Marxist Economics 101: A Descriptive Theory
(A Rough Summary)

by Dr. Jan Garrett

Revised April 30, 2004

1) Worker B has only his labor power to sell.

2) Capitalist A owns capital, which consists of the value of his machinery and plant, raw materials (collectively called constant capital, c) and so-called variable capital (v) to spend on wages.

3) B and A strike a "voluntary" bargain: B gives A the use of his labor power for a certain period, say, a year, in return for a wage.

4) B works for a year and produces goods for A worth G; A sells them and receives G.

5) A deducts from G the value of the wear-and-tear on machinery and plant involved in the production of the goods worth G and the value of the raw materials used to make them. What is left is Q.

6) A pays B his wage, w. Perhaps w=0.2 Q. (w is part of total wages A pays all his workers, i.e., v.)

7) A clears 0.8 Q. This is the surplus value (s) extracted from B.

8) w is, on average, a subsistence wage for B. It keeps him alive and able to reproduce (have kids and raise them to be workers for capitalists in the next generation).

9) All of Q is the product of B's labor, even though B only receives w, a small fraction of Q. (This is exploitation in Marx's sense and it is inevitable under capitalism.)

10) s/w is the rate of surplus value, also known as the rate of exploitation. The rate of exploitation of worker B in our example is 400%. (For the entire firm, this rate is S/v, surplus value generated by all A's workers (S) divided by A's capital tied up in wages.)

11) Total capital invested (TCI) = constant capital + variable capital (c+v)

12) Rate of profit = S / TCI = S / (c+v)

13) Because competition among the capitalists tends to push down prices of goods, G and therefore Q tend to drop. Hence, other factors equal, S will shrink or not expand as fast as TCI. As a result, the rate of profit will tend to decline.

14) The pure competitive market model says that economic agents will be egoists. This is roughly correct for capitalists.

15) Hence, A and other capitalists want to maintain or increase the rate of profit. Possible strategies include:

     a) increase the rate of exploitation (S/v) by forcing down v (cost of wages) by:
          i) weakening or smashing unions,
          ii) increasing the pool of workers competing for the same jobs by
               * creating unemployment
               * increasing immigration
               * creating a larger labor market by offshoring
     b) increasing S/v by raising productivity so workers can produce more with the same labor power and thus with the same amount of variable capital
     c) reducing TCI by getting raw materials more cheaply, e.g., by encouraging (commanding?) wars of conquest by the government
     d) opening new markets for their products (go where no markets went before)

16) The whole process periodically creates crises of "overproduction": the quantities of goods produced outstrip the demand: v is so low that the workers can buy back only a tiny portion of the total product. Yet capitalists, even with spoiled kids, are reluctant to consume for themselves and their families most of what they have in their inventories. There's no point in producing more; so they lay off workers. But this further decreases total wages and thus demand for consumer goods, and a worse economic crisis than before is the result.

Further Reading

Karl Marx, Wage Labor and Capital.
Karl Marx, Value, Price, and Profit.
Ernest Mandel, An Introduction to Marxist Economic Theory.
Ernest Mandel, Marxist Economic Theory, 2 volumes.