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The value of money

Feature by Joseph Choonara, November 2008

How do the billions wiped off the stock market relate to the rest of the capitalist system? Joseph Choonara goes back to Karl Marx to explain.

Pity money. Over recent months it has been "injected" into markets, "destroyed" in financial meltdowns and stock market collapses; it has been "devalued" and "revalued" and passed along the increasingly unfathomable webs spun by capital.

This raises some questions. Take the concept of the economic "bubble". Assets - shares or properties perhaps - soar in price and then the bubble "bursts". But this implies that it is a bubble relative to something else, relative to some "real" measure of wealth. Similarly we might ask how the "paper wealth" recently wiped off stock markets relates to the "real wealth" that presumably lurks in the background.

The great classical economists such as Adam Smith (1723-1790) had to answer such questions. Back then the capitalist class was still establishing itself against the old landed aristocracy. These pioneers of economics looked for some yardstick of "value", and they found it in human labour. "Labour", wrote Smith, "is the real measure of the exchangeable value of all commodities."

Karl Marx developed this "labour theory of value" far more rigorously. He pointed out that capitalism, now entrenched as the dominant economic system, was creating a uniform yardstick for wealth in "socially necessary labour".

This was not the labour of a particular individual or the amount expended in producing a particular commodity. It was the amount of labour that would be required by the typical worker using the normal technique and

equipment available at that point in history. These assumptions made sense in a world where machinery and the division of labour had simplified production, stripping it of all artistry, and where a mass working class was emerging.

This kind of labour could be measured - in person-hours or even person-seconds. The value of the machinery and raw materials used in production could also be measured. Such things are "dead labour" - the crystallised past labour of workers. So machinery acquires value when workers fashion it from iron, just as the iron itself acquires value as workers smelt it.

As raw materials are used their value passes into the commodities produced from them. So too with machinery: a machine that costs £10,000 and lasts ten years would, all other things remaining equal, add £1,000 of value to the commodities produced with it each year. If that is the case, then the capitalist makes neither a profit nor a loss on their dead labour. The amount they pay to acquire it is the same as the value it adds to their output.

"Living labour" is different. The capitalist gets a whole day's labour from each worker. But the worker only needs to take home enough value to get them back to work the next day. They might work eight hours but produce the value of their wage in just four. Only living labour "expands" - creating new, unpaid for, value for the capitalist. Living labour is the source of profit, and squeezing labour to get this profit is called "exploitation".

The rate of profit

Of course, capitalists are ignorant of Marxist economics. For them it appears as if all of their investments are "creating" value, both machinery and workers. So it seems perfectly logical to the capitalist to invest in an ever-greater stock of machinery, computers and factories.

Even if the capitalist had read Capital, they would still be obliged to accumulate dead labour. Investment in dead labour makes workers more productive, reducing the total labour time in each commodity. Capitalists compete by cheapening their commodities, and any capitalist who does not play the game is soon driven out of business. The capitalist who invests earliest can win this battle of competition, so investment seems perfectly rational to the individual capitalist. But across the system as a whole its effects seem completely irrational. In the long term an ever-greater mass of dead labour is accumulated compared to the amount of living labour exploited.

If dead labour grows faster than living labour (the source of profit) then the capitalists must be getting fewer pennies of profit for each pound of investment. In other words, the "rate of profit" falls (see below). Because the rate of profit governs how fast the system can expand, its fall seems to pose a threat to capitalism itself.

How can profit rates recover? Capitalists could simply squeeze workers harder. If workers toil longer (and for less) they create more value for the capitalist (and get less for themselves). But there are limits to this. Eventually the workers would die of exhaustion or starvation. And, presumably, they would resist long before that happened.

The second way capitalism recovers is through crisis. In a crisis, goods, including the dead labour bought by capitalists, pile up in warehouses and are sold at bargain prices. Failing companies are bought up cheap by competitors. Workers suffer unemployment and wage cuts. Investments of all kinds are "devalued", boosting profit rates.

The bigger the problems, the greater the destruction needed to solve them. But, as capitalism ages, companies get bigger as they accumulate value and take each other over. Eventually the failure of the biggest companies threatens to drag down healthy bits of the system. The "painful medicine" of crisis becomes more dangerous, so states bail out unhealthy companies and seek to postpone the crisis.

Prophet and swindler

Finance is an important part of capitalism. Finance, Marx said, is both "prophet" and "swindler". It is a means by which capitalism expands more rapidly, but also a source of instability and crisis.

Banks allow some capitalists to save profits they cannot invest immediately and others to invest profits they do not yet have. If capitalism is like a balloon, with the various firms painted on its surface, credit is like the air being pumped inside. As the balloon expands the surface tension grows. Credit and debt bind the different firms together. A pinprick at one point on the balloon can cause the whole thing to collapse.

The financial system gives new dynamism to capitalism but is linked to the production of value by living labour - the growth of credit must not lose touch with the production of new value. If you want to keep pumping more air into the balloon, eventually you need a balloon made from a greater amount of rubber.

Finance and the rate of profit

The bloated financial system we see today reflects changes in capitalism over the past century. The Great Depression of the 1930s and the Second World War saw the destruction and reorganisation of capital on a vast scale, paving the way for the "golden age" of capitalism - the 1950s and 1960s. But by the 1970s falling profit rates had halted this period of expansion. The ruling class responded by attacking workers to boost profit rates. Profitability was restored but only partially, and certainly not to the levels seen in the early 1950s. This meant that for those with spare cash it seemed more logical to pump it into the financial system than the "real economy". This meant lending to banks, to certain states or directly to consumers.

Workers are drawn into the financial system both as a source of potential money (savings, pension funds, etc) and a source of borrowing. Personal debt has allowed capitalists to hold down our pay but still have us purchase more of the goods they produce. The bubble of debt helped keep the system going. Subprime mortgages were part of this bubble. And waves of "financial innovation" saw mortgage debt repackaged as complex assets that could then be bought, sold and gambled on.

Into the casino

There are whole chunks of the system with little discernable social value - and these have expanded along with the financial system. The most well known examples are stock markets. For Marx these were markets in "fictitious capital". Capital is simply value that expands through the exploitation of living labour. So what is fictitious capital?

If I buy shares in a company and the money I pay is then invested in wages and machinery, then that money is being used as real capital. In exchange I hold in my hand a bit of paper, which may entitle me to a claim on the future profits of the enterprise ("dividends"). But this paper is not, in itself, capital. Nonetheless, huge markets can exist to trade these bits of paper. And the prices these bits of paper attract may bear little resemblance to any underlying flow of value. This is an example of a market in fictitious capital.

Now, if the stock market comes crashing down, making my piece of paper worthless, no real value has been destroyed (although it may not feel this way if your pension is wiped out in the crash). It is only if the firm itself goes bust that there is a real destruction of value.

The stock market is simply the most visible such example. Another is the $50 trillion market in credit default swaps that insure against the risk that debts cannot be repaid. This has become a vast arena for speculation. If companies measure their profit by subtracting the price of such assets at the beginning of the year from the price at the end, such speculation can help create the illusion of profitability - at least for a time.

Just as the study of the human body relies on pathology, so the study of capitalism relies on crisis. Now the patient is sick, we can see what makes it tick. The underlying problems in the "real economy" and the difficulty in solving these through crisis meant that any resolution was deferred. It is as if the patient has been treating a tumour with aspirin. The sickness has grown and shifted in the body. Once the disease becomes unmanageable with painkillers, the sickness is revealed all the more rapidly.

It manifests itself first in the chaos sweeping the financial system and markets in fictitious capital. But these are symptoms, and dealing with the symptoms is not a cure. The disease lies deeper, as we shall see in the coming months. It is a disease rooted in the drive for profit, a drive that must lead the system into crisis again and again. It is a crisis of capitalism.


The falling rate of profit

Assume that one worker produces £100 of value each day but receives only £50 in wages. If they also use up £100 worth of "dead labour" each day, then the total value produced is £200 (£100 living labour plus £100 dead labour) and the total investment made by the capitalist is £150 (£50 wages plus £100 dead labour). The capitalist has made £50 profit. (All these figures are per worker, and we will assume that the number of workers does not change.)

£50 profit from £150 investment is not bad. It means that the capitalist can double the size of their investment every three days by reinvesting their profits.

Now, let's say that this capitalist invests in more machinery and raw material. Now the worker uses £400 of "dead labour". The total value produced is therefore £500. The investment is £450, so the profit is still £50. (The amount of living labour exploited has not changed.)

£50 profit from £450 investment is not so good. Now it takes nine days to double the size of the investment. The "rate or profit", the return on investment, has fallen.

However, the changes in production make sense for the capitalist if, in the short term, they allow them to compete more effective.

So if initially the worker was creating 100 widgets each day, then the value embodied in each was £2 (a total value of £200, spread over 100 widgets). If after the investment they were producing 500 widgets, then the value of each falls to £1 (£500 spread over 500 widgets).

The first capitalist to make this investment would clean up. They could undercut competitors by charging, say, £1.90 a widget and corner the market. Only when competitors started introducing the same technology would the market price of widgets be pushed towards £1, putting pressure on the rate of profit.


Joseph Choonara is deputy editor of International Socialism journal

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