Mariana Mazzucato - The Value of Everything - Making and Taking in the Global Economy

Indeed, the extraordinary aspect of Marx’s theory is his fundamental insight that capitalism is dynamic and constantly changing. But it was not just economically dynamic. Marx was struck by the social upheavals he could see all around him, such as the mass movement of rural workers into cities, which created an urban proletariat. He saw that capitalist society , not just the capitalist economy, was utterly different from preceding societies and was in permanent flux – a very evident phenomenon today as we struggle to come to terms with the massive changes brought by digital, nano, biological and other technologies.

Economists had previously thought of ‘capital’ as purely physical – machinery and buildings, for example – and surplus as solely positive, helping the economy to reproduce itself and grow. But Marx gives capital a social dimension and surplus a negative connotation. Labour produces surplus value, which fuels capital accumulation and economic growth. But capital accumulation is not just due to productive labour. It is also deeply social. Because workers do not own the means of production they are ‘alienated’ from their work. The surplus they produce is taken away from them. Work is necessary for earning the wages they receive to buy the food, shelter and clothes they need to survive. 47Moreover, in a capitalist market society, relations between people are mediated by commodity exchange. In a specialized society with division of labour, humans produce the social product – net national income – together and depend on other humans. But precisely because the division of labour, which Smith extolled, left most workers overly specializing in discrete aspects of the production process, he believed that social relations became relations between commodities (things). 48

Marx was so fascinated by the dynamics of capitalism that he produced his own theory of value to explain how it works. Unlike earlier economists, who tended to define production by sector or occupation (agriculture or manufacturing, merchant or clergyman), Marx defined the production boundary in terms of how profits are made. Marx asked how, by owning the means of production, the capitalist could appropriate surplus value while the workers who provided the labour received barely enough to live on – exactly the question Big Bill Heywood posed. By placing this distinction at the heart of value theory, Marx generated a new and unprecedented production boundary. Marx’s value theory changed economics – at least for a time.

Marx argued that workers are productive if they create surplus value which the capitalist class then retains. For Marx, while workers in capitalist production are productive, the key questions when drawing his production boundary are: who participates in capitalist production? And who receives the surplus that is produced?

Figure 6 gives a graphical answer to these questions. The production sphere, the light grey blob, includes three basic sectors: primary, comprising essential materials such as food and minerals (the only source of value for Quesnay); secondary, which is industry, the basis of value creation in Smith and Ricardo; and tertiary, the services considered by Smith to be ‘immaterial’. The darker blob within, called the ‘circulation sphere’, reflects Marx’s analysis, which we will discuss later, that some aspects of finance are essential to production and deserve to be placed on that side of the production boundary. On the other side of the boundary, Marx followed Smith and Ricardo in regarding government and households as unproductive.

Figure 6.The production boundary according to Karl Marx

At any moment in a capitalist economy, there is a ratio of surplus value to value used for workers’ subsistence – what Marx calls simply the rate of surplus value. It determines what share of the economic product can potentially be used for accumulation and growth. Marx referred to capital that is used to hire labour as ‘variable’ capital: the workers produce more capital than is invested in them, so the capital that hires them ‘varies’ in relation to the capitalist’s total capital. Capital not used to hire workers is invested in other means of production that are ‘constant’ capital – including machinery, land, buildings and raw materials – whose value is preserved but not increased during production. 49

The value used for workers’ subsistence, the ‘wage share’, could not be less than was needed to restore labour power or workers would perish, leaving the capitalist unable to produce surplus value. Historically, the wages of the poor had tended to be at subsistence level. But here Marx introduces a powerful new idea which has informed thinking ever since: class struggle. Workers’ wages were set by class struggle. The side with more power could force through a wage rate favourable to itself. Which class had more power was related to what we would call today the tightness of the labour market. If wages increased because workers had a lot of bargaining power in a tight labour market, capitalists would substitute more machines for labour, creating more unemployment and competition among workers for jobs. Marx thought that capitalists would try to keep a ‘reserve army’ of the unemployed to hold down wages and maintain or increase their own share of the value workers created.

The value of labour power is expressed to workers as wages, to capitalists as profits. The rate of profit for an enterprise is the surplus value divided by variable and constant capital – roughly what today we call the rate of return on a company’s assets. The average profit rate of the economy as a whole is total surplus value divided by total variable and constant capital. But the size of the average profit rate depends on the composition of capital (how much variable and constant capital) and on class struggle – effectively, the size of workers’ wages relative to value produced. The average profit rate is also affected by economies of scale as the productivity of workers rises with a growing market and the increasing specialization of workers. 50In particular, Marx believed that increasing agricultural production would not lead to Ricardo’s stationary, food-constrained world. 51He was right: broadly speaking, food production has kept pace with population increase. Marx was also acute in his understanding of the capacity of technology to transform society. He would not have been surprised by the extent to which automation has replaced people, nor perhaps by the possibility of machines more intelligent than their human creators.

Marx’s analysis of who got what in capitalism did not stop there. He also distinguished between different functions of various capitalist actors in the economy. In doing so he used his value theory shrewdly to identify those who produce value and those who do not.

Like economists before him, Marx believed that competition would tend to equalize rates of profits across the economy. 52But at this point Marx introduced a distinction that is critically important for his and for subsequent theories of value: the way in which different kinds of capitalists came by their profits. The first two categories Marx identified were production (or industrial) capital and commercial capital. The first produces commodities; the second circulates commodities by selling them, making the money received available to production capital for buying the means of production (the dark grey sphere in the lighter blob in Figure 6). As Marx explained, the first creates surplus value, the second ‘realizes’ it. Any unsold commodity will therefore be of no use to a capitalist, regardless of how much he or she exploits his or her workers, because no surplus value is realized. Commercial capital, Marx noted, had existed for millennia: international merchants such as the Phoenicians and the Hanse bought cheap and sold dear. What they did not do was to add value by capitalist production. Under capitalism, the commercial capitalists realize the value produced by the production capitalists. To apply Marx’s theory to a modern-world example, Amazon is a commercial capitalist because it is a means by which production capitalists sell their goods and realize surplus value. Banks’ money transfer services are also an example of commercial capital. 53