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Classical economists and even Marx believe that capitalism is the system that functions for the extraction of surplus value. This means the crucial actions of economic activities are the production and labour. Smith explains the notion of wealth by emphasizing the following sentence ‘the real wealth, the annual produce of the land labour of society. His main emphasis is on production and labour. The wealth of a nation depends on the division of labour which functions through the invisible hand of self-interest. Smith indicates,
Every individual necessarily labours to render the annual revenue of the society as great as he can. He generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it. By preferring the support of domestic to that of foreign industry, he intends only his own security; and by directing that industry in such a manner as its produce gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for that it was no part of it. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it. (2008; p.59)
Production is the fundamental activity of economy for Adam Smith. The division of labour which can be identified as the division of tasks in the manufactory and also as a sort of social division of labour, is the leading strategy to increase productivity and self-interest that is limited by the extent of the market. That is to say, everyone in the market economy is producing for her self-interest not for the need of others. This means that the source of wealth is the productivity and labour process. Smithian labour theory of value avers that the price of a commodity can only be measured by the labour process that it contains. Smith solves the problem of measuring the value of commodity through his theory of natural price. According to Smith (1976: pp.47-48), every produced commodity has a real price, this real price reflects the quantity of labour which is possessed for producing a commodity, and this quantity of labour is also used for the measurement of the ability for buying other commodities. The former one is called labour embodied (that is to say labour time embodied in commodities) while the letter one is identified as labour commanded. If the labour commanded and labour embodied are equal to each other there is no possibility of obtaining profit from a commodity. However, this theory of real price appeals to the primitive societies, and for the advanced societies we need a new theory for explaining the value of a commodity. Price is the reflection of the value as a monetary symbol. In the advance societies the production process is more complex and means of production are gathered in the hands of few persons who seek to gain more profit. There are also landlords that are awaiting profit from the land or manufactory where there the production takes place. Therefore, in order to get profit, the price of a commodity should not only contain the labour embodied, it should also contain the production costs and land rent. Production costs, labour and land determine the natural price of a commodity (Ibid., pp.65-66). Then, this natural price is determined by the techniques of production and the distribution of income among wage, rent and profit. This is related to market price which has a tendency to become natural price in long run. In the short-run market price is determined by the measurement of effectual demand. Effectual demand is the necessary demand to bring a commodity into market. It causes the market prices to gravitate towards natural prices in the long run. As a consequence, the value of a commodity is determined by the labour time embodied in it, the cost productions (including land), and the rate of profit. These are Smith’s labour theory of value and adding-up theory of value. This improves that economy, for him, depends on the production of surplus, and the wealth of a nation is determined by the production process in which value is created by the social and technical division of labour. His adding-up theory has several dimensions. For instance, the annually collected labour is equal to the exchangeable value of it. Wages, profit and rent, are the tree original sources of all revenue as well as of all exchangeable value (p.69). This means that the whole of what is produced by labour embodied equals the whole price of it, but the exchangeable value is distributed to the landlord, the labourer and the capitalist. The national product equals national income (Dooley, 2005; p.137). In the final instance, it is the productive labour that adds to the value of materials.
David Ricardo, as the key figure of classical economy after Adam Smith, also makes a formulation of labour theory of value which also has reference to labour embodied. His labour theory of value aims to observe long-run price. According to him, the exchange value of commodities has two main sources; “from their scarcity, and from the quantity of labour required to obtain them.” (Ricardo, 1996; p.18) He criticizes Smith’s commanded labour theory since he thinks that it is a necessity to understand the variations of labour for measuring the value of a commodity. He avers;
[I]f the reward of the labourer were always in proportion to what he produced, the quantity of labour bestowed on a commodity, and quantity of labour which that commodity would purchase, would be equal, and either might accurately measure the variations of other things; but they are not equal; the first is under many circumstances and invariable standard, indicating correctly the variations of other things; the latter is subject to as many fluctuations as the commodities compared with it. Adam Smith, after most ably showing the insufficiency of a variable medium, such as gold and silver, for the purpose of determining the varying value of other things, has himself by fixing on corn or labour, chosen a medium no less variable. (Ricardo, 1996, p. 19)
Ricardo’s labour theory of value forms the basis of Marx’s theory of surplus value. That is why it is possible to understand the basic function of economy is the production of surplus value according to classical political economy. Ricardo makes a hypothetical deduction to construct his economic theory, and he assumes that value is produced by direct labour and labour embodied. He also focuses on understanding the variations of long-run and relative prices in one particular time. He indicates that
[I]n comparing, therefore, the value of the same commodity at different periods of time, the consideration of the comparative skill and intensity of labour required for that particular commodity need scarcely to be attended to, as it operates equally at both periods. One description of labour at another; if a tenth, a fifth, or a fourth has been added or taken away, an affect proportioned to the cause will be produced on the relative value of the commodity. (Ibid, 24)
The main reason for him to investigate different time periods for understanding the variations on the formation of value is that he considers the labour as a variable component of production process. Therefore, the value can be estimated relatively in each different production process. Each sector has different labour process, but they can relatively have same amount of value with different amount of labour but they can have same amount of labour with different amount value. In this case Ricardo points out
In speaking, however, of labour, as being the foundation of all value and the relative quantity of labour as almost exclusively determining the relative value of commodities, I must not be supposed to be inattentive to the different qualities of labour, and the difficulty of comparing an hour’s or a day’s labour, in one employment, with the same duration of labour in another. The estimation in which different qualities of labour are held, comes soon to be adjusted in the market with sufficient precision for all practical purposes and depends much on the comparative skill of the labourer, and intensity of labour performed. The scale when once performed, is liable to little variation. If a day’s labour of a working jeweler be more valuable than a day’s labour of a common labourer, it has long ago been adjusted, and placed in its proper position in the scale of value. (Ibid., p.23)
As a conclusion, Ricardo’s labour theory of value claims that the quantity of embodied labour to obtain different commodities creates the value as Adam Smith avers. However, his main claims suggest that it is not easy to calculate different variations for different type of labour process and commodities. Therefore, there is a relative relationship among commodities. His analysis depends on reduction of the problem of labour to the simple anaylsis of the quantitative variable of time (Foucault, 2008; p.220). Ricardo also thinks that use value cannot determine the price since utility is not a measure of exchangeable value (p.17). Marx builds his theory of surplus value on Ricardo’s relative labour theory of value. Marx (1976) avers that the one feature all commodities share was that they were produced by human labour. The labour time taken to produce a commodity varies according to the type of machinery used, the intensity of work performed and the way that the labour process is organized (Spies-Butcher et al. 2012, p.21). Marx (1976; p.125) believes that capitalism is a system of commodity production, and money works as an intermediary in this system. Exchange values of commodities are reflected by prices and money plays the role of mediator during the exchange process. Therefore, the capitalist system works via the following formulation C-M-C, the exchange of commodities returns as money and the money plays the intermediary role for the production of new commodities. However, the use of money as a mediator in the exchange process changed this system of commodity circulation. The more crucial thing is the circulation of money which starts to function both as an intermediary and a commodity. The circulation of money which functions as a commodity means capital (Ibid.). Capital then functions to produce more commodities in order to get more money, that is to say more profit. It can be illustrated as M-C-M. This is the basic circulation of capitalist mode of production. However, the value of a commodity which is reflected by the exchange price is determined not only by labour embodied but also by the social relations which are existing for the formation of surplus value. We are living in a world of commodity production – all goods are produced for having an exchange value in the market (Harvey, 1982). Marx agrees with Ricardo that the value is created by labour embodied which is measured through relative and variable labour time and quantity. However, he does not agree with Ricardo’s hypothetical method which does not explain social conditions that produce the value.
Marx uses a historical methodology that aims to show different phases of division of labour and social relations in history. By doing this, he tries to examine different social conditions and production relations in the different epochs of history. He uses this historical materialist method for explaining the labour theory of value through his concept of surplus value. He turns an a-historical universal statement into a theory of value that operates solely under capitalist relations of production (Ibid., p.15). To wit, Marx explores his methodology of historical materialism for deciphering the emergence of capitalism. Capitalism is a new mode of production which emerged in a specific time and spatial context. Each society was characterized by some general economic features such as production, exchange, distribution and consumption which, however, found their concrete expression at a specific time and place in history (Vaggi and Groenewegen, 2003; p. 160). Therefore, this new mode of production is dependent on the endless reproduction of means of production with the specific social relations that refer to class antagonism between bourgeoisie and working classes for endless accumulation. Social relations and class struggles are the key determinants of capitalist mode of production. The means of productions are owned by certain persons who are circulating the capital to get more profit and accumulate more capital, these are persons from bourgeoisie class, and the labour is performed by working class who has only the ability to sell their labour power. Therefore, capitalism transforms labour into labour power and uses abstract labour rather than concrete labour and as Marx indicates abstract labour is measured by socially necessary labour time. The value is formed through socially necessary abstract labour time.
Marx constructs his surplus value theory on this basis, capitalism transforms the labour into something abstract and it becomes labour power, that is to say capitalism transforms labour to a commodity that can be bought as wage labour by capitalists. Marx makes a contribution to the circulation of money, for transforming commodities for making more money, and indicates that there needs to be profit for making capital work as a process. Therefore, profit is a part of valorization of capital. This accumulation of valorized capital, for Marxian thought is not volunteer, it happens by the exploitation of labour power. Labour power is exploited by the capitalists in order extract more surplus value to gain more profit. That is to say, surplus value is the key element for the calculation and increase of rate of profit. The rate of surplus value gives us the degree of exploitation of labour-power (Marx, p.320-321). This forms a new circulation of capital including profit. That is to say M-C-M without profit does not have any meaning, profit must be included in order to circulate money as capital. This can be illustrated as M-C-M’ and M’= (M+∆M) = Surplus value (Marx, p.251). This form of circulation, as David Harvey explains, rests upon an inequality because capitalist possess more money (values) at the end of the process than they did at the beginning, and the symbol ∆M also shows the exploitation of labour power that is constituted in the capital circulation process. Then, Harvey explains the role of labour power;
Labour power as a commodity has a two-fold character: it has a use value and an exchange value. The exchange value is set, in accordance with the rules of commodity exchange, by the socially necessary labour time required to reproduce that labour power at a certain standard of living and with a certain capacity to engage in the work process. The labourer gives up the use value of the labour power in return for its exchange value. (Harvey, 1982, p.22)
Capitalists purchase labour power for using it for a certain production time. They organize the production system for extracting greatest value from the labour power. The exploitation of labour power in the organization of production process through labour time produces surplus value since labourer is paid only subsistence wage to survive his life for satisfying the basic needs for continuing his work.
The leading figures of classical political economy (Smith and Ricardo) and even Marx explain that the source of value is measured by the embodied labour in a commodity. However, Marx uses a historical perspective and injects his theory of exploitation in order to decipher how surplus value is created for getting more profit through exploiting the labour power. Capitalist transforms labour into labour power and it reproduces means of production incessantly in order to compete in the market economy, this increases the mechanization. That is to say, capitalist replaces living labour by dead labour incessantly, and this is also another dimension of the abstraction of labour. This situation causes the emergence of industrial reserve army, and the increase of industrial reserve army constitutes the other dimension of crisis theory, i.e. underconsumption, this is Marx’s theory of misery or poverty. Labour is the source value, and the key factor that determines the capitalist economic activities is the production of commodities. As Marx indicates in the beginning of Capital, capitalism is the system of accumulation of commodities, that is to say it is the system of production.