With two little boys at home, I don’t get out much, so a visit to a new craft brewery in Niagara was an exciting event. Playing it safe, I opted to start with the IPA. It had a nice grapefruit and tangerine aroma that lead into hints of tropical fruit notes followed by a slightly over the top bitterness. There was more than enough potential in this first beer to convince me to purchase a variety of tall cans. In the process of the exchange, I got chatting with the owner who was excited about the growing craft beer movement in Ontario but was worried that the ambition of a few breweries had elevated their production levels beyond the “craft” status. Relaying this story to a friend, I was told that any beer was craft so long as it wasn’t owned by InBev — the corporation responsible for almost 50% of the beer produced in North America that had generated revenue of about 47.06 billion U.S. dollars worldwide in 2014. Bubbling under the surface of the Niagara craft brewer’s concern was, well, beer. He was concerned that the larger the operation, the more likely it was that the passion for beer is eclipsed by the motivation to make money.
In the last post, we learned that according to Marx the only way to generate original value is through labour, the trick that we have yet to discover is how a capitalist generates value using capital alone. This mystery, as we will discover, isn’t all that complicated: to generate value without imputing one’s own labour, the capitalist must exploit someone else’s labour-power. The trick is to find a way of accomplishing this feat without violating the rules of economic exchange.
To recap the last post, capitalists aim to purchase a commodity with the intent of selling it again for more money. Discovering that labour is the primary source of value, capitalists purchase labour-power with the hopes of incorporating it, “as a living agent of fermentation, into the lifeless constituents of the product, which also belong to him” (Capital Vol. 1, 292). After the capitalist purchases what he’ll need to create a new commodity — raw materials, equipment, labour-power — he sets this newly acquired property to work.
Briefly, then, let’s examine the steps involved in putting capital to work by creating a commodity. To begin, the capitalist invests his money in the means of production, including the cost of labour. So, for example, the aspiring owner of a brewery must first purchase the labour, equipment, and ingredients needed to produce a tasty pint of beer. Both equipment and ingredients are resources with varying degrees of value derived from the intensity of labour required for their production. Significantly, in order for their value to remain and further intensify, more labour must be added to the equation. Machines need upkeep and ingredients spoil — malt goes bad and brewing kettles need to be cleaned. Employees then provide a double service for the capitalist by preserving and intensifying the value of resources. Brewers preserves the original value of the hops, malt, and yeast and then add value by operating machinery and expending labour-force, resulting in a new, more valuable commodity, beer. Beer is worth more than its individual components (at least good beer is) because of the additional labour that brought them together. When work is complete, the beer is worth the value of the means of production plus whatever value it accumulates due to the labour process. In a very simplified system, therefore, the value of the final product equals the sum of the value of the capital advanced in equipment (or at least whatever value is lost in wear through the process), raw materials, and labour.
Unfortunately, in our hypothetical ideal market system, the capitalist has not yet achieved the desired outcome: his money has not worked for him. If the math is honest, the value of the commodity is simply the sum of the initial capital plus the new labour value. His capital went from one state to another. The total value found in the initial commodities has not necessarily increased after they are combined to make a new commodity. Since the capitalist is interested in generating capital, reproducing his initial investment won’t bring any satisfaction.*
However, a significant change has occurred. The value that was formerly divided among many different commodities has been preserved and concentrated into a single commodity. So, for example, say the yearly value of the material and depreciation of equipment transferred to the beer (the means of production) costs a total of $150 000 and a year’s worth of sales generated $200 000. To calculate the amount of value contributed by the worker, we subtract the value of the beer from the cost of the means of production. In our example then, labour adds $50 000 to the resulting batch of beer.
Herein lies the magic of capital: only the capitalist knows exactly how much value labour adds to the final product. The worker does not have direct access to this knowledge. A problematic power imbalance develops: with the incentive to generate capital, the capitalist keeps this information to himself so he can find ways of using labour to generate more value than it originally cost him.
Like any other commodity, once purchased, labour becomes the property of its new owner who is free to use it however he pleases. If the capitalist can use the labour to generate more value than it originally costs, then he will have successfully made a return on his investment. If successful, the capitalist will have generated surplus value, satisfying the puzzle of how to put money to work, so to speak, while conforming to the laws that govern exchange.
With a return on investment, the formula articulated above evolves. Now the final product includes three general categories: the value of the means of production, the value of labour the capitalist paid in wage, and the surplus value. So, for example, if the owner of the brewery successfully sold his batch of beer for $200 000 and we assume he spent $25 000 wages and $150 000 on the means of production than he profits $25 000. In this scenario, the owner makes a 16% return. However, because the brewer’s labour contributed $50 000 and he’s only getting paid $25 000, he gets paid for half of his contribution. Although the owners’ rate of return is 16%, the worker is exploited at a rate of 100%. In other words, the worker labours twice as hard as he needs to generate the value of his wages. Unfortunately, the exploitation takes place in private, beyond the knowledge of anyone but the capitalist. Labour-power is purchased and becomes the property of the owner who can use it however he desires, and in the case of the capitalist, he requires a return on his investment.
Owners take a risk advancing funds, and they expend a tremendous amount of energy building and maintaining a business. For all these things, Marx concedes, owners deserve compensation. A capitalist, however, isn’t interested in trading labour for money, rather, he is intent on finding a way to make his money earn for him. Simply getting paid then for his labour isn’t enough. To generate capital, as we’ve argued, capitalists must exploit the labour of someone else.
Marx argues that there are two general ways capitalists use their advantage. First, they can try to control the length of the working day. If, for example, the contract stipulates an 8-hour working day and it takes 4 hours for an employee to reproduce the value of his wages, then he works the final 4 hours for free. Unfortunately for the employee, only the capitalist will know when the employee has reproduced the value of his wages. The second approach to producing surplus value is by increasing the intensity of labour, a feat often associated with technological advancements. If the length of the working day can’t be extended, then the capitalist needs to find ways of increasing an employee’s productivity. The intensity of labour and the length of the working day are two general techniques capitalists use to increase capital gains.
We’ve outlined a few of the many ways capitalists can take advantage of workers. However, I want to conclude by exploring a final advantage capitalists have over labour that flows clearly out of our analysis. The first post in this series observed how money lubricates the exchanges of commodities following the general market formula: C-M-C (Commodity – Money – Commodity). We stated that money becomes capital when it’s used to purchase a commodity with the intent of generating value. The general formula for this market interaction is M-C-M+ (Money – Commodity – More Money). Capitalists, on the one hand, operate in the M-C-M+ circuit. They advance money strictly for the purpose of generating more capital. There’s no urgency in this transaction. Labourers, on the other hand, sell a commodity hoping to make the money they need to pay for life’s necessities. If successful, the labourer will have made enough money to pay for what they need. Because the capitalist’s has deprived them of much of the surplus workers generate, they will be more or less stuck in the C-M-C circuit, selling their labour-power to buy needed commodities.
Imagine if the brewer, in our example above, only contributed the value paid for in wages. In this case, she’d only ever have to work half days. If the brewer wasn’t forced to spend half her time working for free, her life would completely transformed. Among other things, she’d be able to enjoy a lot more craft beer.
Although simplified above, it’s easy to see how Marx believed that the capitalist bond, the contract capitalists enter into with labourers, is only legitimate in form. Under the surface, the capitalist contract is defined by exploitation rather than mutuality. The challenge that Marx advances is this: according to him there is no such thing as an altruistic capitalist.
Is the capitalist bond an inherently unjust contract? How would this change the way we think about our own participation in the economy? How does one determine what’s a fair compensation for lenders who risk money in the market? From where does a capitalist’s initial capital originate?
* We say this occurs in an ideal market because in an ideal market the capitalist could not simply charge more for the commodity. Competitive market forces would undercut any superficial value.