Saving Marxism: A Contribution to Economic Theory by J. Doug Ohmans 1990 ABSTRACT The role of constant capital in economic theory corresponds to the political question of rewards for entrepreneurship while still holding to a pure labor theory of value. INTRODUCTION The thought of Karl Marx is a vast field of inter-related theory and observations, with medium-grade ore everywhere on the surface for the picking, valuable lodes underground, and nuggets to be found whose value seems to increase after we bring them home. In this paper we shall progressively focus our attention on an ever narrower issue, until we reach our objective: an understanding of the role of constant capital, especially "fixed capital" such as machinery, in contributing to commodity value. The problem I think is an important one, for the Marxian proposition that variable capital not constant capital is the source of new value is a pillar of his labor theory of value, upon which much of his social critique rests. The labor theory of value in turn Marx adopted from David Ricardo, who built on some of the insights of Adam Smith. No thinker, not even Karl Marx, can fully dominate every implication of his or her thinking, and when it comes to the role of constant capital, Marx reveals considerable uncertainty. I believe that the problem of clarity revolves around a confusion of terms expressing averages with those involving marginal quantities. In short, I will conclude that for Marx's labor theory of value to be correct, there must be on average no value withdrawn from constant capital beyond what is put into it through labor. However, such additional value does seem to exist on the average, as Marx acknowledges. Therefore, in an analogy with Ricardo's theory of rent, perhaps it is at the margin (where machine use is barely preferable to pure labor-power) that no new value is created by the machine itself, whereas average constant capital is indeed a positive factor of production worthy of some reward. The labor theory of value begins with the perception that labor-power is different from other factor inputs. As Braverman puts it, "Only one who is the master of the labor of others will confuse labor-power with any other agency for performing a task, because to him, steam, horse, water, or human muscle which turns his mill are viewed as equivalents, as 'factors of production'" (Braverman, p.51). Lester Thurow makes a similar point: "In general, the attempt to make labor into just another factor of production ignores a wide variety of characteristics that make human investments very different from physical investments" (Thurow, p.175). In fact, he says, "If one were ranking various economic markets along a continuum by the extent to which they reflected the postulates of the price-auction model, financial markets would probably be placed at one end and labor markets at the other" (Thurow, p.215). Nevertheless, to many economists it has seemed unacceptable to claim that labor is the sole source of value. Of course Marx never denied that machinery would increase productivity. Marx suggests that this change would resolve itself in the short run into lower values (prices) and in the long run into a new unit of measurement for simple labor. He could not have found common ground with Kenneth Boulding who said, "It is not 'labor' that produces a commodity or product... but human knowledge and know-how, operating through institutions which enable this know-how to capture energy and rearrange materials" (Boulding, p.186). Boulding and others reject the labor theory of value as "just simply wrong" because in Marx's version, it is unable to offer a reward to non-labor factors such as these. RICARDO'S LEGACY Marx adopted from his predecessor David Ricardo the solution to the "skilled labor problem." Ricardo had shown that constancy of wage differentials allowed him to ignore them in tracing changes in relative prices caused by other factors. In a similar argument, Marx wrote: "Simple average labor, it is true, varies in character in different countries and at different cultural epochs, but in a particular society it is given. More complex labour counts only as intensified or rather multiplied simple labour, so that a smaller quantity of complex labour is considered equal to a larger quantity of simple labour. Experience shows that this reduction is constantly being made. A commodity may be the outcome of the most complicated labour, but through its value it is posited as equal to the product of simple labour, hence it represents only a specific quantity of simple labour. The various proportions in which different kinds of labour are reduced to simple labour as their unit of measurement are established by a social process that goes on behind the backs of the producers; these proportions therefore appear to the producers to have been handed down by tradition. In the interests of simplification, we shall henceforth view every form of labour-power directly as simple labour-power; by this we shall simply be saving ourselves the trouble of making the reduction" (Marx, p.135). Simple labor-power, by the way, appeared in another connection to Braverman 100 years later. By now, he says, "Every step in the labor process is divorced, so far as possible, from special knowledge and training and reduced to simple labor... This might even be called the general law of the capitalist division of labor" (Braverman, pp.82-83). Ricardo had gone on the analyze how price results out of proportion to simple labor inputs were brought about through different labor periods (the concept of interest), different durabilities of fixed capital (depreciation), and different ratios of fixed to circulating capital. In Marx, some of Ricardo's intricate analysis is assumed away, or set to different purposes. Ricardo's concept of interest becomes the butt of Marx's many jokes about capitalist better living through abstention. Depreciation becomes the measure of the rate at which labor "congealed" in machinery is passed through to final commodities: Marx says machinery "never adds more value than it loses, on an average, by depreciation" (Marx, p.509). And Ricardo's ratio of constant to circulating capital becomes the "organic composition of capital," whose increase illuminates the great overall historical development of capitalism. If Marx was to adopt Ricardo's labor theory of value, he would also need an explanation of existing returns to landlords and capital owners. Ricardo, following Adam Smith, had regarded landlords as parasites. Their increasing rents when population extends itself cause a squeeze on profits in agriculture, which spreads into manufacturing and brings growth to a halt. Marx too adopted a stagnation thesis, but for him a declining profit rate stemmed from competition among capitalists, with increasing organic composition of capital having the effect of reducing market demand from workers as consumers. Marx admitted that land as well as labor-power generates wealth but wanted to absorb that analysis into his focus on the capitalist's role in manufacturing: "by incorporating with itself the two primary creators of wealth, labour-power and land, capital acquires a power of expansion that permits it to augment the elements of its accumulation beyond the limits apparently fixed by its own magnitude, or by the value and the mass of the means of production which have already been produced, and in which it has its being" (Marx, p.752). To clear the field for positing a simple labor theory of value, so as to move on to the analysis of surplus value, Marx introduced the distinction between exchange-values and use-values: "A thing can be a use-value without being a value. This is the case whenever its utility to man is not mediated through labour. Air, virgin soil, natural meadows, unplanted forests, etc. fall into this category" (Marx,p.131). Ricardo's explanation of the factor return to capital owners had been that machines "are always the produce of much less labour than that which they displace" (Ricardo, p.26). In addition to this technological progress, free trade would forestall stagnation. Marx must have read Ricardo's tentative explorations of the sources of value, and Ricardo's assumption of subsistence wages, with a fierce determination to expose the real culprit: exploitation of the worker. But Marx also must have absorbed Ricardo's theory of rent, which I maintain could have clarified his analysis in "Capital." This theory is well summarized by an economic historian: "The difference in productivity of the best land over the poorer constituted a surplus which went to the landlord as rent. Ricardo's statement is not greatly different from that of Malthus. 'Rent,' he says, 'is that portion of the produce of the earth which is paid to the landlord for the use of the original and indestructible powers of the soil.' There is no rent when land of nearly equal fertility is present in sufficient abundance to satisfy human needs. When an increase in population causes land of inferior quality and less advantageous situation to be called into cultivation, rent is paid... The laws of supply and demand and the cost of production on the least favorable land fix the price of corn" (McConnell, p.41). CONSTANT AND VARIABLE CAPITAL IN MARX In chapter 8 of "Capital," Marx distinguishes between constant and variable capital: "That part of capital," he says, "which is turned into a means of production, i.e. the raw material, the auxiliary material and their instruments of labour, does not undergo any quantitative alteration of value in the process of production. For this reason, I call it the constant part of capital, or more briefly, constant capital. On the other hand, that part of capital which is turned into labour-power does undergo an alteration of value in the process of production. It both reproduces the equivalent of its own value and produces an excess, a surplus-value, which may itself vary, and be more or less according to circumstances. This part of capital is continually being transformed from a constant into a variable magnitude. I therefore call it the variable part of capital, or more briefly, variable capital"(Marx, p.317). Braverman's definitions are similar: "when the capitalist buys buildings, materials, tools, machinery, etc., he can evaluate with precision their place in the labor process. He knows that a certain portion of his outlay will be transferred to each unit of production, and his accounting practices allocate these in the form of costs or depreciation. But when he buys labor time, the outcome is far from being either so certain or so definite that it can be reckoned in this way, with precision and in advance. This is merely an expression of the fact that the portion of his capital expended on labor power is the 'variable' portion, which undergoes an increase in the process of production for him, the question is how great that increase will be" (Braverman,pp.57-58). Marx's very definitions establish his labor theory of value, for he defines away increments of value stemming from the "constant" capital portion. By "instruments of labor," he is referring to "buildings, machinery, drain-pipes, ploughing oxen, apparatus of every kind" (Marx, p.756). Marx was writing in the 1860's when manufacturing apparatus was simple and visible. Today among non-labor factors we might include not only computers but even such intangibles as know-how embodied as software or the institutional context exemplified in a patent. It is when we move in this direction that Marx's claims for constant capital may become untenable. Another function of the constant/variable capital distinction in Marx is to explain fetishism," the "reification of a social relation." Constant capital may not contribute to value, but it does come to dominate work. Braverman says, "The means of production become the property of the capitalist, and thus past or dead labor takes the form of capital. The purely physical relationship assumes the social form given to it by capitalism and itself begins to be altered. The ideal toward which capitalism strives is the domination of dead labor over living labor" (Braverman, p.227). The device of distinguishing constant from variable capital was Marx's first step toward his full theory of the capitalist economy, involving further distinctions such as 1) circulating capital, fixed capital and circulation capital, and 2) money capital, productive capital and commodity capital. But the constant/ variable distinction was especially useful in depicting the overall historical tendency of their ratio, the "organic composition of capital," to increase. Marx tried to show that, if we assume a tendency of profit rates across industries to equalize, then price will exceed value in capital-intensive industries while value will exceed price in labor-intensive industries, thereby accelerating the redistributional process of capital accumulation. With a high versus a low organic composition of capital, the value of commodities will be relatively low, and their price, while low in absolute terms, will be relatively high because it absorbs or benefits from averaging the high surplus value creation in the labor-intensive sector. However, this interpretation of capital accumulation depends upon prior acceptance of Marx's labor theory of value. If we assume that constant capital does not contribute to surplus value but does contribute to price, then naturally the price will exceed value most greatly where constant capital is concentrated. But were we to hold that constant capital is a factor of production which creates value, Marx's divergence of price from value would collapse. To seek a theoretical justification for rewarding entrepreneurs and management, we do not have to imply as do the ideologists of business that inanimate machinery receives the factor reward, and we can still agree with Marx that the "abstinence" of the money-lenders is a sham. The question of a factor reward to capital touches on the long standing debate as to the role of management. On the Marxist side, in a famous essay Stephen Marglin writes: "The social function of hierarchical work organization is not technical efficiency, but accumulation... The capitalist division of labor...guaranteed to the entrepreneur an essential role in the production process" and "the origin and success of the factory lay not in technological superiority, but in the substitution of the capitalist's for the worker's control of the work process" (Marglin, p.62). Braverman adds, "The capacity of humans to control the labor process through machinery is seized upon by management from the beginning of capitalism as the prime means whereby production may be controlled not by the direct producer but by the owners and representatives of capital" (Braverman, p.193). Economists who oppose this view are well represented by Oliver Williamson: "it is no accident that hierarchy is ubiquitous within all organizations of any size. This holds not merely within the private-for-profit sector but among nonprofits and government bureaus as well. It likewise holds across national boundaries and is independent of political systems. In short, inveighing against hierarchy is rhetoric; both the logic of efficiency and the historical evidence disclose that non-hierarchical modes are mainly of ephemeral duration" (Williamson, p.270). The justification for a factor return to management would be different from that to owners, except that management often operate as the representative of ownership interests. MARX'S 'PASS-THROUGH' OF CONSTANT CAPITAL Marx's labor theory of value can be understood either positively or negatively. Positively, it entails the proposition that "Human labor, whether directly exercised or stored in such products as tools, machinery, or domesticated animals, represents the sole resource of humanity in confronting nature" (Braverman, p.51). Or, in Marx's words, "As exchange values, all commodities are merely definite quantities of congealed labour-time" (Marx, p.130) The link between labor-power and constant capital is that the former is necessary to "valorize" the latter: "By the simple addition of a certain quantity of labour, new value is added, and by the quality of this added labour, the original values of the means of production are preserved in the product" (Marx, p.309). Extraction of surplus value arises from the productive interaction of congealed labor, means of production, with living labour-power. The exchange-values generated exceed the worker's subsistence costs: "The property...which labour-power in action, living labour, possesses of preserving value, at the same time that it adds to it, is a gift of nature which costs the worker nothing, but is very advantageous to the capitalist since it preserves the existing value of his capital" (Marx, p.315). Negatively, Marx claims that no new value is added to the commodity by the constant capital per se. Since the means of production are not for sale but for use, we are dealing here with their use-values, which are transferred to commodities during production. Marx says, "The value of the means of production is...preserved by being transferred to the product" (Marx, p.307). It is preserved first as a use-value, since "if a use-value is effectively consumed in the production of a new use-value, the quantity of labour expended to produce the article which has been consumed forms a part of the quantity of labour necessary to produce the new use-value; this portion is therefore labour transferred from the means of production to the new product" (Marx, p.308). Dialectically, value is preserved by being transformed, as "means of production...lose in the labor process the original form of their use-value only to assume in the product the form of a new use-value" (Marx, p.310). The final product is treated by the capitalist as an exchange-value, just as it was money that he or she originally invested in means of production: "With regard to the three shillings which have been expended, the new value of three shillings appears merely as a reproduction" (Marx, p.316). For our purpose it is important to emphasize this unconditionality of the "pass-through" of use-value via constant capital. "Suppose," says Marx, "its use-value in the labour process lasts only six days. It then loses on average one-sixth of its use-value every day, and therefore parts with one-sixth of its value to each day's product" (Marx, p.312). Marx dogmatically asserts a sort of forced accounting identity to limit value added from constant capital to depreciation: "However useful a given kind of raw material, or a machine, or other means of production may be, even if it cost 150 pounds or, say, 500 days of labour, it cannot under any circumstances add more than 150 pounds to the value of the product. Its value is determined not by the labour process into which it enters as a means of production, but by that out of which it has issued as a product" (Marx, p.314). Although the use-value of constant capital is simply passed through to the product, technology certainly increases productivity. Marx asserts that "The value of commodities stands in inverse ratio to the productivity of labour" (Marx, p.436). "In general," he says, "the greater the productivity of labour, the less the labour-time required to produce an article, the less the mass of labour crystallized in that article, and the less its value" (Marx, p.131). Marx calls "that surplus-value which arises from a curtailment of the necessary labour-time...relative surplus value" (Marx, p.432). It is a temporary effect of technological advance whereby "At first, the commodities produced under the new production process are distinguished by costing the capitalist less to produce than their real, social value... However, the extra surplus-value gained by this capitalist vanishes when the new means of production are generalized" (Helburn, notes). In other words, under Marx's labor theory of value, the short term result of increasing constant capital is to benefit only the capitalist, and the long-term result is simply to lower the value of commodities. Marx showed that the increasing productivity of the agricultural and industrial revolutions failed to improve, indeed deteriorated, the lot of workers historically. He constructed a tautology making it impossible for machinery to augment value, and attributed any gains that might be made to variable capital. EXCEPTIONS AND DIFFICULTIES WITH 'PASS-THROUGH' We have seen that in Marx's labor theory of value, no value is created by constant capital--raw materials and means of production--beyond that created by the labor which produced them. When this capital combines with living labor-power, or variable capital, new use value is indeed created. In a given epoch, each of "innumerable individual units of labour-power...is the same as any other, to the extent that it has the character of a socially average unit of labour-power and acts as such, i.e. only needs, in order to produce a commodity, the labour-time which is necessary on the average, or, in other words is socially necessary" (Marx, p.129). So, the benefits to the worker of increasing productivity are neutralized by 1) increasing amounts of surplus value being siphoned off by owners, especially before competition neutralizes profits, and 2) exchange value changing inversely with productivity. Yet somehow the explanation seems forced. Marx scorns John Stuart Mill for stating that "the reason why capital yields a profit is because food, clothing, materials and tools, last longer than the time which was required to produce them" (Marx, p.652), yet Mill like Boulding is trying to point to an important aspect of productivity. That is, the means of production seem to make the labor which utilizes them more valuable labor. Marx accepts the fact of increased productivity but, since the gains all go to the idle capitalist, wants to accentuate the intuitive injustice of this by claiming all the gains for the worker. Just because exchange value or price may vary inversely with productivity, and just because none of the increased use value redounds to the worker, is no reason to assert that "the means of production can never add more value to the product than they themselves possess independently of the process in which they assist" (Marx, p.314). There are only two points in Volume 1 of "Capital" where Marx perhaps acknowledges that he tires of denying the common sense of "bourgeois political economy," and we shall quote them both in full. First, "Both in the case of the machine and of the tool, we find that after allowing for their average daily cost, that is for the value they transmit to the product by their average daily wear and tear, and for their consumption of auxiliary substances such as oil, coal, and so on, they do their work for nothing, like the natural forces which are already available without the intervention of human labour. The greater the productive effectiveness of the machinery compared with that of the tool, the greater is the extent of its gratuitous service. Only in large-scale industry has man succeeded in making the product of his past labour, labour which has already been objectified, perform gratuitous service on a large scale, like a force of nature" (Marx,p.510). Second, much later, Marx seems to be still thinking about the problem and casting about for an explanation: "In the same proportion as these instruments of labour serve as agencies in the formation of products without adding value to these products, i.e. in the same proportion as they are wholly employed but only partly consumed, to that degree do they perform, as we saw earlier, the same free service as the forces of nature, such as water, steam, air and electricity" (Marx, p.757). Note that this is a different argument about constant capital than, "The less value it gives up, the more productive it is, and the more its services approach those rendered by natural forces" (Marx, p.512). There, exchange value is still "passed through" one for one. Here, the argument is more akin to Marx's comment about land that a thing can be a use value without being an exchange value. It would seem that in late capitalism, this kind of generation of use value must have become quite common, and if theory is to provide guidance to the political struggle over its ownership, some modification of Marx's labor theory of value may be useful. RECONCILIATION: THE AVERAGE AND THE MARGINAL We have seen above that Marx adopts the concepts of "average labor" and "average depreciation." They allow him to describe the central dynamic of capitalism, and to treat empirical connections as logical ones. When Marx writes of the depreciating machine that "loses on average one-sixth of its use-value every day," he implies that another such machine might be discarded after five days, or another last seven. But on average, they yield up the same amount of value, denominated in labor time, as was invested in them. Let us imagine a machine embodying six days of labor-power that must be discarded on average after five days. Such a machine still might be combined with variable capital, living labor, to enhance labor's productivity. But in the long term, under Marx's labor theory, such machines would not be demanded and their price would fall. Such machines could be called sub-marginal. On the other hand, the machine embodying six days of labor-power that lasts for seven is above the margin. The contribution to value of constant capital is measured in units of labor-power and can be denominated in the price of socially average labor-power, or wages (this is obviously not to say that total wages equal total value). Since price is denominated in wages, the price of the sub-marginal machine cannot fall so long as the value of socially average labor-power remains constant. But that value will not fall because it is kept up by the super-marginal machines. It seems that there is a knot here which Marx's labor theory of value cannot untie. A possible solution involves going part of the way towards the "political economy" that Marx spurned, with its factor reward to capital. I propose that we posit a hybrid concept: marginal constant capital. In Ricardo's theory of rent, the margin of cultivation exists because fertile land is scarce, but so too in the medium-term are raw materials, tools, machinery, and means of production. Environmental constraints limit not only agriculture but all production. In keeping with Marx's labor theory of value, we could say that there is no new value added, only value transformed, from marginal constant capital. However, for the spectrum from this margin to the most productive machines in use, there is added productivity attributable not to labor but to the "gratuitous service" of constant capital. The Ukrainian socialist S. Podolinsky writes, "According to the theory of production formulated by Marx and accepted by socialists, human labor, to use the language of physics, accumulates in its products a greater quantity of energy than had to be expended to produce the power of the workers. Why and how does such accumulation take place?" (Deleage, p.29). He answers that the additional energy comes from nature, which should be "owned" responsibly by all interests, by all generations, and even by all species. The problem is to incorporate negative and positive environmental and social externalities into the account. Who is the legitimate owner of surplus value? The concept of marginal constant capital would clarify and strengthen labor's claim to the lion's share, but not all, of it. Strangely enough, this variant of Marxism would merge with the theory of perfect competition. That is, if all industries are using standard-operating-procedure technology, constant capital would be marginal, and Marx's labor theory of value could claim all surplus value for labor. But if an entrepreneur, financed perhaps by a pension plan, were to innovate with super-marginal constant capital, creating a new industry standard which took time for all to attain, he or she would seem to have a theoretical claim to compensation. Along with such an economic world there also is a political. It is there that Marx still could have attacked the inequality of society's starting positions and the usurious nature of private ownership of the means of production. The absurdity and destructiveness of a ruling class "owning" nature, i.e. the distribution of property and the very concept of nature as property, are questions for the political struggle. With the substitution of marginal constant capital for average constant capital, Marx would not have had to spoil his labor theory of value by making exception for the "gratuitous service" of large-scale industry. He would not have had to depict the contributions of everyone but industrial labor as exploitative. Like Charles Dickens, Marx illuminated miserable capitalist poverty. But well-meaning economists, focusing on wealth-creation, have often rejected his superstructure because of one faulty brick. Bibliography Boulding, Kenneth E. 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