ourselves.
And now, a word of caution before we begin. This is a complex subject, and I have found
it useful to proceed slowly when expounding it, starting with elementary concepts and
postponing until later the introduction of the complexities and complications that are a part of the
finished story. So please, before you write long comments asking why I have not mentioned
these essential complexities, show a little patience. If you really want to know whether I am just
ignorant of those complexities, then read my two books on Marx before you rush to comment.
Thank you.
In order to have before use a numerical example of the process of reproduction, I am now
going to introduce a little model of a very elementary economy. Like all models, its construction
requires a good deal of abstraction.
Let us begin by imagining an economy in which there are only two produced goods [or, if
you prefer, two categories of produced goods], corn and iron [or agricultural goods and industrial
goods]. Each good requires inputs of corn, iron, and labor [forget about land for the moment],
and in each sector of production, the combination of these inputs results in a certain quantity of
output of one good or the other. [In deference to Marx's brilliant analysis of the commodity, I am
not yet referring to these goods as "commodities."] Since all of these theorists lived in the
temperate zone of the Northern Hemisphere. they all assume an annual growing cycle, and we
shall follow that tradition. Here is a simple numerical representation of the economy we are
describing. I choose to treat the reproduction of labor on a par with the reproduction of corn and

iron because that is the way Marx thought about it [as did Ricardo, by the way]. Sraffa's
approach is different, although either way is convertible to the other easily enough. Call this
System A:
Labor Input
Labor Sector
Corn Sector
Iron Sector
Total Input

100 units
90 units
190 units

Corn Input
38 units
2 units
9 units
49 units

Iron Input
19 units
16 units
12 units
47 units

Output
190 units
300 units
90 units

A few preliminary observations about System A;

1. The size of the units is not indicated, but since this is supposed to be an annual cycle of
reproduction, presumably they are pretty big [millions of tons of corn, or something like that.]
2. There is not the slightest indication of what technology of production is being used.
Important though that obviously is, it is irrelevant for the purposes to which we are going to put
this model. Following the Classical Political Economists, we assume that there is one and only
one dominant technique used for the production of each good. If some entrepreneur introduces a
new and more efficient technique, the pressure of competition pretty soon forces all the other
entrepreneurs in that line to adopt it, and it becomes the new standard.
3. Notice [this is crucially important] that both corn and iron are required as inputs in each line
of production.
4. I could make the model somewhat more elaborate, in an effort to do a better job of
mimicking reality, but that would not change the theoretical analysis. It would just require us to
use rather more sophisticated mathematics. I prefer the transparency of the simple model. In a
more complex model, there might be hundreds of sectors of production, and in some of them
[this too is crucial] some goods might not be used as inputs, but they might be used in the
production of goods that were themselves used in the production process, and so we could say
that they were indirectly required. In general, there will be a distinction [also crucial -- there is a
lot of crucial stuff here] between those goods that are directly or indirectly required in every
single line of production, and those goods that are not directly or indirectly required in every line

of production. For reasons that will become clear, we shall call the first group of goods Basic
Goods, and the second group Luxury Goods. In System A, iron and corn are both Basic Goods.
5. This model is deliberately so simple that it even ignores fixed capital, which lasts through
more than one cycle of production, and joint production, a situation in which a given technique
of production has two or more salable outputs. As I said earlier, I am going to creep up on the
more complicated cases.
Even the most cursory inspection of System A reveals that in each cycle of production,
there is more output than is required for the next cycle's input -- 251 units of corn and 43 units of
iron, to be precise. [The fact that there is, at this point, no extra labor produced is actually
analytically important -- wait for it.] If we meditate on this fact for a bit, three questions should
occur to us. All of Economics, Sociology, History, and Political Science is nothing more than
attempts to answer these three questions.
The first question is: WHO GETS THE SURPLUS?
The second question is: HOW DO THE SURPLUS-GETTERS GET THE SURPLUS?
The third questions is: WHAT DO THE SURPLUS-GETTERS DO WITH THE SURPLUS
WHEN THEY GET IT?
Tomorrow we shall begin answering these questions, in the course of which we shall hear
about Natural Price, Productive and Unproductive Labor, Necessary Labor and Surplus Labor,
Base, Superstructure, Ideology, The Labor Theory of Value, and other arcana. Stay tuned.

Part Six
Who gets the surplus?
In virtually every known society, the surplus is appropriated -- taken -- by some relatively
small subset of the population, with the result that the members of that subset live better than the
rest of the members of the society. We know these appropriators as kings, princes, oligarchs,
pharaohs, priests, generals, landed aristocrats, tyrants -- and as entrepreneurs, merchants,
advertising executives, lawyers, professors, and elected politicians. Almost always, the
appropriators trick out their appropriations with justifications, rationales [or rationalizations]

designed to persuade those from whom the surplus is taken of the rightness of the appropriation.
The surplus getters suggest that they are bigger, stronger, more handsome, more charismatic,
smarter, more productive, blessed by the Gods, sanctified by immemorial tradition, chosen by a
vote of the people, riding the wave of history. And for the most part, those from whom the
surplus has been taken -- the expropriated -- accept these rationales, sometimes grudgingly, quite
often willingly or even enthusiastically.
The surplus comes in many forms. It is extra grain harvested from the fields, over and
above what is needed to keep alive those who grow and harvest the grain. It is cloaks and
mantles over and above what is needed to shelter from the weather those who shear the sheep,
card and spin the wool, and weave the cloth for the cloaks and mantles. Sometimes it takes the
form of swords made from iron that would otherwise provide additional plowshares or in the
form of spears that could better serve as pruning hooks. [A little biblical reference there, for
those of a religious turn of mind.]
In some societies, the conditions of life of those who get the surplus are only slightly
more comfortable than those from whom the surplus is taken, but in many societies, the
differences are so great that after a while the two groups of people seem not even to be of the
same species or from the same world. The producers of the surplus are short, thin, careworn,
illiterate, and short lived. The surplus getters are tall, handsome, healthy, cheerful, welleducated, and long-lived. The surplus producers struggle to keep their children from starving to
death. The surplus getters send their children to Ivy League schools and on to the Grand Tour of
Europe. Life is good for the surplus getters; not so good for those who produce the surplus.
How do the surplus getters get the surplus?
In many ways. Sometimes, like the Vikings of early medieval Europe, they simply sail
up the rivers of Western Europe from the coast each Fall and steal the harvest as the peasants
reap it. Or they ride into town as the bandits of the Southwest did and take the harvest at the

point of a gun. At first, this is, and is understood to be, simple theft. But as the bandits return,
year after year, the peasants become accustomed to the raids, and in an effort to avoid bloodshed,
prepare the harvest for the stealing. This is then called taxes. Eventually, one lone bandit rides
into town, not even wearing a gun, to collect the money the peasants have managed to acquire by
selling their crops. The state has arrived.
Sometimes the surplus getters hold the producers in bondage, forcing them to labor on
the lands owned by the surplus getters. Instead of seizing the surplus after it has been produced,
they forcibly command the labor of the producers, allowing to the producers only so much of the
annual product as is needed to keep them alive and allow them to raise up their replacements
when they wear out -- their children. This is known as slavery. The condition of the slaves is
often very little different from that of the nominally free producers whose surplus is taken from
them, or appropriated.
How do the surplus getters get the surplus in a capitalist society. in which all men are free
[we pass over in silence for the moment the condition of women], and all exchanges in the
marketplace voluntary and based on mutual self-interest? That there are surplus getters even in
this "very Eden of the innate rights of man" [CAPITAL, last page of Chapter VI] is manifest, for
cheek by jowl with the slums of Manchester, Liverpool, and London are great mansions in which
live the getters of the capitalist surplus. But HOW they get it is a mystery that eludes even the
greatest minds of the Classical tradition in Political Economy. It is to the solution of this great
puzzle that Marx devotes much of Volumes One, Two, and Three of CAPITAL, and we shall
return to this question shortly, for at its heart lies the secret of capitalism.
What do the surplus getters do with the surplus when they get it?
This is actually the question that exercised Smith and Ricardo the most. In their view,
entrepreneurs used the surplus [in the form of profits] to expand the scope of production,
reinvesting it in an expanded labor force, new machinery, more fields under cultivation, and so

on. The landed aristocrats, by contrast, used their share of the surplus [which came to them in
the form of rents] to employ crowds of liveried servants, give lavish balls, maintain gilded
carriages, consuming the surplus unproductively. Smith in particular was worried that as the
demand for grain pressed on the available land and rents rose, so much of the annual surplus
would be transferred to these unproductive expenditures that growth would come to a halt and
the dreaded "stationary state" would result. It is worth noting that the notion of class conflict
was central to classical political economy, and was not in any way original with Marx.
A share of the social surplus in most societies is consumed buttressing, protecting, and
rationalizing the privileged position of the surplus getters. Some of that share is used to support
a substantial military and police force which is available to put down any dangerous protests
from those who are being denied the fruits of their productive labors. Some supports priests and
churches, in which the virtues of submission and the promise of plenty in the next life serve to
dull the resentment of the expropriated producers. Some must be devoted to maintaining lawyers
and judges who can be counted on to resolve all disputes in a manner favorable to the surplus
getters' interests. And there is even a bit of this share left over to keep in comfortable
unproductivity artists to provide amusements for the surplus getters and philosophers to explain
why all is for the best in the best of all possible worlds.
The secret of the explosive power of capitalism, as Smith, Ricardo, and Marx well
understood, is that it alone, among all the forms of economy and society that history reveals to
us, relentlessly allocates as much as possible of the social surplus to reinvestment for the purpose
of expanding yet further the magnitude of the surplus. "Accumulate! Accumulate! That is
Moses and the Prophets to the capitalists," as Marx writes in one of many brilliant passages in
volume I of CAPITAL.
There are of course books to be written on every one of the observations in the preceding
paragraphs, and Marx wrote a good many of them himself. But in the interest of brevity, I shall

concentrate here on one question among all those that have been raised or intimated, namely,
How in a capitalist economy does it come about that entrepreneurs exit from the market ever
richer? Exactly how is it that in a capitalist economy the annual surplus is appropriated by one
class, the entrepreneurs, or capitalists?
To answer this question, Marx must wrestle with and finally solve a technical puzzle
concerning the determinants of the prices of commodities in the marketplace that had baffled
Smith and in the end stumped Ricardo.
In the next post, we shall begin our discussion of this famous puzzle, leading finally to
Marx's version of that centerpiece of Classical Political Economy, the Labor Theory of Value.

Part Seven
The theoretically most interesting and problematic of the doctrines of the Classical
Political Economists is their explanation of how prices are determined in a laisser-faire capitalist
economy. Why, you may wonder, is that so important a question? Well you may ask. I myself
asked that same question of John Eatwell [currently Baron Eatwell and President of Queen's
College, Cambridge], when as a young man in his thirties he taught a brilliant graduate course on
Value Theory in the UMass Economics Department in the semester when I was first acquainting
myself with economic theory. He was rather startled by the question, not anticipating that a total
naif would be sitting in on his very advanced seminar, but the answer is quite simple. The two
great questions of Classical Political Economy are, First, how is the annual social product [the
"wealth of nations," in Smith's words] divided up among the three classes of society -- the landed
aristocracy, the entrepreneurs, and the laboring class? and Second, what are the conditions of
sustained economic growth? Growth and distribution are the alpha and omega of the classical
school. It is what makes their theories, otherwise so out of date, interesting today. Now, in a
laisser-faire money economy, the social product is apportioned to each class by the
intermediation of money. Each class receives a share of the social product in the form of the

money that it manages to lay its hands on. The landed aristocracy is paid a price for the use of its
land -- we call it rent. The entrepreneurial class is paid a price for the use of its capital -- we call
it profit. And the laboring class is paid a price for its laboring [or, as Marx will say, for the use of
its Labor Power -- but that gets ahead of our story.] -- we call it wages. These prices -- rents,
profits, and wages -- determine the distribution of the annual social product. The same processes
of competition that determine the prices of corn and iron, cloth and coal, eggs and cattle fodder
also determine rents, profits, and wages.
Confronted with this question, Adam Smith makes a series of brilliant conceptual moves
that virtually define the discipline of economics ever after. [Aside: I have just re-read Chapter
Two of my book, UNDERSTANDING MARX, in which I set forth Smith's innovative
conceptual moves in some detail. If anyone is really interested in this subject, I strongly
recommend looking at what I have written there. It is simply too detailed to reproduce here.]
He begins by observing that there is an ambiguity in the term "value," for sometimes we
mean by the value of a good its usefulness to us in satisfying some want or enabling us to
advance some undertaking. Water slakes our thirst. Cloth protects us from the elements. This
aspect of any good Smith calls its "value in use," or, as we have learned to say, its use value. But
goods may also be exchanged for other goods, and this aspect of them Smith calls their "value in
exchange," or exchange value. When we consume some good, it is its use value that concerns us
-- will this apple satisfy my hunger? Will that lump of coal burn well and provide warmth or
energy to drive a machine? But in the marketplace, our concern is for the exchange value of a
good. How many apples can I get in exchange for this bolt of cloth? How many bushels of corn
for a ton of coal?
Drawing on the notion of nature as a system of universal laws -- an idea well-established
in the late eighteenth century as a consequence of the manifest success of Newton and others in
articulating that system in elegant mathematical form -- Smith suggests that society is a second

nature, governed, as is physical nature, by universal laws. Instead of gravitation as the key to
these laws, Smith offers the universal tendency of men to "truck and bargain" in the marketplace.
[See David Hume's TREATISE OF HUMAN NATURE for a similar conceptual move -- in
Hume's case, the principle of the association of ideas. Hume and Smith, of course, were good
friends.]
We observe, Smith says, that in any given neighborhood or marketplace, there is a
customary or usual price at which goods sell, and also a customary or usual wage paid to
laborers, rent paid to land owners, and profit earned by entrepreneurs. These customary or usual
prices may, of course, vary on a particular day as a consequence of momentary factors, such as a
glut of corn one day or a scarcity of cloth the next. Smith, like Ricardo and Marx after him, was
quite aware of what have come to be called the "laws of supply and demand," but he, as did they,
considered these to be ephemera, not underlying determinants of the system of society. To those
customary prices Smith gives the name "natural prices," calling the momentary fluctuations
"market prices." The natural prices act, he says, like centers of gravity, drawing the fluctuating
market prices to them [you see the influence of Newton.] From that day forward, one of the
central tasks of Economics became the discovery of the determinants of natural price. Those of
you who have studied economics will be familiar with the notion of natural price under its
modern label, equilibrium price.
What then determines the natural price of a good in the market? Smith is actually rather
confused about this question, and offers three answers without seeming to understand that they
are different from, and in fact incompatible with, one another. One source of his confusion is his
belief, which Ricardo shared, that in order to understand what happens when the relative prices
[exchange ratios] of two goods change, one needs to find in the circle of exchanging goods one
whose natural price never changes, so that any change can be traced to some alteration in the

conditions under which the other good is produced. All of this is fascinating, but much too
complex to go into here. [Once again, see my book.]
What matters is that Smith advances a seminal idea, on which all subsequent Classical
Political Economy rests. The natural price of a good, Smith proposes, is determined by the
amount of labor that is required to produce it.
Now, a small but important terminological matter. In the eighteenth and early nineteenth
centuries, the term "value" was used interchangeably with "natural price." The value in
exchange, or exchange value, of a good in the market was called either its natural price or its
value. Thus, when Smith advanced the hypothesis that the natural price of a good is determined
by the quantity of labor needed to produce it, he was offering a Labor Theory of Natural Price,
or, what was to him the same thing, a Labor Theory of Value. That, just so you know, is the
origin of this famous and controversial phrase.
In support of his hypothesis, Smith now sketches a little story in which is actually
embodied a theorem in rational choice theory. Here is the entire passage, from Book I, Chapter 6
of WEALTH OF NATIONS.
"In that early and rude state of society which precedes both the accumulation of stock
and the appropriation of land, the proportion between the quantities of labour necessary for
acquiring different objects seems to be the only circumstance which can afford any rule for
exchanging them for one another. If among a nation of hunters, for example, it usually costs
twice the labour to kill a beaver which it does to kill a deer, one beaver should naturally
exchange for or be worth two deer. It is natural that what is usually the produce of two days
or two hours labour, should be worth double of what is usually the produce of one day's or
one hour's labour.
And there it is! The Labor Theory of Value, in its first appearance on the world stage. It
won't do in the form in which he presents it, of course, and Smith knows that. Indeed, in the
very first phrase of the first sentence, he indicates why it won't do. This simple theory may hold
for situations in which there is no accumulation of stock [hence no tools, farm animals, or other
inputs into production] and no appropriation of land [hence no rent charged for the use of the

land], but in the real world, all economic activity relies upon both "the accumulation of stock"
and the "appropriation of land."
Just so we are clear, let me spell out the problem, even at the risk of being a trifle tedious.
Suppose the deer hunters use bows and arrows to hunt the deer, while the beaver hunters use
beaver traps to catch the beaver. [Bows and arrows and beaver traps are "stock."] Now, it takes
labor to make a bow and arrows and also to make a beaver trap. Clearly, in deciding in what
ratios they will exchange the deer for the beavers, both groups of hunters need to take into
account that labor as well as the actual labor of hunting or checking the traps. It might be, for
example, that beaver traps take only a few moments to make, but really can be used only once
[the beavers wreck them trying to escape], whereas bows and arrows take many days to make,
but can be re-used for years. In some way or other, this indirectly required labor will have to be
taken account of if the two groups of hunters are to succeed in making rational decisions when
they enter into bargaining with one another.
Smith pretty much gave up on this problem, and there things stood for forty-one years.
Enter David Ricardo, arguably one of the three or four greatest economists of all time. The
solution to the problem, Ricardo proposed, is to think of the stock -- the tools, raw materials, etc.
used in the process of production -- as though they had embodied in them the labor that had been
expended at an earlier time in making them or gathering them. When workers use those tools
and machines as they work up the raw materials into the finished products ready to be sold in the
marketplace, we can think of them as transferring that embodied labor, along with their own
labor, to the finished product. Thus, the natural price, or value, of the end product is really
determined by the sum of the labor directly required in the production process and by the labor
indirectly required in earlier periods of production. The sum -- of embodied labor and direct
labor -- is the true determinant of natural price or value. This in a nutshell is Ricardo's version of

the Labor Theory of Value, and it is, as we shall see, a dramatic advance on Smith's hypothesis,
even though it is still not quite right.
At this point, I am going to stop, because in the next Part, I must incorporate some little
systems of equations into the text, and despite the helpful suggestions of a number of you, I have
not quite figured out how to do that. Also, I must lecture this afternoon to my graduate seminar,
and I think I ought at least to make a show of preparing for my lecture. See you all tomorrow, if
I succeed in sorting out the technical details of incorporating equations into the text.

Part Eight [part one]

We are now ready to engage with Ricardo's version of the Labor Theory of Natural Price
[or Value], to see what it means, and to ascertain whether it is correct. For a variety of reasons, it
is useful to change my original corn/iron model a bit by assuming that the surplus getters
[capitalists, in this case] use a portion of the physical surplus to underwrite a sector devoted to
the production of luxury goods. Technically, these are goods that require inputs of various sorts,
but whose output is not required as input into either the corn or the iron sector. They are, in
modern terminology, final goods. We could, of course, posit a sector devoted to the production
of luxurious clothing or sporty cars or gourmet breakfast foods, but since we are explicating
Ricardo, and therefore presumably analyzing the doings of stern, upright, seriously religious
Protestant businessmen, I shall assume that the luxury good to which they choose to devote a
portion of their surplus is theology books. By the way, some of you may be wondering why
Corn Flakes and frozen Macaroni and Cheese dinners do not count as luxury goods, even though
they, like theology books, are not used as inputs into any line of production, and thus are also
final goods. The answer -- and it turns out to be super important, theoretically -- is that Corn
Flakes and frozen Macaroni and Cheese dinners are wage goods -- i.e., things consumed by the
labor producing sector, which is to say by the workers. Thus they do enter indirectly into the
production of all the other sectors, because labor does. Way down the road, this is going to allow

me to invoke a nifty theorem proved by John von Neumann to demonstrate exactly when Marx's
sophisticated version of the Labor Theory of Value is true. I say this now just to keep up the
spirits of the cognoscenti among you who may be yawning and wondering when I am going to
get to the good stuff.
Here is the revised model:
Labor
Corn
Labor sector
42
Corn sector
100
2
Iron sector
90
9
Books sector
20
1
Total Input
210
54

Iron
21
16
12
2
51

Books
0
0
0
2
2

Output
210
300
90
40

Part Eight [part two]

You will notice that I have constructed the sector devoted to the production of devotional
literature so that iron, corn, and theology books are required as input. You may wonder in what
sense theology books can be required as input into the production of theology books. Let us just
suppose that the writers of the new books in each cycle of production read and re-read the
existing books so assiduously that they wear them out. Analytically speaking, what matters here
is that none of the output of the books sector is required as input into any other sector but itself.
[For those of a more formal turn of mind, the square matrix of unit input coefficients is semipositive and partially decomposable, with one of the submatrices representing the sector of basic
commodities and another representing the sector of luxury commodities, but we need not go into
that.]
Now, let us get to it. According to Ricardo, the natural price, or value, of a commodity
[which is to say, something reproducible, like corn or iron, not something non-reproducible, like
land or an Old Master] is determined by the quantity of labor that is required, directly or
indirectly, to produce it. By labor indirectly required Ricardo means the labor that was required
to produce the non-labor inputs into its production. If we look at the Corn Sector in the little
model above, we will see that 100 units of labor are required to produce 300 units of corn, so

each unit of corn requires one-third of a unit of labor directly. But each unit of corn also requires
1/150 of a unit of corn, as seed presumably [I get this number by dividing the left hand side of
the Corn Sector line through by 300, to find out what are called the "unit input requirements" of
the Corn Sector.] Now, we have just seen that each unit of corn requires 1/3 of a unit of labor, so
the corn that is used up in the production process of the Corn Sector must have required 1/450 of
a unit of labor in the previous cycle of production. This labor is described by Ricardo as being
"embodied" in the seed corn, and as being transferred to the output when the seed corn is used in
the production process. The same sort of calculation shows that a unit of corn requires 4/75 of a
unit of iron. Now, looking at the Iron Sector, we find that each unit of iron requires one unit of
labor to be produced, so that means that the iron that goes into one unit of corn production must
itself have required 4/75 of a unit of labor in the previous cycle of production. So, thus far, we
see that a unit of corn requires 1/3 of a unit of labor directly, and (1/450 + 4/75) or 1/18 of a unit
of labor indirectly -- 1/18 of a unit of embodied labor.
But wait, you will protest [and you will be right], in that previous cycle of production to
which you have been alluding, corn and iron, as well as labor, were required to produce the corn
and iron that are being used in this cycle, so there are some extra little bits of embodied labor
carried over from an even earlier cycle, that must be added in. It doesn't take much mathematical
imagination to see that we have here the makings of an infinite sum of bits of embodied labor.
Two questions immediately present themselves: First, does this infinite sum converge on some
finite quantity? and Second, if it does, what does it converge on? How much total labor, directly
and indirectly, does it take to produce one unit of corn? Or, as we have learned to say, What is
the Labor Value of Corn?
Well, it turns out that we have here a problem whose answer can be arrived at by setting
up and solving a little system of simultaneous linear equations. The Table we have been working

with gives us a great deal of information about the production of corn, iron, and theology books,
but there are three quantities that it does not directly tell us about. namely, the Labor Values of
corn, iron, and theology books. These are, as they say in elementary algebra classes, the
unknowns [or, as Donald Rumsfeld would say, the known unknowns.] So, I am going to choose
three symbols to stand for these unknowns. Let us let Lc stand for the labor value of corn, which
is to say the total amount of labor directly and indirectly required for the production of one unit
of corn. Li will stand for the labor value of iron, and Lb for the labor value of books. Three
unknowns, three equations pretty easily arrived at. We can solve that baby! Tomorrow, I will
show you the equations [back to the scanner -- ugh], tell you what the solution is [you are going
to have to work out that bit of elementary math yourselves], and move on to the next step in the
process of checking to see whether Ricardo's Labor Theory of Value is true.

Part Nine
Using the variables defined at the end of the last Part, we can now set up a system of
three simultaneous linear equations. Here they are:
100 + 2Lc + 16Li + 0Lb = 300Lc
90 + 9Lc + 12Li + 0Lb = 90Li
20 + 1Lc + 2Li + 2Lb = 40Lb
The first equation says that 100 units of labor directly applied to 2 units of corn, in which
is embodied a quantity of labor two times the labor value of corn, and to 16 units of iron, in
which is embodied sixteen times the labor value of iron, yields 300 units of corn, in which is
embodied 300 times the labor value of corn. And so forth. Notice that the variable Lb does not
appear in either of the first two equations. That means that an increase in the difficulty of
producing theology books [problems with the proofs for the existence of God, perhaps] will have
no effect whatsoever on the labor value of either corn or iron. It also means that we can treat the
first two equations as a system of two linear equations in two unknowns, and after solving it we
can simply plug the values of Lc and Lb into the third equation to find the value of Lb. [All of

this is a mathematical representation of a very important set of facts about the economy, of
course.]
So what is the solution to the first two equations? Well, if you will carry out the
manipulations yourselves, you will find that Lc = 0.4 and Li = 1.2. Lb turns out to be equal to
0.6.
0.4 what? you may ask. 0.4 units of labor is the answer. That is how much direct and indirect
labor ends up being embodied in one unit of corn. If the dimension of labor happens to be
worker-years, and the dimension of corn happens to be metric tons, then the equations tell us that
in this system it takes 0.4 worker-years of labor, directly and indirectly, to produce one metric
ton of corn. [Real world factual plausibility is not an issue. We are doing economics here!]
We have now ascertained the labor values of the produced commodities in this system. Ricardo
says that these labor values determine the natural or equilibrium prices at which these
commodities sell in a laisser-faire marketplace. More precisely, he says that commodities
exchange in proportion to their labor values. To find out whether he is right, we must still figure
out what the equilibrium prices are, so that we can see whether they are proportional to the labor
values.
In calculating labor values, we remained in the sphere of production, attending only to the
quantities of inputs required for specified quantities of outputs, but now, as Marx would say, we
move into the sphere of circulation. We must set up a new system of equations that is a bit more
complicated to solve [second semester high school algebra], but before we can set up the
equations, we must make a number of simplifying assumptions and behavioral assumptions
about the capitalist economy in which all of this is taking place. Here are some of the things we
must assume. [Marx, as we shall see eventually, has enormously insightful and important things
to say about the historical, sociological, economic, and psychological conditions under which

these assumptions are plausible, but I can only talk about one thing at a time, so they will have to
wait for a while.]
First of all, we must assume that the goods being produced have become standardized, so
that one unit of corn or iron or books is much like another. If the society is still in the stage of
craft production, with hand crafted furniture and artisanal loaves of bread or wheels of cheese, it
will be impossible to represent the production process by our simple equations. The workers too
must be standardized, and stripped of their inherited skills, so that one unit of labor directly
applied is much like another. In the sphere of circulation, we must assume that competition
establishes a single price for each kind of good, a single wage rate for labor, and a single rate of
profit on invested capital [rent is not yet an issue.] All of these assumptions are hidden behind
the simple price equations we shall shortly be setting down. Marx was the first economist
[indeed, the first thinker of any sort] to recognize the enormous significance of these
assumptions. Much of the first several chapters of CAPITAL is devoted to spelling them out and
analyzing them. Later on, I shall have a good deal to say about them.
To formulate our equations, we need some new symbols for the unknowns. [I am limited,
unfortunately, by the fonts available to me, so this will be clumsier than I would like.] First of
all, we need a variable for each of the prices of the goods produced: Pc for the price of corn, Pi
for the price of iron, and Pb for the price of books. We shall use W for the money wage, and R
for the rate of profit. [Ordinarily one would use the Greek letter pi, but such is life in
cyberspace.] Here are the equations read off from the same data that yielded the labor value
equations:
(100W + 2Pc + 16Pi + 0Pb) (1 + R) = 300Pc
( 90W + 9Pc + 12Pi + 0Pb) (1 + R) = 90Pi
( 20W + 1Pc + 2Pi + 2Pb) (1 + R) = 40Pb

Why (1 + R), you may ask. Because the money that the capitalists get from selling their output
[300Pc in the case of the corn sector] must be enough to cover the cost of production [the 1] plus
enough to yield the going rate of profit on that cost [the R]. Hence (1 + R).
This is a system of three equations in five unknowns. Mathematicians call such a system
"underdetermined" [no, that is not what Althusser means by "underdetermined,' but that is
another matter entirely.] What to do? Well, the first step is to eliminate one of the price
variables. Remember that what we are interested in is relative prices, which is to say exchange
ratios between different commodities. The classical practice, employed by Smith, Ricardo, Marx
and all other classical Political Economists, is to select one commodity as the money in the
system, give one unit of it the price 1, and then express all other prices as multiples of that unit
commodity, or as it is usually called, numeraire. This can be an ounce of gold, a pound of silver
[the British Pound Sterling] or, if one is a Masaai warrior, one cow. In this case, we shall choose
corn as our numeraire, and set the price of one unit of corn equal to 1. When we plug that
assumption into our equations, we get:
(100W + 2 + 16Pi + 0Pb) (1 + R) = 300
( 90W + 9 + 12Pi + 0Pb) (1 + R) = 90Pi
( 20W + 1 + 2Pi + 2Pb) (1 + R) = 40Pb
This system is still undetermined, by one degree [as we say], because there are now three
equations and four unknowns. Notice that once again, the first two equations can be treated
separately, because the price of books, Pb, does not appear in them. They constitute a system of
two equations in three unknowns: Pi, W, and R.
There are two things we can do. The first is to reduce the equations to one by eliminating
the price of iron, so that we get a single equation in W and R. If we do this, we find with some
algebraic manipulations [which I must simply assume you folks can do on your own] that there is
the following inverse relationship between W and R:
(1 + R) = 6/(2W + 1)

Inspection reveals that as the wage rises, the profit rate falls, and vice versa, which nicely
demonstrates the fundamental Classical thesis that the interests of the working class and the
capitalist class are diametrically opposed.
But we can also try just to solve the two equations for the price of iron. In general, when
you have a system of two equations in three unknowns, you cannot do this, but if you go ahead
and try, you will discover, to your amazement, that the Wage and the Profit Rate drop out, and
the two equations yield the result Pi = 3. This is an extraordinary result. It seems that in this
system, the price of iron [and also the price of books, which turns out to be 1.5] is totally
independent of the wage rate and the profit rate. No matter how those fluctuate in inverse
relation to one another, the prices remain the same.
Well, Ricardo said that the prices at which goods exchange -- their natural prices or
values -- are proportional to the quantities of labor required directly and indirectly for their
production -- their labor values. Is he right? Let us see.
The price of corn is 1 and the labor value is 0.4, so the ratio is 1/.4 = 2.5
The price of iron is 3 and the labor value is 1.2, so the ratio is 3/1.2 = 2.5
The price of books is 1.5 and the labor value is 0.6 so the ratio is 1.5/.6 = 2.5
HEY PRESTO! RICARDO IS RIGHT. TA DA!
Ah well, if life were only that easy. Stay tuned. Tomorrow we shall discover the secret
of this remarkable result.

Part Ten
[The absence of comments on the last two posts suggests that I have finally succeeded in
boring you to death. But I am having such fun expounding this material, that I am going to press
on, even posting twice in one day. Perhaps it is just as well that I cannot see your eyes glaze
over.]
I guess you already figured out that I cooked the books to confirm Ricardo's hypothesis.
If you want to check up on me, just alter the numbers a little -- a bit more iron needed in the corn
sector, a trifle less corn in the iron sector, that sort of thing -- and solve the equations again, both
for the labor values and for the prices. The first thing you will discover is that the price

equations cannot be solved so nicely. It is still true that the wage and the profit rate vary
inversely -- that is, as Jane Austen says, a "truth universally acknowledged." But until you
specify a real wage [so much corn and so much iron per unit of labor] and plug it into the
equations, the system will be underdetermined. And when you do, the nice neat proportionality
between prices and labor values will not hold true.
What is happening? What is it about the little system I created that yields the nice neat
Ricardo-confirming results? Well, in the jargon that Marx would introduce a half century after
Ricardo published his great work, I created a system that exhibits "equal organic composition of
capital." That means that the ratio of labor directly required to embodied labor [or labor
indirectly required] is the same in all sectors lines of production. Check it out.
Another way of saying the same thing is that in some sectors of production, the labor
indirectly required has been embodied in the non-labor inputs for a longer time, and hence, when
we are figuring prices and profit rates, needs to be earning more profit. Suppose, for example,
that one producer is making wine, which must sit in its cask for three years before it can be sold,
while another producer is making bread that is sold hot out of the ovens. They may both have
the same amount of capital bound up in production, but the wine maker has to get a price that
compensates him for the time his capital has been tied up. Even if they are both getting 10%
annually on their invested capital, the wine maker's capital must earn 10% a year over three
years, which compounded is 33.1%, whereas the bread maker turns his capital over so rapidly
that he need make only a fraction of one percent on each turnover to rack up a 10% annual rate
of return. These differences will, when competition works its magic, drive the price of wine up
above the price of bread. But since the labor values of the wine and bread are unaffected by the
amount of time capital is tied up in production -- labor values only measure the quantity of labor
directly or indirectly required -- the ratio of the price to the labor value of wine will diverge from

the ratio of the labor value to the price of bread. This, for those of you who have ever wondered,
is what is called "the transformation problem." [By the way, some of you may in your study of
economics have come across the phrase "the roundaboutness of production." That phrase refers
to the same thing we have been discussing.]
Now the really interesting thing is that Ricardo knew all about this problem, and spent a
good deal of his life trying unsuccessfully to solve it. He was well aware that in the general case,
prices are not proportional to labor values. But the problem stumped him. It was left to Marx to
think the matter through more deeply and come up with a brilliant solution that is ALMOST, but
not quite, satisfactory. It is going to be some days before I get to that part of the story, so hold
the thought.
Strictly speaking, we have come to the end of our discussion of Ricardo, and are ready to
move on to Marx, but there is one more little matter that I should like to discuss, namely rent.
This is not part of Marx's story, because Marx knew that Ricardo had solved the problem of rent,
and therefore he did not bother with it. Still, it was a brilliant coup on Ricardo's part, and we
ought to be able to spare a few paragraphs to pay tribute to him.
The problem, in a nutshell, is this: Entrepreneurs [which in Ricardo's day frequently
meant investors renting land on which to grow grain or raise sheep] pay rent for the land they use
[to the landed aristocrats, those lazy bums]. That rent is one of their costs of production, as
surely as the wages they pay or the money they shell out for seed and farm machinery. But land
is not a produced commodity, and does not contain embodied labor that is passed along to or
embodied in the commodities produced on it. That being so, it would seem that the Labor
Theory of Value cannot hold true even in the special case of equal organic composition of
capital. The theory can only be true if rent is NOT a cost of production. But how can that be?
Certainly, if you ask an entrepreneur in the wool or corn trade, he will assure you that the rent he
pays is very much a cost of production. Why would he pay it otherwise?!

Here is Ricardo's answer: In any country, there are many different qualities of arable
land, many variations in the productivity of the land. On some land, one need merely throw the
grain at the ground and crops will spring up. On other land, some cultivation is required, on still
other land fertilizer is needed to get a crop, and there is some land so arid and unproductive that
one can scarcely grow anything on it at all. Now, at a given level of demand for corn [i.e., grain
-- recall that "corn" is the English name for whatever is the dominant grain in a region, not for
what we call corn, which the English call maize], entrepreneurs will compete for the best land,
and they will offer rent to its owner, for they know that even after paying rent, they can make a
profit on such fertile land. When all the best land has been rented, the remaining entrepreneurs
will bid on the somewhat less fertile land. They will only be willing to pay lower rents, because
they will not be able to compete against the investors who have snatched the best land, if they are
forced to pay equally high rents. If demand presses on supply, and drives up prices in the
market, more entrepreneurs will fan out and offer rents to the owners of even less fertile lands.
The landowners are engaged in a parallel competition among themselves. The land is utterly
useless to them unless it is rented out, so although they will press for the highest rents they can
get, if push comes to shove, they will take whatever they can get.
At the margin, the least fertile plot of land will rent for virtually nothing per acre, for
there is so little demand for it that the last entrepreneur who comes along and offers pennies an
acre will succeed in striking a bargain. Remember, if you want to know why a landowner would
rent his land out for so little, the answer is that anything is better than nothing.
Now, come harvest time, all these entrepreneurs who have been raising indistinguishable and
interchangeable corn on lands of varying fertilities, on which they are paying varying rents, will
bring their crops to the market, and there competition will ensure that every bushel of corn sells
for the same price, REGARDLESS OF HOW MUCH OR LITTLE RENT HAS BEEN PAID

FOR THE LAND ON WHICH IT WAS GROWN. That means that the corn grown on the least
fertile land will fetch the same price in the market, and among the costs of production of the
capitalist who grew his corn on that land, rent does not appear. Therefore, rent is NOT a cost of
production.
BUT IF RENT IS NOT A COST OF PRODUCTION, WHAT IS IT?
The answer, Ricardo says, is that rent is a diversion into the pockets of the landowners of
a portion of the profit earned by the capitalist class. It is, functionally speaking, identical with
the money that is diverted today into the pockets of financiers, who drain the profits from
capitalists just as the landed aristocracy did in the late eighteenth and early nineteenth centuries.
We are now ready to turn to Marx.

Part Eleven
And so, after sixteen thousand words of preliminary remarks, I come finally to the
centerpiece of Marx's lifework, his analysis and critique of capitalism. Although, as I have
remarked, Marx wrote at least 5000 pages of economic analysis [and maybe more, as one
commentator noted], everyone, I think, will agree that the central text is Volume One of
CAPITAL. When we open the pages of this extraordinary book, we are immediately confronted
by a problem of great complexity and difficulty. Marx purports to be writing in the tradition of
Smith, Ricardo, and dozens of lesser lights, but his language bears almost no relation to theirs. It
is complex, convoluted, rife with metaphors, ironies, literary allusions, and metaphysical
crochets. Ricardo's language is recognizably like that of Smith, and Smith's language looks not
very different from that of Quesney [although it is, of course, English, not French], but Marx's
language is absolutely nothing like that of any of his predecessors. What on earth is going on?
In my opinion, this question is of such importance that it needs, and deserves, an entire book
devoted to it. So I wrote one. MONEYBAGS MUST BE SO LUCKY is my attempt to
confront, engage with, and answer the question. Each writer must choose a language whose
syntactic and literary possibilities are adequate to the complexity of the object of his or her

discourse. The classical political economists were children of the Enlightenment, and believed
that when the fog of superstition was blown away, what would remain was a simple, clear
transparent world whose structure could successfully be captured by a plain, non-metaphorical
prose. To them, the marketplace was a transparent world of rational calculation and exchange.
But Marx believed that capitalist economy and society is deeply mystified, presenting itself as
transparent when it is in fact opaque, as rational when it is in fact irrational, as the end of history
when it is in fact just one more stage in the unfolding of history. What is more -- this is really
difficult and important -- he is convinced that although we can, by great effort, see through the
opacity and the irrationality, we and he as inhabitants of that world can never entirely rid
ourselves of the effects of the mystifications. To express the full subtlety of this insight, he needs
a language that can, at one and the same time, reproduce that surface opacity and irrationality,
analyze and explicate it, and yet acknowledge our bondage to it, with full and appropriate
intensity of emotional articulation of each level. His solution, unique among social scientists of
any discipline or persuasion, is a complexly ironic discourse, rich with cultural allusions and
resonant with overtones and implications. No one had ever written social science like this
before, and no one has since, or perhaps ever will again.
This is not the customary view of Marx's language, of course. The reaction of the British,
as exemplified by Joan Robinson, has been to subscribe to what I elsewhere call the childhood
polio view of Marx's writing style. This is the notion that when he was young, he contracted a
nearly fatal case of Hegelism, which nearly destroyed his ability to move gracefully from the
beginning to the end of a sentence. Long years in England facilitated a partial recovery, but the
effects lingered, with the result that he never succeeded in achieving the limpid clarity of a David
Ricardo. Never mind that this view is offered with respect to the man who wrote THE
COMMUNIST MANIFESTO, arguably the most powerful piece of political prose ever penned.

We know for a certainty that the theory is wrong because while Marx was preparing Volume One
of CAPITAL for publication, he wrote, in ENGLISH, an exposition of his views, published as
the pamphlet VALUE, PRICE, AND PROFIT, which is as transparent a piece of Ricardian prose
as one could ask for. Clearly, Marx chose to write as he did because he believed that only thus
could he communicate his richly complex ironic vision of capitalist society and economy. And, I
am quite convinced, he was correct.
[After writing these last lines, I re-read portions of MONEYBAGS MUST BE SO
LUCKY, to keep some of its phrases and arguments fresh in my mind. That little book, I believe,
is, sentence for sentence and page for page, the best thing I have ever written, although it has
languished for years now, having, in David Hume's poignant phrase, fallen "stillborn from the
presses." I cannot reproduce it here, though I should like to, but perhaps some of you will be
moved to take a look at it.]
In the opening pages of CAPITAL, Marx begins his analysis of the mystifications of
capitalism, but I am going to postpone my discussion of this aspect of Marx's theory because it
would interrupt the story I have been telling about the Labor Theory of Value. I shall have to
return to this theme of mystification, however, because it is impossible to understand the full
complexity of Marx's economic theory without it.
Recall the point at which we had arrived when we concluded our look at Ricardo.
Ricardo solved Smith's problem of the "accumulation of stock" by revising the Labor Theory of
Value to take account of labor indirectly required for production -- or as Ricardo puts it,
"embodied labor." This embodied labor is thought of as residing in the capital inputs and being
transferred, but by bit, to the output in the process of production. [Marx will have a wonderful
time both ridiculing and embracing this bizarre notion of bits of labor being passed from the
spindle to the wool as the wool is spun into thread. He calls the notion absurd, crack-brained,
"verruckt," and yet, despite that fact, correct. We shall have to see later on what that is all about.]

But brilliant though Ricardo's revision was, it turned out to hold true only in the very special case
of economies like the little corn/iron-books model we were looking it. As I told you [without
proof, though that is easily supplied if you know a little linear algebra], prices are in fact
proportional to labor values only in the case in which each line of production exhibits the same
ratio of labor directly required to labor indirectly required -- a situation which Marx equivalently
describes as "equal organic composition of capital." [Marx also rather vividly describes this as a
situation in which each line of production uses the same proportions of "living labor and dead
labor."]
Since Marx believes that he can salvage the Labor Theory of Value despite this
problematic limitation, and in doing so reveal some very deep truths about capitalism, we might
expect him to begin Volume One of CAPITAL by posing the problem for the general case, in
which we do not have the convenient and rather unusual situation of equal organic composition
of capital. But to our surprise, Marx does not follow this strategy of exposition. Instead, all of
Volume One is written about the special case of equal organic composition, and it is not until
Volume Three that Marx completes his defense of the [now considerably revised and elaborated]
Labor Theory of Value. Why?
The reason is that Marx sees in the writings of his classical predecessors an even deeper
problem than that of the determinants of natural price, a problem of which Smith, Ricardo, and
Mill were not even aware. The problem goes so deep into the real nature of capitalism that it
takes Marx virtually an entire volume to solve it and explore the historical, ideological, social,
and economic implications of the solution. Eventually, he will use his solution to this little
understood problem as the clue to the final defense of the Labor Theory of Value. I shall argue
that it is his solution of the problem posed in Volume One, rather than his resolution of the
difficulties with the Labor Theory of Value, that is the real heart of Marx's entire critique of

capitalism. It is also the central truth of Marx's lifework, unrefuted to this day, a truth that stays
with us after history and mathematics and politics and time have tarnished Marx's reputation. It
is because of this truth that I call myself a Marxist.
If I may be facetious for a moment and make a little philosophical joke, the problem
Marx sees is the economic version of a more general problem that Martin Heidegger would later
pose: Warum gibt es uberhaput etwas, und nicht nichts? [Why is there is general something and
not nothing?] Marx asks, why, in a capitalist economy, are there any profits at all?
We know that in virtually every economy, there is a physical surplus each year that is
appropriated by someone in the society. And we know for a fact that there are enormous profits
in capitalist economies, because we can see the capitalists getting rich, year after year. It
certainly looks as though the capitalists are appropriating the surplus, and indeed, with a little
calculation, we can demonstrate that in our corn/iron/books model, the natural price of the annual
physical surplus exactly equals the profits garnered by the capitalists. [To demonstrate this, we
would first have to specify the wage, and this, as we shall see, is a profoundly important step in
the process of analyzing what is going on in the economy.] But why are there any profits at all?
Why do capitalists get rich under capitalism?
We know why slave masters get rich. They force their slaves to perform productive labor
whose product the masters appropriate. We know why feudal lords get rich. They compel their
serfs to labor several days a week on the lord's land, and the lords then appropriate what is grown
on that land. But in a capitalist economy, there are no slaves, there are no serfs. There are only
legally free men and women who voluntarily accept jobs working in the factories of their
employers, the entrepreneurs. These workers are paid wages determined by the forces of the free
market. How, in this situation, can it be that the workers merely survive, and the capitalists
grow fat on profits?

The apologists for capitalism on the eighteenth and nineteenth centuries had a number of
answers to this question, all of them, needless to say, very flattering to the capitalists, and these
answers have stayed with us. One can still find them in modern mainstream economics
textbooks.
The first answer, and my favorite, is the abstinence, or, as I like to think of it, the cheeseparing, theory of profits. According to this explanation, most people improvidently and
wantonly spend every bit of money they can lay their hands on, buying fine clothes and hard
liquors and expensive delicacies for their dinner table, and so they never grow any wealthier.
But a few sternly religious upstanding Protestant men live simply, pare their cheese, scrimp on
their clothing, eschew hard liquor, and set aside every bit of money they can squeeze out of their
daily budgets until they have amassed enough to start a small business. "Many a mickle makes a
muckle," as George Washington said, misquoting the old Scots proverb. Profit is then the reward
in this life for the virtue that will be even more lavishly rewarded in the next. Modern
economics jettisons the religious trappings and simply calls profit the reward for waiting [i.e.,
waiting to consume.]
This explanation of profit, spiritually uplifting though it may be, is unfortunately not
terribly plausible analytically. In fact, it confuses the rate of interest with the rate of profit. To
see that this is indeed a confusion, perform the following little thought experiment. Imagine two
would-be entrepreneurs, each of whom decides to launch a business. We may suppose that both
businesses, once started, will have gross annual receipts of five million dollars and annual
expenses [including raw materials, machinery, labor, utilities, and so forth] amounting to
$4,840,000. The going rate of interest, let us assume, obtainable at the local bank, is 6%. The
first entrepreneur, a fine upstanding Puritan, has saved for years and managed finally to assemble
a fund of one million dollars, which he decides to invest in his start-up. By doing so, of course,

he chooses to forego the sixty thousand dollars in interest that he could earn simply by putting
his money in the bank. At the end of the year, when it comes times for him to do his books and
figure out whether he has made a profit, he will have to subtract, from his gross revenues, not
only the cost of his labor, raw materials, machinery, and so forth, but also that lost sixty thousand
dollars. That is, as they say these days, the opportunity cost to him of using his million dollars to
start the business. His calculations yield a happy result. Against his five million in gross
revenues, he writes the $4,840,000 he has spent for all those inputs, adds to this the $60,000 in
foregone bank interest, and finds that he still has $100,000 left over, for a healthy 10% profit on
his invested one million. In short, he has made a profit. The second entrepreneur, who has until
now led a rather profligate life, has no savings at all, but he is a fast talker, and manages to
persuade a banker to lend him one million dollars, in order to launch his business. His end of
the year calculations yield exactly the same result. He has five million in revenues, four million
eight hundred and forty thousand in production costs, and sixty thousand in bank interest, all of
which, when deducted from his gross revenues, leaves him with the same 10% profit. So it
seems that profit is not the reward for abstinence, upstanding living, and frugality.
[This is growing rather long. I shall continue tomorrow.]

Part Twelve
Other explanations [and justifications]have been offered for the existence of profits. The
profit earned by the entrepreneur, it was said, is actually his wages of management -- a more
plausible rationale in the early days when businesses were routinely run by their owners. But
this too is fairly obviously a non-starter. To see why, just consider a business inherited by the
ne'er-do-well son of an industrious, hard-working capitalist. Not wishing to spend his days on
the shop floor overseeing his employees, the son hires a manager, to whom he pays whatever
salary is the going rate in the labor market. That salary is one of the costs of doing business, to
be subtracted from gross earnings before a profit rate is calculated. The young man would be

quite surprised if he were informed that the salary of the manager had entirely gobbled up the
company's profits, leaving nothing for him to disport himself on the Riviera.
Equally implausible is a more recent rationale, which traces profits to the compensation
for entrepreneurship and innovation. No doubt, in any economic system, some compensation
must be made for those indispensable talents, but why then do routine businesses, not engaged in
daring and exciting flights of innovation and entrepreneurship, also earn a solid profit?
Marx poses the problem in its full difficulty by positing, as I have said, that commodities are
exchanging at prices proportional to their labor values -- which, as we have seen, means that
there is equal organic composition of capital in all lines of production. Now, under those
circumstances, the capitalist pays for his inputs a money price proportional to the labor embodied
in those inputs. He then hires workers to transform those inputs into salable output. What wage
does he pay his employees? Well [this is the crucial point in the entire exercise], the workers are,
from the point of view of the theory of laisser-faire capitalism, petty commodity producers,
producing their laboring, which they sell for a wage, so they, like everyone else, are paid a
money wage proportional to the cost to them of producing their labor. This means that they are
paid enough money to buy the food, clothing, and shelter they require to be able to continue to
work. In addition, since their physical plant [their bodies] wears out, they must be paid enough
for a depreciation fund so that when their physical plant is completely spent [and they die], it can
be replaced. In short, they must be paid enough to raise children who, at the age of twelve or
thirteen, are ready to take their place in the factories. [Yes, Marx fully intends this as bitterly
ironical, which is to say BOTH literally true AND ALSO a devastating condemnation of
capitalism. This is why he needs a complex language capable of capturing all of this. More of
this anon.]
Now, when the capitalist combines his various inputs, the result is a product embodying a
quantity of labor directly and indirectly applied. The product is then sold in the market, and by

Marx's assumption, it, like the inputs, sells at a money price proportional to its labor value. And
here is the nub of the problem. The capitalist has paid the labor value price for his inputs. He
has combined them [including, perhaps, his own managerial laboring], thereby transferring to the
output all of that embodied and direct labor. And he now sells the output for its labor value,
which is to say for a money price proportional to the labor embodied in it. How on earth can he
make a profit? If he decides arbitrarily to slap a 10% surcharge on the cost of his inputs, that will
do him no good, because all the other capitalists will do the same, and the cost to him of his
inputs will rise so as to eat up what he gained by upping the price of his output. As Marx writes
at the very end of Chapter Five ["Contradictions in the Formula of Capital"]:
"Our friend, Moneybags, who as yet is only an embryo capitalist, must buy his
commodities at their value, must sell them at their value, and yet at the end of the process must
withdraw more value from circulation than he threw into it at starting. His development into a
full-grown capitalist must take place, both within the sphere of circulation and without it. These
are the conditions of the problem. Hic Rhodus, hic salta!" ["Here is Rhodes. Jump here!" -- the
tag line of an ancient Roman story about a braggart who claimed to have made a great broad
jump in Rhodes, and was challenged to reproduce it on the spot.]
And now, in the very next paragraph, Marx springs his great discovery, the solution to
that puzzle that had stumped all of his predecessors, namely: In a capitalist system, how do the
surplus-getters get the surplus? [As I have been phrasing it.] Here is his answer.
"In order to be able to extract value from a commodity, our friend, Moneybags, must be so lucky
as to find, within the sphere of circulation, a commodity, whose use-value possesses the peculiar
property of being a source of value, whose actual consumption, therefore, is itself an
embodiment of labour, and consequently, a creation of value. The possessor of money does find
on the market such a special commodity in capacity for labour or labour-power."
A few words about the language of this passage. First of all, the term translated by
Aveling, Moore, and Engels as "Moneybags" is geldbesitzer, whose standard translation is
"possessor of money." But the etymology of "geldbesitzer" suggests someone sitting on money,
and that calls to mind the wonderful nineteenth century caricatures of Thomas Nast and others,
who routinely represented capitalists as fat men in tails and top hats with big dollar signs or

pound signs on their breasts, sitting on bags of money. The translation "Moneybags" perfectly
captures Marx's mocking tone. This character is presented to us by Marx as a naive, decent
fellow searching in the market for a commodity that will have the magical quality of adding
more value, when it is consumed in production, than is contained within it. We are invited to
imagine him trying first this commodity and then that, until, hey presto, he hits upon labor, and
suddenly finds that he is making a profit.
This is crackbrained, mad, absurd, "verruckt," as Marx says. [I cannot do an umlaut in
this damned blog, so you will have to supply the umlaut each time I write "verruckt."] But it is
also true, and the solution to the mystery of profit. The fact that a proposition about capitalism
can be both true and crack-brained is one of Marx's way of showing us that capitalism, despite its
surface appearance of every-day simplicity and rationality, is in fact deeply mystified and shot
through with what he calls, following Hegel, "contradictions."
The precise solution to the problem, Marx says, is that there is a distinction, in the case of
labor but in the case of no other commodity, between the Labor-Power of the worker, which is a
human capacity, and the Labor, which is what the worker does when hired by the capitalist. The
worker is paid for his or her Labor-Power [strictly, although Marx does not say so, the LaborPower is rented, not sold], and the natural price of that Labor-Power, as for any other commodity,
is its replacement cost, which is to say the amount of labor embodied in it. When the worker eats
food, wears clothes, and rests at night in a shelter, he or she is consuming commodities
purchased in the market at their natural prices. The labor embodied in those wage goods is then
transferred to the worker, or more precisely is transferred to the worker's Labor-Power,
reconstituting it.
Now comes the real secret. Let us suppose that it takes six hours of labor a day, directly
and indirectly, to produce the food, clothing, and shelter that the worker needs to reconstitute her
Labor-Power for one more day. In that case, the worker will be paid a money wage proportional

to those six hours of embodied labor. BUT, when the worker goes to work the next day, she will
be required to work a full twelve-hour day. In working a twelve hour day, she will embody
twelve hours of new labor, living labor, labor directly required, in the product that the capitalist
will eventually sell. And the difference between the six hours of embodied labor she must
purchase in the form of wage goods, and the twelve hours of labor she is required to perform, is
the surplus labor, or Surplus Value, extracted from her by the capitalist. When the capitalist sells
the product in the market, at its value, he appropriates that six hours of surplus labor, in the form
of an equivalent amount of money, which thereupon becomes his profit.
How do I know that the embodied labor in the wage goods will be less than the labor time
given up in the sphere of production? Because it is a mathematical truth, easily proved, that IF
THERE IS A PHYSICAL SURPLUS IN THE SYSTEM AS A WHOLE, THEN THERE WILL
BE SOME AMOUNT OF SURPLUS LABOR PERFORMED IN THE SPHERE OF
PRODUCTION. What is more, THE LABOR VALUE OF THE PHYSICAL SURPLUS WILL
EXACTLY EQUAL THE SURPLUS LABOR PERFORMED IN THE SYSTEM, AND THE
MONEY VALUE OF THE PHYSICAL SURPLUS WILL EXACTLY EQUAL THE MONEY
PROFIT.
Or, as we say these days, Ta da!
There is a very great deal more to be said, but I must go teach, so I will post this, and continue
tomorrow.

Part Thirteen
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 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 quanties 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.]

Part Fourteen
Why are the workers compelled to accept a wage that allots to them nothing more than
subsistence? This, of course, is the real story of capitalism, and Marx devoted a great deal of
time and many pages to his answer. Marx was, among other things, the first great economic
historian [that is to say, historian of economic matters -- he was also the first great historian of
economic theory, which is another thing entirely. See the three volumes of THEORIES OF
SURPLUS VALUE.] Looking principally at the evolution of capitalism in England [the data for
which were more readily available to him], Marx argues that over a period of several centuries,
peasants and artisans were progressively deprived of their ownership of or access to the means of
production -- the land, in the first instance, but also the forests, the mines, the tools of their

trades, and also, eventually, the inherited knowledge and skill that made them productive
craftspersons. Having no access to the means of production, they were left with nothing but their
capacity for labor, or as Marx calls it, their Labor Power. They are compelled to work for wages,
at terms set for them by the capitalists. At the same time, the traditional bonds between lord and
peasant are broken, so that on the one side, the workers are legally free to accept work wherever
and at whatever wage they choose, while on the other side, the employer is liberated from any
traditional or legal responsibility for the well-being, indeed for the survival, of his workers. It is
no concern of his if they starve to death. To be sure, if an employer offers wages well below the
market standard, his workers will leave him for an employer offering better wages. But the
competition between workers and employers is unequal, because the employers own and control
the means of production, and are capable of sitting out a strike, whereas the workers are living
from hand to mouth. The key to understanding any historical era, Marx says, is identifying who
controls the means of production. It is for this reason that the central demand of socialists is
collective control and ownership of the means of production.
A few side notes on this vast subject, which I am merely touching on. First, in the
seventeenth century, as capitalism and wage labor were developing, it was common to view
working for wages as a kind of slavery [what eventually came to be called by radical critics
"wage slavery."] John Locke, in his classic SECOND TREATISE OF CIVIL GOVERNMENT,
asserts that I acquire ownership in a portion of the common given to us by God by mixing my
labor with it. [Thus, if I clear an uncultivated field and make it ready for cultivation, I acquire
ownership of the field by mixing my labor with it.] If my servant [his word], who works for me
for wages, clears the land, then, since I own his labor, I and not he acquire property in the land.
It is in this way that one individual comes to own vastly more land than he could ever mix his
labor with.

Second, Marx considers the appropriation of the means of production perfectly just, by
bourgeois [say, Lockean] conceptions of justice. But does he think it is REALLY just? The
answer -- rather surprising to readers who expect Marx to be a utopian reformer -- is that there is
no such thing as Real JUSTICE. Morality is a by-product of the structure of the social relations
of production in an era. Feudal justice simply IS justice in a feudal society, albeit it is an
anachronism in a capitalist society. So long as the slave owner in a slave society pays the
contracted price for his slaves, he has a legitimate claim to own them IN A SLAVE SOCIETY.
Marx never, never says that socialism OUGHT to replace capitalism. He says that socialism
WILL replace capitalism, as a consequence of the working out of the "laws of motion" of
capitalist society and economy.
One amusing final observation. Capitalism, for purposes of rationalizing the subsistence
wage, construes the worker as a petty commodity producer whose commodity is Labor-Power
[and for whom the wage is the cost of production of that commodity.] Now, in the American tax
code, independent business owners are permitted to deduct their costs of doing business from
their gross taxable income before arriving at the net taxable income on which they owe taxes.
So, since the worker must eat, wear clothes, and find shelter in order to produce, each day, his or
her product -- Labor-Power -- the worker ought to be able to deduct the cost of food, clothing
and shelter [and also medical expenses, etc.] from his or her gross taxable income before arriving
at the net taxable amount. Good luck! If I am not mistaken, someone [in Connecticut?] actually
took such a claim to court. The logic of the claim was, I believe, unassailable, but not
surprisingly, the court threw it out. So much for bourgeois justice when it conflicts with the
interests of the ruling capitalist class.
Not only did Marx study the history of the development of capitalism, and the history of
economic theory, he also studied what actually went on in the factories that were spewing out the

vast quantities of commodities that were making capitalists rich. In this as well he was breaking
new ground. Marx did not go into factories and watch the production process. Instead he went
to that great library, the British Museum. Why so? Because one of the achievements of the
Reform Movement that flourished in England in the first third of the nineteenth century was the
establishment of a cadre of professional Parliamentary Factory Inspectors charged by the
government with traveling around England and gathering data, first hand, on the conditions in
the rapidly multiplying factories. The Inspectors not only observed the production process.
They also interviewed workers and collected data on their working and living conditions. Their
observations were presented to Parliament in [I think] semi-annual Factory Inspectors' Reports,
which Marx read, volume after volume. [These reports have been reprinted by the Irish
University Press, and should be available in most really good university libraries.] Much of the
extraordinary Chapter X of CAPITAL Volume One, "The Working Day," is drawn from the
reports, as Marx's footnotes indicate.
Marx describes the endless devices by which employers sought to extract extra labor time
from their employees. They would even go so far as to push back the hands of the clock in the
factory so as to steal an extra few minutes of unpaid labor. These detailed, matter of fact
descriptions give the modern reader an appalling picture of life in the early factories. But it is
very important to be clear that Marx is NOT saying that these tricks and thefts on the part of the
capitalists explain or account for the existence of profit. One of the beauties of Marx's theory is
that it accounts for profits in the ideal, never actualized case in which workers are faithfully paid
the wages for which they contracted, the production line is not speeded up above the norm for
the industry as a whole, and equal organic composition of capital in all liens of production
guarantees that all goods, outputs and inputs, exchange in proportion to their labor value.

It is also important to be clear that despite Marx's itemizing of the cruelties and dishonesties of
English capitalists, he insists that we will only have a satisfactory theory of capitalism if we can
explain how it works when all the capitalists are good-hearted, upstanding, honest men and all
the workers dutiful and obedient employees. His analysis and critique focus on the structure of
capitalism, its logic, so to speak, not on the many corruptions of it and deviations from the
canons of bourgeois justice.
There is, of course, a great deal more to be said about Marx's account of capitalism, but at
this point I want to continue the story I have been telling about Marx's completion and critique of
the classical school of Political Economy. We had gotten as far as showing [or at least reporting
-- I have not set down the proofs here. They can be found in UNDERSTANDING MARX] that
in the special case of equal organic composition of capital, prices are proportional to labor values
and surplus labor is extracted annually from the workers in an amount exactly equal to the labor
value of the annual physical surplus. The ratio of total profits to total surplus value is then
exactly equal to the ratios of prices to labor values, and thus, in that direct sense, profit just IS the
surplus labor extracted from the workers.
One terminological point before we move on to Marx's solution to Ricardo's problem of
unequal organic composition. In common speech, to exploit something is to make use of it so as
to achieve some end. Now, in that very generally sense, we may say that the factory owner
exploits coal's natural ability to burn in such a manner as to fuel a power machine, and the corn
producer exploits iron's ability to hold its shape and serve as a plowshare. But there is a more
precise and limited sense of the word that Marx invokes in his account of the origin of profit. To
exploit an input into production in this limited sense is to extract from it, in the process of
employing it in production, more value than has been embodied in it in the process by which it
was produced. There is, Marx says, only one such commodity [see the mocking passage, quoted

above, about Moneybags] -- namely, Labor Power. The capitalist buys a day's Labor Power from
its producer, the worker, at its natural price, namely a price proportional to the quantity of labor
embodied in it. [By the way, I keep inserting the term "proportional to" because money and
labor are measured in two different units -- pounds sterling, let us suppose, for money, and hours
of average socially necessary labor time for labor. Hence they can never, in the strict sense, be
"equal."] The capitalist then extracts from the labor power, in the production process, MORE
VALUE THAN IS CONTAINED IN IT.
It is in this precise sense that, according to Marx, CAPITALISM RESTS ON THE
EXPLOITATION OF THE WORKING CLASS.
And, if I may end today's post with a personal note, it is this proposition, in my
considered judgment, that is absolutely true, and remains when all the criticisms I have yet to
mount are leveled against Marx's specific solution of Ricardo's problem. The simple truth, as
true now as it was when Marx first advanced it, is that capitalism rests upon exploitation. That is
why, on this blog and elsewhere, I call myself a Marxist.

Part Fifteen
The time has come to see how Marx solves Ricardo's problem. This is going to get a
trifle gnarly, so you will have to follow along carefully. Our exposition will take us from Volume
One into Volume Three [Chapter 10]. Bear with me. To save space and time, I will simply state
the results of solving little equations and carrying out little calculations. Those who are serious
about mastering this subject are encouraged to work the equations out for themselves on a piece
of paper.
Recall the problem we face: Ricardo was aware that in the general case, when different
lines of production exhibit differing degrees of capital intensity, prices are not proportional to
labor values. He was convinced that the labor required directly or indirectly in production was
still the key to understanding the determination of the distribution of the social product, but he

simply could not figure out what happens when some lines of production are more labor
intensive and others more capital intensive.
To focus our attention, it will be useful to introduce a new model for analysis. [I trust
you understand that everything I say about these little three sector models can be proved quite
generally for a system with any finite number of lines of production. The formal proofs are all in
the Appendix to my book UNDERSTANDING MARX.] So, consider this new model, with
three sectors: corn, iron, and tools. Notice that in this model there are no luxury goods
[theology books]. Corn, iron, and tools are all required, directly or indirectly, in the production
of all three sectors. This, we shall discover, is essential to Marx's analysis. I will discuss it at
length a little later on. Notice also that I have specified the real wage, which is once again 0.2
units of corn and 0.1 units of iron per unit of labor.
Labor

Corn
Iron
Tools
Output
Labor
30
15
0
150
Corn Sector
80
128
2
3
240
Iron Sector
20
16
1
5
60
Tools Sector
50
6
27
4
16
Using Lc to stand for the labor value of corn, Li to stand for the labor value of iron, and
Lt to stand for the labor value of tools, we can form three labor value equations, as before, from
the input and output data of those three sectors. When we solve the equations, we get the
following result, using the symbol "~" to mean "approximately equal to."
Lc ~ 0.9344
Li ~ 1.2168
Lt ~ 7.3712
In Marx's terminology, the total amount of embodied labor required by a sector of
production is called its Constant Capital, which he labels C. The total amount of direct labor
required he calls its Variable Capital, which he labels V. He uses these terms because the capital
inputs yield up a constant amount of embodied labor to the output in the production process, but

the labor power inputs yield up an amount of labor that varies according to the capitalist's ability
to wring more labor out of his workers.
Having solved the equations for the variables Lc, Li, and Lt, we can now plug these
values back into the table and calculate the ratio of constant to variable capital in each sector,
which Marx calls The Organic Composition of Capital. This is the same ratio that Ricardo
would call the ratio of embodied or indirectly required labor to directly required labor. These are
all different terms for the same mathematical quantities. When we do this, we find the
following:
The organic composition of the corn sector is 0.1713
The organic composition of the iron sector is 0.1164
The organic composition of the tools sector is 0.2271
The organic composition of the entire system is 0.1746
Quite obviously, this is not at all a case of equal organic composition of capital. We can
now set up the price equations, using Pc for the price of corn, Pi for the price of iron, Pt for the
price of tools, W for the money wage, and R for the profit rate. Because we have specified the
real wage, this system of three equations now has four unknowns: Pc, Pi, Pt, and R. When we
set the price of corn equal to 1, we have a system that can be solved. The results are as follows:
Pc = 1
Pi ~ 1.364
Pt ~ 7.455
R ~ 1/3
At these prices, the real wage ~ .3364
As should be obvious, in this system prices are not proportional to labor values.
Pc/Lc ~ 1.0702
Pi/Li ~ 1.12097
Pt/Lt ~ 1.0014
Now Marx makes his move. Tomorrow I shall tell you about Marx's big idea. [Hey!
This stuff is so deep in the weeds even my eyes glaze over. I have to do something to keep you
coming back.]

Part Sixteen
Now Marx makes his move. [This paragraph is actually quoted from page 127 of my
book, UNDERSTANDING MARX. It seems to me somehow vaguely cheating to quote from a

book rather than to write something new, but I did write it myself, after all.] The prices at which
commodities exchange in the market are merely the surface of the capitalist market, the
appearance. The underlying reality is the extraction of surplus value from the workers in the
sphere of production. As Marx says in a letter to Engels in the year following the publication of
volume one, "profit is for us first of all only another name or another category of surplus value ...
[S]urplus value gets the form of profit, without any quantitative difference between the one and
the other. This is only the illusory form in which surplus value appears."
The equality of profits with surplus value is an economy-wide fact, Marx claims. In any
single industry, the particular capital intensity may cause prices to deviate from surplus value, so
that the equality of the two, and the grounding of capitalism on exploitation, is hidden from view.
But in the society as a whole, the total of profits, rent, interest and other unearned income must
exactly equal the surplus labor value extracted from the workers. Marx adds the assertion of a
second claim: That the total price of all the commodities sold in a time period must equal the
total labor value of those commodities, even though the price of an individual commodity may
lie above or below its labor value.
As it stands, Marx's solution to the problem posed by Ricardo is incoherent. The problem
is one of units. Prices are measured in units of whatever is being used as money in the economy.
Labor values are measured in units of labor time [hours, person-years, etc.] Strictly speaking,
they cannot be equal unless one is deliberately stipulating the equality as a way of defining the
money unit, in which case the equality is a tautology. But there is a simple way of capturing
what Marx really intends to assert, namely in the following equality, which is definitely not a
tautology:
(total profits/total surplus value) = (total prices/total labor values)

Since the numerator of each side of the equation is measured in money units, and the
denominator is measured in labor time units, the units cancel out, leaving Marx asserting the
equality of two pure fractions.
Marx also asserts one more equality, between the money profit rate and something he
calls the value rate of profit. This latter quantity is simply the ratio between the surplus value
extracted in the economy as a whole [ S] and the sum of the constant capital [C] and variable
capital [V], measured in labor units. In other words:
The value rate of profit = S/(C+V)
So Marx claims that S/(C+V) = R
Is Marx right? Let us start by checking our little corn/iron/tools economy, the one that
does not have equal organic composition of capital. We can do this, albeit a trifle tediously, by
plugging into Marx's equation the values we got for prices, profits, labor values, and profit rate in
that system. Here is what we get:
Total profits are simply the total money cost of all the capital inputs in the system,
including labor [evaluated by means of the money wage], multiplied by the system wide profit
rate, which is 1/3. When we carry out this calculation, we find that
Total profits ~ 110.28 money units [which, we will recall, was specified as units of corn,
because we set Pc = 1.]
Total surplus value is calculated by subtracting the total amount of necessary labor in the
economy [which is the labor value of all the real wages earned by the workers] from the total
amount of labor employed in the economy. This is equal to 150(1 - Lw).
Total surplus value ~ 103.71 units of labor.
Total prices are arrived at by simply adding up the money price of the total output: Total
prices ~ 441.12 money units
Total values are calculated in analogous fashion by adding up the labor value of all the
outputs. Total values ~ 415.20 units of labor
Now we can check Marx's claim.
(total profits)/(total surplus value) ~ 1.063 money units/unit of labor
(total prices)/(total values) ~ 1.062 money units/unit of labor.

Marx is right! [Indeed, the minor difference is actually a result of rounding. The actual
result is a strict equality.]
But this is just for our little corn/iron/tools model. What about the general case? Well,
there is bad news, and there is good news. The bad news is that if you add a theology books
sector, the equality break down. The good news is that the equality holds for EVERY
POSSIBLE LINEAR REPRODUCTION MODEL IN WHICH THERE ARE NO LUXURY
GOODS. What does all of this mean?
Well, when there are no luxury goods, the entire physical surplus is being used to expand
the magnitude of production. In other words, an economy without any of its surplus diverted to
luxury goods is engaged in the fastest possible rate of growth. "Accumulate, Accumulate, that is
Moses and the Prophets to the capitalists," says Marx. Now, to the more alert among you, the
following question may occur: As capitalists attempt to reinvest all of their profits in expanded
production, how do we know that they will not be frustrated by bottlenecks and gluts -- too little
of one input, too much of another? Can we be certain that balanced growth is in fact possible,
whatever the technical specifications of production may be?
The answer, I am happy to say, is yes. There may indeed be mismatches between supply
and demand at first, but it is a mathematical fact [proved in the Appendix of my book] that for
any linear single-product system of production, there is some vector of levels of activity of the
different industries, arrived at over time by the forces of competition, that supports a process of
balanced growth, year after year. The growth rate, needless to say, is equal to the profit rate.
Interestingly enough, the great twentieth century mathematician John von Neumann proved a
theorem in growth theory exactly along these lines. As a consequence, an economy embarked on
maximum growth is said to be on a von Neumann balanced growth path.
[There is one really hinky other case in which Marx's equation is true, but as it has no
apparent economic meaning, and involves some hairy propositions about maximal eigenvalues, I

will leave it alone. You can find it discussed in Abraham-Frois and Berrebi's fascinating book,
THEORY OF VALUE, PRICES, AND ACCUMULATION.]
This is the theoretical high point for Marx, the outer limits of the success of his version of
the Labor Theory of Value. The key to the entire development in Marx is the distinction between
labor and labor-power, which opens up the possibility of surplus value. Tomorrow, I will show
you that Marx is all wrong, but that nevertheless his underlying intuition about capitalism is
correct. I will also suggest an alternative theoretical formulation of this underlying intuition.
Stay tuned.

Part Seventeen
I write these next words with tears in my eyes -- not because it turns out that Marx is
wrong. No, I am a grown-up, I have lived through twenty years of Reagan, Bush, and Bush
without breaking. I have shown that I can take it. The tears are for my one claim to economic
fame. In 1981, I published an essay entitled "A Critique and Reinterpretation of Marx's Labor
Theory of Value," in a journal called PHILOSOPHY AND PUBLIC AFFAIRS. [I believe it is
available on-line.] In that essay, I proved an extremely important theorem that shows that Marx
was wrong to impute the exploitative capacity of capitalism to the labor/labor power distinction.
I was, I firmly believed, the first person ever to realize the underlying logical flaw in Marx's
argument, and to demonstrate it mathematically. The proof was not much from a mathematical
point of view. Indeed, when I had first actually proved the theorem several years earlier, I was
ignorant of linear algebra, and had used nothing but elementary algebra and some ingenious
labeling moves. After the essay appeared [since I made the mistake of publishing it in a
philosophy journal, almost no one read it who was capable of appreciating it], the brilliant,
mathematically extremely sophisticated Marxist John Roemer published a reply and criticism in
the journal in which, in passing, he pointed out that the same theorem had been published two
years earlier by Josep M. Vegara in a monograph entitled ECONOMIA POLITICA Y

MODELOS MULTISECTORIALES. [For those who are interested, the proof appears in section
3.5 of that book.] As I am linguistically challenged, and do not even read Spanish, let alone
Hungarian or Japanese, I had of course not noticed Vegara's book. In the essay, I go on to
develop an entirely original alternative analysis of exploitation, which in due course I shall
repeat here [Roemer criticized that too]. But since this was my one shot at a genuine formal
proof to which my name could be attached, I still weep, all these years later, for the lost
opportunity. I am not the only person to whom this has happened, needless to say. At some
point in the 70's, Samuel Bowles presented to his class at UMass an elegant formal refutation of
Marx's famous claim about the falling rate of profit. When he finished, one of the graduate
students said, "Sam, Okishio proved that in 1960." Bowles was reduced to publishing a note in
1981 in the CAMBRIDGE JOURNAL OF ECONOMICS with the rather modest title "Technical
Change and the Profit Rate: A Simple Proof of the Okishio Theorem." I think I will stick to
philosophy. In that field, if someone publishes an idea before you do, all you need to do is put
brackets around your essay and a negation sign in front of the brackets, and then publish. You
will get just as much respect.
So, herewith an informal, very simple, and elegant exposition of Vegara's Theorem.
[God, how I hate writing those words.] The purpose of formal representations of arguments is to
exhibit certain very general structural features of the arguments without the distraction of the
content. Suppose I present you with the following argument: All Martians are vegans. All
vegans are politically correct pompous asses. Therefore, all Martians are politically correct
pompous asses. If you have never had an elementary course in logic, you may protest that there
are no Martians, and that you are offended by the statement about vegans. These natural
reactions are likely to blind you to the fact that the argument is a perfectly valid instance of what,
in the old days, was called a syllogism in Barbara, namely All A are B, All B are C, therefore All

A are C. [As a mnemonic device to help them remember which syllogisms are valid, the
medievals gave all the various possibilities names in which in which a sequence of three vowels
stood for the major and minor premises and the conclusion. Since "All A are B" was labeled a
proposition in the "a" form, the name Barbara, with syllables aaa, stands for a syllogism in which
each of the three propositions is of the form "All x are y."]
Marx, as we have seen, makes a number of formal claims about the relationship between
the physical surplus, the quantity of labor directly indirectly required to produce a commodity,
the prices at which goods exchange in a market ruled by competition, and the profit rate. Some
of these claims are true, others are true under certain interesting circumstances, and still others
are false. Marx also makes the very strong claim that all of these theses rest on the distinction,
unique to the labor input in production, between labor and labor power. Taken all together, he
claims to have shown rigorously that capitalism and its profits rest on the exploitation of the
working class. What is more, he argues, on the basis of all of these claims, that exploitation is
completely compatible with bourgeois morality, whose fundamental command is to give equals
for equals.
We have translated many of Marx's claims into formal mathematical assertions, and have
been able by this device to establish exactly when, and under what circumstances, they are true.
Suppose now that we look back at the equations we formulated for the purpose of calculating
labor values and prices and see whether, in those equations, there is some formal representation
of Marx's signature innovation, the distinction between labor and labor power.
On first inspection, the answer would seem to be yes. Here, for example, is the equation
we formulated, in the corn/iron/books model, for the labor values in the corn sector:
100 + 2Lc + 16Li + 0Lb = 300Lc
The labor inputs are distinguished by the fact that in the process of production, each unit
contributes one full unit of labor value to the corn output, whereas the corn and iron inputs
contribute only an amount equal to their labor value. The amount of labor required to produce a

unit of labor is, we saw, necessarily LESS than one unit of labor [this follows necessarily from
the fact that the system as a whole produces a physical surplus], and yet it contributes a full unit
of labor to the output. The difference between those two quantities -- the amount of labor
required to produce a unit of labor and a unit of labor -- is precisely the surplus labor that is
transformed, in the sphere of circulation, into profit.
But suppose now we ask a question that it never occurred to Smith or Ricardo or Marx to
ask, a question [I cannot let this go] which, for a brief moment, I thought I was the first person
ever to ask: How much corn, directly and indirectly, does it take to produce one unit of iron, one
unit of books, one unit of corn itself, AND ONE UNIT OF LABOR? Why on earth ask that
question? There is no plausible distinction between corn and corn power, after all. But that is
just the point. If we look at the equations, the only thing that tells us which input is labor, which
is, corn, which is iron is the label. Suppose we keep the same physical characteristics of the
model, but rewrite the equations so that they are set up to discover how much corn it takes,
directly and indirectly, to produce one unit of each input. Following our labeling practice, let is
call Ci the amount of corn, directly and indirectly required to produce one unit of iron, Cl the
amount of corn directly and indirectly required to produce one unit of labor, Cb the "corn value"
of books, and Cc the "corn value" of corn itself.
We can certainly do this. Nothing stops us from formulating such equations. But will
they have any economic meaning? Do we have any assurance that we won't get absurd results,
such as a negative value for the "corn value" of books? And, most important of all, will it turn
out that it takes less than one unit of corn to produce a unit of corn, so that there is some "surplus
corn value" generated each time we use corn as an input into production?
The answer to all of these questions, and any other similar questions we might ask, is a
simple YES. EVERY SINGLE RESULT WE PROVED IN OUR VARIOUS SYSTEMS WITH
REGARD TO LABOR, LABOR VALUES, AND SURPLUS LABOR VALUE, CAN BE

PROVED IN EXACTLY A PARALLEL MANNER FOR CORN VALUES, OR FOR IRON

VALUES OR TOOL VALUES. The only thing we cannot do is replicate these results for "book
values," because books are not required directly or indirectly as an input into every line of
production. They are a luxury commodity, as I called them.
It is necessarily true that all of the corn values or iron values or tools values] will be
positive, that the corn [or iron or tools] value of the physical surplus will exactly equal the
surplus corn [or iron or tool] value extracted from the corn inputs, that in an economy embarked
on a von Neumann balanced growth path:
(total money profits)/(total surplus corn value) = (total money prices)/(total corn values)
and so on and on.
Clearly, Marx and Smith and Ricardo are right that there is something special about labor
that sets it apart from all the other inputs into production, but the distinction between labor and
labor power is not it, because the revised equations we wrote [well, we did not actually rewrite
all of them, but you get the idea] appear to demonstrate that in our system corn is exploited!
What on earth is going on?
I have an answer [and this one IS in some sense original with me, I think], but I must
prepare now to lecture this afternoon about Michael Oakeshott, so my answer will have to wait
until tomorrow.

Part Eighteen
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].

Part Nineteen
Here are the price equations of our corn/iron/tools model, revised so as to represent workers as
petty commodity producers. In order to indicate that capital cannot be transferred from the labor
producing "industry" to other lines of production, I introduce a new variable, r, to stand for the
rate of "profit," if there is any, in that "industry.
( 0Pl + 30Pc + 15Pi + 0Pt )( 1 + r ) = 150Pl
( 60Pl + 128Pc + 2Pi + 3Pt )( 1 + R) = 240Pc
( 20Pl + 16Pc + 1Pi + 5Pt )( 1 + R) = 60Pi
( 50Pl +
6Pc + 27Pi + 4Pt )( 1 + R) = 16Pt
It is not necessary to specify the real wage because that is implied by the input quantities of the
first line of production. This is now a system of four equations in six unknowns: Pl, Pc, Pi, Pt, r,
and R. We reduce the number of unknowns to five by stipulating that corn is the money
commodity, as before, setting Pc = 1. That still leaves one degree of freedom.
It is not difficult to demonstrate [see the essay referenced above] that r and R vary inversely to
one another. That, note, is different, formally speaking, from showing that the wage and the
profit rate in the old system vary inversely to one another, although the underlying facts are
much the same. A non-zero r means that the workers have somehow managed to extract from the
capitalists some portion of the surplus. But this way of representing things, besides making no
reference to the Labor Theory of Value, also opens the way for economists like Gary Becker to
introduce the notion of "human capital." Workers who, in effect, drive the wage above bare
subsistence can either consume the extra in the form of a somewhat less miserable standard of
living, or they can -- as Becker might say -- invest in the improvement of their capital stock
[themselves] by paying for education, which will allow them to produce a new and higher priced
commodity -- namely, skilled labor. This way of thinking, crazy as it is [Marx is brilliant on

this], leads naturally to the countless discussions of the "return on investment in education' in the
form of higher lifetime earnings.
Notice, by the way, that if we wish to continue with this charade of labor as a commodity
produced by a petty bourgeois entrepreneur, we must allow for several labor sectors, each with
its own particular "product" [some form of unskilled or skilled labor or educated labor] and with
its own rate of return. We can even analyze a failure of some children of the educated workforce
to take advantage of the opportunities provided by their parents as their choosing to consume the
additional portion of the surplus made available to them instead of investing it, thus reproducing
the fairytale about prudent and imprudent capitalists [ants and grasshoppers.] And, of course, the
variation in the rates of return in the several labor sectors permits us to talk about the relative
exploitation of unskilled workers by much better compensated skilled workers.
The point of all this is to elaborate on the fundamental verrucktheit, or craziness, of the
manner in which bourgeois ideology [law, economic theory, philosophy, sociology, etc.]
mystifies and conceals the exploitative nature of capitalism, making it appear that the failure of
the workers to improve themselves is attributable to their imprudence rather than to the
disadvantageous position in which they find themselves vis-a-vis capital.
[A propos, Susie and I saw "Company Men" last night, an interesting movie about the
effects of the economic crisis on three privileged and advantaged corporate executives -- Ben
Affleck, Chris Cooper, and Tommy Lee Jones, with a nice turn by Kevin Costner. It is worth
seeing, I think.]
It is not difficult to show, formally, that the total profit appropriated by the corn, iron, and
tools sectors is equal to what is lost to the labor sector by its inability to shift its capital to a more
profitable line investment.
I have now come to the end of my story, even though there is a very great deal more to be
said about Marx's theories, some of which I have said at length in my two books and several
articles on him. Let me explain why I have taken so very much time and expended so much

effort expounding and analyzing the Labor Theory of Value, only in the end to show [with
arguments original to Vegara and myself] that the theory is incorrect.
Part of the reason, to be totally honest, is that I simply find the analytics of the theory
fascinating and elegant. My entire life has been spent taking impossibly difficult theories [such
as those in Kant's First Critique] and clarifying them in my own mind until I can present them to
others as clear, simple, elegant, and beautiful. My second reason is to rescue Marx from the
unfounded criticism that he is -- in the infamous words of Paul Samuelson -- a "minor postRicardian autodidact." I was so offended by those words when I first read them that I felt a need
to show, clearly and simply, that they were just not true. My third reason is that I believe one
cannot really come to grips with the profound truth at the heart of Marx's critique of capitalism
without first working through this theoretical story and becoming completely clear on its precise
status and limits. Speaking simply for myself, I could not have been led to an understanding of
the ironic structure of Marx's critique, and the core irrationality of treating workers as though
they are participants in a free market of exchange among producers and consumers, had I not
first made my peace, intellectually, mathematically, and theoretically with Marx's own attempts
to capture that craziness.
I hope this tutorial has been useful to some of you. As I feared, it went on for a very long
time, so long, I imagine, that I lost a number of readers along the way. But I have enjoyed
writing it, and it will live forever in cyberspace, in the weird way things have of surviving in that
realm.