The Communist Manifesto and Das Kapital

MANIFESTO OF THE COMMUNIST PARTY

A new idea is spreading across Europe. It’s like a ghost haunting the continent—the ghost of communism. All the established powers of old Europe have joined together in a kind of sacred mission to get rid of this “ghost.” This alliance includes powerful figures like the Pope and the Tsar (the Russian emperor), government leaders like Metternich (from Austria) and Guizot (from France), as well as French Radicals (a political group) and German police spies.

It seems that any opposition party, when it challenges those in power, gets labeled as “communistic.” And these opposition parties themselves often throw the same accusation of communism at groups more radical than they are, or even at their opponents who want to return to older ways.

Two important things become clear from this situation:

1. All the major powers in Europe already recognize communism as a significant force.
2. It is high time for Communists to openly present their views, aims, and tendencies to the entire world. They need to respond to these scary, made-up stories about the “ghost of communism” with a clear statement—a manifesto—from the party itself.

To achieve this, Communists from various countries have gathered in London. They have written the following manifesto. It will be published in the English, French, German, Italian, Flemish, and Danish languages.

CHAPTER ONE

BOURGEOIS AND PROLETARIANS: The Oppressors and the Oppressed

The written history of all societies that have existed until now is a story of struggles between different social classes.

Throughout history, we see these opposing groups:

• Free people and enslaved people
• Patricians (nobles in ancient Rome) and plebeians (commoners in ancient Rome)
• Lords (landowners in the Middle Ages) and serfs (farm workers tied to the land)
• Guild-masters (master craftsmen in trade associations) and journeymen (skilled workers employed by guild-masters)

In short, there has always been an oppressor class and an oppressed class. These two groups have constantly been in conflict with each other. This fight was ongoing—sometimes hidden, sometimes out in the open. Each time, the fight ended in one of two ways:

• A complete, revolutionary rebuilding of society.
• Or, the destruction of both fighting classes.

In earlier periods of history, societies almost everywhere had complex structures. They were divided into various social orders, with many different levels of social rank.

• In ancient Rome, there were patricians, knights, plebeians, and slaves.
• In the Middle Ages, there were feudal lords, vassals (those who served lords in exchange for land), guild-masters, journeymen, apprentices (learners), and serfs. Within almost all of these classes, there were further, smaller rankings.

A New Form of Class Conflict

Modern bourgeois society grew from the ruins of the old feudal society. This new society, run by the bourgeoisie (the capitalist class, owners of the means of production), has not eliminated class conflicts. Instead, it has simply:

• Created new classes.
• Established new conditions of oppression.
• Developed new forms of struggle to replace the old ones.

Our current era, the era of the bourgeoisie, has a special feature: it has simplified class conflicts. Society as a whole is splitting more and more into two great enemy camps, into two major classes that directly oppose each other: the Bourgeoisie and the Proletariat (the modern working class).

The Rise of the Bourgeoisie

The first members of the bourgeoisie came from the serfs of the Middle Ages. These serfs became the chartered burghers (citizens with special rights) of the earliest towns. From these townspeople, the first elements of the bourgeoisie began to develop.

Several key events helped the rising bourgeoisie grow:

• The discovery of America.
• The sailing route around the southern tip of Africa (the Cape of Good Hope).

These discoveries opened up new opportunities. The markets in East India and China, the colonization of America, trade with these colonies, and an increase in trade goods and money gave a huge boost to:

• Commerce (trade).
• Navigation (shipping).
• Industry (manufacturing).

This rapid development helped the revolutionary part of feudal society (the early bourgeoisie) to grow quickly, while feudal society itself was crumbling.

The old feudal system of industry could no longer meet the growing needs of the new markets. Under this system, production was controlled by closed guilds (exclusive associations of craftsmen). The manufacturing system took its place. The manufacturing middle class pushed the guild-masters aside. The old way of dividing labor among different guilds disappeared. Instead, work was divided within each individual workshop.

The Industrial Revolution and the Modern Bourgeoisie

Meanwhile, markets kept expanding, and demand for goods kept rising. Even the manufacturing system eventually wasn’t enough. Then, steam power and machinery revolutionized industrial production. Giant Modern Industry replaced the manufacturing system. Industrial millionaires—the leaders of whole industrial armies, the modern bourgeois—took the place of the industrial middle class.

Modern Industry created the world market. The discovery of America had prepared the way for this. The world market led to an enormous expansion of:

• Commerce (trade).
• Navigation (shipping).
• Communication over land.

This expansion, in turn, helped industry to grow further. And as industry, commerce, navigation, and railways expanded, the bourgeoisie grew stronger. They increased their capital (wealth used for investment) and pushed all the classes remaining from the Middle Ages into the background.

So, we can see that the modern bourgeoisie is itself the product of a long period of development. It emerged from a series of revolutions in how goods were produced and exchanged.

The Political Rise of the Bourgeoisie

Each step in the bourgeoisie’s development was matched by a political advance for that class.

• Under feudal lords, they were an oppressed class.
• In the medieval commune (self-governing towns), they formed armed, self-governing associations.
• In some places, like Italy and Germany, they became independent city-republics.
• In others, like France, they were the “third estate”—a tax-paying commoner class under the monarchy.
• Later, during the manufacturing period, they served monarchs (either semi-feudal or absolute) as a force to balance the power of the nobility. In fact, they were the foundation of the great monarchies.

Finally, with the establishment of Modern Industry and the world market, the bourgeoisie gained exclusive political power in the modern representative State (governments with elected representatives). The government in a modern state is essentially a committee for managing the common affairs of the entire bourgeoisie.

The Bourgeoisie’s Revolutionary Role in History

Historically, the bourgeoisie has played a highly revolutionary part.

Wherever it has gained power, the bourgeoisie has:

• Ended all old feudal, patriarchal (male-dominated), and sentimental social relationships.
• Ruthlessly broken the complex feudal ties that bound people to their “natural superiors” (like lords).
• Left no connection between people other than naked self-interest and unemotional “cash payment.”
• Replaced religious passion, chivalrous enthusiasm, and sentimentalism with cold, self-centered calculation.
• Reduced personal worth to exchange value (how much something can be sold for).
• Instead of many guaranteed, historic freedoms, it established one single, ruthless freedom: Free Trade.

In simple terms, the bourgeoisie replaced exploitation hidden by religious and political illusions with exploitation that is open, shameless, direct, and brutal.

The bourgeoisie has removed the special, honored status from many occupations that were previously looked upon with respect. It has turned the following into its paid workers:

• The physician (doctor).
• The lawyer.
• The priest.
• The poet.
• The man of science.

The bourgeoisie has stripped away the emotional sentimentality from family life. It has reduced family relationships to mere money relationships.

The bourgeoisie has shown how the brutal displays of strength in the Middle Ages, which some traditionalists greatly admire, were actually balanced by extreme laziness. It was the first to demonstrate what human activity can achieve. It has created wonders far greater than:

• Egyptian pyramids.
• Roman aqueducts (structures for carrying water).
• Gothic cathedrals. It has led expeditions that overshadow all previous mass migrations of peoples and crusades.

Constant Change under Bourgeois Rule

The bourgeoisie cannot exist without constantly revolutionizing:

1. The instruments of production (tools, machines, technology).
2. Thereby, the relations of production (how work and ownership are organized).
3. And with them, all the relations in society.

In contrast, all earlier industrial classes needed to keep old ways of production unchanged to survive. The bourgeois era is different from all earlier ones because of:

• Constant revolutionizing of production.
• Uninterrupted disturbance of all social conditions.
• Everlasting uncertainty and agitation.

All fixed, long-established relationships, along with their ancient and respected prejudices and opinions, are swept away. All newly formed relationships become outdated before they can solidify. Everything that seems solid disappears into thin air. Everything sacred is treated with disrespect. Finally, people are forced to face their real conditions of life and their relationships with others in a sober, clear-headed way.

Global Expansion

The need for a constantly expanding market for its products drives the bourgeoisie across the entire globe. It must:

• Establish itself everywhere.
• Settle everywhere.
• Create connections everywhere.

Through its control of the world market, the bourgeoisie has made production and consumption in every country international (cosmopolitan). Much to the dismay of traditionalists (Reactionists), it has pulled the national foundation out from under industry.

• Old national industries have been destroyed or are being destroyed daily.
• New industries are replacing them. The introduction of these new industries is a matter of life and death for all civilized nations.
• These new industries no longer use local raw materials. Instead, they use raw materials from the most distant parts of the world.
• Their products are consumed not only at home but in every part of the globe.

Instead of the old needs, which were met by a country’s own production, we find new needs. Satisfying these new needs requires products from distant lands and different climates. Instead of the old local and national isolation and self-sufficiency, we have connections in every direction and a universal interdependence of nations.

This applies to material production and also to intellectual production (ideas, literature, art). The intellectual creations of individual nations become common property. National one-sidedness and narrow-mindedness become more and more impossible. A world literature is emerging from the many national and local literatures.

Creating a World in Its Own Image

The bourgeoisie, by rapidly improving all tools of production and by making communication immensely easier, draws all nations, even the most “barbarian” (meaning less technologically developed, from their perspective), into civilization.

• The cheap prices of its goods are like heavy cannons. With these, it breaks down all “Chinese walls” (barriers to trade and foreign influence).
• It forces these nations to accept its ways by overcoming their strong hatred of foreigners.
• It compels all nations, on pain of extinction, to adopt the bourgeois mode of production.
• It forces them to introduce what it calls “civilization” into their societies—in other words, to become bourgeois themselves.

In short, the bourgeoisie creates a world that looks like itself.

Urbanization and Centralization

The bourgeoisie has made the countryside dependent on the towns. It has:

• Created enormous cities.
• Greatly increased the urban (city) population compared to the rural (countryside) population.
• Thus, it has rescued a large part of the population from what it saw as the isolation and limited horizons of rural life.

Just as it made the country dependent on towns, it has also made:

• “Barbarian” and “semi-barbarian” countries (less developed nations) dependent on “civilized” ones (industrialized nations).
• Nations of peasants dependent on nations of bourgeois (capitalist nations).
• The East dependent on the West.

The bourgeoisie continues to eliminate the scattered state of:

• The population.
• The means of production (tools, factories, land).
• Property.

It has:

• Agglomerated population (concentrated people in large groups, mainly in cities).
• Centralized the means of production (brought factories and tools together under fewer owners).
• Concentrated property in a few hands.

The necessary result of this was political centralization. Independent or loosely connected provinces, each with their own interests, laws, governments, and tax systems, were brought together. They formed one nation, with:

• One government.
• One code of laws.
• One national class-interest.
• One frontier (border).
• One customs tariff (taxes on imported goods).

Unprecedented Productive Power

In its rule of barely one hundred years, the bourgeoisie has created more massive and colossal productive forces than all preceding generations combined. Consider these achievements:

• Controlling Nature’s forces for human use.
• Machinery.
• Applying chemistry to industry and agriculture.
• Steam-powered ships.
• Railways.
• Electric telegraphs.
• Clearing whole continents for farming.
• Making rivers navigable (canalization).
• Causing whole populations to spring up as if by magic.

What earlier century even had a hint that such productive forces lay hidden in the potential of social labor?

The Bourgeoisie’s Own Contradictions

So, we see that the means of production and exchange, which formed the foundation for the bourgeoisie’s rise, were created within feudal society. At a certain stage in the development of these tools and methods, the conditions under which feudal society produced and traded goods—the feudal organization of farming and manufacturing, or simply, feudal property relations—were no longer compatible with the already developed productive forces. They became like chains (fetters) holding back progress. They had to be broken, and they were broken.

Free competition took their place. This was accompanied by a social and political system suited to it, and by the economic and political rule of the bourgeois class.

Crises of Overproduction

A similar movement is happening before our very eyes today. Modern bourgeois society, with its complex relations of production, exchange, and property, has created such gigantic means of production and exchange. Now, it is like a sorcerer who can no longer control the powerful spirits he has summoned.

For many decades, the history of industry and commerce has been the history of the revolt of modern productive forces against modern conditions of production. This means a revolt against the property relations that are essential for the existence and rule of the bourgeoisie.

It is enough to mention the commercial crises (economic downturns). These crises return periodically, each time more threateningly, putting the existence of the entire bourgeois society on trial. In these crises:

• A large part of existing products is destroyed.
• A large part of previously created productive forces is also destroyed.
• An epidemic breaks out that would have seemed absurd in all earlier times—the epidemic of overproduction.

Society suddenly finds itself thrown back into a state of temporary barbarism. It seems as if a famine or a devastating war has cut off all supplies. Industry and commerce appear to be destroyed. And why? Because there is:

• Too much civilization.
• Too many means of subsistence (food, necessities).
• Too much industry.
• Too much commerce.

The productive forces available to society no longer help to develop the conditions of bourgeois property. On the contrary, they have become too powerful for these conditions, which now act as chains on them. As soon as these productive forces overcome these chains, they bring disorder to all of bourgeois society and endanger the existence of bourgeois property. The conditions of bourgeois society are too narrow to contain the wealth created by them.

How does the bourgeoisie overcome these crises?

1. By forcibly destroying a large amount of productive forces.
2. By conquering new markets.
3. By more thoroughly exploiting old markets.

Essentially, they try to solve crises by paving the way for even larger and more destructive crises in the future, and by reducing the means available to prevent crises.

The Bourgeoisie Forges Its Own Weapons

The weapons with which the bourgeoisie defeated feudalism are now turned against the bourgeoisie itself.

But the bourgeoisie has not only created the weapons that will bring about its own downfall. It has also brought into existence the people who will use those weapons—the modern working class, the proletarians.

The Rise of the Proletariat

As the bourgeoisie (meaning, capital) develops, the proletariat (the modern working class) develops in the same proportion. The proletariat is a class of laborers who live only as long as they can find work. And they find work only as long as their labor increases capital. These laborers must sell themselves piece by piece. They are a commodity, like any other article of trade. Therefore, they are exposed to all the ups and downs of competition and all the fluctuations of the market.

The Dehumanization of Work

Due to the widespread use of machinery and the division of labor (breaking down tasks into small, repetitive steps), the work of proletarians has lost all individual character. Consequently, it has lost all appeal for the worker. The worker becomes like an appendage of the machine. Only the simplest, most monotonous, and most easily learned skill is required.

Therefore, the cost of producing a worker (their wage) is limited almost entirely to the basic necessities they need to survive and to raise a family. But the price of a commodity, and therefore also of labor, is equal to its cost of production. So, as the unpleasantness of the work increases, the wage tends to decrease.

Furthermore, as the use of machinery and division of labor increases, the burden of toil also increases. This can happen through:

• Longer working hours.
• An increase in the amount of work demanded in a given time.
• Increased speed of machinery, and so on.

The Factory System

Modern Industry has transformed the small workshop of the old patriarchal master (a craftsman who might have treated his few workers somewhat like family) into the great factory of the industrial capitalist. Masses of laborers are crowded into the factory. They are organized like soldiers in an industrial army, placed under the command of a complete hierarchy of officers and sergeants.

They are not only slaves of the bourgeois class and the bourgeois State. They are also enslaved daily and hourly by:

• The machine itself.
• The supervisor (overlooker).
• And, above all, by the individual bourgeois manufacturer.

The more openly this system of control (despotism) declares that its only aim is profit, the more petty, hateful, and bitter it becomes.

Changing Labor Force

The less skill and strength are needed for manual labor—in other words, the more modern industry develops—the more the labor of men is replaced by that of women. For the working class, differences of age and sex no longer have any real social importance. All are simply instruments of labor, costing more or less to use depending on their age and sex.

Exploitation Continues

As soon as the worker receives their wages in cash from the manufacturer (ending one phase of exploitation), they are immediately targeted by other parts of the bourgeoisie:

• The landlord (for rent).
• The shopkeeper (for goods).
• The pawnbroker (for loans), and so on.

The Proletariat Recruits from Other Classes

The lower sections of the middle class gradually sink into the proletariat. This includes:

• Small tradespeople.
• Shopkeepers.
• Retired tradesmen.
• Handicraftsmen.
• Peasants.

This happens for two main reasons:

1. Their small amounts of capital are not enough to compete on the scale of Modern Industry. They are overwhelmed by competition from large capitalists.
2. Their specialized skills become worthless due to new methods of production.

Thus, the proletariat is recruited from all classes of the population.

Early Stages of Proletarian Struggle

The proletariat goes through various stages of development. Its struggle with the bourgeoisie begins as soon as it comes into existence. At first, the fight is carried on by:

• Individual laborers.
• Then, by the workers of a single factory.
• Then, by the workers in one trade, in one specific location, against the individual bourgeois who directly exploits them.

Early Attacks and Misdirected Efforts

In these early stages, workers often direct their attacks in the wrong way.

• They attack not the bourgeois conditions of production (the capitalist way of making things), but the instruments of production (the tools and machines) themselves.
• They destroy imported goods that compete with their labor.
• They smash machinery to pieces.
• They set factories on fire.
• They try to forcefully bring back the lost status of workers from the Middle Ages.

At this point, the laborers are still a disorganized group. They are scattered across the country and divided because they compete with each other for work. If they do unite to form more organized groups, it’s not yet because of their own efforts to unite. Instead, it’s often because the bourgeoisie unites them. The bourgeois class, to achieve its own political goals, needs to get the whole proletariat moving and, for a time, is able to do so.

Therefore, at this stage, the proletarians (workers) are not fighting their real enemies (the bourgeoisie). Instead, they are fighting the enemies of their enemies:

• The remaining supporters of absolute monarchy (rule by a king or queen with total power).
• Landowners.
• Non-industrial bourgeois (capitalists not involved in industry).
• The petty bourgeois (small-scale business owners).

So, the entire historical movement is concentrated in the hands of the bourgeoisie. Every victory gained in this way is a victory for the bourgeoisie.

The Proletariat Grows Stronger

But as industry develops, the proletariat doesn’t just increase in number.

• It becomes concentrated in larger groups.
• Its strength grows.
• It becomes more aware of that strength.

The different interests and living conditions within the ranks of the proletariat become more and more similar. This happens as machinery:

• Wipes out all differences in types of work.
• Reduces wages to the same low level nearly everywhere.

The growing competition among the bourgeois themselves, and the economic crises that result, make workers’ wages even more unstable. The constant improvement of machinery, which develops more and more rapidly, makes their livelihoods increasingly uncertain. Clashes between individual workers and individual bourgeois employers increasingly take on the character of clashes between two classes.

In response, workers begin to form combinations (early forms of trade unions) against the bourgeois.

• They team up to keep wages from falling.
• They create permanent associations to prepare for these occasional revolts.
• Here and there, the conflict breaks out into riots.

Expanding Union and Political Struggle

Now and then, the workers win a victory, but only for a short time. The real benefit of their battles is not the immediate result. Instead, it’s the ever-expanding union of the workers.

This union is helped by the improved means of communication created by modern industry. These new communication methods (like railways) put workers from different areas in contact with each other. This contact was exactly what was needed to unite the many local struggles, all similar in nature, into one national struggle between classes. And every class struggle is a political struggle.

The townspeople (burghers) of the Middle Ages, with their poor roads, needed centuries to achieve such unity. Modern proletarians, thanks to railways, can achieve it in a few years.

The Proletariat as a Political Force

This organization of the proletarians into a class, and therefore into a political party, is constantly being disrupted by competition among the workers themselves. But it always rises up again—stronger, firmer, and mightier.

By taking advantage of divisions within the bourgeoisie itself, this workers’ party forces laws to be passed that recognize particular interests of the workers. For example, the ten-hours’ bill (a law limiting the workday to ten hours) was passed in England this way.

How the Bourgeoisie Aids the Proletariat’s Development

Overall, conflicts between the classes of the old society help the development of the proletariat in many ways. The bourgeoisie finds itself in a constant battle:

• First, with the aristocracy (the old nobility).
• Later, with parts of the bourgeoisie whose interests oppose the progress of industry.
• At all times, with the bourgeoisie of foreign countries.

In all these battles, the bourgeoisie feels forced to appeal to the proletariat for help. By doing so, it drags the proletariat into the political arena. Therefore, the bourgeoisie itself provides the proletariat with some of its own tools for political and general education. In other words, it gives the proletariat weapons to fight the bourgeoisie.

Furthermore, as we have already seen, the advance of industry throws entire sections of the ruling class down into the proletariat. Or, at least, their conditions of existence are threatened. These groups also supply the proletariat with new ideas and understanding that help them progress.

Defectors from the Ruling Class

Finally, in times when the class struggle is nearing a decisive point, the process of breakdown within the ruling class—and indeed within the whole of old society—becomes so violent and obvious that a small section of the ruling class breaks away. This small group joins the revolutionary class, the class that holds the future in its hands.

So, just as a part of the nobility went over to the bourgeoisie in an earlier period, now a portion of the bourgeoisie goes over to the proletariat. This is particularly true for some bourgeois ideologists—thinkers from the bourgeois class who have developed the ability to understand the historical movement as a whole from a theoretical perspective.

The Proletariat: The Only Truly Revolutionary Class

Of all the classes that currently oppose the bourgeoisie, the proletariat alone is a truly revolutionary class. The other classes decline and finally disappear with the rise of Modern Industry. The proletariat, however, is Modern Industry’s special and essential product.

Consider these other groups:

• The lower middle class (small manufacturers, shopkeepers, artisans, peasants): They all fight against the bourgeoisie to save their existence as parts of the middle class from being wiped out. Therefore, they are not revolutionary, but conservative.
• In fact, they are often reactionary because they try to turn back the wheel of history.
• If, by chance, they are revolutionary, it is only because they see they are about to be pushed into the proletariat. In that case, they are defending their future interests, not their present ones. They abandon their own viewpoint to adopt the viewpoint of the proletariat.

The “Dangerous Class” (Lumpenproletariat)

Then there is the “dangerous class” (the lumpenproletariat). This is the social scum, the passively decaying mass thrown off by the lowest layers of the old society. Here and there, it might be swept into the movement by a proletarian revolution. However, its life conditions make it far more likely to be bribed to take part in reactionary plots.

The Proletarian Condition

The conditions of life for the proletariat already reflect the destruction of the old society’s conditions.

• The proletarian has no property.
• His relationship with his wife and children has nothing in common with bourgeois family relations.
• Modern industrial labor, modern enslavement to capital (which is the same in England as in France, in America as in Germany), has stripped him of any national character.
• To him, law, morality, and religion are just so many bourgeois prejudices. Behind these prejudices lurk just as many bourgeois interests.

The Proletariat’s Unique Mission

All previous classes that gained power tried to strengthen their already acquired position by forcing all of society to accept their conditions of appropriation (their ways of owning and controlling things). The proletarians cannot become masters of the productive forces of society except by abolishing their own previous way of appropriation, and with it, every other previous way of appropriation.

Workers have nothing of their own to secure and strengthen. Their mission is to destroy all previous securities for, and insurances of, individual property.

A Majority Movement

All previous historical movements were movements of minorities, or in the interest of minorities. The proletarian movement is the self-aware, independent movement of the vast majority, acting in the interest of the vast majority. The proletariat, the lowest layer of current society, cannot stir or raise itself up without the entire structure of official society built above it being blown apart.

The National Struggle and Revolution

Though not in its core substance, the struggle of the proletariat with the bourgeoisie is at first a national struggle in its form. The proletariat of each country must, of course, first settle matters with its own bourgeoisie.

In describing the main stages of the proletariat’s development, we have traced the more or less hidden civil war raging within existing society. This war develops up to the point where it breaks out into open revolution. At that point, the violent overthrow of the bourgeoisie lays the foundation for the rule of the proletariat.

The Bourgeoisie is Unfit to Rule

Up to now, as we have seen, every form of society has been based on the conflict between oppressing and oppressed classes. But to oppress a class, certain conditions must be guaranteed under which it can at least continue its enslaved existence.

• The serf, during serfdom, managed to raise himself to become a member of the commune (a self-governing town).
• The petty bourgeois, under the burden of feudal absolutism (absolute royal power), managed to develop into a bourgeois.

The modern laborer, on the contrary, instead of rising with the progress of industry, sinks deeper and deeper below the conditions of existence of his own class. He becomes a pauper (a very poor person), and pauperism (extreme poverty) develops more rapidly than population and wealth.

And here it becomes clear: the bourgeoisie is no longer fit to be the ruling class in society. It is unfit to impose its conditions of existence upon society as an overriding law. It is unfit to rule because:

• It is incompetent to guarantee an existence to its “slave” (the worker) even within his slavery.
• It cannot help letting him sink into such a state that it has to feed him, instead of being fed by him. Society can no longer live under this bourgeoisie. In other words, the existence of the bourgeoisie is no longer compatible with society.

The Foundation of Bourgeois Rule and Its Undermining

The essential conditions for the existence and rule of the bourgeois class are:

1. The formation and growth of capital (wealth used to make more wealth).
2. The condition for capital is wage-labor (workers being paid wages).

Wage-labor rests entirely on competition between the laborers themselves. The advance of industry, which the bourgeoisie promotes (even if unintentionally), replaces the isolation of laborers (caused by competition) with their revolutionary combination (caused by association in unions and movements).

Therefore, the development of Modern Industry cuts out from under the feet of the bourgeoisie the very foundation on which it produces and takes ownership of products. What the bourgeoisie produces, above all, are its own grave-diggers. Its fall and the victory of the proletariat are equally inevitable.

CHAPTER TWO

PROLETARIANS AND COMMUNISTS: The Workers and Their Allies

What is the relationship between Communists and the working class (the proletarians) as a whole?

Communists and the Working Class

Communists do not form a separate political party that opposes other working-class parties.

• They do not have any interests that are separate from the interests of the entire proletariat.
• They do not set up any narrow, special rules of their own to shape the proletarian movement.

What Makes Communists Different?

Communists are different from other working-class parties in only two ways:

1. International Focus: In the national struggles of the workers in different countries, Communists point out and promote the common interests of the entire proletariat, regardless of nationality.
2. Focus on the Whole Movement: In the various stages of the struggle between the working class and the bourgeoisie (the capitalist class), Communists always and everywhere represent the interests of the movement as a whole.

Therefore, Communists are:

• Practically: The most advanced and determined section of the working-class parties in every country. They are the part that pushes all others forward.
• Theoretically: They have an advantage over the great mass of the proletariat because they clearly understand the direction, the conditions, and the final overall outcomes of the proletarian movement.

Immediate Goals

The immediate goal of the Communists is the same as that of all other proletarian parties:

• To organize the proletariat into a distinct social class.
• To overthrow the ruling power of the bourgeoisie.
• For the proletariat to conquer (win) political power.

The Basis of Communist Ideas

The theoretical ideas of the Communists are not based on ideas or principles invented or discovered by some would-be universal reformer who claims to have all the answers. Instead, Communist ideas simply describe, in general terms, the actual relationships that come from an existing class struggle. They describe a historical movement happening right before our eyes. The abolition (ending) of existing property relations is not a unique feature of communism.

All property relations in the past have constantly changed as historical conditions have changed. For example, the French Revolution abolished feudal property (the old system of land ownership) and replaced it with bourgeois property (capitalist ownership).

Abolishing Property: What It Really Means

The distinguishing feature of Communism is not the abolition of property in general. It is the abolition of bourgeois property.

Modern bourgeois private property is the final and most complete form of a system of producing and owning things that is based on:

• Class conflicts (antagonisms).
• The exploitation of the many by the few.

In this sense, the theory of the Communists can be summed up in one single sentence: Abolition of private property.

Addressing Criticisms About Property

We Communists have been accused of wanting to abolish the right of individuals to acquire property as the fruit of their own labor. This kind of property, it is claimed, is the foundation of all personal freedom, activity, and independence.

“Hard-won, self-acquired, self-earned property!”

• Are you talking about the property of the small-scale craftsman (petty artisan) or the small peasant farmer? This was a form of property that existed before the bourgeois form. There is no need for us to abolish that. The development of industry has already largely destroyed it and continues to destroy it daily.
• Or are you talking about modern bourgeois private property?

But does wage-labor (working for wages) create any property for the laborer? Not at all. It creates capital—that is, the kind of property that exploits wage-labor. Capital can only increase if it can create a new supply of wage-labor for fresh exploitation. Property, in its current form, is based on the conflict between capital and wage-labor. Let us look at both sides of this conflict.

Capital: A Social Power

To be a capitalist means having not just a purely personal status, but a social status in production. Capital is a collective product. It can only be put into motion by the united action of many members of society—indeed, in the end, only by the united action of all members of society. Therefore, capital is not just personal; it is a social power.

So, when capital is converted into common property, into the property of all members of society, personal property is not automatically transformed into social property. It is only the social character of the property that changes. It loses its class character (its connection to a specific social class).

Wage-Labor and the Worker

Now let’s consider wage-labor. The average price of wage-labor is the minimum wage. This is the smallest amount of basic necessities (means of subsistence) absolutely required to keep the laborer alive and able to work. Therefore, what the wage-laborer gets through his labor is merely enough to keep him alive and allow him to reproduce.

We certainly do not intend to abolish this personal appropriation of the products of labor. This appropriation is made for the maintenance and reproduction of human life. It leaves no extra (surplus) with which to command the labor of others. All we want to do away with is the miserable nature of this appropriation. Under the current system, the laborer lives only to increase capital. He is allowed to live only if it serves the interest of the ruling class.

Labor in Bourgeois vs. Communist Society

• In bourgeois society, living labor (the work people do now) is just a means to increase accumulated labor (capital, wealth from past labor).
• In Communist society, accumulated labor (capital) will be just a means to widen, enrich, and promote the existence of the laborer.

Therefore:

• In bourgeois society, the past dominates the present.
• In Communist society, the present will dominate the past.
• In bourgeois society, capital is independent and has “individuality,” while the living person is dependent and has no real individuality.

Freedom and Individuality under Attack?

The bourgeoisie calls the abolition of this state of things the “abolition of individuality and freedom!” And in a way, they are right. We undoubtedly aim to abolish:

• Bourgeois individuality.
• Bourgeois independence.
• Bourgeois freedom.

Under the present bourgeois conditions of production, “freedom” means free trade, free selling, and free buying. But if selling and buying disappear, then free selling and buying also disappear. All this talk about free selling and buying, and all the other “brave words” from our bourgeois about freedom in general, only have meaning when compared to the restricted selling and buying and the controlled traders of the Middle Ages. They have no meaning when opposed to the Communist abolition of:

• Buying and selling.
• The bourgeois conditions of production.
• And the bourgeoisie itself.

The Accusation of Destroying Property

You are horrified because we intend to do away with private property. But in your existing society, private property is already done away with for nine-tenths of the population. Its existence for the few is only possible because it does not exist for those nine-tenths. Therefore, you accuse us of intending to do away with a form of property whose necessary condition for existence is the non-existence of any property for the vast majority of society.

In one word, you accuse us of intending to do away with your property. Precisely so; that is just what we intend.

Whose Individuality Vanishes?

You say that from the moment when labor can no longer be converted into capital, money, or rent—into a social power that can be monopolized—from that moment, individuality vanishes. By “individual,” therefore, you must confess that you mean no other person than the bourgeois, the middle-class owner of property. This person must indeed be swept out of the way and made impossible.

Communism’s Aim Regarding Appropriation

Communism does not deprive any person of the power to appropriate (take for themselves) the products of society. All that it does is to deprive them of the power to subjugate (control or enslave) the labor of others by means of such appropriation.

The “Universal Laziness” Argument

It has been argued that if private property is abolished, all work will stop, and universal laziness will overtake us. According to this logic, bourgeois society should have collapsed from sheer idleness long ago. Why? Because in bourgeois society, those who work acquire nothing, and those who acquire anything do not work. This whole objection is just another way of saying the obvious: there can no longer be any wage-labor when there is no longer any capital.

Culture and Class

All objections raised against the Communist way of producing and appropriating material products have also been raised against the Communist way of producing and appropriating intellectual products (like ideas and culture).

• Just as the disappearance of class property seems to the bourgeois like the disappearance of production itself…
• So the disappearance of class culture seems to him identical with the disappearance of all culture.

That culture, the loss of which he mourns, is, for the enormous majority, merely a training to act like a machine.

Don’t Judge by Bourgeois Standards

But don’t argue with us as long as you judge our intended abolition of bourgeois property by your own bourgeois standards of freedom, culture, law, and so on. Your very ideas are simply the result of your bourgeois conditions of production and bourgeois property. Your system of law (jurisprudence) is just the will of your class made into a law for everyone—a will whose essential character and direction are determined by the economic conditions of your class’s existence.

The Selfish Misconception of Ruling Classes

You have a selfish mistaken idea that makes you transform your current social forms—which arise from your present mode of production and form of property—into eternal laws of nature and reason. These are, in reality, historical relations that rise and disappear as production progresses. You share this misconception with every ruling class that has come before you.

• What you see clearly in the case of ancient property (like in Rome)…
• What you admit in the case of feudal property…
• You are, of course, forbidden by your own interests to admit in the case of your own bourgeois form of property.

The Family

“Abolition of the family!” Even the most radical people get angry at this infamous proposal by the Communists.

On what foundation is the present family, the bourgeois family, based?

• On capital.
• On private gain. In its completely developed form, this family exists only among the bourgeoisie. But this situation is complemented by:
• The practical absence of the family among the proletarians.
• Public prostitution.

The bourgeois family will naturally vanish when its complement (the lack of family for proletarians and prostitution) vanishes. And both will vanish when capital vanishes.

Do you accuse us of wanting to stop the exploitation of children by their parents? We plead guilty to this crime.

But, you say, we destroy the most sacred of relationships when we replace home education with social education. And what about your education? Is it not also social? Is it not determined by the social conditions under which you educate, by the direct or indirect intervention of society, through schools, etc.? Communists have not invented the intervention of society in education. They only seek to:

• Change the character of that intervention.
• Rescue education from the influence of the ruling class.

The bourgeois nonsense (clap-trap) about the family and education, about the sacred relationship between parents and child, becomes all the more disgusting as Modern Industry tears apart all family ties among the proletarians. Their children are transformed into simple articles of commerce and instruments of labor.

Community of Women

“But you Communists would introduce community of women!” screams the entire bourgeoisie in unison.

The bourgeois man sees his wife as a mere instrument of production (a tool for producing children or performing labor). He hears that the instruments of production are to be used in common. Naturally, he can only conclude that women will also be shared by all. He does not even suspect that the real goal is to do away with the status of women as mere instruments of production.

Besides, nothing is more ridiculous than the self-righteous anger (virtuous indignation) of our bourgeois about this supposed “community of women” which, they pretend, is to be openly and officially established by the Communists. Communists have no need to introduce community of women; it has existed in various forms almost since time began.

Our bourgeois men are not content with having the wives and daughters of their proletarians at their disposal (not to mention common prostitutes). They also take the greatest pleasure in seducing each other’s wives. Bourgeois marriage is, in reality, a system of wives in common. So, at most, what Communists might be accused of is wanting to introduce an openly legalized community of women to replace one that is hypocritically concealed. Beyond this, it is obvious that the abolition of the present system of production must also bring about the abolition of the community of women that springs from that system (i.e., both public and private prostitution).

Nationality and Country

Communists are further accused of wanting to abolish countries and nationality. The working men have no country. We cannot take from them what they do not have. Since the proletariat must first of all win political power, must rise to be the leading class of the nation, and must constitute itself as the nation, it is, to that extent, national itself—though not in the bourgeois sense of the word.

National differences and conflicts between peoples are disappearing more and more each day. This is due to:

• The development of the bourgeoisie.
• Freedom of commerce (trade).
• The world market.
• Uniformity in the mode of production and in the conditions of life that result from it.

The rule of the proletariat will cause these differences to vanish even faster. United action, at least of the leading civilized countries, is one of meninas conditions for the emancipation (freeing) of the proletariat. As the exploitation of one individual by another is put to an end, the exploitation of one nation by another will also be put to an end. As the conflict between classes within a nation vanishes, the hostility of one nation to another will come to an end.

Ideas and Consciousness

The charges against Communism made from a religious, a philosophical, and, generally, from an ideological (idea-based) standpoint, do not deserve serious examination. Does it require profound understanding to see that a person’s ideas, views, and conceptions—in one word, a person’s consciousness—change with every change in:

• The conditions of their material existence?
• Their social relations?
• And their social life?

What else does the history of ideas prove, other than that intellectual production changes its character as material production changes? The ruling ideas of each age have always been the ideas of its ruling class.

When people speak of ideas that revolutionize society, they are only expressing the fact that within the old society, the elements of a new one have been created. The dissolution (breaking down) of the old ideas keeps pace with the dissolution of the old conditions of existence.

• When the ancient world was in its final decline, ancient religions were overcome by Christianity.
• When Christian ideas gave way to rationalist ideas in the 18th century, feudal society fought its death battle with the then-revolutionary bourgeoisie.
• The ideas of religious liberty and freedom of conscience merely expressed the dominance of free competition within the realm of knowledge.

Eternal Truths?

“Undoubtedly,” it will be said, “religious, moral, philosophical, and legal ideas have been modified during historical development. But religion, morality, philosophy, political science, and law have constantly survived this change.” “Furthermore,” the argument goes, “there are eternal truths, such as Freedom, Justice, etc., that are common to all states of society. But Communism abolishes these eternal truths. It abolishes all religion and all morality, instead of reshaping them on a new basis. Therefore, it contradicts all past historical experience.”

What does this accusation actually mean? The history of all past society has consisted in the development of class conflicts (antagonisms). These conflicts took different forms in different periods. But whatever form they took, one fact is common to all past ages: the exploitation of one part of society by the other. No wonder, then, that the social consciousness of past ages, despite all its multiplicity and variety, moves within certain common forms, or general ideas. These common forms cannot completely vanish except with the total disappearance of class conflicts.

The Communist revolution is the most radical break (rupture) with traditional property relations. No wonder that its development involves the most radical break with traditional ideas.

But let us be done with the bourgeois objections to Communism.

The First Step: Winning Democracy

We have seen above that the first step in the revolution by the working class is to raise the proletariat to the position of ruling class—to win the battle of democracy.

The proletariat will use its political supremacy (its ruling power) to:

• Gradually take all capital away from the bourgeoisie.
• Centralize all instruments of production (tools, factories, land, etc.) in the hands of the State. (Here, the State means the proletariat organized as the ruling class).
• And increase the total productive forces as rapidly as possible.

Of course, in the beginning, this cannot be achieved except by means of forceful interventions (despotic inroads) against the rights of property and against the conditions of bourgeois production. These will be measures, therefore, which appear economically insufficient and unworkable at first. However, in the course of the movement, they will go beyond their initial scope, require further interventions into the old social order, and are unavoidable as a means of completely revolutionizing the mode of production.

These measures will, of course, be different in different countries.

Nevertheless, in most advanced countries, the following measures will be pretty generally applicable:

2. End private ownership of land. Use all rent collected from land for public purposes (to benefit everyone).

3. A heavy progressive or graduated income tax. This means that people who earn more money will pay a higher percentage of their income as tax.

4. Abolish all rights of inheritance (the right for people to automatically inherit wealth or property from family members).

5. Take away the property of all emigrants (those who have fled the country and are actively working against the revolution) and rebels (those who fight against the new system from within).

6. The state will control all credit (lending of money). This will be done through a national bank that uses state capital (money owned by the state) and has an exclusive monopoly (sole power to operate).

7. The state will control all means of communication (like postal services, telegraphs) and transport (like railways, roads).

8. The state will own more factories and instruments of production (tools and machines). Waste-lands (unused land) will be brought into cultivation (farmed). The soil will be improved generally according to a common plan.

9. Everyone will have an equal duty (liability) to work. Industrial armies (organized groups of workers), especially for agriculture (farming), will be established.

10. Combine agriculture with manufacturing industries. Gradually end the big differences between town (city) and country by distributing the population more evenly across the country.

11. Free education for all children in public schools. Abolish children’s factory labor in its current form. Combine education with industrial production (practical work), and similar measures.

The Ultimate Goal: A Classless Society

When, in the course of development:

• Class distinctions have disappeared, and
• All production has been concentrated in the hands of a vast association of the whole nation (all the people working together), then public power (the government) will lose its political character.

Political power, when properly understood, is merely the organized power of one class used for oppressing another class.

If the proletariat (the working class), during its fight with the bourgeoisie (the capitalist class), is forced by circumstances to organize itself as a class; if, through a revolution, it makes itself the ruling class; and if, as the ruling class, it forcefully sweeps away the old conditions of production; then, along with these old conditions, it will also have swept away the conditions that allow for class conflicts (antagonisms) and for the existence of classes generally. By doing this, the proletariat will have abolished its own rule (supremacy) as a class.

In place of the old bourgeois society, with its classes and class conflicts, we shall have an association (a community or society) in which the free development of each person is the condition for the free development of all.

CHAPTER THREE

SOCIALIST AND COMMUNIST LITERATURE: Different Ideas About Changing Society

This chapter looks at different types of socialist and communist writings that existed at the time.

1. Reactionary Socialism

Reactionary forms of socialism look to the past. They try to turn back historical progress instead of moving forward.

A. Feudal Socialism

Because of their historical position, some aristocrats (nobles) in France and England began to write pamphlets criticizing modern bourgeois society (the society run by the capitalist class). These aristocrats had lost power to the bourgeoisie, whom they saw as a hateful new force (an “upstart”). This happened after events like the French Revolution of July 1830 and political reform movements in England.

After these defeats, a serious political struggle for the aristocracy was impossible. Only a literary battle remained. But even in writing, the old slogans from the “restoration period” (when old monarchies tried to regain power) were no longer believable.

Pretending to Care for Workers To get sympathy, the aristocracy had to pretend they weren’t just looking out for their own interests. They wrote their accusations against the bourgeoisie as if they were only concerned about the exploited working class. So, the aristocracy took revenge by:

• Writing mocking songs and texts (lampoons) about their new masters (the bourgeoisie).
• Whispering dark predictions (sinister prophesies) of future disaster into their ears.

This is how Feudal Socialism came about. It was:

• Half a sad complaint (lamentation), half a mockery.
• Half an echo of the past, half a threat about the future.
• Sometimes, its bitter, witty, and sharp criticism hit the bourgeoisie hard.
• But it always ended up looking ridiculous because it completely failed to understand the direction of modern history.

False Banners and Old Symbols To attract people, the aristocracy waved the workers’ charity bag (proletarian alms-bag) as their flag, pretending to support the poor. But whenever people joined them, they saw the old feudal symbols (coats of arms) on the aristocrats’ backsides. The people then left, laughing loudly and disrespectfully. Some French Legitimists (supporters of the old royal family) and a group called “Young England” made this kind of spectacle.

Ignoring Their Own Exploitation When feudal socialists pointed out that their way of exploiting people was different from the bourgeoisie’s, they forgot something important. They forgot that their own exploitation happened under very different circumstances and conditions that are now outdated. When they showed that the modern proletariat (working class) did not exist under their rule, they forgot that the modern bourgeoisie is the necessary result of their own form of society.

Besides, they barely hide the reactionary (backward-looking) nature of their criticism. Their main accusation against the bourgeoisie is that under bourgeois rule, a class is developing that is destined to completely destroy the old order of society. What they really blame the bourgeoisie for is not so much that it creates a proletariat, but that it creates a revolutionary proletariat.

Hypocrisy in Practice So, in political practice, these feudal socialists join in all forceful (coercive) actions against the working class. And in everyday life, despite their fancy, high-sounding phrases, they are happy to:

• Pick up the “golden apples” (profits) dropped from the tree of industry.
• Trade truth, love, and honor for business deals in things like wool, beet-sugar, and potato spirits (alcohol).

Clerical Socialism Just as priests (parsons) have often sided with landlords, Clerical Socialism (socialism linked with the church) has gone hand in hand with Feudal Socialism. Nothing is easier than to give Christian self-denial (asceticism) a socialist appearance.

• Hasn’t Christianity spoken out against private property, against marriage, against the State?
• Hasn’t it preached charity and poverty, celibacy (not marrying) and punishing the body (mortification of the flesh), monastic life (life in a monastery), and Mother Church instead? Christian Socialism is just the holy water that the priest uses to bless the aristocrat’s bitterness and resentment.

B. Petty-Bourgeois Socialism

The feudal aristocracy was not the only class ruined by the bourgeoisie. It wasn’t the only class whose way of life declined and died in modern bourgeois society. The medieval town-dwellers (burgesses) and small peasant landowners were the forerunners of the modern bourgeoisie. In countries that are not very developed industrially and commercially, these two classes still exist alongside the rising bourgeoisie.

A New Class Between Rich and Poor In countries where modern civilization is fully developed, a new class of petty bourgeois has formed. This class includes small shopkeepers, small-scale manufacturers, and small farmers. They are positioned between the proletariat (working class) and the bourgeoisie (capitalist class), and they constantly try to renew themselves as an additional part of bourgeois society. However, individual members of this class are constantly thrown down into the proletariat by competition. As modern industry develops, they see the time approaching when they will completely disappear as an independent section of modern society. They will be replaced in manufacturing, agriculture, and commerce by supervisors (overlookers), farm managers (bailiffs), and shop assistants.

Speaking for the Workers, From a Different Viewpoint In countries like France, where peasants make up much more than half the population, it was natural for some writers to take sides. When they supported the proletariat against the bourgeoisie, they often criticized the bourgeois system using the standards of the peasant and the petty bourgeois. They argued for the working class from the viewpoint of these intermediate classes. This is how Petty-Bourgeois Socialism arose. Sismondi was the leading figure of this school of thought, not only in France but also in England.

Sharp Criticisms of Capitalism This type of socialism was very sharp in its analysis of the contradictions in modern production.

• It exposed the insincere justifications (hypocritical apologies) of economists who defended capitalism.
• It undeniably proved the disastrous effects of machinery and the division of labor.
• It highlighted the concentration of capital and land in a few hands.
• It pointed out overproduction and crises.
• It showed the inevitable ruin of the petty bourgeois and peasant, the misery of the proletariat, the lack of planning (anarchy) in production, the glaring inequalities in how wealth is distributed, the destructive industrial competition between nations, and the breakdown of old moral bonds, old family relations, and old nationalities.

Backward-Looking Solutions However, in its positive goals, this form of socialism wants either:

1. To restore the old means of production and exchange, and with them the old property relations and the old society.
2. Or, to force the modern means of production and exchange into the framework of the old property relations—relations that were inevitably destroyed by these modern means. In either case, it is both reactionary (wanting to go backward) and Utopian (idealistic but impractical).

Its final words are: old-style craft organizations (corporate guilds) for manufacturing, and traditional, father-figure-led (patriarchal) relations in agriculture. Ultimately, when stubborn historical facts got rid of all the intoxicating effects of self-deception, this form of socialism ended in a miserable, dejected mood (a fit of the blues).

C. German or “True” Socialism

The socialist and communist literature of France originated under the pressure of a ruling bourgeoisie. It expressed the struggle against this power. This French literature was introduced into Germany at a time when the German bourgeoisie had just begun its fight against feudal absolutism (rule by an all-powerful king or feudal lords).

Misinterpreting French Ideas German philosophers, would-be philosophers, and literary figures (beaux esprits) eagerly grabbed this literature. However, they forgot one crucial thing: when these writings came from France to Germany, French social conditions did not come with them. In the context of German social conditions, this French literature lost all its immediate practical importance and took on a purely literary appearance. For example, to German philosophers of the 18th century:

• The demands of the first French Revolution were seen as nothing more than the demands of “Practical Reason” in general.
• The expressed will of the revolutionary French bourgeoisie seemed to them to be the laws of pure Will, of Will as it should be, of true human Will in general.

The work of these German writers consisted only of trying to match the new French ideas with their old philosophical beliefs. Or rather, they tried to take over the French ideas without giving up their own philosophical viewpoint. They did this in the same way one learns a foreign language: by translation.

Philosophical Nonsense on Top of French Criticism It is well known how monks in the Middle Ages wrote silly stories about Catholic Saints on top of ancient manuscripts containing classical pagan works. The German literary figures did the reverse with the non-religious (profane) French literature. They wrote their philosophical nonsense underneath the French original text. For instance:

• Beneath the French criticism of the economic role of money, they wrote “Alienation of Humanity.”
• Beneath the French criticism of the bourgeois state, they wrote “Dethronement of the Category of the General,” and so on.

They called this introduction of philosophical phrases into the French historical criticisms things like: “Philosophy of Action,” “True Socialism,” “German Science of Socialism,” or “Philosophical Foundation of Socialism.”

Weakening the French Ideas In this way, the French socialist and communist literature was completely weakened (emasculated). And since, in the hands of the Germans, it stopped expressing the struggle of one class against another, the German writers felt they had overcome “French one-sidedness.” They believed they were representing not true needs, but the needs of Truth; not the interests of the proletariat, but the interests of Human Nature, of Man in general—a Man who belongs to no class, has no reality, and exists only in the hazy world of philosophical fantasy.

This German Socialism, which took its student-like task so seriously and solemnly, and promoted its poor ideas like a con artist (mountebank), gradually lost its overly academic and naive (pedantic) innocence.

“True” Socialism in German Politics The fight of the German bourgeoisie, especially the Prussian bourgeoisie, against the feudal aristocracy and absolute monarchy—in other words, the liberal movement—became more serious. This gave “True” Socialism the long-awaited opportunity to:

• Confront the political movement with socialist demands.
• Make its traditional strong condemnations (anathemas) against liberalism, representative government, bourgeois competition, bourgeois freedom of the press, bourgeois laws, and bourgeois liberty and equality.
• Preach to the masses that they had nothing to gain, and everything to lose, from this bourgeois movement.

German Socialism forgot, just in time, a key point: the French criticism it was foolishly echoing actually presumed the existence of modern bourgeois society. This included its corresponding economic conditions and the suitable political system—the very things that the struggle in Germany was trying to achieve.

A Tool for Governments To the absolute governments, with their followers of priests, professors, country landowners (squires), and officials, “True” Socialism served as a welcome scarecrow against the threatening bourgeoisie. It was a sweet comfort after the bitter experiences of floggings and bullets, which these same governments were using at that time to suppress German working-class uprisings.

Serving Reactionary Interests While “True” Socialism served the government as a weapon against the German bourgeoisie, it also directly represented a reactionary interest: the interest of the German Philistines (narrow-minded, conventional middle-class people). In Germany, the petty-bourgeois class—a leftover from the 16th century that kept reappearing in various forms—is the real social basis of the existing state of things. To preserve this class is to preserve the existing state of things in Germany. The industrial and political rule of the bourgeoisie threatens this petty-bourgeois class with certain destruction from two directions:

1. From the concentration of capital.
2. From the rise of a revolutionary proletariat. “True” Socialism seemed to offer a way to deal with both these threats. It spread like an epidemic.

Fancy Wrapping for Poor Ideas The German Socialists wrapped their sorry “eternal truths” (which were all skin and bone, lacking substance) in a robe of philosophical spiderwebs (speculative cobwebs), embroidered with fancy words (flowers of rhetoric), and soaked in the dew of overly sentimental feelings. This grand, abstract robe served to wonderfully increase the sale of their ideas to such an audience. And, for its part, German Socialism increasingly recognized its own calling: to be the pompous (bombastic) representative of the petty-bourgeois Philistine.

It declared the German nation to be the model nation, and the German petty Philistine to be the typical human. To every nasty, mean-spirited (villainous) action of this model human, it gave a hidden, higher, “Socialistic” interpretation that was the exact opposite of its real character. It went to the extreme of directly opposing the “brutally destructive” tendency of Communism and proclaiming its supreme and impartial contempt for all class struggles. With very few exceptions, all the so-called Socialist and Communist publications circulating in Germany at that time (1847) belong to this category of foul and weakening literature.

2. Conservative or Bourgeois Socialism

A part of the bourgeoisie wants to fix certain social problems (redress social grievances) in order to ensure the continued existence of bourgeois society. This section includes:

• Economists.
• Philanthropists (people who donate to good causes).
• Humanitarians (people concerned with human welfare).
• Those wanting to improve the condition of the working class.
• Charity organizers.
• Members of societies for the prevention of cruelty to animals.
• Temperance fanatics (extreme supporters of prohibiting alcohol).
• All sorts of minor, local reformers (hole-and-corner reformers). This form of socialism has even been worked out into complete systems. We can mention Proudhon’s Philosophie de la Misère (“The Philosophy of Poverty”) as an example of this type.

Wanting Capitalism Without the Struggle The Socialistic bourgeois want all the advantages of modern social conditions without the struggles and dangers that necessarily result from them.

• They want the existing state of society but without its revolutionary and society-breaking (disintegrating) elements.
• They wish for a bourgeoisie without a proletariat. The bourgeoisie naturally thinks the world where it is supreme is the best world. Bourgeois Socialism develops this comfortable idea into various more or less complete systems. When it asks the proletariat to carry out such a system and thereby march straight into a “social New Jerusalem” (a perfect new society), it really just requires that the proletariat should:
• Remain within the boundaries of existing society.
• But cast away all its hateful ideas about the bourgeoisie.

A More Practical, Less Systematic Form A second form of this socialism is more practical but less systematic. It tried to make every revolutionary movement seem less valuable in the eyes of the working class. It did this by showing that no mere political reform, but only a change in the material conditions of existence—in economic relations—could be of any advantage to them. However, by “changes in the material conditions of existence,” this form of socialism does not mean the abolition of bourgeois relations of production (which can only be achieved by a revolution). Instead, it means administrative reforms—changes based on the continued existence of these capitalist relations. Therefore, these reforms do not affect the relations between capital and labor in any fundamental way. At best, they lessen the cost and simplify the administrative work of bourgeois government.

Bourgeois Socialism finds its true expression only when it becomes a mere figure of speech—empty words.

• “Free trade: for the benefit of the working class!”
• “Protective duties (taxes on imports): for the benefit of the working class!”
• “Prison Reform: for the benefit of the working class!” This is the final and only seriously meant message of bourgeois socialism. It can be summed up in the phrase: the bourgeois is a bourgeois—for the benefit of the working class.

3. Critical-Utopian Socialism and Communism

Here, we are not talking about the writings that, in every great modern revolution, have always expressed the demands of the proletariat (such as the writings of Babeuf and others).

Early Proletarian Attempts The first direct attempts of the proletariat to achieve its own goals were made in times of great social upheaval, when feudal society was being overthrown. These attempts necessarily failed. This was because:

• The proletariat itself was still undeveloped.
• The economic conditions for its emancipation (freedom) were absent. These conditions had yet to be created and could only be created by the coming bourgeois era.

The revolutionary literature that accompanied these first movements of the proletariat necessarily had a reactionary character. It taught:

• Universal asceticism (extreme self-denial).
• Social levelling (making everyone equal) in its crudest form.

The Founders of Utopian Systems The Socialist and Communist systems properly called “utopian”—those of Saint-Simon, Fourier, Owen, and others—appeared in the early, undeveloped period of the struggle between proletariat and bourgeoisie (as described in Chapter One).

The founders of these systems did see class conflicts (antagonisms). They also saw the action of the elements that were causing the existing form of society to break down. But the proletariat, still in its infancy, seemed to them to be a class without any historical initiative (ability to act independently to shape history) or any independent political movement.

Searching for New Social Laws Since the development of class conflict kept pace with the development of industry, the economic situation, as they found it, did not yet offer them the material conditions for the emancipation of the proletariat. Therefore, they searched for a new social science, for new social laws, that were supposed to create these conditions.

• Historical action was to be replaced by their personal inventive action.
• Historically created conditions for emancipation were to be replaced by fantastic, imaginary ones.
• The gradual, spontaneous class organization of the proletariat was to be replaced by an organization of society specially designed (contrived) by these inventors. In their eyes, future history would simply be the propaganda and practical implementation of their social plans.

Concern for the Working Class In forming their plans, these utopian thinkers are conscious of mainly caring for the interests of the working class, as it is the most suffering class. The proletariat exists for them only from the point of view of being the most suffering class.

The undeveloped state of the class struggle, as well as their own social surroundings, causes Socialists of this kind to consider themselves far superior to all class antagonisms.

They want to improve the condition of everyone in society, even the wealthiest and most privileged. So, they usually appeal to all of society, without focusing on class differences. In fact, they often prefer to appeal to the ruling class. They believe that once people understand their system, they will surely see it as the best possible plan for the best possible society.

Because of this, they reject all political action, especially any revolutionary action. They wish to achieve their goals by peaceful means. They also try to pave the way for their new social “gospel” (their new message for society) through the force of example and small experiments, which are bound to fail.

These idealized and unrealistic visions (fantastic pictures) of future society are created at a time when the working class (proletariat) is still very undeveloped. The workers themselves have only a hazy, unrealistic idea of their own position. These visions match the first natural, instinctive desires (yearnings) of that class for a complete rebuilding of society.

Valuable Criticisms, but Utopian Proposals

However, these Socialist and Communist writings also contain a critical element. They attack every principle of existing society. Because of this, they are full of the most valuable materials for helping the working class understand things better.

The practical measures they propose include:

• Abolishing the distinction between town and country.
• Abolishing the family (as it existed in bourgeois society).
• Ending industries run by private individuals.
• Abolishing the wage system.
• Proclaiming social harmony.
• Changing the role of the state to merely overseeing production.

All these proposals point only toward the disappearance of class conflicts (antagonisms). At that time, these conflicts were only just beginning to appear. In these publications, class conflicts are recognized only in their earliest, unclear, and undefined forms. Therefore, these proposals are purely Utopian (idealistic and impractical).

Losing Relevance Over Time

The importance of Critical-Utopian Socialism and Communism is inversely related to historical development. This means that as the modern class struggle develops and takes a clear shape, these socialists’ unrealistic way of standing apart from the struggle, and their unrealistic attacks on it, lose all practical value and all theoretical justification.

Therefore, even though the creators of these systems were revolutionary in many ways, their followers have, in every case, formed mere reactionary sects (small groups that want to go backward or resist progress).

• They hold onto the original views of their masters, opposing the progressive historical development of the proletariat.
• They consistently try to weaken (deaden) the class struggle and to reconcile (make peace between) the opposing classes.
• They still dream of carrying out experiments to create their social Utopias. This includes founding isolated “phalansteres” (Fourier’s ideal communities), establishing “Home Colonies” (Owen’s communities), or setting up a “Little Icaria” (Cabet’s community). These are like small-scale versions of paradise (“duodecimo editions of the New Jerusalem”).
• To build these unrealistic dreams (castles in the air), they are forced to appeal to the feelings and the money (purses) of the bourgeois class.

Gradually, these followers sink into the category of the reactionary or conservative Socialists described earlier. They differ from them only by being more rigidly academic (systematic pedantry) and by their fanatical and superstitious belief in the miraculous effects of their own social science.

For these reasons, they violently oppose all political action by the working class. According to them, such action can only result from a blind disbelief in their new “gospel.”

The Owenites in England (followers of Robert Owen) and the Fourierists in France (followers of Charles Fourier), for example, oppose the Chartists (a working-class political reform movement in England) and the Réformistes (social reformers in France) respectively.

CHAPTER FOUR

HOW COMMUNISTS WORK WITH OTHER OPPOSITION PARTIES

Chapter Two explained how Communists relate to existing working-class parties, like the Chartists in England and the Agrarian Reformers (those wanting land reform) in America.

Working for Today, Preparing for Tomorrow

Communists fight to achieve the short-term goals and support the current needs of the working class. But in the present movement, they also represent and look after the long-term future of that movement.

Here’s how Communists work with different parties in various countries:

• In France: Communists team up with a party known as the Social-Democrats. They work together against the conservative (wanting to keep things as they are) and radical (wanting big changes, but still capitalist) sections of the bourgeoisie (the capitalist class). However, Communists reserve the right to critically examine ideas and false beliefs (illusions) passed down from the time of the great French Revolution.

• In Switzerland: They support the Radicals. But they don’t forget that this party is made up of conflicting groups. Some are Democratic Socialists (like those in France), while others are radical bourgeois.

• In Poland: They support the party that insists a revolution in land ownership (an agrarian revolution) is the most important condition for national freedom. This was the party that encouraged the uprising in Cracow in 1846.

• In Germany: They fight alongside the bourgeoisie whenever the bourgeoisie acts in a revolutionary way against:

  • The absolute monarchy (rule by a king with total power).
  • The feudal squirearchy (landowning feudal nobles).
  • The petty bourgeoisie (small-scale business owners and shopkeepers).

Preparing for the Next Fight in Germany

But Communists in Germany never stop, not even for a moment, doing something crucial. They work to make the working class very clearly understand the deep and hostile conflict between the bourgeoisie and the proletariat (the working class). Why? So that the German workers can immediately use the social and political conditions that the bourgeoisie must create under its rule as weapons against the bourgeoisie itself. And so that, after the fall of the reactionary (backward-looking) classes in Germany, the fight against the bourgeoisie itself can begin right away.

Germany: The Focus of Attention

Communists pay special attention to Germany for these reasons:

• Germany is on the verge of a bourgeois revolution (a revolution led by the capitalist class).
• This revolution is bound to happen under more advanced conditions of European civilization than previous revolutions.
• Germany has a much more developed proletariat than England had in the 17th century or France in the 18th century.
• Therefore, the bourgeois revolution in Germany will be just the beginning (a prelude) of a workers’ revolution that will follow immediately.

Supporting Revolution Everywhere

In short, Communists everywhere support every revolutionary movement that is against the existing social and political order.

In all these movements, they make the property question the most important issue, no matter how developed that question is at the time.

Finally, they work everywhere for the union and agreement of democratic parties in all countries.

Our Aims Are Open

Communists refuse to hide their views and aims. They openly declare that their goals can only be achieved by the forceful overthrow of all existing social conditions. Let the ruling classes tremble at a Communist revolution. The proletarians have nothing to lose but their chains. They have a world to win.

Workers of All Countries, Unite!

CHAPTER ONE

THE ACCUMULATION OF CAPITAL

A. How Production Keeps Going (Simple Reproduction)

The Need for Continuous Production A society cannot stop producing things any more than it can stop consuming things. For a society to keep producing, it must constantly use some of its products as means of production for the future. These means of production include:

• Tools and machinery (instruments of labor).
• Raw materials.
• Other necessary supplies (auxiliary substances).

If everything else stays the same, the only way a society can keep its wealth at the same level is by replacing all the means of production that were used up during the year. It must replace them with an equal amount of the same kinds of items. These replacement items must be taken from the total goods produced that year and put back into the production process.

Capitalist Production and Surplus-Value In a capitalist society, all means of production act as capital. This is because they allow their owner (the proprietor) to gain surplus-value (extra value or profit) by employing people who work for wages (wage-labor). The capitalist doesn’t just want to get surplus-value once; they want to get it continuously from the capital they invested.

If the capitalist consumed all the surplus-value every year for personal use, production would just repeat itself on the same scale. This is called simple reproduction. But even this simple, continued repetition changes the nature of the process over time.

How Wages Are Really Paid The process of production starts with buying a worker’s ability to work (their labor-power) for a certain period. But the worker isn’t paid until after they have used their labor-power to produce goods. These goods contain not only the value of their labor-power (which is roughly their wages) but also surplus-value for the capitalist.

So, the worker has produced:

1. Surplus-value for the capitalist.
2. The very fund from which their own wages are paid, even before that money comes back to them as wages. A worker can only stay employed as long as they keep reproducing this fund.

This means that wages are just a part of the product that the worker continuously reproduces. Yes, the capitalist pays the worker in money. But this money is just the changed form of what the worker produced. The worker’s labor from last week or last year pays for their labor-power this week or this year.

The illusion that money creates – making it seem like wages are an advance from the capitalist’s own pocket – disappears immediately if we look at the whole picture. If we consider the entire capitalist class and the entire working class, we see something different.

• The capitalist class constantly gives the working class “order notes” (money) for a portion of the goods the workers produced (and which the capitalists have taken).
• The workers constantly give these “order notes” back to the capitalist class to get their share of what they themselves produced. The real nature of this transaction is hidden because products are seen as commodities (things for sale) and money is used in the exchange.

Original Capital is Eventually Replaced by Surplus-Value True, the illusion that wages come from the capitalist’s own funds only vanishes when we look at capitalist production as a continuous, renewing process. But that process had to start somehow. For now, let’s assume that a capitalist once got money independently, without using the unpaid labor of others, and used this money to buy labor-power.

However it started, the mere continuity of the process—simple reproduction—brings about some other surprising changes. These changes affect not just the part of capital used for wages (variable capital), but the total capital.

Imagine a capital of £1,000 earns a surplus-value of £200 each year. If the capitalist consumes this entire £200 every year:

• After 5 years, the total surplus-value consumed will be 5 x £200 = £1,000.
• This £1,000 is the same amount as the original capital invested.

If only half the surplus-value (£100) were consumed each year, the same result would happen after 10 years (10 x £100 = £1,000).

General rule: After a certain number of years (depending on the amount of capital invested and surplus-value consumed), the capital originally invested has been consumed by the capitalist and has disappeared. The capitalist thinks they are consuming the surplus-value (the product of others’ unpaid labor) and keeping their original capital untouched. But what the capitalist thinks doesn’t change the facts. After some years, the capital value they now possess is equal to the total sum of surplus-value they took during those years. And the total value they have personally consumed is equal to their original capital.

It’s true that they still have capital of roughly the same amount, and some parts of it (like buildings and machinery) were there when the business started. But here, we are concerned with the value of that capital, not its physical parts. If a person spends all their property while taking on debts equal to its value, their property really just represents their total debts. It’s the same with the capitalist. When they have consumed the equivalent of their original capital, the value of their current capital represents nothing but the total amount of surplus-value they have taken without payment. Not a single bit of the value of their old, original capital still exists.

So, the simple ongoing process of production (simple reproduction) sooner or later, and inevitably, turns every capital into capitalized surplus-value (surplus-value that has been turned into capital). Even if that capital was originally earned by the personal labor of the employer, it sooner or later becomes value taken without giving something of equal value in return. It becomes the unpaid labor of others, turned into money or some other object.

The Capital-Labor Relationship is Constantly Reproduced To turn money into capital and exploit the labor of others, the capitalist originally had to find workers in the labor market who lacked their own means of production (tools, land, etc.) and means of subsistence (food, shelter). This was the real factual basis and starting point of capitalist production.

But through the mere continuation of the process, through simple reproduction, these conditions are constantly reproduced:

• On one hand, the production process continuously turns material wealth into capital – into means for the capitalist to create more wealth and have more things to enjoy.
• On the other hand, the laborer leaves the production process in the same state they entered it: a source of wealth for others, but without any means of making that wealth their own.

Because the worker’s own labor has already been separated (alienated) from them by selling their labor-power (which the capitalist then owns and combines with capital), the product of their labor also belongs to the capitalist. This constant reproduction, this endless continuation of the worker as a proletarian, is an essential condition of capitalist production.

Worker’s Consumption: For Themselves and For Capital The laborer consumes in two ways:

1. Productive Consumption: While producing, the worker uses up the means of production (by their labor) and turns them into products with a higher value than the capital originally invested. This is their productive consumption. At the same time, it is the capitalist consuming the worker’s labor-power, which the capitalist bought.
2. Individual Consumption: The worker uses the money paid to them for their labor-power to buy means of subsistence (food, clothing, etc.). This is their individual consumption.

The laborer’s productive consumption and their individual consumption are therefore completely distinct.

• In productive consumption, the worker acts as the driving force of capital and belongs to the capitalist.
• In individual consumption, the worker belongs to themselves and performs necessary life functions outside the production process. The result of one is that the capitalist lives and profits; the result of the other is that the laborer lives.

True, the laborer is often forced to make their individual consumption just a part of the production process. In such cases, they get necessities only to maintain their ability to work, just as coal and water are supplied to a steam engine or oil to a wheel. However, this seems to be an abuse, not something essential to capitalist production itself.

The Working Class Consumes to Reproduce Labor-Power for Capital The situation looks different when we consider not just a single capitalist and a single laborer, but the capitalist class and the working class as a whole. We must look at capitalist production in its entirety and on its actual social scale.

By turning part of his capital into labor-power, the capitalist increases the value of his entire capital. He profits not only by what he receives from the laborer but also by what he gives to the laborer. The capital given in exchange for labor-power (wages) is turned into necessities by the worker. The consumption of these necessities reproduces the muscles, nerves, bones, and brains of existing laborers, and also helps create new laborers (their children).

Within the limits of what is strictly necessary, the individual consumption of the working class is therefore the process of turning the means of subsistence (given by capital in exchange for labor-power) back into fresh labor-power that capital can then exploit. It is the production and reproduction of the most essential means of production for the capitalist: the laborer themself.

So, the individual consumption of the laborer—whether it happens inside or outside the workshop, whether it’s part of the production process or not—is a factor in the production and reproduction of capital. It’s just like cleaning machinery, which benefits capital whether it’s done while the machinery is working or idle. The fact that the laborer consumes their means of subsistence for their own purposes, and not to please the capitalist, doesn’t change this. The consumption of food by a working animal is still a necessary factor in production, even if the animal enjoys what it eats.

The maintenance and reproduction of the working class is, and must always be, a necessary condition for the reproduction of capital. But the capitalist can safely leave this task to the laborer’s natural instincts of self-preservation and having children (propagation). All the capitalist cares about is reducing the laborer’s individual consumption as much as possible to what is strictly necessary. They are far from imitating some South American employers who supposedly forced their laborers to eat more substantial food to make them stronger.

Productive vs. Unproductive Consumption (from the Capitalist’s View) Therefore, both the capitalist and their ideological supporters (like political economists) consider only one part of the laborer’s individual consumption to be “productive.” This is the part that is needed to keep the working class going (perpetuation of the class), so that the capitalist will have labor-power to consume. Whatever the laborer consumes for their own pleasure beyond that necessary part is considered “unproductive consumption.”

The Working Class: A Tool for Capital From a social point of view, therefore, the working class, even when not directly working, is just as much an appendage of capital (something attached to and dependent on it) as ordinary tools are. Even its individual consumption is, within certain limits, merely a part of the process of reproducing capital.

However, that process makes sure to prevent these self-aware “instruments” (the workers) from abandoning it. It does this by constantly transforming their product, as soon as it is made, into the property of capital. Individual consumption, on the one hand, provides workers with the means for their maintenance and reproduction. On the other hand, by using up these necessities, it ensures the worker continually reappears in the labor market needing to sell their labor.

The Roman slave was held by physical chains (fetters). The wage-laborer is bound to their owner by invisible threads. The appearance of independence is maintained by constant changes of employers and by the legal fiction (fictio juris) of a contract (which implies a free agreement, though the worker has little choice).

In the past, capital sometimes used laws, when necessary, to enforce its ownership rights over the “free” laborer. For instance, in England, until 1815, skilled workers (mechanics) employed in machine-making were forbidden from emigrating, under threat of severe punishments.

Capitalists’ View of Skilled Workers: The Cotton Famine Example The reproduction of the working class also involves passing down and accumulating skills from one generation to another. The extent to which capitalists consider such a skilled class as one of their factors of production—belonging to them by right—becomes clear when a crisis threatens them with its loss.

During the American Civil War, there was a “cotton famine” (shortage of cotton). As a result, most of the cotton factory workers (operatives) in Lancashire, England, were thrown out of work. From both the working class itself and other parts of society, there were calls for government aid or private donations to help these “unneeded” (superfluous) workers emigrate to the colonies or the United States.

In response, The Times newspaper published a letter on March 24, 1863, from Edmund Potter, a former president of the Manchester Chamber of Commerce. In the House of Commons, this letter was rightly called the “manufacturers’ manifesto.” Here are a few key passages where the ownership rights of capital over labor-power are shamelessly asserted:

Mr. Potter wrote about the unemployed worker: “He… may be told the supply of cotton-workers is too large… and… must… in fact be reduced by a third, perhaps, and that then there will be a healthy demand for the remaining two-thirds… Public opinion… urges emigration… The master (i.e. the cotton manufacturer) cannot willingly see his labour supply being removed; he may think, and perhaps justly, that it is both wrong and unsound… But if public funds are to be devoted to assist emigration, he has a right to be heard, and perhaps to protest.”

Mr. Potter then explained how useful the cotton trade is:

• “trade has undoubtedly drawn the surplus-population from Ireland and from the agricultural districts.”
• Its extent is immense (in 1860, it was 5/13ths of total English exports).
• After a few years, it will expand again with new markets, especially India, and by getting plenty of cotton at 6 pence per pound.

He continued: “Time… one, two, or three years, it may be, will produce the quantity… The question I would put then is this: Is the trade worth retaining? Is it worth while to keep the machinery (he means the living labour machines) in order, and is it not the greatest folly to think of parting with that? I think it is. I allow that the workers are not a property, not the property of Lancashire and the masters; but they are the strength of both; they are the mental and trained power which cannot be replaced for a generation; the mere machinery which they work might much of it be beneficially replaced, nay improved, in a twelvemonth. Encourage or allow (!) the working-power to emigrate, and what of the capitalist?… Take away the cream of the workers, and fixed capital (factories, machines) will depreciate (lose value) in a great degree, and the floating capital (money for current expenses) will not subject itself to a struggle with the short supply of inferior labour… We are told the workers wish it (emigration). Very natural it is that they should do so… Reduce, compress the cotton trade by taking away its working power and reducing their wages expenditure, say one-fifth, or five millions, and what then would happen to the class above, the small shopkeepers; and what of the rents, the cottage rents… Trace out the effects upward to the small farmer, the better householder, and… the landowner, and say if there could be any suggestion more suicidal to all classes of the country than by enfeebling a nation by exporting the best of its manufacturing population, and destroying the value of some of its most productive capital and enrichment… Can anything be worse for landowners or masters than parting with the best of the workers, and demoralising and disappointing the rest by an extended depletive emigration, a depletion of capital and value in an entire province?”

Potter, the chosen spokesperson for the manufacturers, distinguished between two sorts of “machinery,” both belonging to the capitalist:

1. One stands in his factory (physical machines).
2. The other is housed outside the factory at night and on Sundays, in cottages (the workers). One is non-living (inanimate); the other is living. The non-living machinery not only wears out and loses value daily, but much of it quickly becomes outdated due to constant technical progress. It can often be advantageously replaced by new machinery after just a few months. The living machinery, on the contrary, gets better the longer it lasts, as skills are passed down and accumulate from one generation to another.

The Times newspaper answered this “cotton lord” as follows: “Mr. Edmund Potter is so impressed with the exceptional and supreme importance of the cotton masters that, in order to preserve this class and perpetuate their profession, he would keep half a million of the labouring class confined in a great moral workhouse against their will. ‘Is the trade worth retaining?’ asks Mr. Potter. ‘Certainly by all honest means it is,’ we answer. ‘Is it worth while keeping the machinery in order?’ again asks Mr. Potter. Here we hesitate. By the ‘machinery’ Mr. Potter means the human machinery, for he goes on to protest that he does not mean to use them as an absolute property. We must confess that we do not think it ‘worth while,’ or even possible, to keep the human machinery in order—that is to shut it up and keep it oiled till it is wanted. Human machinery will rust under inaction, oil and rub it as you may. Moreover, the human machinery will, as we have just seen, get the steam up of its own accord, and burst or run amuck (go wild) in our great towns. It might, as Mr.”

…Mr. Potter says, it might take some time to ‘reproduce’ the workers (meaning, for a new generation of workers to grow up). But, he argued, with existing machinists and capitalists, “we could always find thrifty, hard, industrious men with which to improvise more master manufacturers than we can ever want.” Mr. Potter talks of the cotton trade reviving ‘in one, two, or three years,’ and he asks the public not ‘to encourage or allow (!) the working power to emigrate.’ He says that it is very natural for the workers to wish to emigrate. But he thinks that despite their desire, the nation ought to keep this half million workers, with their 700,000 dependents (family members), shut up in the cotton districts. As a necessary consequence, he must also think that the nation ought to keep down their unhappiness by force, and support them with charity (alms), all on the chance that the cotton factory owners might someday need them again… The time has come when the great public opinion of these islands must act to save this ‘working power’ from those who would treat it as they would treat iron, coal, and cotton.”

The Times article was only a witty remark (a jeu d’esprit), not a serious challenge. The “great public opinion” actually agreed with Mr. Potter: that the factory workers were part of the movable equipment of a factory. Their emigration was prevented. They were locked up in that “moral workhouse” of the cotton districts, and they continue to be the “strength” of the cotton manufacturers of Lancashire.

The System Reproduces Itself Capitalist production, therefore, by its very nature, reproduces the separation between labor-power (the workers’ ability to work) and the means of labor (tools, factories, materials).

• It thereby reproduces and continues indefinitely the conditions for exploiting the laborer.
• It constantly forces the laborer to sell their labor-power in order to live.
• It constantly enables the capitalist to purchase labor-power in order to get richer.

It is no longer a mere accident that the capitalist and the laborer meet in the market as buyer and seller. It is the process itself that constantly throws the laborer back onto the market as a seller of their labor-power. And it constantly turns the worker’s own product into the means by which another person (the capitalist) can buy them.

Therefore, capitalist production, when seen as a continuous, connected process—a process of reproduction—produces not only:

• Commodities (goods for sale),
• And surplus-value (profit),
• But it also produces and reproduces the capitalist relation itself: on one side the capitalist, on the other the wage-laborer.

B. How Capital Grows from Surplus-Value (Accumulation)

So far, we have looked at how surplus-value comes from capital. Now we need to see how capital comes from surplus-value. Using surplus-value as capital—turning it back into capital—is called accumulation of capital.

The Capitalist’s Viewpoint First, let’s look at this from the viewpoint of an individual capitalist. Suppose a spinner (someone who makes yarn) has invested a capital of £10,000.

• Four-fifths of this (£8,000) is spent on cotton, machinery, etc. (constant capital).
• One-fifth (£2,000) is spent on wages (variable capital).

Let’s say this spinner produces 240,000 pounds of yarn annually, with a total value of £12,000. If the rate of surplus-value is 100% (meaning the extra value created is equal to the wages paid), then the surplus-value is contained in the surplus or net product. This would be 40,000 pounds of yarn (one-sixth of the total yarn produced), with a value of £2,000. This £2,000 profit is realized when the yarn is sold.

£2,000 is £2,000. We can’t see or smell any trace of surplus-value in this sum of money itself. When we know that a certain value is surplus-value, we know how its owner got it. But that knowledge doesn’t change the nature of value or money.

Reinvesting Surplus-Value To turn this additional sum of £2,000 (the surplus-value) into new capital, the factory owner will, if all circumstances remain the same:

• Spend four-fifths of it (£1,600) to buy more cotton, machinery, etc.
• Spend one-fifth (£400) to hire additional spinners. These new workers will find the necessities of life (food, shelter, etc.) available in the market, the value of which the owner has advanced to them as wages.

Then, this new capital of £2,000 starts working in the spinning mill. In turn, it brings in its own surplus-value, say £400.

The Form of Capital and Surplus-Value The original capital-value was initially in the form of money. If the 200,000 pounds of yarn (representing the part of production that just replaces the initial capital, not the surplus part) in which it is invested are sold, the capital-value returns to its money form. The surplus-value, however, starts as the value of a specific portion of the total product (the extra 40,000 lbs of yarn in our example). Through the sale, the original form of the surplus-value (yarn) is also changed into money.

From this moment, both the original capital-value and the surplus-value are sums of money. Turning them back into working capital happens in exactly the same way. The capitalist uses both sums to buy commodities (like more raw materials, new machines, or more labor-power). These commodities put the capitalist in a position to start making goods again, but this time on a larger scale. But to buy these commodities, they must be available in the market.

The Market and Surplus Product Commodities that are to be bought on the market must have been produced beforehand. Market transactions only achieve the exchange of the individual parts of the annual product, transferring them from one person to another. Market transactions can neither increase the total annual production nor change the nature of the objects produced.

The annual production must first provide all those useful things (use-values) needed to replace the material parts of capital that were used up during the year. After deducting these, what remains is the net or surplus-product, which contains the surplus-value.

And what does this surplus-product consist of? Perhaps it consists of things meant to satisfy the wants and desires of the capitalist class (like luxury goods)? If that were the case, the surplus-value would be completely consumed by the capitalists, and no accumulation could happen.

Except by a miracle, we cannot turn anything into capital unless it is:

1. Articles that can be used in the labor process (i.e., means of production like tools, raw materials).
2. Further articles suitable for the workers’ sustenance (i.e., means of subsistence like food, clothing).

Consequently, a part of the annual surplus-labor (the unpaid labor that creates surplus-value) must have been used to produce additional means of production and additional means of subsistence. This production must be over and above the quantity needed to simply replace the capital used up. In other words, surplus-value can be turned into capital only because the surplus-product (whose value it represents) already contains the physical elements of new capital (more machines, more raw materials, more food for more workers).

Adding More Labor Now, for these elements to actually function as new capital, the capitalist class needs additional labor. If the exploitation of the workers already employed doesn’t increase (either by making them work longer/harder or by employing more of them without increasing overall capital), then additional labor-power must be found.

The mechanism of capitalist production provides for this beforehand. The wages paid to workers are generally enough not only for their own maintenance but also for the increase of the working class (i.e., for them to have children who become new workers). Capital only needs to incorporate this additional labor-power, supplied annually by the working class in the form of laborers of all ages, with the surplus means of production found in the annual produce. When this happens, the conversion of surplus-value into capital is complete.

The Cycle of Accumulation Let us return to our spinner example. It’s like the old saying: Abraham begat Isaac, Isaac begat Jacob, and so on.

• The original capital of £10,000 brings in a surplus-value of £2,000. This £2,000 is capitalized (turned into new capital).
• The new capital of £2,000 then brings in a surplus-value of £400. This £400 is also capitalized, converted into a second additional capital.
• This second additional capital, in turn, produces a further surplus-value of £80. And so the ball rolls on, with capital constantly expanding.

We are currently leaving out the portion of surplus-value that the capitalist consumes for personal use. It also doesn’t concern us for now whether the additional capital is added to the original capital or is separated from it to function independently. Nor does it matter whether the same capitalist who accumulated it employs it, or whether they hand it over to another capitalist. We must only remember this: alongside the newly formed capital, the original capital continues to reproduce itself and produce surplus-value. This is also true for all accumulated capital.

The Origin of Capital: Myth vs. Reality The original capital was formed by an investment of £10,000. How did the owner get this money? “By his own labor and that of his forefathers,” is the unanimous answer from the spokesmen of political economy (mainstream economists).

But the situation is quite different for the additional capital of £2,000. We know perfectly well how that originated. It is capitalized surplus-value. There is not a single atom of its value that does not owe its existence to unpaid labor. The means of production with which the additional labor-power is combined, as well as the necessities that sustain the laborers, are nothing but parts of the surplus-product. This surplus-product is like a tribute (a forced payment) demanded annually from the working class by the capitalist class.

Even if the capitalist class uses a portion of that tribute to purchase additional labor-power at its full price (so that, on the surface, an equivalent is exchanged for an equivalent), the transaction is still like the old trick of every conqueror. The conqueror buys goods from the conquered people using the very money he has robbed from them.

Exploitation Continues and Expands If the additional capital employs the very person who produced it, this producer must not only continue to increase the value of the original capital but must also buy back the results of their previous labor with more labor than those results originally cost. When viewed as a transaction between the entire capitalist class and the entire working class, it makes no difference that additional laborers are employed using the unpaid labor of previously employed laborers. The capitalist might even convert the additional capital into a machine that throws the workman who made it out of a job, replacing them with a few children. In every case, the working class creates, by the surplus-labor of one year, the capital that is destined to employ additional labor in the following year.

The accumulation of the first additional capital of £2,000 (in our example) assumes that the capitalist already possessed £10,000, supposedly due to his “primitive (original) labor,” which he invested. The second additional capital of £400, however, only assumes the previous accumulation of the £2,000, of which the £400 is the capitalized surplus-value. The ownership of past unpaid labor now becomes the sole condition for appropriating (taking) living unpaid labor on a constantly increasing scale. The more the capitalist has accumulated, the more they are able to accumulate.

Property Rights Turned Upside Down Because of the process just described—the constant increase of capital by means of previously made surplus-value, a part of which is always used to buy new labor-power (even if bought at its real value)—it is clear that private property, which is based on the production and circulation of commodities, changes into its very opposite. The exchange of equivalents (equal values) has now become twisted so that there is only an apparent exchange. This is due to two facts:

1. The capital exchanged for labor-power is itself only a portion of the product of others’ labor, taken without giving an equivalent.
2. This capital must not only be replaced by its producer (the worker) but replaced along with a surplus.

The exchange between capitalist and laborer becomes a mere form, different from the real nature of the transaction, and only serves to mystify (hide) it. The constantly repeated purchase and sale of labor-power is now just a formality. What really happens is this: the capitalist again and again takes, without an equivalent, a portion of the labor of others (already existing in the commodities) and exchanges it for a greater quantity of living labor.

At first, the rights of property seemed to be based on a person’s own labor. At least, some such assumption was necessary because, in the market, only commodity owners with equal rights faced each other. The only way a person could get the commodities of others was by giving away their own commodities; and these could only be replaced by labor. Now, however, property turns out to be:

• The right, for the capitalist, to appropriate the unpaid labor of others or its product.
• The impossibility, for the laborer, of appropriating their own product.

All Capital Becomes Accumulated Surplus-Value We have seen that even in simple reproduction (where the capitalist consumes all surplus-value), all capital, whatever its original source, eventually becomes converted into capitalized surplus-value. But in the ongoing flood of production, all the capital originally invested becomes an insignificant amount (a vanishing quantity) compared with the directly accumulated capital. This directly accumulated capital is the surplus-product that is reconverted into capital, whether it is used by its original accumulator or by others.

Consumption vs. Accumulation of Surplus-Value It is clear that only a portion of the surplus-value can be converted into capital. Another portion must be used for the capitalist’s own sustenance (living expenses and luxuries). The larger one of these parts is, the smaller the other will be. The less the capitalist consumes personally, the greater the accumulation will be.

The Capitalist’s “Historical Role” The historical value and justification of the capitalist are found in the fact that he ruthlessly forces the human race to produce for production’s sake. He thus forces:

• The development of society’s productive powers (its ability to produce).
• The creation of those material conditions which alone can form the real basis of a higher form of society. This higher society would be one in which the full and free development of every individual is the main principle.

Moreover, the development of capitalist production constantly makes it necessary to keep increasing the amount of capital invested in any given industrial business. Competition forces each individual capitalist to keep expanding their capital just to preserve it. But they cannot expand it except by means of progressive (continuous and increasing) accumulation.

CHAPTER TWO

HOW CAPITAL ACCUMULATION AFFECTS THE WORKING CLASS, CREATES A RESERVE ARMY OF WORKERS, AND LEADS TO GROWING POVERTY

The Initial Impact of Accumulation on Wages

When a part of surplus-value (the extra value created by workers) is turned into capital and used as additional capital, this new capital clearly needs labor to function. If all other circumstances stay the same, and a certain amount of means of production (like machines and raw materials, called constant capital) always needs the same amount of labor-power (workers, paid by variable capital) to be put into motion, then the demand for labor will increase. This demand will grow more quickly the faster capital increases.

Capital produces surplus-value each year. A part of this surplus-value is added to the original capital each year. This surplus-value increases every year because the total capital increases (as a result of accumulation). Finally, if there are special opportunities to get rich—like the opening of new markets or new areas for investing capital due to newly developed social needs—capitalists might simply reduce their personal spending to accumulate much more surplus-value.

For all these reasons, the need for labor due to accumulating capital might grow faster than the increase in the number of available laborers. When this happens, wages may rise. This must eventually happen if the conditions described above continue. Since more laborers are employed each year than the year before, a point must sooner or later be reached where the demand for labor from accumulation surpasses the usual supply of labor. Therefore, a rise in wages takes place. Complaints about this were heard in England throughout the 15th century and the first half of the 18th century.

However, whether the wage-working class lives and multiplies in more or less favorable circumstances does not change the fundamental nature of capitalist production.

• Just as simple reproduction (production on the same scale) constantly reproduces the capital-labor relationship itself (capitalists on one side, wage-workers on the other),
• So, reproduction on a growing scale (i.e., accumulation) reproduces the capital-labor relationship on a growing scale: more capitalists or larger capitalists on one side, and more wage-workers on the other. Therefore, the accumulation of capital also means an increase of the proletariat (the working class).

Early Views on Labor and Wealth As early as 1696, John Bellers said: “For if one had a hundred thousand acres of land and as many pounds in money, and as many cattle, without a labourer, what would the rich man be, but a labourer? And as the labourers make men rich, so the more labourers, there will be the more rich men … the labour of the poor being the mines of the rich.”

Similarly, Bertrand de Mandeville wrote at the beginning of the 18th century (1728): “It would be easier, where property is well secured, to live without money than without poor; for who would do the work? … As they (the poor) ought to be kept from starving, so they should receive nothing worth saving. If here and there one of the lowest class by uncommon industry, and pinching his belly (eating very little to save money), lifts himself above the condition he was brought up in, nobody ought to hinder him; nay, it is undeniably the wisest course for every person in the society, and for every private family to be frugal (save money); but it is the interest of all rich nations, that the greatest part of the poor should almost never be idle, and yet continually spend what they get … Those that get their living by their daily labour … have nothing to stir them up to be serviceable (willing to work) but their wants, which it is prudence to relieve, but folly to cure. The only thing then that can render the labouring man industrious, is a moderate quantity of money, for as too little will, according as his temper is, either dispirit (discourage) or make him desperate, so too much will make him insolent (disrespectful) and lazy … From what has been said, it is manifest, that, in a free nation, where slaves are not allowed of, the surest wealth consists in a multitude of laborious poor; for besides that they are the never-failing nursery (source) of fleets and armies, without them there could be no enjoyment, and no product of any country could be valuable. To make the society [which of course consists of non-workers] happy and people easier under the meanest (poorest) circumstances, it is requisite (necessary) that great numbers of them should be ignorant as well as poor; knowledge both enlarges and multiplies our desires, and the fewer things a man wishes for, the more easily his necessities may be supplied.”

What Mandeville, an honest and clear-headed man, had not yet seen is that the mechanism of the accumulation process itself increases, along with the capital, the mass of “labouring poor”—that is, the wage-laborers.

The “Golden Chain” of Wage Labor Under the conditions of accumulation assumed so far—which are the conditions most favorable to laborers—their relationship of dependence on capital takes on a more bearable form. A larger part of their own surplus-product (which is always increasing and continually turned into additional capital) comes back to them as payment. This allows them to:

• Expand the range of things they can enjoy.
• Make some additions to their consumption-fund (for clothes, furniture, etc.).
• Save small amounts of money.

But just as better clothing, food, treatment, and a larger personal allowance (peculium) for a slave do not end the exploitation of the slave, these improvements do not end the exploitation of the wage-worker. A rise in the price of labor (wages) due to capital accumulation only means that the length and weight of the “golden chain” the wage-worker has already made for himself allow for a loosening of its tension. An increase in wages, at best, only means a reduction in the amount of unpaid labor the worker has to supply. This reduction can never reach a point where it would threaten the capitalist system itself.

How Capital Controls Wage Levels There are two possibilities:

1. Wages keep rising without harming accumulation: The price of labor keeps rising because its rise does not interfere with the progress of accumulation. This is not surprising. As Adam Smith said (in 1774), “after these (profits) are diminished, stock (capital) may not only continue to increase, but to increase much faster than before… A great stock, though with small profits, generally increases faster than a small stock with great profits.” In this case, it’s clear that a reduction in unpaid labor does not stop capital from expanding its control.
2. Accumulation slows due to rising wages: Accumulation slows down because the incentive of profit is weakened by the rise in labor costs. The rate of accumulation lessens. But at the same time, the high demand for labor-power (which was due to large accumulation) stops, and wages fall again. The mechanism of capitalist production itself removes the very obstacles that it temporarily creates.

The Real Driver of Labor Demand So, we see:

• In the first case, it’s not a reduced rate of increase in the laboring population that makes capital seem excessive. Conversely, it’s the excess of capital that makes exploitable labor-power seem insufficient.
• In the second case, it’s not an increase in labor-power that makes capital seem insufficient. Conversely, it’s the relative reduction of capital that makes exploitable labor-power (or rather its price) seem excessive.

These are absolute movements in the accumulation of capital. They are reflected as relative movements in the mass of exploitable labor-power and therefore seem to be caused by the labor-power’s own independent movement. It is a serious mistake to interpret these phenomena of accumulation by saying that there are sometimes too few, and sometimes too many, wage-laborers.

Therefore, neither the actual amount of social wealth, nor the size of the capital already functioning, leads to a rise of wages. It is only the constant growth of accumulation and the speed of that growth that do so.

Changes in How Capital is Composed So far in our study, we have assumed that the productive power of labor stays the same. This means we assumed that the same amount of means of production (machines, materials) requires the same amount of labor-power to use it. We also assumed that the division of capital into constant (c, for means of production) and variable (v, for labor-power) portions remains unchanged. But a closer analysis shows this assumption to be wrong.

The productive power of labor is increased by accumulation. Adam Smith said, “The same cause which raises the wages of labour, the increase of stock (capital), tends to increase its productive powers, and to make a smaller quantity of labour produce a greater quantity of work.” However, increasing productiveness of labor means that the same quantity of labor (v) uses up a larger quantity of means of production (c). The inner, technical composition of capital (the physical ratio of machinery/materials to workers) must change during accumulation. A relatively larger portion of capital is spent on means of production (c), and a relatively smaller portion on labor-power (v).

For example, capital might originally be divided:

• 50% on means of production (c)
• 50% on labor-power (v) Later, with increased productivity, it might be:
• 80% on means of production (c)
• 20% on labor-power (v)

This law of the progressive increase in constant capital relative to variable capital is confirmed at every step. We can see this by comparing the prices of commodities across different economic eras or different nations in the same era.

Value Composition vs. Material Composition This decrease in the variable part of capital compared to the constant part (the altered value composition of capital) only approximately shows the change in the composition of its physical components. For example, if the capital-value used today in spinning is 7/8 constant and 1/8 variable, while at the beginning of the 18th century it was 1/2 constant and 1/2 variable, there’s another factor. The mass of raw material, tools, etc., that a certain amount of spinning labor productively consumes today is many hundred times greater than at the beginning of the 18th century. The reason is simple: with increasing productivity of labor, not only does the mass of the means of production consumed by it increase, but their value compared with their mass diminishes. So, although the difference in value between constant and variable capital increases, the difference between the mass of the means of production (constant capital) and the mass of labor-power (variable capital) increases much more rapidly.

Absolute vs. Relative Demand for Labor But, if the progress of accumulation lessens the relative size of the variable part of capital, it does not, by doing this, rule out a rise in its absolute size. Suppose a capital-value is at first divided 50% constant and 50% variable. Later, it’s 80% constant and 20% variable. If, in the meantime, the original capital (say, £6,000) has increased to £18,000, its variable part has also increased.

• It was £3,000 (50% of £6,000).
• It is now £3,600 (20% of £18,000). But whereas formerly an increase of capital by 20% would have been enough to raise the demand for labor by 20%, now this same percentage rise in labor demand requires a tripling of the original capital.

Large-Scale Production and Accumulation In another chapter, it was shown how the development of the productivity of social labor requires cooperation on a large scale. Only with this large-scale cooperation can:

• Division and combination of labor be organized.
• Means of production be used more economically by concentrating them on a vast scale.
• Instruments of labor that are only fit for common use (like a system of machinery) be created.
• Huge natural forces be put to the service of production.

On the basis of commodity production (where goods are made for sale), where the means of production are private property, and where the artisan either produces goods in isolation or sells his labor-power as a commodity because he lacks the means for independent industry, cooperation can only happen through the increase of individual capitals. It can only happen as the social means of production and means of subsistence are transformed into the private property of capitalists. Commodity production can only support large-scale production in its capitalistic form. A certain accumulation of capital in the hands of individual commodity producers is therefore a necessary precondition for the specifically capitalist mode of production.

But all methods for raising the social productive power of labor that are developed on this basis are, at the same time, methods for the increased production of surplus-value or surplus-product. This surplus-product, in turn, is the element that forms accumulation. They are, therefore, at the same time, methods for the accelerated accumulation of capital. The continual re-transformation of surplus-value into capital now appears as the increasing size of the capital that enters the production process. This, in turn, is the basis for:

• An extended scale of production.
• The methods for raising the productive power of labor that accompany it.
• Accelerated production of surplus-value.

Therefore, if a certain degree of capital accumulation is a condition for the capitalist mode of production, the capitalist mode of production, conversely, causes an accelerated accumulation of capital. With the accumulation of capital, the specifically capitalist mode of production develops. And with the capitalist mode of production, capital accumulation develops. Both these economic factors, through the combined force of the impulses they give each other, bring about that change in the technical composition of capital by which the variable part (wages) becomes always smaller and smaller compared with the constant part (machines, materials).

Concentration and Centralization of Capital

Every individual capital is a larger or smaller concentration of means of production, with a corresponding command over a larger or smaller labor army. Every accumulation becomes the means for new accumulation. With the increasing mass of wealth that functions as capital, accumulation increases the concentration of that wealth in the hands of individual capitalists. This, in turn, widens the basis for production on a large scale and for the specific methods of capitalist production. The growth of social capital happens through the growth of many individual capitals.

At the same time, parts of original capitals break off and function as new, independent capitals. Besides other causes, the division of property within capitalist families plays a large part in this. With the accumulation of capital, therefore, the number of capitalists grows to a greater or lesser extent.

Accumulation and the concentration that comes with it are not only scattered over many points. The increase of each functioning capital is also held back by the formation of new capitals and the sub-division of old ones. Accumulation, therefore, appears on the one hand as increasing concentration of the means of production and of command over labor. On the other hand, it appears as the repulsion (pushing away) of many individual capitals from one another.

Centralization Merges Capitals This splitting up of the total social capital into many individual capitals, or the repulsion of its parts from one another, is counteracted by their attraction. This attraction means the centralization of capitals already formed:

• Destruction of their individual independence.
• Expropriation (taking away property) of capitalist by capitalist.
• Transformation of many small capitals into a few large capitals.

This process of centralization differs from accumulation. Accumulation means growing the total amount of capital. Centralization only assumes a change in the distribution of capital already existing and functioning. Its field of action is therefore not limited by the growth of social wealth. Capital grows in one place to a huge mass in a single hand because it has been lost by many in another place. This is centralization proper, as distinct from accumulation and concentration.

Competition and the Role of Credit The battle of competition is fought by making commodities cheaper. The cheapness of commodities depends, other things being equal, on the productiveness of labor. This, in turn, depends on the scale of production. Therefore, larger capitals beat smaller ones. It will also be remembered that with the development of the capitalist mode of production, there is an increase in the minimum amount of individual capital necessary to run a business under its normal conditions. Smaller capitals, therefore, crowd into spheres of production that modern industry has only partially or incompletely taken over. Here, competition always ends in the ruin of many small capitalists, whose capitals partly pass into the hands of their conquerors and partly vanish.

Apart from this, with capitalist production, an altogether new force comes into play—the credit system.

• This itself is a new and mighty weapon in the battle of competition.
• Moreover, by unseen threads, it draws the available money, scattered in larger or smaller amounts across society, into the hands of individual or associated capitalists. It is the specific machine for the centralization of capitals.

The centralization of capital becomes more intense as the specifically capitalist mode of production develops along with accumulation. In its turn, centralization becomes one of the greatest levers (driving forces) of this development.

Centralization Speeds Up Change Centralization completes the process of accumulation by enabling capitalists to expand their businesses. And the expansion of industrial businesses is the starting point for organizing the cooperation of large numbers of people on a comprehensive scale, and for a broader development of their material resources.

It’s clear that the accumulation of capital—its gradual growth by reinvesting surplus-value—is a slow process compared to centralization. Centralization just brings already existing capitals together and changes their grouping. The world would still (in 1874, when Marx was writing) be without railways if it had had to wait until the accumulation of some individual capitals was large enough to build a railway line. Centralization, through joint-stock companies (where many investors pool their money), made railway construction possible without such long delays. And while centralization thus emphasizes and speeds up the effects of accumulation, it also:

• Extends the scope of technological revolutions in how capital is composed (the mix of machinery/materials versus labor-power).
• Hastens these revolutions. These changes increase capital’s constant part (machinery, materials) at the expense of its variable part (wages for labor), thus reducing the proportional demand for labor.

The large amounts of capital joined together overnight by centralization then reproduce themselves and increase just like other capitals, but more rapidly. They become new and powerful drivers (levers) of accumulation.

How Technology Reduces Labor Demand The increasing size of individual masses of capital becomes the material basis for an ongoing revolution in the way production itself happens. Continually, the capitalist mode of production takes over branches of industry that it had not yet fully controlled, or had only touched upon occasionally or formally. At the same time, new branches of industry grow up on its foundation—branches that could not exist without it. Finally, in the branches of industry already run on a capitalist basis, the productivity of labor is rapidly increased, as if in a hothouse.

In all these cases, the number of laborers employed falls in proportion to the mass of the means of production they work with.

• An ever-increasing part of the capital is turned into means of production (machines, raw materials).
• An ever-decreasing part is turned into labor-power (wages).

As the extent, concentration, and technical efficiency of the means of production grow, the degree to which these means of production also serve as means of employment for laborers progressively lessens. For example, a steam plough is a much more efficient means of production than an ordinary plough. But the capital spent on the steam plough employs far fewer people than if that same capital were spent on many ordinary ploughs.

At first, expanding and technically revolutionizing production simply involves adding new capital to old. But soon, this change in composition and technical transformation more or less completely takes over all old capital when it reaches the point where it needs to be replaced.

So, on the one hand, the additional capital formed during accumulation attracts fewer and fewer laborers in proportion to its size. On the other hand, the old capital, when it is periodically reproduced with a new technological composition, pushes away (repels) more and more of the laborers it formerly employed.

The Pace of Change and Labor Demand The development of labor’s productive power, and the resulting change in the organic composition of capital (the ratio of constant capital to variable capital), do not merely keep pace with the advance of accumulation or with the growth of social wealth. They develop much faster. This is because:

1. Mere accumulation (the absolute increase of total social capital) is accompanied by the centralization of the individual capitals that make up that total.
2. The change in the technological composition of new (additional) capital causes a similar change in the technological composition of original capital when it’s replaced.

Therefore, with the advance of accumulation, the proportion of constant capital to variable capital changes.

• If it was originally, say, 1 part constant to 1 part variable (1:1),
• It now successively becomes 2:1, 3:1, 4:1, 5:1, 7:1, and so on. This means that as total capital increases, instead of half of its total value being turned into labor-power (wages), only 1/3, then 1/4, then 1/5, then 1/6, then 1/8, etc., is used for labor-power. Conversely, 2/3, 3/4, 4/5, 5/6, 7/8, etc., is turned into means of production.

Since the demand for labor is determined not by the amount of total capital, but by its variable part (wages) alone, that demand falls progressively with the increase of the total capital. It does not, as previously assumed, rise in proportion to it. The demand for labor falls relative to the size of the total capital, and at an accelerated rate as this total capital increases.

With the growth of the total capital, its variable part (or the labor-power it employs) also increases, but in a constantly diminishing proportion. The short periods in which accumulation simply means expanding production on a given technical basis become shorter.

It’s not just that an accelerated accumulation of total capital (accelerating in a constantly growing progression) is needed to absorb an additional number of laborers, or even to keep those already working employed (due to the constant transformation of old capital). In turn, this increasing accumulation and centralization becomes a source of new changes in the composition of capital. These new changes lead to an even more accelerated decrease of its variable part compared to its constant part.

This accelerated relative decrease of the variable part (fewer workers needed for a given amount of capital) that goes along with the accelerated increase of the total capital (and moves more rapidly than this increase) makes it appear, on the other hand, as if the laboring population were increasing faster than the variable capital or the means of employment. But in fact, it is capitalistic accumulation itself that constantly produces a population that is larger than what is needed for capital’s own expansion. The laboring population therefore produces, along with the accumulation of capital created by it, the very means by which it itself is made relatively superfluous (more workers than needed by capital).

This is a law of population peculiar to the capitalist mode of production. In fact, every specific historical mode of production has its own special laws of population, which are historically valid only within its limits. An abstract, universal law of population exists only for plants and animals, and only as long as humans have not interfered with them.

The Industrial Reserve Army of Workers But if a surplus laboring population is a necessary product of accumulation (or of the development of wealth on a capitalist basis), this surplus population, conversely, becomes a driver (lever) of capitalist accumulation. Indeed, it is a condition for the existence of the capitalist mode of production. It forms a disposable industrial reserve army (a pool of unemployed or underemployed workers) that belongs to capital just as absolutely as if capital had bred it at its own cost. Independently of the limits of the actual increase of population, it creates a mass of human material always ready for exploitation, catering to capital’s changing needs for self-expansion.

With accumulation, and the development of labor productivity that comes with it, capital’s power of sudden expansion also grows. The mass of social wealth, overflowing with the advance of accumulation and ready to be transformed into additional capital, thrusts itself frantically into:

• Old branches of production whose markets suddenly expand.
• Newly formed branches, such as railways, etc., the need for which grows out of the development of the old ones.

In all such cases, there must be the possibility of throwing great masses of people suddenly onto the decisive points of production without withdrawing them from other branches. Over-population (the industrial reserve army) supplies these masses.

The Boom and Bust Cycle of Industry The characteristic course of modern industry is a ten-year cycle (the decennial cycle), interrupted by smaller ups and downs (oscillations). This cycle consists of periods of:

• Average activity
• Production at high pressure (boom)
• Crisis (bust)
• Stagnation (little or no growth)

This cycle depends on the constant formation, the greater or lesser absorption, and the re-formation of the industrial reserve army or surplus population.

This peculiar course of modern industry, which occurs in no earlier period of human history, was also impossible in the childhood of capitalist production. In early capitalism, the composition of capital (the ratio of machines/materials to workers) changed very slowly. Therefore, as capital accumulated, there was generally a corresponding growth in the demand for labor. Slow as the advance of accumulation was then compared with modern times, it was checked by the natural limits of the exploitable laboring population. These limits could only be overcome by forceful means (which will be mentioned later).

The expansion of production by fits and starts is the first step towards its equally sudden contraction. The contraction, in turn, leads to another expansion. But expansion is impossible without disposable human material—without an increase in the number of laborers independent of the absolute growth of the population. This increase is created by the simple process that constantly “sets free” (makes unemployed) a part of the laborers. This happens through methods that lessen the number of laborers employed in proportion to the increased production. The whole form of the movement of modern industry, therefore, depends upon the constant transformation of a part of the laboring population into unemployed or half-employed workers.

Capitalist production can by no means be content with the amount of disposable labor-power that the natural increase of population provides. For its free operation, it requires an industrial reserve army independent of these natural limits.

Getting More Work from Fewer Workers Up to this point, we have assumed that an increase or decrease in variable capital (money spent on wages) corresponds exactly with an increase or decrease in the number of laborers employed. However, the number of laborers commanded by capital may remain the same, or even fall, while the variable capital increases. This happens if the individual laborer yields more labor (works longer hours or more intensely), and therefore their wages increase, even if the price of labor per hour remains the same or even falls (but falls more slowly than the total amount of labor performed rises).

It is in the absolute interest of every capitalist to get a given quantity of labor out of a smaller, rather than a greater, number of laborers, if the cost is about the same. If more laborers are used, the outlay on constant capital (machines, etc., that each worker needs) increases in proportion to the mass of labor set in action. If fewer (but more intensely working) laborers are used, that increase in constant capital costs is much slower. The more an industry expands, the stronger this motive becomes. Its force increases with the accumulation of capital.

How Capital Increases Labor Without More Laborers We have seen that the development of the capitalist mode of production and of the productive power of labor—which are both the cause and effect of accumulation—enables the capitalist, with the same spending on variable capital (wages), to set more labor in action by greater exploitation (longer hours, more intensity) of each individual labor-power. We have also seen that the capitalist, with the same amount of capital, buys a greater mass of labor-power as they progressively replace:

• Skilled laborers with less skilled.
• Mature labor-power with immature (younger workers).
• Male labor with female labor.
• Adult labor with that of young persons or children.

Therefore, on the one hand, with the progress of accumulation:

• A larger amount of variable capital (more money for wages) sets more labor in action without necessarily hiring more individual laborers (because existing workers work more). On the other hand:
• A variable capital of the same amount sets more labor in action with the same total mass of labor-power (again, through intensification). And finally:
• A greater number of inferior (cheaper or less skilled) labor-powers are employed by displacing higher ones.

The Reserve Army and Worker Conditions The production of a relative surplus population—or the “setting free” of laborers—therefore happens even more rapidly than the technical revolution of the production process (which is itself accelerated by accumulation). It also happens more rapidly than the corresponding decrease of the variable part of capital compared with the constant part. In proportion as the productiveness of labor increases, capital increases its supply of labor (by making existing workers work more or replacing them with cheaper labor) more quickly than its demand for laborers.

The overwork of the employed part of the working class swells the ranks of the reserve army. Conversely, the greater pressure that the reserve army, through competition for jobs, exerts on the employed workers forces these employed workers to submit to overwork and to subjugation under the dictates of capital. The condemnation of one part of the working class to enforced idleness by the overwork of the other part, and vice versa, becomes a means of enriching individual capitalists. At the same time, it accelerates the production of the industrial reserve army on a scale that corresponds with the advance of social accumulation.

The example of England shows how important this element is in forming the relative surplus population. England’s technical means for “saving” labor are colossal. Nevertheless, if tomorrow (in 1867, when Marx was writing) labor generally were reduced to a rational amount, and divided fairly among the different sections of the working class according to age and sex, the working population available would be absolutely insufficient to carry on national production on its present scale. The great majority of laborers who are now “unproductive” (either unemployed, underemployed, or engaged in non-essential tasks from capital’s viewpoint) would have to be turned into “productive” ones.

What Really Controls Wages Taking them as a whole, the general movements of wages are exclusively regulated by the expansion and contraction of the industrial reserve army. These, in turn, correspond to the periodic changes of the industrial cycle. Wages are, therefore, not determined by the variations in the absolute number of the working population. They are determined by the varying proportions in which the working class is divided into an active army (employed) and a reserve army (unemployed/underemployed), by the increase or decrease in the relative amount of the surplus-population, and by the extent to which it is now absorbed into production, now set free.

For modern industry, with its ten-year cycles and periodic phases (average activity, boom, crisis, and stagnation)—which, as accumulation advances, are complicated by irregular ups and downs following each other more and more quickly—it would indeed be a strange law that pretended to make the action of capital dependent on the absolute variation of the population. Instead, the demand and supply of labor are regulated by the alternate expansion and contraction of capital. The labor market now appears relatively under-supplied because capital is expanding, and then again over-supplied because capital is contracting.

A Critique of Economists’ Wage Theories Yet, this is the dogma ( unquestioned belief) of the economists. According to them:

1. Wages rise as a consequence of capital accumulation.
2. Higher wages stimulate the working population to multiply more rapidly.
3. This continues until the labor market becomes too full, and wages fall.
4. Now we see the other side of the coin: the working population is gradually reduced (decimated) as a result of the fall in wages.
5. This leads to capital again being in excess relative to workers. Or, as others explain it, falling wages allow for an increase in profit, which again accelerates accumulation, while at the same time, the lower wages hold the increase of the working class in check.
6. Then comes again the time when the supply of labor is less than the demand, wages rise, and so on.

This is a “beautiful” mode of motion for developed capitalist production, Marx says sarcastically! Before any actual positive increase of the population fit for work could occur as a result of a rise in wages, the time would have passed again and again during which the industrial campaign must have been carried through, the battle fought and won.

Real-World Example: English Farm Workers Between 1849 and 1859, a rise in wages occurred in the English agricultural districts. This rise was practically only nominal (in name only, not necessarily in real buying power), though it was accompanied by falling prices of grain (corn).

• In Wiltshire, for example, weekly wages rose from 7 shillings to 8 shillings.
• In Dorsetshire, they rose from 7 or 8 shillings to 9 shillings, etc. This was the result of an unusual exodus (mass departure) of the agricultural population. This exodus was caused by the demands of war, and the vast expansion of railroads, factories, mines, etc., which drew workers away from farming.

The lower the initial wages, the higher the proportion in which even a tiny rise expresses itself.

• If the weekly wage is, for example, 20 shillings and it rises to 22 shillings, that is a rise of 10 percent.
• But if it is only 7 shillings and it rises to 9 shillings, that is a rise of about 28.5 percent, which sounds very impressive. Everywhere the farmers were complaining. The “London Economist,” referring to these starvation wages, talked quite seriously of “a general and substantial advance.”

What did the farmers do then? Did they wait until, as a consequence of this brilliant payment (remuneration), the agricultural laborers had increased and multiplied so much that their wages would fall again (as the economists’ theory suggested)? No. They introduced more machinery. In a moment, the laborers were redundant (no longer needed) again, in a proportion satisfactory even to the farmers. There was now “more capital” invested in agriculture than before, and in a more productive form. With this, the demand for labor fell, not only relatively (compared to the capital invested), but absolutely (in terms of the total number of workers needed).

Local vs. General Wage Movements The economic dogma mentioned above confuses the laws that regulate the general movement of wages with the laws that distribute the working population over the different spheres of production. If, for example, due to favorable circumstances, accumulation in a particular sphere of production becomes especially active, and profits in it are greater than average profits, this will attract additional capital. Of course, the demand for labor in that sphere rises, and wages also rise. The higher wages draw a larger part of the working population into that more favored sphere until it is glutted (oversupplied) with labor-power. Then, wages at length fall again to their average level, or below it, if the pressure of too many workers is too great. At that point, not only does the immigration of laborers into that branch of industry stop; it gives way to their emigration (workers leaving that sector).

Economists Misunderstand Wage Movements Here the political economist (mainstream economist) thinks he sees the reasons for an absolute increase of workers when wages increase, and for a decrease in wages when there’s an absolute increase of laborers. But what he really sees are only the local ups and downs of the labor market in a particular area of production. He only sees the things that happen as the working population gets distributed into different areas where capital is invested, according to capital’s varying needs.

The Role of the Industrial Reserve Army The industrial reserve army (the pool of unemployed and underemployed workers):

• During periods of stagnation (no growth) and average prosperity, it weighs down the active labor army (those who are employed), keeping wages in check.
• During periods of over-production and intense boom (paroxysm), it holds back the wage claims of the employed workers.

Therefore, this relative surplus population (the reserve army) is the central point (pivot) around which the law of demand and supply of labor works. It limits the operation of this law to conditions that are absolutely convenient for the exploitation and domination of capital. The mechanism of capitalist production manages things so that an increase of capital is not accompanied by a corresponding rise in the general demand for labor.

Workers Begin to Understand the System As soon, therefore, as laborers learn the secret of how things work:

• They see that the more they work and the more wealth they produce for others, and the more the productive power of their labor increases…
• …the more uncertain (precarious) their own role as a means for capital to expand becomes.
• They discover that the intensity of competition among themselves depends entirely on the pressure from the relative surplus population (the reserve army).
• As soon as they try, through Trades’ Unions and other organizations, to create regular cooperation between employed and unemployed workers to destroy or weaken the ruinous effects of this “natural law” of capitalist production on their class…

…then capital and its flattering supporter (sycophant), political economy, cry out about the violation (infringement) of the “eternal” and supposedly “sacred” law of supply and demand. Every combination of employed and unemployed workers disturbs the “harmonious” action of this law.

Capital’s Hypocrisy Regarding Supply and Demand But, on the other hand, as soon as unfavorable circumstances (e.g., in the colonies) prevent the creation of an industrial reserve army and, with it, the absolute dependence of the working class upon the capitalist class, capital (along with its academic defender, the economist) rebels against the “sacred” law of supply and demand. It tries to stop its inconvenient effects by forceful means and State interference.

Different Forms of the Unemployed and Underemployed (The Industrial Reserve Army) The relative surplus population exists in every possible form. Every laborer belongs to it during the time when he is only partially employed or wholly unemployed.

1. The Floating Surplus Population: In factories and large workshops where machinery is a factor or where modern division of labor is used, large numbers of boys are employed until they reach maturity. Once they are adults, only a small number continue to find employment in the same industries, while the majority are regularly discharged (fired). Some of them emigrate, often following capital that has moved elsewhere. One consequence, as seen in England, is that the female population grows more rapidly than the male (as men emigrate). It’s a contradiction inherent to capitalism:

   • The natural increase in the number of laborers does not satisfy capital’s need for accumulation.
   • Yet, at the same time, the number of laborers is always in excess of capital’s needs. Capital wants larger numbers of young laborers and a smaller number of adult laborers. The contradiction is no more glaring than another one: there are complaints about a shortage of workers (want of hands), while at the same time many thousands are out of work because the division of labor chains them to a particular branch of industry. Besides, capital consumes labor-power so rapidly that the laborer, by mid-life, is often more or less completely worn out. He falls into the ranks of the unneeded workers (supernumeraries) or is pushed down from a higher to a lower position. It is precisely among the workers in modern industry that we find the shortest lifespans. Dr. Lee, a Medical Officer for Manchester, stated that the average age at death for the Manchester upper-middle class was 38 years, while for the laboring class it was 17. In Liverpool, these figures were 35 years versus 15 years. It thus appeared that the well-to-do classes had a lifespan more than double that of the less favored citizens.

2. The Latent Surplus Population (From Agriculture): As soon as capitalist production takes over agriculture, and to the extent that it does so, the demand for an agricultural laboring population falls absolutely, even while the capital employed in agriculture grows. Part of the agricultural population is therefore constantly on the point of moving to cities to become urban or manufacturing workers (proletariat). They are always on the lookout for favorable circumstances for this change. This source of relative surplus population is thus constantly flowing. But this constant flow towards the towns assumes that in the countryside itself, there is a constant hidden (latent) surplus population. The extent of this hidden surplus only becomes clear when the ways for these workers to leave (channels of outlet) open up unusually wide. The agricultural laborer is therefore reduced to the minimum wage and always stands with one foot already in the swamp of extreme poverty (pauperism).

3. The Stagnant Surplus Population (Irregular Employment): Another category of the relative surplus population is part of the active labor army but has extremely irregular employment. Because of this, it provides capital with an inexhaustible supply (reservoir) of disposable labor-power. Their conditions of life sink below the average normal level of the working class. This makes them a broad basis for special branches of capitalist exploitation. This group is characterized by:

   • Maximum working time.
   • Minimum wages. Its chief form is “domestic industry” (work done at home). It constantly recruits itself from the unneeded workers of modern industry and agriculture, and especially from those decaying branches of industry where handicraft is being replaced by manufacture, and manufacture by machinery. But at the same time, this group is a self-reproducing element of the working class. It takes a proportionally greater part in the general increase of that class than other elements. In fact, not only the number of births and deaths, but the absolute size of families, are in inverse proportion to the height of wages (meaning, lower wages often correlate with larger families). This is therefore related to the amount of means of subsistence available to different categories of laborers. This law of capitalist society would sound absurd to indigenous peoples (“savages”) or even to civilized capitalists. It brings to mind the boundless reproduction of animal species that are individually weak and constantly hunted down.

4. Pauperism: The Lowest Layer: The lowest layer (sediment) of the relative surplus population finally dwells in the sphere of pauperism (extreme poverty). Excluding vagabonds, criminals, prostitutes—in a word, the “dangerous” classes—this layer of society consists of three categories:

   • Those able to work: One only needs to glance superficially at statistics of English pauperism to find that the number of paupers increases with every economic crisis and decreases with every revival of trade.
   • Orphans and pauper children: These are candidates for the industrial reserve army. In times of great prosperity (like 1860, for example), they are speedily enrolled in large numbers into the active army of laborers.
   • The demoralized and ragged, and those unable to work: This includes people who cannot adapt due to the effects of the division of labor, those whose lives are longer than the normal working life of laborers, and finally, the victims of industry. The number of these victims increases with the increase of dangerous machinery, mines, chemical works, etc. They include the mutilated, the sickly, widows, and so on. Pauperism is the hospital of the active labor army and the dead weight of the industrial reserve army. Its production is included in that of the relative surplus population; its necessity is part of theirs. Along with the surplus population, pauperism is a condition of capitalist production and of the capitalist development of wealth. It enters into the incidental expenses (faux frais) of capitalist production; but capital knows how to shift these costs, for the most part, from its own shoulders onto those of the working class and the lower middle class.

The Absolute General Law of Capitalist Accumulation The greater the social wealth, the functioning capital, the extent and energy of its growth—and, therefore, also the absolute mass of the proletariat and the productiveness of its labor—the greater is the industrial reserve army. The same causes that develop the expansive power of capital also develop the labor-power at its disposal. The relative mass of the industrial reserve army therefore increases with the sources of wealth.

But the greater this reserve army in proportion to the active labor army, the greater is the mass of a consolidated (established) surplus population, whose misery is in inverse ratio to its torment of labor (meaning, their misery is greater when their work is less, because they are unemployed or underemployed and suffering). The more extensive, finally, the Lazarus-layers of the working class (referring to Lazarus, the poor man in the Bible, meaning the most destitute layers) and the industrial reserve army, the greater is official pauperism. This is the absolute general law of capitalist accumulation. Like all other laws, its working is modified by many circumstances, the analysis of which does not concern us here.

The True Cause of Worker Misery The folly of the economic wisdom that preaches to laborers that they should adjust their numbers to the requirements of capital is now obvious. The mechanism of capitalist production and accumulation constantly brings about this adjustment.

• The first word of this adaptation is the creation of a relative surplus population, or industrial reserve army.
• Its last word is the misery of constantly extending layers of the active army of labor, and the dead weight of pauperism.

The law by which a constantly increasing quantity of means of production can be set in motion by a progressively diminishing expenditure of human power (thanks to advances in the productivity of social labor)—this law, in a capitalist society, is expressed as follows: the higher the productiveness of labor, the greater is the pressure of laborers on the means of employment, and therefore, the more uncertain (precarious) becomes their condition of existence. That condition is the sale of their own labor-power for the purpose of increasing another’s wealth, or for the self-expansion of capital. The fact that the means of production, and the productiveness of labor, increase more rapidly than the productive population, therefore expresses itself, under capitalism, in the inverse form: the laboring population always increases more rapidly than the conditions under which capital can employ this increase for its own self-expansion.

The Worsening Condition of the Laborer We saw in earlier chapters (of the original Capital, Vol. 1) that within the capitalist system, all methods for raising the social productiveness of labor are achieved at the cost of the individual laborer. All means for the development of production transform themselves into means of domination over, and exploitation of, the producers.

• They mutilate the laborer into a fragment of a man.
• They degrade him to the level of an appendage of a machine.
• They destroy every remnant of charm in his work and turn it into a hated toil.
• They estrange (alienate) from him the intellectual potentialities of the labor process in the same proportion as science is incorporated into it as an independent power.
• They distort the conditions under which he works.
• They subject him during the labor process to a despotism (tyranny) all the more hateful for its meanness.
• They transform his life-time into working-time.
• They drag his wife and child beneath the wheels of the Juggernaut (an unstoppable, crushing force) of capital.

But all methods for the production of surplus-value are at the same time methods of accumulation; and every extension of accumulation, in turn, becomes a means for the development of those methods. It follows, therefore, that in proportion as capital accumulates, the lot (condition) of the laborer, whether his payment is high or low, must grow worse.

The law, finally, that always balances the relative surplus population (or industrial reserve army) with the extent and energy of accumulation—this law rivets (binds) the laborer to capital more firmly than the wedges of Hephaestus (the Greek god of fire and metalworking) bound Prometheus to the rock. It establishes an accumulation of misery corresponding with the accumulation of capital. Accumulation of wealth at one pole is, therefore, at the same time accumulation of misery, agony of toil, slavery, ignorance, brutality, and moral degradation at the opposite pole (among the working class).

CHAPTER THREE

THE STORY OF SO-CALLED “PRIMITIVE ACCUMULATION”: Where Did Early Capital Come From?

We have seen how capital is used to make surplus-value (profit), and how surplus-value is used to make more capital. But for this cycle to begin, certain things must exist:

• The accumulation of capital presupposes (requires) surplus-value.
• Surplus-value presupposes capitalist production (making goods using wage labor).
• Capitalist production presupposes that large amounts of capital and labor-power (workers ready to sell their ability to work) already exist in the hands of people who produce commodities (goods for sale).

The whole movement, therefore, seems to turn in a difficult circle. We can only get out of this circle by assuming there was a “primitive accumulation” before capitalist accumulation began. This primitive accumulation was not the result of the capitalist way of production, but its actual starting point.

The Myth vs. The Reality of Primitive Accumulation

Mainstream political economy (the economic theories of the time) explains the origin of this primitive accumulation with a kind of historical fairytale. The story goes like this: A long, long time ago, there were two sorts of people:

1. One group was diligent, intelligent, and, above all, good at saving money (frugal).
2. The other group consisted of lazy scoundrels who wasted everything they had, and more, on wild living.

And so, the story continues, the first group accumulated wealth. The second group eventually had nothing left to sell except their own skins (their ability to work). From this “original sin” (this first wrongdoing), we are told, comes:

• The poverty of the great majority, who, despite all their labor, still have nothing to sell but themselves.
• The wealth of the few, which constantly increases even though they stopped working long ago.

But in actual history, it is well-known that conquest, enslavement, robbery, murder—in short, force—played the biggest part. In the gentle, idealized stories (“tender annals”) told by political economists, peace and harmony have reigned since time began. They claim that right and “labor” were always the only ways to get rich (except, of course, for the present year, which is always an exception). As a matter of fact, the methods of primitive accumulation were anything but peaceful and idyllic.

What is Primitive Accumulation? The capitalist system requires the complete separation of laborers from all property in the means by which they can do their labor (like land, tools, etc.). Once capitalist production is established, it not only maintains this separation but reproduces it on a continually growing scale.

Therefore, the process that clears the way for the capitalist system can only be the process that takes away from the laborer the possession of their means of production. The so-called primitive accumulation, then, is nothing else than the historical process of divorcing the producer from the means of production—separating the worker from the things they need to work.

How Capitalism Emerged from Feudalism The economic structure of capitalist society has grown out of the economic structure of feudal society. The breakdown (dissolution) of feudal society set free the elements needed for capitalist society.

The laborer could only sell their own labor-power after two things happened:

1. They ceased to be attached to the soil (as a serf).
2. They ceased to be the slave, serf, or bondsman (a person tied to service) of another person.

To become a “free” seller of labor-power—someone who carries their commodity (their ability to work) wherever they can find a market—the laborer also had to escape from the control of the guilds. Guilds had strict rules for apprentices and journeymen, and their regulations hindered free labor. So, the historical movement that changes producers into wage-workers appears, on one hand, as their freedom (emancipation) from serfdom and from the restrictions of the guilds. This is the only side that bourgeois historians (historians who favor the capitalist class) tend to see.

A “Freedom” with a Catch But, on the other hand, these newly freed people became sellers of themselves only after they had been robbed of all their own means of production (their land, tools, etc.). They were also robbed of all the guarantees of existence (like access to common land) that the old feudal arrangements had provided. And the history of this process of being robbed (their expropriation) is written in the history books of mankind in letters of blood and fire.

The Rise of the Capitalist Class The industrial capitalists, these new powerful figures (potentates), had to displace two groups:

1. The guild masters of handicrafts.
2. The feudal lords, who owned the sources of wealth (mainly land).

In this respect, the capitalists’ conquest of social power looks like the result of a successful struggle against both feudal lordship (with its disgusting special privileges) and against the guilds (and the restrictions they placed on the free development of production and the free exploitation of man by man). However, these “knights of industry” (chevaliers d’industrie) only succeeded in replacing the “knights of the sword” (feudal lords) by taking advantage of events for which they themselves were not responsible. They have risen by methods as vile (wicked) as those by which the Roman freedman (an ex-slave) once made himself the master of his former owner (patronus).

How Capitalism Began: A Transformation of Servitude The starting point of the development that created both the wage-laborer and the capitalist was the servitude (bondage) of the laborer. The advance consisted in a change in the form of this servitude—the transformation of feudal exploitation into capitalist exploitation. To understand its progress, we don’t need to go back very far. Although we find the first early signs of capitalist production in the 14th or 15th century, occurring occasionally (sporadically) in certain Mediterranean towns, the capitalist era truly dates from the 16th century. Wherever it appears, the abolition of serfdom has long been achieved, and the highest development of the Middle Ages—the existence of independent, self-governing (sovereign) towns—has long been declining.

The Main Event: Kicking Peasants Off the Land (The Case of England) In the history of primitive accumulation, those moments are particularly important when great masses of people are suddenly and forcibly torn from their means of subsistence (their ways of making a living, especially land). They are then hurled onto the labor market as “free” and “unattached” proletarians (workers with nothing to sell but their labor). The expropriation of the peasant from the soil (taking away their land) is the basis of this whole process. We will study its history in England.

England in the 14th and 15th Centuries: A Land of Free Peasants In England, serfdom had practically disappeared by the last part of the 14th century. The vast majority of the population then, and even more so in the 15th century, consisted of free peasant proprietors (farmers who owned their own land). On the larger noble estates (seignorial domains), the old bailiff (manager), who was often a serf himself, was replaced by the free farmer. Agricultural wage-laborers consisted partly of peasants who used their leisure time to work on the large estates. Another part was an independent, special class of wage-laborers, though they were few in number. These wage-laborers were also practically peasant farmers themselves because, besides their wages, they were given farmland (arable land) of 4 or more acres along with their cottages. Furthermore, they, along with the rest of the peasants, enjoyed the use (usufruct) of the common land. This common land provided pasture for their cattle and furnished them with timber, firewood, turf (for fuel), etc.

In all countries of Europe, feudal production was characterized by dividing the soil among the greatest possible number of sub-feudatories (people holding land under a lord). The power of the feudal lord, like that of a king, depended not on the size of his rent income but on the number of his subjects. And the number of subjects depended on the number of peasant proprietors. Therefore, although English land after the Norman conquest (1066) was distributed in gigantic baronies (large territories ruled by barons), often including hundreds of old Anglo-Saxon lordships, it was covered with many small peasant properties. Only here and there were these interspersed with great noble estates. Such conditions, together with the prosperity of the towns (so characteristic of the 15th century), allowed for much wealth among the people. However, it excluded the possibility of specifically capitalist wealth (large concentrations of capital).

Early Steps: Breaking Up Feudal Bands The prelude to the revolution that laid the foundation of the capitalist mode of production was played in the last third of the 15th and the first third of the 16th century. A mass of free proletarians was thrown onto the labor market by the breaking up of the bands of feudal retainers (armed followers who uselessly filled the houses and castles of lords). Although the royal power (the king), itself a product of bourgeois development and striving for absolute sovereignty (total power), forcibly sped up the dissolution of these bands of retainers, it was by no means the sole cause. In defiant conflict with the king and parliament, the great feudal lords created an incomparably larger proletariat by:

1. Forcibly driving the peasantry from the land (to which the peasants had the same feudal right as the lord himself).
2. Wrongfully seizing (usurpation of) the common lands.

The Enclosure Movement: “Sheep Eat Men” The rapid rise of wool manufacturing in Flanders (a region in Europe) and the corresponding rise in the price of wool in England gave the direct push for these evictions. The old nobility had been consumed by the great feudal wars. The new nobility was a child of its time, for whom money was the greatest power. Therefore, their cry was: transform arable land (for crops) into sheep-walks (pastures for sheep).

Harrison, in his “Description of England,” (prefixed to Holinshed’s Chronicle), describes how the expropriation (dispossession) of small peasants was ruining the country. The homes of the peasants and the cottages of the laborers were demolished (razed to the ground) or left to decay. Harrison said that if old records were checked, it would be clear that countless houses and small farms had disappeared, that the soil fed far fewer people, and that many towns had decayed, though a few new ones had appeared. He could say much about towns and villages pulled down for sheep-walks, with only the lordships remaining. The complaints of these old chroniclers are always exaggerated, but they faithfully reflect the impression made on people at the time by this revolution in the conditions of production.

Laws Try to Stop It – And Fail Legislation was terrified by this revolution. In his history of King Henry VII, Francis Bacon says: “Inclosures at that time (1489) began to be more frequent, whereby arable land was turned into pasture, which was easily managed by a few herdsmen; and tenancies for years, lives, and at will (on which much of the yeomanry lived) were turned into demesnes (land kept for the lord). This bred a decay of people, and (consequently) a decay of towns, churches, tithes (church taxes), and the like… In remedying this inconvenience the king’s wisdom was admirable, and the parliament’s at that time… They took a course to take away depopulating inclosures, and depopulating pasturage.”

• An Act of Henry VII in 1489 forbade the destruction of all “houses of husbandry” (farmhouses) to which at least 20 acres of land belonged.
• An Act of 25 Henry VIII renewed this law. It stated that many farms and large flocks of animals, especially sheep, were concentrated in the hands of a few men. This had caused land rent to rise significantly, tillage (crop farming) to decline, churches and houses to be pulled down, and “marvellous numbers of people” to be deprived of the means to support themselves and their families. The Act, therefore, ordered the rebuilding of decayed farmsteads and fixed a proportion between land for crops and land for pasture.
• An Act of 1533 stated that some owners possessed 24,000 sheep and limited the number any one person could own to 2,000. (In his book Utopia from around 1516, Thomas More speaks of a remarkable country where sheep devour men).

The cry of the people and the legislation directed against the expropriation of small farmers and peasants, for 150 years after Henry VII, were equally fruitless (had no effect).

The Reformation: More Land Grabs In the 16th century, the process of forcibly expropriating the people received a new and frightful impulse from the Reformation (the religious movement that led to Protestantism) and the huge looting (colossal spoliation) of church property that followed. At the time of the Reformation, the Catholic Church was a feudal proprietor (owner) of a great part of English land. The suppression of the monasteries and similar actions hurled their inhabitants into the proletariat. The estates of the church were largely:

• Given away to greedy (rapacious) royal favorites.
• Or sold at a nominal (very low) price to speculating farmers and citizens, who then drove out the hereditary sub-tenants (long-term renters) en masse (as a large group) and combined their holdings into larger farms. The legally guaranteed property of the poorer folk in a part of the church’s tithes (church taxes) was tacitly confiscated (taken away without open declaration).

The Disappearance of the Independent Peasant (Yeomanry) Even in the last decades of the 17th century, the yeomanry (the class of independent peasants) was more numerous than the class of tenant farmers. They had formed the backbone of Cromwell’s army and, even according to Macaulay (a historian), were a favorable contrast to the drunken local gentry (squires) and their servants, the country clergy (who sometimes had to marry their master’s cast-off mistresses). Even agricultural wage-laborers were still part-users (co-proprietors) of the common land.

• By about 1750, the yeomanry had disappeared.
• By the last decades of the 18th century, the last trace of the common land available to agricultural laborers had also vanished.

Legal Tricks: Landlords Solidify Their Power After the restoration of the Stuart monarchy, the landed proprietors (landowners) carried out, by legal means, an act of wrongful seizure (usurpation) that was often done on the European continent without any legal formality.

• They abolished the feudal tenure of land, meaning they got rid of all their obligations to the State that came with holding land under the feudal system.
• They “indemnified” (compensated) the State by imposing taxes on the peasantry and the rest of the common people.
• They claimed for themselves the rights of modern private property in estates to which they had only a feudal title.
• Finally, they passed Laws of Settlement, which had a similar effect on the English agricultural laborer as the edict (decree) of the Tartar Boris Godunov had on the Russian peasantry (tying them to specific areas).

The “Glorious Revolution” and Theft of State Lands The “Glorious Revolution” (of 1688) brought into power, along with William of Orange, the landlords and capitalist appropriators of surplus-value. They began the new era by practicing, on a massive scale, thefts of state lands—thefts that had previously been managed more modestly. These estates were:

• Given away.
• Sold at a ridiculous (very low) figure.
• Or even annexed to private estates by direct seizure. All this happened without the slightest attention to legal properness (etiquette). The crown lands (state lands) thus fraudulently taken, together with the robbery of Church estates (those not lost during the republican revolution), form the basis of the vast, princely domains of the English oligarchy (rule by a small, wealthy group) today. The bourgeois capitalists favored this operation with several aims in mind, including:
• Transforming land into a commercial article (something to be bought and sold).
• Extending modern agriculture on a large-farm system.
• Increasing their supply of “free” agricultural proletarians ready to be hired. Besides, the new landed aristocracy was the natural ally of the new “bankocracy” (powerful bankers), the newly emerged high finance, and the large manufacturers, who at that time depended on protective duties (taxes on imports).

Clearing Common Lands While small farmers on yearly leases (a dependent and insecure group) replaced the independent yeoman, the systematic robbery of Communal lands especially helped, next to the theft of State lands, to swell those large farms. These were called “capital farms” or “merchant farms” in the 18th century. This process also served to “set free” the agricultural population, turning them into proletarians for manufacturing industry.

By the 19th century, the very memory of the connection between the agricultural laborer and communal property had, of course, vanished. Not to mention more recent times, the agricultural population received no compensation at all (not a farthing) for the 3,511,770 acres of common land stolen from them between 1801 and 1831. This theft was accomplished by parliamentary tricks (devices) and the land was presented to landlords by landlords.

The Final Act: “Clearing of Estates” in Scotland The last process of wholesale expropriation of the agricultural population from the soil is, finally, the so-called clearing of estates—that is, sweeping people off them. All the English methods considered so far culminated in “clearing.” But what “clearing of estates” really means, we learn best in the “promised land” of modern romance, the Highlands of Scotland.

The Highland Celts were organized in clans, and each clan owned the land on which it was settled. The representative of the clan, its chief or “great man,” was only the owner of this property in name (titular owner), just as the Queen of England is the titular owner of all national soil. When the English government succeeded in suppressing the internal wars (intestine wars) of these “great men” and their constant raids (incursions) into the Lowland plains, the chiefs of the clans did not give up their long-standing trade as robbers; they only changed its form. On their own authority, they transformed their nominal right to the land into a right of private property. As this brought them into conflict with their clansmen, they resolved to drive them out by open force.

In the 18th century, the hunted-out Gaels (Highland Celts) were forbidden to emigrate from the country. This was done to drive them by force to Glasgow and other manufacturing towns. As an example of the method used in the 19th century, the “clearing” made by the Duchess of Sutherland will suffice. This person decided, upon taking over her governance, to carry out a radical economic “cure.” She aimed to turn the whole county—whose population had already been reduced to 15,000 by similar earlier processes—into a sheep-walk (a vast sheep pasture). From 1814 to 1820, these 15,000 inhabitants, about 3,000 families, were systematically hunted and rooted out.

• All their villages were destroyed and burnt.
• All their fields were turned into pasturage. British soldiers enforced this eviction and clashed with the inhabitants. One old woman was burnt to death in the flames of her hut, which she refused to leave. Thus, this “fine lady” took possession of 794,000 acres of land that had belonged to the clan from time immemorial. She assigned to the expelled inhabitants about 6,000 acres on the sea-shore—roughly 2 acres per family. These 6,000 acres had, until this time, lain waste and brought in no income to their owners. The Duchess, in the “nobility of her heart,” actually went so far as to let these lands at an average rent of 2 shillings and 6 pence per acre to the clansmen, who for centuries had shed their blood for her family. She divided the whole of the stolen clan-land into 29 great sheep farms, each inhabited by a single family, mostly imported English farm-servants. In the year 1825, the 15,000 Gaels were already replaced by 131,000 sheep.

The Highland Clearances Continue: From Sheep to Deer The remaining original inhabitants (aborigines), thrown onto the sea-shore, tried to live by catching fish. But they had to pay even more dearly for their romantic, mountain-based worship (idolatry) of the “great men” of the clan. The smell of their fish reached the noses of these great men. They sensed an opportunity to make money from it and rented out the sea-shore to the big fish sellers (fishmongers) of London. For the second time, the Gaels (the Highland people) were hunted out.

But finally, some of the sheep-walks (sheep pastures) were turned into deer preserves (large areas for hunting deer). Everyone knows that there are no real forests in England in the way Scotland has them. The deer in the parks of the great English landowners are like tame domestic cattle, as fat as London city officials (aldermen). Scotland is therefore the last refuge of this “noble passion” for hunting.

Somers wrote in 1848 about the Highlands: “New forests are springing up like mushrooms… The transformation of their land into sheep-walks drove the Gaels onto barren, infertile land (sterile tracks of soil). Now deer are replacing sheep; and these deer are once more reducing the small remnants of the population to even more crushing poverty (grinding penury). Deer forests and people cannot co-exist. One or the other must give way. Let the forests be increased in number and size during the next quarter of a century, as they have been in the last, and the Gaels will perish from their native soil… This movement among the Highland proprietors (landowners) is for some a matter of ambition… for some a love of sport… while others, of a more practical mind, follow the trade in deer with an eye only to profit. For it is a fact that a mountain range laid out as a forest is, in many cases, more profitable to the owner than when let as a sheep-walk… The huntsman who wants a deer-forest limits his offers only by the size of his wallet… Sufferings have been inflicted in the Highlands scarcely less severe than those caused by the policy of the Norman kings… Deer have received larger areas, while men have been hunted into an ever smaller circle… One by one, the liberties of the people have been cut down… And the oppressions are increasing daily… The clearance and dispersion of the people is pursued by the proprietors as a settled policy, as an agricultural necessity, just as trees and brushwood are cleared from the wild lands of America or Australia; and the operation goes on in a quiet, business-like way.”

A Summary of “Primitive Accumulation” Methods The looting (spoliation) of the Church’s property, the fraudulent selling off (alienation) of State lands, the robbery of the common lands, the wrongful seizure (usurpation) of feudal and clan property and its transformation into modern private property under circumstances of ruthless violence and intimidation (reckless terrorism)—these were all the so-called peaceful, “idyllic” methods of primitive accumulation. They conquered the land for capitalist agriculture, made the soil an essential part of capital, and created for the town industries the necessary supply of an outlawed proletariat (workers cast out from the old system and without rights).

Creating a Class of Vagabonds The proletariat, thus deprived of its means of existence, could not possibly be absorbed by the newly developing (nascent) factories as fast as it was thrown upon the world. On the other hand, these people, suddenly dragged from their usual way of life (wonted mode of life), could not as suddenly adapt themselves to the discipline of their new condition. They were turned, as a large group (en masse), into beggars, robbers, and vagabonds (homeless wanderers). Hence, at the end of the 15th and during the whole of the 16th century, throughout Western Europe, there was bloody legislation against vagabondage. The fathers of the present working class were punished (chastised) for being forcibly transformed into vagabonds and paupers. Legislation treated them as “voluntary” criminals and assumed that it depended on their own good will to go on working under the old conditions that no longer existed.

The State Helps Control the New Working Class At the time when the capitalist system of production began, the rising bourgeoisie used the power of the State to:

• “Regulate” wages (usually to keep them low).
• Lengthen the working day.
• Keep the laborer himself in a state of dependence. This is an essential part of the so-called primitive accumulation.

The class of wage-laborers, which arose in the latter half of the 14th century, formed then and in the following century only a very small part of the population. Their position was well protected by the independent peasant farmers in the country and the guild organizations in the towns. In both country and town, masters and workmen stood close together socially. Variable capital (money for wages) was much larger than constant capital (money for tools, materials, etc.). Therefore, the demand for wage-labor grew rapidly with every accumulation of capital, while the supply of wage-labor followed only slowly.

Where Did the First Capitalists Come From? Now that we have considered the forcible creation of a class of outlawed proletarians, the question remains: where did the capitalists originally come from? For the expropriation (dispossession) of the agricultural population directly creates only great landed proprietors.

The Rise of the Capitalist Farmer However, as far as the origin (genesis) of the capitalist farmer is concerned, we can trace it because it was a slow process evolving over many centuries. In England, the first form of the farmer was the bailiff, who was himself a serf.

• During the second half of the 14th century, he was replaced by a farmer to whom the landlord provided seed, cattle, and tools (implements). This farmer’s condition was not very different from that of the peasant, only he exploited more wage-labor.
• Soon he became a “half-farmer.” He provided one part of the agricultural stock (equipment, animals), and the landlord provided the other. They divided the total product in proportions determined by contract. This form quickly disappeared in England.
• It gave way to the farmer proper. This farmer makes his own capital grow by employing wage-laborers. He pays a part of the surplus-product (extra produce), in money or in kind, to the landlord as rent.

So long as the independent peasant and the farm-laborer (who worked for himself as well as for wages) enriched themselves by their own labor (during the 15th century), the circumstances of the farmer and his scale of production were equally ordinary (mediocre). The agricultural revolution, which began in the last third of the 15th century and continued for almost the whole of the 16th century (except its last decades), enriched the farmer just as speedily as it impoverished the mass of the agricultural people.

• The wrongful seizure (usurpation) of the common lands allowed him to greatly increase his stock of cattle almost without cost.
• The cattle, in turn, yielded him a richer supply of manure for tilling the soil.

To this was added, in the 16th century, a very important element. At that time, contracts for farms ran for a long time, often for 99 years. The progressive fall in the value of precious metals (gold and silver), and therefore of money (due to discoveries in the Americas), brought the farmers golden fruit. Apart from all the other circumstances discussed above, it lowered wages in real terms. A portion of wages was now added to the profits of the farm. The continuous rise in the price of grain (corn), wool, meat—in a word, of all agricultural produce—swelled the money capital of the farmer without any action on his part, while the rent he paid was calculated on the old, lower value of money. Thus, these farmers grew rich at the expense of both their laborers and their landlords. No wonder, therefore, that England, at the end of the 16th century, had a class of capitalist farmers who were rich, considering the circumstances of the time.

How Dispossession Created the Home Market The expropriation and expulsion of the agricultural population, which happened intermittently but was renewed again and again, supplied (as we saw) the town industries with a mass of proletarians entirely unconnected with the old craft guilds. The thinning-out of the independent, self-supporting peasants not only corresponded to the increasing density of the industrial proletariat. Something else happened: in spite of the smaller number of its cultivators, the soil produced as much or more food and materials as before. This was because the revolution in land ownership was accompanied by:

• Improved methods of farming.
• Greater cooperation among workers.
• Concentration of the means of production, etc.
• And because agricultural wage-laborers were not only made to work more intensely, but the field of production on which they worked for themselves became smaller and smaller.

Therefore, with the “setting free” of a part of the agricultural population, their former means of nourishment (food) were also “set free.” The expropriated peasant now had to buy the value of this food in the form of wages from his new master, the industrial capitalist. What holds true for means of subsistence also holds true for the raw materials of industry produced by home agriculture. Suppose, for example, a part of the Westphalian peasants in Germany, who, at the time of Frederic II, all spun flax, were forcibly expropriated and hunted from the soil. And suppose the other part that remained were turned into day-laborers for large farmers. At the same time, large factories for flax-spinning and weaving arise, in which the “set free” men now work for wages. The flax looks exactly as before. Not a fiber of it has changed, but a new social soul has entered its body. It now forms a part of the constant capital of the factory owner.

• Formerly, it was divided among many small producers, who cultivated it themselves and, with their families, spun it on a small scale (in retail fashion).
• Now, it is concentrated in the hands of one capitalist, who sets others to spin and weave it for him. The extra labor spent in flax-spinning formerly resulted in extra income for numerous peasant families, or perhaps, in Frederic II’s time, in taxes for the state. Now, it results in profit for a few capitalists. The spindles and looms, formerly scattered across the countryside, are now crowded together in a few great labor-factories (“labour-barracks”), along with the laborers and the raw material. And spindles, looms, and raw material are now transformed from means of independent existence for the spinners and weavers into means for commanding them and sucking unpaid labor out of them. One does not perceive, when looking at the large factories and large farms, that they originated from combining many small centers of production, and were built up by the expropriation of many small independent producers.

The expropriation and eviction of a part of the agricultural population not only set free laborers, their means of subsistence, and material for labor for industrial capital; it also created the home market.

Formerly, the peasant family produced the means of subsistence and the raw materials, which they themselves, for the most part, consumed. These raw materials and means of subsistence have now become commodities (goods for sale). The large farmer sells them; he finds his market in the factories (manufactures). Yarn, linen, coarse woolen stuffs—things whose raw materials had been within the reach of every peasant family, and had been spun and woven by it for its own use—were now transformed into articles of manufacture. The country districts at once served as markets for these factory goods. Thus, hand in hand with the expropriation of the self-supporting peasants and their separation from their means of production, goes the destruction of rural domestic industry (crafts done in rural homes). And only the destruction of rural domestic industry can give the internal market of a country the size and stability (consistence) that the capitalist mode of production requires. Still, the manufacturing period, properly so-called, does not succeed in carrying out this transformation radically and completely. Modern industry alone, with its machinery, supplies the lasting basis for capitalist agriculture, radically expropriates the enormous majority of the agricultural population, and completes the separation between agriculture and rural domestic industry, tearing up its roots—spinning and weaving. It therefore also, for the first time, conquers the entire home market for industrial capital.

The Rise of the Industrial Capitalist The origin (genesis) of the industrial capitalist did not happen in such a gradual way as that of the farmer. Doubtless, many small guild-masters, and even some wage-laborers, transformed themselves into small capitalists. And then (by gradually extending their exploitation of wage-labor and corresponding accumulation of capital) they became full-blown capitalists. The very slow speed (snail’s pace) of this method did not match the commercial needs of the new world market created by the great discoveries of the end of the 15th century. But the Middle Ages had handed down two distinct forms of capital:

1. Usurer’s capital (money lent at interest).
2. Merchant’s capital (capital used in trade).

The money capital formed through usury and commerce was prevented from turning into industrial capital by the feudal system in the country and by the guild organizations in the towns. Even as late as 1794, small clothmakers in Leeds, England, sent a delegation to Parliament with a petition for a law to forbid any merchant from becoming a manufacturer. These restrictions (fetters) vanished with the breakdown of feudal society and with the expropriation and partial eviction of the country population. The new factories were established at seaports, or at inland locations beyond the control of the old municipalities (town governments) and their guilds. Hence, in England, there was a bitter struggle by the old guild towns (corporate towns) against these new industrial centers (nurseries).

Global Plunder: Key Moments in Primitive Accumulation The discovery of gold and silver in America, the wiping out (extirpation), enslavement, and entombment in mines of the native (aboriginal) population, the beginning of the conquest and looting of the East Indies, the turning of Africa into a hunting ground (warren) for the commercial hunting of black-skinned people (the slave trade)—all these signalized the dawn of the era of capitalist production. These so-called “peaceful” (idyllic) proceedings are the chief driving forces (momenta) of primitive accumulation. On their heels followed the commercial wars of the European nations, with the entire globe as their stage. These wars began with the revolt of the Netherlands from Spain, grew to giant dimensions in England’s anti-Jacobin war (against revolutionary France), and are still going on in events like the Opium Wars against China.

The different driving forces of primitive accumulation spread, more or less in chronological order, particularly over Spain, Portugal, Holland, France, and England. In England, at the end of the 17th century, they came together in a systematic combination involving:

• The colonies.
• The national debt.
• The modern mode of taxation.
• The protectionist system (protecting home industries with tariffs).

These methods depend in part on brute force, for example, the colonial system. But they all use the power of the State to hasten, in an artificially sped-up (hothouse) fashion, the process of transforming the feudal mode of production into the capitalist mode, and to shorten the transition. Force is the midwife of every old society pregnant with a new one. Force itself is an economic power.

The Brutality of the Colonial System Of the Christian colonial system, W. Howitt, a man who specialized in writing about Christianity, said: “The barbarities and desperate outrages of the so-called Christian race, throughout every region of the world, and upon every people they have been able to subdue, are not to be paralleled by those of any other race, however fierce, however untaught, and however reckless of mercy and of shame, in any age of the earth.” The history of the colonial administration of Holland—and Holland was the leading capitalist nation of the 17th century—“is one of the most extraordinary relations of treachery, bribery, massacre, and meanness.” To secure Malacca (a port city), the Dutch corrupted the Portuguese governor. He let them into the town in 1641. They hurried at once to his house and assassinated him, to “abstain” from (avoid) paying £21,875, the price of his treason. Wherever they set foot, devastation and depopulation followed. Banjuwangi, a province of Java, numbered over 80,000 inhabitants in 1750; in 1811, only 8,000 remained.

The English East India Company: Wealth from Plunder The English East India Company, as is well known, obtained not only political rule in India but also the exclusive monopoly of the tea trade, as well as of the Chinese trade in general, and of the transport of goods to and from Europe. But the coastal trade of India and between the islands, as well as the internal trade of India, were the monopoly of the higher officials of the company. The monopolies of salt, opium, betel, and other commodities were inexhaustible mines of wealth. The officials themselves fixed the prices and plundered the unhappy Hindus at will. The Governor-General took part in this private traffic. His favorites received contracts under conditions that allowed them, cleverer than alchemists, to make gold out of nothing. Great fortunes sprang up like mushrooms in a day; primitive accumulation went on without the advance of a single shilling. The trial of Warren Hastings (a British governor in India) is full of such cases. Here is an instance: A contract for opium was given to a certain Sullivan when he was leaving on an official mission to a part of India far from the opium district. Sullivan sold his contract to a Mr. Binn for £40,000; Binn sold it the same day for £60,000. The ultimate purchaser who carried out the contract declared that, after all, he made an enormous gain. According to one of the lists presented to Parliament, the Company and its officials received £6,000,000 from the Indians as gifts between 1757 and 1766. Between 1769 and 1770, the English manufactured a famine by buying up all the rice and refusing to sell it again, except at fabulous (extremely high) prices.

Colonies Fuel Capital Accumulation The colonial system ripened trade and navigation like a hothouse. The “Societies Monopolia” (monopoly companies praised by Luther) were powerful levers for the concentration of capital. The colonies provided:

• A market for the budding new factories.
• Increased accumulation through the monopoly of this market. The treasures captured outside Europe by undisguised looting, enslavement, and murder floated back to the mother country and were turned into capital there. Holland, which first fully developed the colonial system, stood at the peak (acme) of its commercial greatness by 1648. It was “in almost exclusive possession of the East Indian trade and the commerce between the south-west and north-east of Europe. Its fisheries, navy (marine), and manufactures surpassed those of any other country.”

Holland: Wealth Built on Worker Hardship The total capital of the Dutch Republic was probably more significant than that of all the rest of Europe combined. (A writer named Gülich forgets to add that by 1648, the people of Holland were more overworked, poorer, and more brutally oppressed than those in the rest of Europe.)

Today, industrial power usually means commercial power. However, in the earlier period of manufacturing (before full-scale modern industry), it was the other way around: commercial power gave a country industrial dominance. This is why the colonial system played such a dominant (preponderant) role at that time. It was like a “strange God” that perched itself on the altar side-by-side with the old Gods of Europe. Then, one day, with a shove and a kick, it overthrew them all. This new system proclaimed that making surplus-value (profit) was the sole end and aim of humanity.

The Rise of Public Debt The system of public credit—that is, of national debts—whose origins we can find in Genoa and Venice as early as the Middle Ages, took hold of Europe generally during the manufacturing period. The colonial system, with its sea trade and commercial wars, acted as a “forcing-house,” speeding up the development of national debt. Thus, it first took root in Holland. National debts, which mean the selling off of future state revenue or the state becoming indebted (the alienation of the State)—whether the state was despotic, constitutional, or republican—characterized the capitalist era. The only part of the so-called “national wealth” that actually enters into the collective possessions of modern peoples is their national debt.

How National Debts Fueled Primitive Accumulation Public debt becomes one of the most powerful drivers (levers) of primitive accumulation. Like magic (with the stroke of an enchanter’s wand), it gives unproductive money the power to multiply (the power of breeding) and thus turns it into capital. This happens without the money having to face the troubles and risks that come with using it in industry or even in usury (lending at high interest). The State’s creditors (those who lend money to the state) actually give nothing away. The sum lent is transformed into public bonds, which are easily tradable and continue to function in their hands just like cash would.

But beyond the class of lazy annuitants (people living off the interest from these bonds) thus created, and the quickly made (improvised) wealth of the financiers who act as middlemen between the government and the nation—as well as the tax-farmers, merchants, and private manufacturers, for whom a good part of every State loan acts like free capital fallen from heaven—the national debt has also given rise to:

• Joint-stock companies.
• Dealings in all kinds of tradable financial documents (negotiable effects).
• Agiotage (speculation in stocks). In a word, it led to stock-exchange gambling and the modern bankocracy (rule by bankers).

The Birth of Modern Banks From their very beginning, the great banks, often decorated with national titles, were merely associations of private speculators. They positioned themselves alongside governments and, thanks to the privileges they received, were able to lend money to the State. Therefore, the accumulation of national debt has no surer measure than the successive rise in the stock (value) of these banks. Their full development dates from the founding of the Bank of England in 1694. The Bank of England began by lending its money to the Government at 8% interest. At the same time, Parliament empowered it to essentially create money from the same capital by lending it again to the public in the form of bank-notes. It was allowed to use these notes for:

• Discounting bills (buying debt at a discount).
• Making advances (loans) on commodities.
• Buying precious metals.

It was not long before this credit-money, made by the bank itself, became the currency in which the Bank of England made its loans to the State and paid the interest on the public debt on behalf of the State. It wasn’t enough that the bank gave with one hand and took back more with the other; even while receiving payments, it remained the eternal creditor of the nation, down to the last shilling advanced. Gradually, it became the inevitable storage place (receptacle) for the country’s gold and silver reserves (metallic hoard) and the central point (centre of gravity) of all commercial credit. At the same time as England stopped burning witches, she began to hang people who forged banknotes. The writings of that time show the powerful effect that the sudden rise of this new group—bankers, financiers, rentiers (people living off investments), brokers, and stock-jobbers (stock market speculators)—had on their contemporaries.

International Credit: Shifting Fortunes With national debt came an international credit system. This system often hides one of the sources of primitive accumulation in one nation or another. For example, the wicked deeds of the Venetian “thieving system” (exploitative trade practices) formed one of the secret bases of the capital-wealth of Holland. Venice, in its decline, lent large sums of money to Holland. The same happened between Holland and England. By the beginning of the 18th century, Dutch manufacturing was far surpassed by England’s. Holland had ceased to be the dominant nation in commerce and industry. Therefore, one of its main businesses from 1701–1776 was lending out enormous amounts of capital, especially to its great rival, England. The same thing is happening today (in 1867, when Marx was writing) between England and the United States.

Modern Taxes: Supporting Debt and Burdening the People Since national debt relies on public revenue (government income) to cover the yearly payments for interest, etc., the modern system of taxation was the necessary partner of the system of national loans. Loans allow the government to meet extraordinary expenses without the taxpayers feeling the burden immediately. However, these loans inevitably lead to increased taxes later on. On the other hand, the raising of taxes caused by the accumulation of debts (contracted one after another) compels the government always to resort to new loans for new extraordinary expenses. Modern government finance (fiscality), which revolves around taxes on the most necessary means of subsistence (like food, thereby increasing their price), thus contains within itself the seed (germ) of automatic progression—taxes tend to keep rising. Over-taxation is not an accident, but rather a principle. In Holland, where this system was first introduced, the great patriot De Witt praised it. He said it was the best system for making the wage-laborer submissive, frugal (thrifty), industrious, and overburdened with labor. However, the destructive influence that this system has on the condition of the wage-laborer concerns us less here than the forcible expropriation (dispossession) of peasants, artisans, and, in a word, all elements of the lower middle class that results from it. On this point, there are not two opinions, even among bourgeois economists. The effectiveness of this system in dispossessing people is further heightened by the system of protectionism, which is one of its essential components.

Protectionism: Forcing Industrial Growth The system of protection (protecting home industries with tariffs on imports) was an artificial means of:

• Manufacturing manufacturers (creating factory owners).
• Expropriating independent laborers (taking away the livelihoods of self-employed workers).
• Capitalizing the national means of production and subsistence (turning them into capital).
• Forcibly shortening the transition from the medieval (feudal) to the modern mode of production.

The European states tore each other apart over the rights to this “invention” (protectionism). Once they entered into the service of the surplus-value makers (capitalists), they didn’t just tax their own people in pursuit of this goal (indirectly through protective duties, directly through export payments/premiums). They also forcibly rooted out all industry in their dependent countries. For example, England did this with the Irish woolen manufacture. On the continent of Europe, following Colbert’s (a French minister) example, the process was much simplified. Here, primitive industrial capital sometimes came directly out of the State treasury.

The colonial system, public debts, heavy taxes, protectionism, commercial wars, etc.—these “children” of the true manufacturing period—grew enormously during the early stages (infancy) of modern industry.

A Violent Transition So much trouble was thus required to complete the process of separation between laborers and the conditions of labor. This was needed to transform, at one pole (end), the social means of production and subsistence into capital, and at the opposite pole, the mass of the population into wage-laborers. If money, according to a writer named Augier, “comes into the world with a congenital (from birth) blood-stain on one cheek,” then capital comes dripping from head to foot, from every pore, with blood and dirt.

CHAPTER FOUR

WHAT CAPITALIST ACCUMULATION LEADS TO: The Rise and Fall of Capitalist Property

What “Primitive Accumulation” Really Means So, what does the primitive accumulation of capital—its historical origin or beginning—ultimately mean? If it’s not just the immediate transformation of slaves and serfs into wage-laborers (which would just be a change in the form of exploitation), it simply means the expropriation (taking away property) of the immediate producers. In other words, it means the ending of private property that was based on the owner’s own work.

The Era of the Small Producer The private property of the laborer in their means of production (tools, land, etc.) is the foundation of petty industry (small-scale production). Petty industry, in turn, is an essential condition for the development of social production and for the free individuality of the laborer themself, at a certain stage of history. Of course, this small-scale mode of production also exists under slavery, serfdom, and other states of dependence. But it truly flourishes and unleashes all its energy only when the laborer is the private owner of their own means of labor, which they themselves set in action. Examples include:

• The peasant owning the land which they cultivate.
• The artisan owning the tool which they handle like a highly skilled master (a virtuoso).

This way of producing things requires:

• The land to be divided into small plots (parcelling of the soil).
• Other means of production to be scattered.

Because it excludes the concentration of these means of production, it also excludes:

• Cooperation on a large scale.
• Division of labor within each separate production process (as opposed to between different crafts).
• Society’s control over and productive use of the forces of nature.
• The free development of society’s productive powers.

It is compatible only with a system of production, and a society, that moves within narrow and more or less primitive limits. To try to keep it going forever (perpetuate it) would be to officially declare that everything should remain average or ordinary (universal mediocrity).

Why Small-Scale Production Had to End At a certain stage of development, this petty mode of production brings forth the material means (agencies) for its own breakdown (dissolution). From that moment, new forces and new passions spring up in the heart of society. But the old social organization chains (fetters) them and keeps them down. It must be completely destroyed (annihilated); it is annihilated.

Its annihilation involves:

• The transformation of individualized and scattered means of production into socially concentrated ones.
• The change from the tiny (pigmy) property of many into the huge property of a few.
• The expropriation of the great mass of the people from the soil, from their means of subsistence (food, etc.), and from their means of labor (tools). This fearful and painful expropriation of the mass of people forms the introduction (prelude) to the history of capital.

Two Forms of Private Property Self-earned private property—which is based, so to speak, on the direct connection (fusing together) of the isolated, independent laborer with the conditions of their labor—is replaced (supplanted) by capitalistic private property. Capitalistic private property rests on the exploitation of the labor of others who are free only in name (nominally free labor)—that is, on wage-labor.

Capitalism Develops: The Next Wave of Expropriation As soon as this process of transformation has sufficiently broken down (decomposed) the old society from top to bottom; as soon as the laborers are turned into proletarians (workers who must sell their labor); as soon as their means of labor are turned into capital; and as soon as the capitalist mode of production is fully established (stands on its own feet); then the further socialization of labor (labor becoming more organized and cooperative on a large scale) and the further transformation of the land and other means of production into socially exploited means of production—and therefore, the further expropriation of private proprietors—takes a new form.

What is now to be expropriated is no longer the laborer working for themself, but the capitalist exploiting many laborers. This expropriation is accomplished by the action of the immanent laws of capitalistic production itself—laws that operate from within the system. It happens through the centralization of capital. One capitalist always “kills” (drives out of business) many smaller ones.

Results of Centralization Hand in hand with this centralization, or this expropriation of many capitalists by a few, the following things develop on an ever-expanding scale:

• The cooperative form of the labor process.
• The conscious technical application of science.
• The economizing of all means of production through combined, socialized labor.
• The entanglement of all peoples in the net of the world market.
• And with this, the international character of the capitalist regime.

Growing Misery, Growing Revolt Along with the constantly diminishing number of magnates of capital (very wealthy and powerful capitalists), who wrongfully seize (usurp) and exclusively control (monopolize) all advantages of this process of transformation, there grows:

• The mass of misery.
• Oppression.
• Slavery.
• Degradation.
• Exploitation.

But with this too grows the revolt of the working class. The working class is always increasing in numbers and is disciplined, united, and organized by the very mechanism of the process of capitalist production itself.

Capitalism Reaches Its Limit The monopoly of capital becomes a chain (fetter) on the mode of production, which has sprung up and flourished alongside it and under it. The centralization of the means of production and the socialization of labor at last reach a point where they become incompatible with their capitalist “shell” (integument or framework). This shell is burst apart violently (burst asunder). The death bell (knell) of capitalist private property sounds. The expropriators are expropriated (those who took property from others will now have their property taken from them).

The End of Capitalist Private Property: A New Kind of Property The capitalist way of appropriating things (taking ownership), which is the result of the capitalist mode of production, is capitalist private property. This is the first negation (or cancellation) of individual private property, which was founded on the labor of the proprietor (the owner working for themselves).

But capitalist production, with the unavoidability of a law of nature, creates the conditions for its own negation (its own overthrow). This is the “negation of the negation.” This second negation does not re-establish the old kind of private property for individuals. Instead, it establishes individual property based on the achievements (acquisitions) of the capitalist era: that is, on:

• Cooperation.
• And the common possession (shared ownership) of the land and of the means of production, which are themselves produced by labor.

An Easier Transformation Ahead? The transformation of scattered private property, arising from individual labor, into capitalist private property was, naturally, a process incomparably more long and drawn out (protracted), violent, and difficult than the transformation of capitalistic private property—which already practically rests on socialized production—into socialized property.

• In the former case (primitive accumulation), we had the expropriation of the mass of the people by a few usurpers (those who wrongfully seized property).
• In the latter case (the coming revolution), we will have the expropriation of a few usurpers by the mass of the people.

CHAPTER FIVE

MONEY: The Universal Exchanger

Goods (commodities) can’t go to the market and trade themselves. So, we must turn to their keepers or owners.

Why People Exchange Goods (Commodities) A commodity is not directly useful to its owner if they plan to sell it. If it were, they wouldn’t bring it to the market.

• A commodity is useful to others (non-owners).
• For its owner, its only direct usefulness is as a store of exchange-value—something that holds value and can be traded. It is, therefore, a means of exchange. So, the owner will happily part with it for other commodities whose usefulness (use-value) is of service to them.

In short:

• All commodities are not directly useful to their owners (who want to sell them).
• All commodities are useful to their non-owners (who might want to buy them). Consequently, they must all change hands. This change of hands is what we call exchange.

How Exchange Begins and Develops The sale of a useful object only becomes possible when someone has more of it than they personally need. When this happens, the people involved in a potential trade just need to unofficially consider each other as the private owners of such objects. But this state of mutual independence as private owners doesn’t exist in early societies where property is owned in common (shared by the group). Examples include a large family group (patriarchal family), an ancient Indian community, or a Peruvian Inca State. Therefore, individual members of such a community could not exchange their goods as private commodities.

The exchange of commodities first begins on the boundaries of such communities—where they come into contact with other similar communities or their members. As soon as the custom of exchanging things is established, it spreads to trade within the community as well.

At first, the amounts that are considered equal in a trade (the proportions in which they are exchangeable) are quite a matter of chance. But over time, the need for foreign useful objects gradually becomes established. The constant repetition of exchange makes it a normal social activity. Therefore, in due course, at least some products of labor must be made with the specific intention of exchanging them. From that moment, a firm distinction arises between:

1. The usefulness of an object for consumption (its use-value).
2. Its usefulness for exchange (its exchange-value). Its use-value becomes different from its exchange-value.

On the other hand, the actual quantity of one item that can be exchanged for another (the quantitative proportion) becomes dependent on how much labor it takes to produce them. Custom or habit eventually “stamps” them as values with definite amounts.

The Need for a Universal Exchanger: Money Every owner of commodities wants to trade their goods only for other commodities whose usefulness can satisfy their own wants. However, they would still be willing to trade their goods for any other kind of commodity that has the same value, whether their own commodity is useful to the owner of the other commodity or not. This creates a problem. Other owners won’t want to acquire commodities that are of no use to them. So, if the exchange of commodities becomes customary, a special commodity is needed. This special commodity must possess usefulness (use-value), not just for one or two people, but for all owners of commodities without exception. It must be a commodity that offers the possibility of exchanging it for every other sort of commodity. In other words, a general medium of exchange is required.

The problem arises at the same time as the means to solve it. As soon as trade develops to a point where commodity owners regularly compare (equate) their goods to various other goods, it becomes customary for different commodities to be exchanged by their owners for a third, uniform (homogeneous) type of commodity that has an equivalent value. This third commodity, being an exchange medium for various other commodities, immediately takes on the character of a general, or social, exchange medium—although at first, this might be within narrow limits. This special character comes and goes with the temporary social contact that created it. It might attach itself first to this commodity, then to that one, in a temporary way.

What Becomes Money? But as exchange develops further, this role of general exchange medium becomes firmly and exclusively fixed to particular sorts of commodities. It solidifies by taking on the money-form. Money is a commodity generally recognized by all commodity-owners as a medium of exchange for all their various commodities, and they use it as such.

The particular kind of commodity that becomes money is at first a matter of accident. Nevertheless, two circumstances have a decisive influence:

1. The money-form attaches itself to the most important articles of exchange coming from outside the community.
2. Or, it attaches itself to a useful object that forms the chief portion of locally owned tradable wealth (indigenous alienable wealth), like cattle.

Nomadic groups (who move from place to place) are the first to develop the money-form. This is because all their worldly goods consist of moveable objects and are therefore directly tradable. Also, their way of life continually brings them into contact with foreign communities, which encourages the exchange of products. Humans have often made other humans, in the form of slaves, serve as the primitive material of money. But humans have never used land for that purpose. Such an idea could only arise in a well-developed bourgeois (capitalist) society. It dates from the last third of the 17th century, and the first attempt to put it into practice on a national scale was made a century later, during the French bourgeois revolution.

Precious Metals: The Ideal Money As exchange breaks through its local boundaries and becomes more widespread, the character of money attaches itself to commodities that are naturally suited to perform the social function of a universal equivalent (something that can represent the value of all other things). Those commodities are the precious metals—gold and silver.

If money is to be able to represent the value of every other commodity in any amount, a material is needed whose every sample has the same uniform qualities. On the other hand, since the difference between amounts of value is purely quantitative (a matter of more or less), the money commodity must be divisible at will and equally capable of being re-united. Gold and silver naturally possess these properties.

The Value of Money Itself Although we may know that gold is money, and therefore directly exchangeable for all other commodities, that fact by no means tells us how much, for instance, 10 pounds of gold is worth. Money, like every other commodity, can only express the size (magnitude) of its value relatively, in other commodities. This value is determined by the labor-time required for its production. It is expressed by the quantity of any other commodity that costs the same amount of labor-time to produce. This quantitative determination of its relative value happens at the source of its production (e.g., at the gold mine) by means of barter (direct trade). When gold steps into circulation as money, its value is already given.

Gold: Our Example of Money Throughout this work, for the sake of simplicity, I will assume gold is the money-commodity.

Money’s First Big Job: Measuring Value The first chief function of gold is to supply commodities with the material for expressing their values. It serves to represent their values as amounts (magnitudes) of the same kind (denomination), qualitatively equal, and quantitatively comparable. It thus serves as a universal measure of value. And only because of this function does gold (or any other money-commodity) become money.

It is not money that makes commodities commensurable (able to be measured by the same standard). It’s the other way around. It is because all commodities, as values, represent realized human labor, and are therefore already commensurable, that their values can be measured by one and the same special commodity. This special commodity can then be converted into the common measure of their values—that is, into money. Money as a measure of value is the outward form (phenomenal form) that the real, underlying measure of value in commodities (labor-time) must necessarily take.

What is Price? The expression of the value of a commodity in gold (or money) is its money-form or price. A single equation, such as “1 ton of iron = 2 ounces of gold,” is now enough to express the value of the iron in a socially valid way. This means it indicates the value of the iron relative to all other commodities, because all other commodities likewise indicate their value in gold. But money itself has no price. If it did, we would have to compare it to itself as its own equivalent, which is meaningless.

The price or money-form of commodities is, like their form of value generally, quite distinct from their physical, touchable (palpable bodily) form. It is, therefore, a purely ideal or mental form. Although invisible, the value of iron, linen, and grain has actual existence in these very articles. It is made perceptible in the mind (ideally) by their equality with gold. The value, or in other words, the quantity of human labor contained in a ton of iron, is expressed in imagination by a quantity of the money-commodity (gold) that contains the same amount of labor as the iron.

The Journey of a Commodity: Selling and Buying (C-M-C) Let us now accompany the owner of some commodity—say, a weaver of linen—to the market, where exchange takes place. His 20 yards of linen has a definite price, say £2.

1. He exchanges his linen for the £2.
2. Then, like a traditional sort of person, he parts with the £2 for a family Bible of the same price.

The linen, which in his eyes is a mere commodity (a store of value), he gives away (alienates) in exchange for gold. Gold is the linen’s value-form. He then parts with this gold form for another commodity, the Bible, which is meant to enter his house as an object of usefulness and moral or intellectual improvement (edification) for its members. The exchange becomes a completed fact through two metamorphoses (transformations) that are opposite yet complete each other:

• The conversion of the Commodity (linen) into Money (C-M). This is selling.
• The re-conversion of the Money back into a Commodity (Bible) (M-C). This is buying. For the weaver, these are two acts: selling and buying. The unity of these two acts is selling in order to buy.

The result of the whole transaction for the weaver is this: instead of having the linen, he now has the Bible. Instead of his original commodity, he now possesses another of the same value but of different utility. In a similar way, he gets his other means of subsistence (food, etc.) and production (tools, etc.). From his point of view, the whole process achieves nothing more than the exchange of the product of his labor for the product of someone else’s labor.

The exchange of commodities is therefore accompanied by the following changes in their form: Commodity — Money — Commodity (or C—M—C)

The result of the whole process, as far as the objects themselves are concerned, is C—C: the exchange of one commodity for another, the circulation of materialized social labor (labor embodied in goods). When this result is achieved, the process is at an end.

Many Exchanges, All Connected The money which serves to buy a commodity has previously been obtained by selling another one. Let’s assume the two gold pieces (£2) for which our weaver parted with his linen are the transformed shape of a quarter of wheat.

• The sale of the linen (C—M: linen into money) is, for the weaver, the first act.
• But for the person who bought the linen with money from selling wheat, this C—M (linen-money) is also an M—C (money into linen), which was the last act of their own C—M—C process (wheat—money—linen). So, the transformation of one commodity into money (C-M) is always also the re-transformation of a second commodity from money back into a commodity (M-C) for someone else.

The same is true in the other direction.

• For our weaver, the life of his commodity (linen) ends with the Bible, into which he has reconverted his £2. (Linen—Money—Bible).
• But suppose the seller of the Bible uses that £2 (which he got from the weaver) to buy brandy. The M—C for the weaver (money into Bible) is also a C—M for the Bible seller (Bible into money). This then becomes the first phase of a new C—M—C for the Bible seller (Bible—money—brandy).

The producer of a particular commodity often has only that one article to offer, which they might sell in large quantities. But their many and various wants compel them to split up the price they received (the sum of money) into numerous purchases of various articles. Hence, one sale leads to many purchases of various articles. The final transformation of one person’s commodity thus makes up a collection (aggregation) of first transformations for various other commodities.

The circuit made by every commodity (with its sale and following purchase of another commodity) is inseparably mixed up with the circuits of other commodities. The total of all these different circuits makes up the circulation of commodities.

How Circulation Differs from Direct Barter The circulation of commodities differs from the direct exchange of products (barter), not only in form but also in substance. Just consider the course of events. The weaver has, in fact, exchanged his linen for a Bible—his own commodity for that of someone else. But this is true only as far as he himself is concerned. The seller of the Bible, who perhaps prefers something to warm his stomach (like brandy), no more thought of exchanging his Bible for linen than our weaver knew that wheat had been exchanged for his linen. B’s commodity (Bible) replaces A’s (linen), but A and B do not mutually exchange those specific commodities directly.

Here we see:

1. How the exchange of commodities breaks through all the local and personal limits that are inseparable from direct barter. It develops the circulation of the products of social labor.
2. How it develops a whole network of social relations entirely beyond the control of the individual actors. It is only because the farmer has sold his wheat that the weaver is enabled to sell his linen. Only because the weaver has sold his linen is some other person (our “hotspur”) enabled to sell his Bible. And only because the latter has sold the “water of everlasting life” (the Bible) is the distiller enabled to sell his brandy (eau-de-vie), and so on.

How Money Keeps Moving The process of circulation, therefore, does not end when the useful items (use-values) change places and hands, as in direct barter. The money does not vanish when it drops out of the circuit of the transformation of a given commodity. It is constantly being pushed (precipitated) into new places in the trading arena (arena of circulation) that other commodities have left. In the complete transformation of the linen, for example (linen—money—Bible):

• First, the linen falls out of circulation, and money steps into its place.
• Then, the Bible falls out of circulation, and money again takes its place. When one commodity replaces another, the money-commodity always sticks to the hands of some third person. Circulation sweats money from every pore.

As an agent of the process of circulation of commodities, money acquires the function of a medium of circulation.

The Appearance of Money’s Role The movement of the labor-product C—M—C is a circuit. Its result is that a given value starts the process in the shape of a commodity and also ends it in the shape of a (different) commodity. On the other hand, the movement of money is not, and cannot be, a circuit in this simple C-M-C process. The result is not the return of the same money to its starting point (in that single C-M-C transaction), but its continued removal further and further away. So long as the seller holds onto his money (which is the transformed shape of his commodity), that commodity has completed only half its course. But as soon as he completes the process—as soon as he follows up his sale with a purchase—the money again leaves his hands. It is true that if the weaver, after buying the Bible, sells more linen, money comes back into his hands. But this return is not due to the circulation of the first 20 yards of linen; that circulation resulted in the money getting into the hands of the seller of the Bible. The return of money into the hands of the weaver is brought about only by the circulation of a fresh commodity. This new process ends with the same result as its predecessor did (the weaver gets money for his new linen). Hence, the movement directly given to money by the circulation of commodities takes the form of a constant motion away from its starting point, of a course from the hands of one commodity owner into those of another. This course makes up its currency (cours de la monnaie).

That this one-sided character of money’s motion arises out of the two-sided character of the commodity’s motion is a fact that is hidden (veiled over). The very nature of the circulation of commodities creates the opposite appearance.

• The first transformation of a commodity (C-M, selling) is visibly not only the money’s movement but also that of the commodity itself.
• In the second transformation (M-C, buying), on the contrary, the movement appears to us as the movement of the money alone.

In the first phase of its circulation, the commodity changes place with the money. Then the commodity, in its aspect as a useful object, falls out of circulation into consumption. (Even if the commodity is sold over and over again, when it is definitively sold for the last time, it falls out of the sphere of circulation into that of consumption.) In its place, we have its value-shape—the money. The money then goes through the second phase of its circulation, not in its own natural shape (as a useful object itself, if it had one beyond being money), but under the shape of gold (or whatever the money-commodity is). The continuity of the movement is therefore kept up by the money alone. And the same movement that, for the commodity, consists of two processes of an opposing (antithetical) character (selling then buying), is, when considered as the movement of the money, always one and the same process: a continued change of places with ever-fresh commodities. Hence, the result brought about by the circulation of commodities—namely, the replacing of one commodity by another—takes the appearance of having been achieved not by means of the change of form of the commodities, but rather by the action of the money. Money appears to circulate commodities, which seem motionless in themselves, and appears to set them in motion. And it does so in a direction constantly opposed to the direction of the money (e.g., if money moves from A to B, the commodity moves from B to A).

So, although the movement of money is merely an expression of the circulation of commodities (goods), it often seems like the circulation of commodities is the result of the movement of money.

How Much Money is Needed for Trade? Every commodity, when it first enters circulation and undergoes its first change of form (is sold for money), does so only to fall out of circulation again (when it’s consumed) and be replaced by other commodities. Money, on the contrary, as the medium of circulation (the go-between), keeps continually within the sphere of circulation and moves about in it. The question therefore arises: how much money does this sphere of circulation constantly absorb or need?

In a given country, many sales and purchases of commodities take place every day at the same time. And since, in the form of circulation we are currently considering, money and commodities always physically meet (come bodily face to face), it is clear that the amount of money needed for circulation is determined beforehand by the total sum of the prices of all these commodities.

If the value of gold (the money-commodity) itself changes—for example, if new gold discoveries make gold easier to get, its value falls—then the sum of the prices of commodities will rise (as more gold is needed to represent the same value). If gold becomes more valuable, prices will fall. In such cases, the quantity of money in circulation must rise or fall to the same extent. A one-sided observation of what happened after new supplies of gold and silver were discovered led some economists in the 17th, and particularly in the 18th century, to a false conclusion. They thought that the prices of commodities had gone up because of the increased quantity of gold and silver serving as money. In fact, what really happened was:

1. The value of gold and silver had decreased because they became easier to produce (facility of exploitation).
2. As a result, the prices of commodities (expressed in this less valuable gold/silver) increased at the same time.
3. And these more expensive commodities naturally required greater quantities of money for their circulation. From now on, we will assume the value of gold is given and stable.

If we now further suppose the price of each commodity is given, the total sum of prices clearly depends on the mass (total quantity) of commodities in circulation. It doesn’t take much hard thinking (racking of brains) to understand that if one quarter of wheat costs £2, then 100 quarters will cost £200, 200 quarters £400, and so on. Consequently, the quantity of money that changes place with the wheat when it’s sold must increase with the quantity of that wheat.

If the total quantity of commodities remains constant, the quantity of circulating money changes with the fluctuations (ups and downs) in the prices of those commodities. It increases or decreases because the sum of the prices increases or decreases due to changes in price. Whether the change in price matches an actual change of value in the commodities, or whether it’s the result of mere fluctuations in market prices, the effect on the quantity of money needed for circulation remains the same.

This rule applies to sales and purchases happening at the same time, but not for those happening one after another (successive ones).

The Speed of Money (Velocity) Suppose the following items are sold at the exact same time: one quarter of wheat, 20 yards of linen, one Bible, and 4 gallons of brandy. If the price of each article is £2, it follows that £8 in money must go into circulation to make all these trades happen simultaneously.

If, on the other hand, these same articles are links in a chain of transformations that we already know: 1 quarter of wheat —is sold for—> £2 The £2 —is used to buy—> 20 yards of Linen The Linen —is sold for—> £2 (perhaps different money, or the same money in another transaction) The £2 —is used to buy—> 1 Bible The Bible —is sold for—> £2 The £2 —is used to buy—> 4 gallons of brandy (Let’s simplify Marx’s example: Wheat sells for £2, that £2 buys Linen, that Linen sells for £2, that £2 buys a Bible, that Bible sells for £2, that £2 buys Brandy.) In this chain, if the same £2 coin is used for each transaction, it makes four moves. This means only £2 (¼ of the £8 needed for simultaneous sales) is required.

The more moves the same sum of money makes in a given time—that is, the greater the velocity of its currency (how fast it circulates)—the less total money the process of circulation requires. Hence, the quantity of money functioning as the circulating medium is equal to: (Sum of the prices of the commodities) / (Number of moves made by coins of the same denomination).

Or, more simply: Total Price of Goods Sold / Speed of Money = Amount of Money Needed

This law holds generally. So:

• If the number of moves made by individual pieces of money increases (money circulates faster), the total number of those pieces needed in circulation decreases.
• If the number of moves decreases (money circulates slower), the total number of pieces needed increases.

Since the quantity of money that can be absorbed by circulation is given for a certain average speed of currency, all that is necessary to remove a given number of gold coins (sovereigns) from circulation is to put the same number of one-pound notes into it. This is a trick well known to all bankers (as paper notes can represent the gold).

What Really Determines the Amount of Money in Circulation? Just as the currency of money (its circulation) is generally a result and reflection of the circulation of commodities, the velocity of that currency reflects the speed with which commodities circulate—not the other way around. Thus, a slowing down (retardation) of money’s currency reflects a stagnation (slowing down) in the circulation of commodities. The circulation process itself, of course, gives no clue to the origin of this stagnation. The general public, who see money appear and disappear less frequently at the edges (periphery) of circulation when currency slows down, naturally blame this slowdown on not enough money being available (a quantitative deficiency in the circulating medium).

The total quantity of money functioning during a given period as the circulating medium is determined, on the one hand, by the sum of the prices of the circulating commodities, and on the other hand, by the speed of their circulation. But the sum of the prices of the circulating commodities depends on the quantity of commodities as well as on their individual prices. These three factors, however:

1. State of prices
2. Quantity of circulating commodities
3. Velocity of money-currency are all variable in different proportions and can therefore compensate for each other. Consequently, we find, especially if we look at long periods, that the deviations from the average level of the quantity of money circulating in any country are much smaller than we might at first expect (apart, of course, from major disturbances, mostly arising from industrial and commercial crises).

The mistaken opinion that prices are determined by the quantity of circulating money, and that the amount of circulating money depends on the quantity of precious metals in a country, was based by those who first held it on an absurd hypothesis. They imagined that commodities have no price, and money has no value, when they first enter into circulation. They thought that, once in circulation, a random fraction (aliquot part) of the jumble (medley) of commodities is exchanged for a random fraction of the pile of precious metals.

Why Gold and Silver Became Coins That money takes the shape of coin springs from its function as the circulating medium. The weight of gold represented in imagination by the prices of commodities must confront those commodities within the circulation in the shape of coins or pieces of gold of a given denomination (e.g., a £1 coin representing a certain weight of gold). The only difference, therefore, between coin and bullion (gold or silver in bulk, like bars) is one of shape. Gold can at any time pass from one form to the other. But no sooner does a coin leave the mint (where coins are made) than it immediately finds itself on the high road to the melting pot (to be melted down).

During their circulation, coins wear away—some more, others less. Their name (e.g., “one pound”) and their substance (the actual gold content) begin to separate. Coins of the same denomination become different in actual value because they are different in weight. Gold thereby ceases to be a real equivalent of the commodities whose prices it represents. The natural tendency of circulation is thus to convert coins into a mere outward appearance (semblance) of what they profess to be—into a symbol of the weight of metal they are officially supposed to contain.

From Metal Coins to Paper Money This fact implies the possibility of replacing metallic coins with tokens made of some other material, or by symbols serving the same purposes as coins. The practical difficulties in coining extremely tiny quantities of gold or silver, and the fact that at first, less precious metal is often used as a measure of value instead of more precious metal (e.g., copper instead of silver, silver instead of gold), and that the less precious metal circulates as money until replaced by the more precious—all these facts explain the historical roles played by silver and copper tokens as substitutes for gold coins. Silver and copper tokens take the place of gold in those areas of circulation where coins pass from hand to hand most rapidly and are subject to the maximum amount of wear and tear. This happens where sales and purchases on a very small scale are continually happening. To prevent these lesser coins (satellites) from permanently establishing themselves in the place of gold, specific laws (positive enactments) determine the extent to which they must be accepted as payment instead of gold.

The weight of metal in silver and copper tokens is arbitrarily fixed by law. When in circulation, they wear away even more rapidly than gold coins. Hence, their functions are totally independent of their weight, and consequently of all value. The function of gold as coin becomes completely independent of the metallic value of that gold. Therefore, things that are relatively without value, such as paper notes, can serve as coins in its place. This purely symbolic character is somewhat hidden (masked) in metal tokens. In paper money, it stands out plainly.

We are referring here only to paper money issued by the State and having compulsory circulation (meaning it must be accepted as payment by law). It has its immediate origin in metallic currency. Money based upon credit, on the other hand, involves conditions that we are not discussing here.

The Dangers of Too Much Paper Money The State puts in circulation bits of paper on which their various denominations (values), say £1, £5, etc., are printed. In so far as they actually take the place of gold to the same amount, their movement is subject to the laws that regulate the currency of money itself. A law peculiar to the circulation of paper money can arise only from the proportion in which that paper money actually represents gold. Such a law exists; stated simply, it is as follows: the issue of paper money must not exceed in amount the gold which would actually circulate if not replaced by symbols.

Now, the quantity of gold that circulation can absorb constantly fluctuates around a given level. Still, in a given country, it never sinks below a certain minimum, which can be easily determined by experience. The fact that this minimum mass continually undergoes changes in its constituent parts (i.e., the individual pieces of gold are constantly replaced by fresh ones) causes no change either in its total amount or in the continuity of its circulation. It can therefore be replaced by paper symbols.

If, on the other hand, all the channels (conduits) of circulation were today filled with paper money to the full extent of their capacity for absorbing money, they might tomorrow be overflowing as a consequence of a fluctuation in the circulation of commodities. There would no longer be any standard. If the paper money exceeds its proper limit—which is the amount in gold coins of the same denomination that can actually be current (circulating)—it would, apart from the danger of falling into general disrepute (losing public trust), represent only that quantity of gold which, according to the laws of the circulation of commodities, is required and is alone capable of being represented by paper. If the quantity of paper money issued is double what it ought to be, then, as a matter of fact, £1 would be the money-name not of ¼ of an ounce of gold, but of 1⁄8 of an ounce. Those values that were previously expressed by the price of £1 would now be expressed by the price of £2.

Hoarding: Saving Money Instead of Spending It With the very earliest development of the circulation of commodities, there also develops the necessity, and the passionate desire, to hold onto the product of the first transformation (C-M) – that is, to hold onto money. Commodities are thus sold not for the purpose of buying other commodities, but in order to replace their commodity-form with their money-form. From being merely the means of enabling the circulation of commodities, this change of form (from commodity to money) becomes the end and aim itself. The money becomes solidified (petrified) into a hoard (a saved pile), and the seller becomes a hoarder of money.

Precisely in the early stages of commodity circulation, only surplus useful things (use-values) are converted into money. Gold and silver thus automatically become social expressions for surplus or wealth.

As the production of commodities develops further, every producer of commodities is compelled to make sure they have the “sinews of things” (nervus rerum), the social guarantee – money. Their wants are constantly making themselves felt and require the continual purchase of other people’s commodities. Meanwhile, the production and sale of their own goods require time and depend upon circumstances. In order, then, to be able to buy without selling, they must have sold previously without buying. In this way, all along the line of exchange, hoards of gold and silver of varied extent are accumulated. With the possibility of holding and storing up exchange-value in the shape of a particular commodity (money), the greed for gold also arises. Along with the extension of circulation, the power of money increases. To an early commodity owner, like a “barbarian” or even a West-European peasant, value is the same as value-form (money). Therefore, to him, the increase in his hoard of gold and silver is an increase in actual value.

Why People Hoard Money In order that gold may be held as money, it must be prevented from circulating, or from transforming itself into a means of enjoyment (being spent on consumer goods). The hoarder, therefore, makes a sacrifice of the pleasures of the flesh (lusts of the flesh) to his gold fetish (his irrational reverence for gold). He earnestly acts according to the “Gospel of abstention” (the teaching of doing without). On the other hand, he can withdraw from circulation no more than what he has thrown into it in the shape of commodities. The more he produces, the more he is able to sell. Hard work, saving, and avarice (greed) are therefore his three main virtues (cardinal virtues). To “sell much and buy little” is the sum of his political economy.

Besides the basic form of a hoard (piled-up money), we also find its aesthetic form in the possession of gold and silver articles (jewelry, ornaments). This grows with the wealth of civil society. In this way, two things are created:

1. A constantly expanding market for gold and silver, unconnected with their functions as money.
2. A hidden (latent) source of supply of gold and silver, which is mainly tapped into in times of crisis and social disturbance.

Hoarding serves various purposes. Its first function is this: we have seen how, along with the continual fluctuations in the extent and speed of commodity circulation and in their prices, the quantity of money currently in use unceasingly increases and decreases (ebbs and flows). This mass of money must, therefore, be capable of expansion and contraction. At one time, money must be attracted into circulation to act as coin; at another, circulating coin must be pushed out (repelled). In order that the mass of money actually current may constantly fill (saturate) the absorbing power of the circulation, it is necessary that the quantity of gold and silver in a country be greater than the quantity required to function as coin at any one time. This condition is fulfilled by money taking the form of hoards. These reserves serve as channels (conduits) for the supply or withdrawal of money to or from the circulation, which in this way never overflows its banks.

Money as a Means of Payment (Credit) With the development of commodity circulation, conditions arise under which the sale (alienation) of commodities becomes separated by an interval of time from the realization of their prices (getting paid). It will be enough to indicate the most simple of these conditions:

• One sort of article requires a longer time for its production, another a shorter time.
• The production of different commodities depends on different seasons of the year.
• One sort of commodity may be produced at its own marketplace; another has to make a long journey to market. Commodity owner No. 1 may therefore be ready to sell before No. 2 is ready to buy.

When the same transactions are continually repeated between the same persons, the conditions of sale are regulated according to the conditions of production. On the other hand, the use of a given commodity—a house, for instance—is sold for a definite period. Here, it is only at the end of the term that the buyer has actually received the use-value of the commodity. He therefore buys it before he pays for it. The seller (vendor) becomes a creditor (someone owed money), and the purchaser becomes a debtor (someone who owes money). Thus, money also acquires a fresh function: it becomes the means of payment.

Debtors and Creditors Throughout History The character of creditor or debtor results here from simple circulation. The change in the form of that circulation stamps buyer and seller with this new identity (die). At first, therefore, these new roles are just as temporary (transient) and switching (alternating) as those of seller and buyer, and are in turns played by the same actors. But the opposition (conflict) is not nearly so pleasant. These same characters (debtor and creditor) can, however, be assumed independently of the circulation of commodities. The class struggles of the ancient world, for instance, took the form chiefly of a contest between debtors and creditors. In Rome, this ended in the ruin of the plebeian (commoner) debtors, who were displaced by slaves. In the Middle Ages, the contest ended with the ruin of the feudal debtors, who lost their political power along with the economic basis on which it was established. Nevertheless, the money relation of debtor and creditor that existed at these two periods merely reflected the deeper-lying conflict (antagonism) between the general economic conditions of existence of the classes in question.

Let us return to the circulation of commodities. The appearance of commodities and money (in a transaction) has ceased to be simultaneous (happening at the same time).

Money’s Role When Payment is Delayed The money now functions in new ways when payment is not immediate:

1. First, it acts as a measure of value when determining the price of the commodity being sold. The price, fixed by the contract, measures what the debtor (the buyer who owes money) has to pay on a fixed future date.
2. Secondly, it serves as an ideal means of purchase. Even though the money only exists as the buyer’s promise to pay, it causes the commodity to change hands.

It is not until the day fixed for payment that the means of payment (the actual money) steps into circulation. It leaves the hand of the buyer and goes to the seller. The means of payment enters the circulation, but only after the commodity has already left it. The money is no longer the thing that makes the exchange process happen; it only brings the process to a close.

Why Money Becomes the Goal

• The seller turned their commodity into money to satisfy some want.
• The hoarder did the same to keep their commodity in its money-shape (as saved money).
• And now, the debtor (who bought on credit) needs to turn their commodities into money in order to be able to pay their debt. If they do not pay, their goods will be seized and sold by auction. Money is therefore now the end and aim of a sale. This is due to a social need that comes from the process of circulation itself.

Buying Before Paying, Selling Before Being Paid The buyer converts money back into commodities (by receiving the goods) before they have turned their own commodities into money (by selling something to get the cash to pay). In other words, the buyer achieves the second transformation of commodities (Money to Commodity, M-C, for them) before their first (Commodity to Money, C-M, if they had to sell something first).

The seller’s commodity circulates and its price is realized (its value is acknowledged), but only in the shape of a legal claim upon money (a right to be paid later). It is converted into a useful thing (a use-value) for the buyer before it has been converted into money for the seller. The completion of its first transformation (from commodity to actual money for the seller) happens only at a later period.

How Much Money is Needed for Payments? The obligations (debts) falling due within a given period of circulation represent the total sum of the prices of the commodities whose sale created those obligations. The quantity of money necessary to pay this sum depends, in the first instance, on the speed (rapidity of currency) of the means of payment. This speed is affected by two circumstances:

1. The relationships between debtors and creditors often form a sort of chain. For example, A, when receiving money from their debtor B, immediately hands it over to C, who is A’s creditor, and so on.
2. The length of the time intervals between the different due dates of the obligations.

The continuous chain of payments is very different from the crisscrossing series of immediate purchases and sales we considered earlier.

• With the circulation of money as a simple medium of exchange (C-M-C), the connection between buyers and sellers is not just expressed but is created by and exists only in that circulation.
• In contrast, the movement of money as a means of payment expresses a social relationship (debtor-creditor) that was already in existence before the payment was made.

Clearing Payments: Reducing the Need for Cash In proportion as payments become concentrated in one spot, special institutions and methods are developed for settling them (their liquidation). An example from the Middle Ages was the virements system in Lyons, France (an early form of clearing house). Debts due to A from B, to B from C, to C from A, and so on, only have to be compared with each other to cancel each other out (annul each other) to a certain extent. This means only a single remaining balance needs to be paid in cash. The greater the total amount of payments concentrated, the smaller this balance is relative to that total amount, and the less actual cash (mass of the means of payment) is needed in circulation.

Total Money in Circulation: A Fuller Picture If we now consider the total sum of money circulating during a given period, we find that, given the speed (rapidity of currency) of:

1. The circulating medium (money used for immediate C-M-C exchanges), and
2. The means of payment (money used for settling debts), it is equal to:

(The sum of the prices of goods to be paid for immediately)

• (The sum of the payments falling due) – (The payments that balance each other out, like in a clearing system) – (The number of times the same piece of coin serves in turn as a means of circulation for one transaction and then as a means of payment for another).

For instance, a peasant sells his wheat for £2, which thus serves as a circulating medium. When his debt is due, he pays the weaver (who supplied him with linen) with that same £2. The same £2 now functions as a means of payment. The weaver, in turn, buys a Bible for cash; the £2 functions once more as a circulating medium, and so on. Hence, the quantity of money circulating and the mass of commodities circulating during a given period (such as a day) no longer directly correspond.

• Money that represents commodities long withdrawn from circulation (already consumed) continues to circulate.
• Commodities circulate whose equivalent in money will not appear on the scene until some future day (goods bought on credit). Moreover, the debts contracted each day and the payments falling due on the same day are quite different quantities.

The Rise of Credit-Money Credit-money (like IOUs or other promises to pay that are accepted as payment) springs directly out of the function of money as a means of payment. Certificates of the debts owing for purchased commodities (like promissory notes) circulate for the purpose of transferring those debts to others. On the other hand, to the same extent that the system of credit is extended, so is the function of money as a means of payment.

Saving Up to Pay Debts: Payment Reserves The development of money into a medium of payment makes it necessary to accumulate money specifically for the dates when payments are due. While hoarding as a distinct way of acquiring riches (just piling up gold for its own sake) vanishes with the progress of civil society, the formation of reserves of the means of payment (saving up money to pay future debts) grows with that progress.

CHAPTER SIX

THE JOURNEY OF CAPITAL: HOW IT MOVES AND THE TIME IT TAKES

We have learned what makes up the basic nature of money: it physically represents the exchange-value of all other commodities (goods). This exchange-value comes from all the human labor contained within those goods. We have also seen the functions of money in the simple circulation of commodities. Now, we need to investigate the nature of money when it acts as capital.

Money as Capital: The Goal is Surplus-Value When we talk about “capital,” we mean an amount of value that produces, or should produce, surplus-value (extra value, or profit). So, money capital is capital that exists in the form of money. In other words, it’s a sum of money used for the purpose of obtaining surplus-value.

We have seen how surplus-value is obtained: in the production of commodities. Therefore, money capital must be used for producing commodities. For this purpose, it is essential, above all, to purchase the things required for production. These are:

1. Means of production (tools, machines, raw materials, etc.).
2. Labor-power (the ability of people to work).

The production process can then begin. When it is completed, its results (the new commodities) must be sold. This is done to bring back the money capital—and also the surplus-value obtained—to its previous money form.

The Three Phases of Money Capital’s Journey The circular journey (course) of money capital passes through the following three phases:

1. Phase One: Buying (M—C) The capitalist appears in the market for commodities and in the labor market as a purchaser. Their money (M) is turned into commodities (C - specifically, means of production and labor-power). This completes the first phase of the circulation process: Money into Commodities (M—C).

2. Phase Two: Producing (P) The commodities bought in Phase One are used for production and are consumed in this process. The result is new commodities that have an increased value (C’).

3. Phase Three: Selling (C’—M’) The capitalist returns to the market as a seller. Their new, more valuable commodities (C’) are turned back into money (M’). This completes the second phase of the circulation process: Commodities into Money (C’—M’). (M’ is greater than the original M because it includes the surplus-value).

The circular journey of money capital can thus be shown by the following formula:

M — C … P … C’ — M’

In this formula:

• M is the original money capital.
• C represents the commodities (labor-power and means of production) bought with M.
• The dots (…) after C and before P indicate that circulation is interrupted for the production process (P).
• P stands for the process of production.
• C’ represents the new commodities produced, which have more value than C.
• M’ represents the money received from selling C’, which is more than the original M (M’ = M + surplus-value).

The second phase (P - production) has already been analyzed in detail in previous discussions. We are left with the first and third phases (the circulation phases). For now, we must ignore (make abstraction of) all accidental, non-essential circumstances. Consequently, we will assume not only that commodities are sold for their true value but also that this happens under circumstances that remain the same. We will therefore set aside any changes in value that might occur during the process of circulation itself.

The First Step: Buying Workers and Materials (M—C) The first phase of this process (M—C) involves the capitalist buying commodities using the money available as capital. But the nature of these commodities is not a matter of free choice (optional). These commodities must have certain definite qualities:

• They must be means of production (Mp).
• They must be labor-power (L).

Furthermore, these two types of commodities must be suitable for each other (adapted to each other). The means of production must be such that they can be worked on precisely by the labor-power that is purchased. If L represents labor-power and Mp the means of production, the money capital (M) is divided into two parts:

• One part buys labor-power (L).
• The other part buys the corresponding means of production (Mp).

We can show this as: M — C { L, Mp } (Money is exchanged for Commodities, which consist of Labor-power and Means of Production).

Labor-power and means of production must not only be suitable for each other in quality but also in quantity. The means of production (Mp) must be sufficient to employ the labor-power (L), including the surplus-labor (unpaid work) that will be required. For instance, if the daily value of one unit of labor-power is 3 shillings, and these 3 shillings are the product of 5 hours’ labor, then according to the laws of capitalist production, these 3 shillings must be considered as the wage for more than 5 hours’ labor—let us say, for 10 hours’ labor. If such a contract is made with 50 workers, they must collectively provide the purchaser with 500 working hours per day. Of these 500 hours, 250 represent exclusively surplus-labor. The capitalist who buys these 50 labor-powers must therefore buy enough means of production (Mp) to last not just for 250 working hours, but for all 500. The proportion in which the money capital must be divided when purchasing L and Mp is thus a very specific one.

When this has been done, the capitalist not only has the amount of Mp and L necessary for producing a useful article. He also has the means necessary to produce articles of greater value—that is, to create surplus-value. His money capital has become productive capital.

The Capitalist-Worker Relationship: Already Set We know that the purchase of labor-power (M—L) is the essential feature of this process, because surplus-value arises from the employment of labor-power. Buying means of production (M—Mp) is only necessary because it enables the purchased labor-power to become active.

So, although in the process M—L (buying labor-power), the owner of money and the owner of labor-power meet each other only as buyer and seller, the capital-relation (the relationship between capitalist and worker) is nonetheless already included in this act of circulation. As a matter of fact, before a capitalist can use his money as capital for the first time, he must usually purchase the means of production (buildings, machines, etc.) before purchasing the labor-power. This is because as soon as labor-power comes under his control, the means of production must be there to make it possible to use that labor-power. So, when he buys labor-power (L), the capitalist is thus already the owner of the means of production (Mp).

The capital-relation—the class relationship between capitalist and wage-laborer—thus already exists, or is at least presumed, when the two meet each other in the M—L process. This relationship exists because the conditions under which labor-power can actually work (i.e., the necessaries of life and the means of production) are entirely outside the control of the owner of labor-power (the worker). The capital-relation that exists during the process of production is only made clear (manifest) because it already exists in the process of circulation. It exists in the various fundamental economic conditions under which buyer and seller meet each other—in other words, in their class relationship.

The Final Step: Selling for More Money (C’—M’) When the process of production is finished, a certain amount of new commodities is available (C’). For example, 10,000 pounds of yarn. The value of these new commodities is greater than the value of the total amount of commodities (L + Mp) available when the production process began. The fact that these produced commodities now constitute capital is clear from this increase in value.

These new commodities (C’) must now be sold. For as long as they are just lying on the market, production is at a standstill. The speed with which capital is reconverted from the commodity form (C’) back to the money form (M’) will greatly affect how much the same capital-value can be used for creating new products and new value. Furthermore, the entire amount of the commodities C’ must be sold. It is essential that no part of the batch remains unsold. Only when the capitalist has sold all the 10,000 lbs. of yarn has he converted the entire capital-value and surplus-value into money. After the sale, at the end of the whole circulation process, the capital-value returns to the original money form in which it started the process. Thus, it can begin the process again as money capital and pass through its various phases once more.

Separating Profit from Reinvestment When the sale C’—M’ is finished, the original capital-value and the added surplus-value are both found, side by side, in the sum of money that appears as the final result of the whole process. They can then be separated from each other, or not, as the owner desires. This is important for the continuation of the production process, depending on whether the surplus-value is added to the capital in its entirety, or only partially, or not added to it at all (i.e., if it’s all spent by the capitalist).

Production and Circulation: Closely Linked The process of the circulation of capital can proceed normally only as long as its various phases pass into each other smoothly, without obstacles (let or hindrance). On the other hand, it is in the nature of things that the circulation process itself will cause capital to be tied up (immobilisation) in its various phases for definite lengths of time.

The circulation of capital, in its totality, shows the very close link (intimate connection) between production and circulation.

• In the first phase of its circulation (M-C), capital needs the general circulation of commodities in the wider market to get the inputs (L and Mp) in the form it needs to function in production.
• Capital requires this general circulation just as much in the third phase (C’-M’). This is to get rid of its commodity form (under which it cannot renew its own circulation process) and turn back into money. It also needs general circulation to have the possibility of separating the circulation of its own capital from the circulation of the surplus-value added to it.

Why the Money Circuit is Key The circulation of money capital (M-C…P…C’-M’) is thus the most direct, and therefore noticeable and typical (striking and characteristic) form in which industrial capital shows itself. In that process, the aim and driving force of industrial capital—expansion of value, making money, accumulation—show themselves most strongly in the form of “buying in order to sell dearer.” The fact that the first phase is M—C makes clear that the components of productive capital come from the commodity market. It also makes clear that the capitalist production process depends on circulation (i.e., trade). The circular journey of money capital is not only about producing commodities; it is itself brought about solely by the process of circulation, which it requires as a prior condition.

Managing Money: Payments and Reserves The labor-power (L) that the capitalist buys must, as a rule, be paid for by him at the end of one or two weeks. With the means of production (Mp), the case is different. Here, the dates of purchase and payment are often different. Consequently, a part of the money must be used to complete the M—C process for Mp, while another part (for wages, or for Mp to be paid later) must retain its money form. The necessities of circulation thus cause a storing-up of money. Since all money withdrawn from circulation takes the form of a hoard or treasure, the treasuring-up of money is essential for the regular functioning of money capital.

Saving Up Surplus-Value to Grow The storing-up of a money treasure also results in another way. In the chapter on accumulation, we saw that surplus-value is always freshly added to capital. That is, it is used to extend the scope of production or to create new places where capital operates. For this purpose, however, the surplus-value must be of a certain size. It must be sufficient to employ a given number of workers and to get the means of production they require. The proportions in which production can be extended are not arbitrary; they are determined by technical necessities. If the surplus-value from one circular journey of capital is not sufficient, it must be accumulated (saved up). This continues until, after many such circular journeys, it has reached the required size. Meanwhile, it is tied up (immobilised) in the shape of a treasure. In this shape, it forms potential money capital—that is, money capable of serving as capital, but which does not yet serve as such.

If the commodities sold by our capitalist are not payable immediately, but only after a certain time (which may be short or long), that part of the surplus-product destined to be added to the capital is not turned into money. Instead, it is turned into claims, or ownership rights (proprietary rights) to some equivalent value (counter-value). This counter-value may perhaps already be in the possession of the buyer, or perhaps only in his expected future possession.

Whether the surplus-value (which has been turned into gold/money) will be added once more immediately to the productive capital-value depends on circumstances that are independent of its mere existence.

• If it is to serve as money capital in a second, independent business transaction, it must amount to the required minimum sum.
• Such a minimum sum is also necessary if it is to be applied to increasing the original capital. The spinner, for instance, cannot increase the number of his spindles without at the same time getting the corresponding number of carding machines and roving frames (other textile machines), not to mention the increased expenses for cotton and wages that such an expansion would require. As long as the surplus-value that has been turned into money does not reach this minimal amount, the circular course of capital must be repeated several times. Even small modifications, for example, in the spinning machinery, if they make the machinery more productive, often require greater spending (outlay) for spinning material, an increase in carding machinery, etc. Thus, the surplus-value will, in the meantime, be accumulated (saved up as money).

Selling More Than You Buy: The Capitalist’s Aim Once the process of production is completed, the capitalist throws his commodities into the stream of circulation in order to sell them. These commodities (C’) possess greater value than those (L + Mp) bought by the capitalist before the production process began. He thus draws, through the sale of his products, a greater value from the process of circulation (in the form of money, M’) than he originally threw into it (as M). But he can only do this because he throws a greater value into the stream of circulation (in the form of C’) than he withdrew from it (as C = L+Mp).

As far as we consider only the “industrial” capitalist (the one involved in production), this capitalist always throws a greater value in the form of commodities into circulation than he withdraws from it (in the form of L and Mp). If his supply of commodity-values just matched his demand for inputs, his capital would not grow (obtain no increment). He must, indeed, “sell dearer than he bought.” He can do this, however, only because he has, in the course of the production process, transformed the less valuable commodities he bought into more valuable ones. The profit yielded by his capital increases in proportion to how much his supply of commodity-values exceeds his demand for inputs. He can, therefore, never aim at establishing a balance (equilibrium) between his supply (output) and his demand (for inputs); on the contrary, he must constantly try to increase his supply as much as possible beyond his demand.

The same holds true for the capitalist class as a whole. We are, of course, only talking here about the demand that is necessary for production—that is, the demand for labor-power (L) and means of production (Mp).

As we have already seen, the capital invested (Cp) is divided into the part used for buying Mp (constant capital, c) and the part used for buying L (variable capital, v). If we consider its value, the demand for Mp is therefore smaller than the total capital invested (Cp). Consequently, it is much smaller than the commodity-capital (C’ = c+v+s, where s is surplus-value) which is, last of all, thrown into circulation after production is completed.

The demand for L is increasingly less than the demand for Mp (as discussed in the chapter on Accumulation).

In so far as the laborer converts the greater part of his wages into means of subsistence—and especially into essential means of subsistence—the capitalist’s demand for L is at the same time, indirectly, a demand for the consumer goods required by the laboring class. But this demand is equal to v (variable capital, or total wages), and not an atom larger. At most, it is smaller, if the laborer economizes on his wages.

Thus, the total demand for commodities on the part of the capitalist (for L and Mp) can never be greater than Cp = c + v. But his supply of commodities is equal to c + v + s. The greater the rate of profit (i.e., the greater the surplus-value ‘s’ relative to the total capital c+v), the more the supply of commodities by the capitalist will exceed his demand for productive inputs, and the less his demand for those inputs will be relative to his total supply.

We must not forget that his demand for Mp is always less than his capital, calculated day by day (because Mp is used up over time). Let us assume there is another capitalist alongside him, who supplies him with those Mp. If this supplier, under otherwise identical circumstances, works with an equally large capital, then the first capitalist’s demand for Mp will always be less, in terms of value, than the commodity-product of the second one. The fact that there is not only one capitalist, but many, does not alter the matter. For example, assume a capitalist’s capital amounts to £50, of which the constant part (c, for Mp) is £40. In this case, the demand made by him on all other capitalists for Mp is equal to £40. If these other capitalists together, on (say) £50 of their own capital at equal profit rates, produce Mp for the value of £60 (this £60 would include their own costs and surplus value), then his demand (£40) only covers two-thirds of their supply (£60). His own total demand for inputs (L+Mp) is also less than his own total supply of output (C’). (Marx’s example here is a bit complex, aiming to show that individual capitalists’ demands for inputs from each other don’t automatically match the total supply each produces).

Only if the capitalist were to consume the entire surplus-value personally, and were to continue producing with the capital at its original size (simple reproduction), would his demand—as a capitalist (for c+v)—be equal in value to his supply (c+v, before surplus value is added). But even then, his demand as a capitalist only corresponds to a part of his total potential supply (which is c+v+s); he consumes the surplus-value (s) in his capacity as a non-capitalist (a consumer).

But that is impossible for capitalism as a whole to continue that way. The capitalist must not only build up a reserve capital (to deal with price variations and to wait for the most favorable opportunities for purchase and sale). He must also accumulate capital in order to expand the scope of production and to be able to use the latest technical progress in his business.

Saving Up to Reinvest: The Capitalist’s Treasure In order to accumulate capital (grow their investment), the capitalist must first let a part of the surplus-value (s) – which they gained from selling their goods and which is now in money form – build up as a “treasure” or saved fund. This saving continues until the treasure has reached the necessary size for reinvestment. As long as this process of forming a treasure lasts, the capitalist’s demand for new goods (to expand production) does not increase. The money is tied up (immobilised). It does not buy new commodities from the market to replace the value it represents, which originally came from selling the capitalist’s own produced commodities.

(For now, we will ignore the role of credit. When a capitalist, for instance, deposits their accumulating money in a bank to earn interest, this is also a credit operation, but we are simplifying for the moment.)

The Two Main Time Periods for Capital’s Journey The total time needed by capital for its circular journey (to go from money, to production, and back to more money) is equal to:

• The time of its production + The time of its circulation.

Why Production Time is Often Longer Than Labor Time The “time of working up” (the actual time labor is applied) is included in the time of production. However, the total time of production is often longer than the actual labor time. The production process itself may require interruptions of the labor process. During these interruptions, the object being worked on (the object of labor) is exposed to the influence of physical or chemical processes without any further human work. Examples include:

• Grain (corn) that is sown and left to grow.
• Wine that ferments in a cellar.
• Labor material used in many factories, such as tanneries (where leather is made), which is subjected to chemical processes.

The capitalist must also have a stock of raw materials on hand. And it must be remembered that tools, machines, etc. (implements of labor) are part of the production process over a long time, during which they exist as capital but are not constantly being worked on by laborers to add new value in every instant.

Idle Capital During Production All this represents capital that is “lying idle” at certain points – tied up but not actively being transformed by labor in that moment. As far as labor is possible during these stages—for example, work done to keep the stocks of materials in good condition—it is productive labor that creates surplus-value. This is because a part of such labor (as is the case with all other wage-labor) is not paid for. Normal interruptions of the whole production process where no labor is applied, on the contrary, produce neither new value nor surplus-value. This is why efforts are sometimes made to enforce night-labor – to keep the machinery and process going without interruption.

Interruptions of labor time that the object of labor must undergo during the production process—for example, the time wood needs for drying—produce neither new value nor surplus-value.

The Drive to Reduce Non-Laboring Production Time Whatever the reason for the time of production being longer than the actual labor time, in none of these cases (like drying or fermenting) do the means of production (Mp) absorb new labor, nor, consequently, new surplus-labor. Hence, capitalist production has a tendency to shorten as much as possible any extension (prolongation) of the production time that goes beyond the actual labor time.

The Impact of Circulation Time on Profits Apart from the time of production, capital must also pass through the time of circulation. This includes the time it takes to sell the produced commodities (C’-M’) and the time it takes to buy new means of production and labor-power (M-C). During this circulation time, capital produces neither new commodities nor new surplus-value.

Therefore:

• The longer the time of circulation lasts, the smaller, proportionally, is the surplus-value produced in a given period (like a year).
• Conversely, the more the capitalist succeeds in reducing the time of circulation, the greater will be the surplus-value produced in that period.

This phenomenon (shorter circulation time leading to more profit in a given period) might appear to wrongly confirm the false idea that surplus-value is created from circulation (i.e., from smart buying and selling), rather than from the production process itself.

CHAPTER SEVEN

COMMERCIAL ACTIVITY

(A) Purchase and Sale

When we talk about buying and selling goods, we usually assume they are traded at their actual value. In these deals, it’s really about changing the same value from the form of a product into the form of money, or from money back into a product.

Even if goods are not sold at their exact value, the total amount of value involved in the exchange stays the same. If one person gains extra, another person loses that same amount. So, the overall value doesn’t change.

The act of converting value from one form to another, like selling a product for cash, takes time and effort. This effort doesn’t create new value. It just makes it possible to change the form of the existing value. It’s important to note that even if both the buyer and seller try to get more value than they give, this doesn’t change the situation. This extra effort, driven by trying to get a better deal, doesn’t create any more value. It’s similar to legal battles – the work lawyers do doesn’t increase the value of what’s being fought over.

So, if people who make goods are independent producers (not big company owners), the time they spend buying and selling is time taken away from making things. That’s why in the past, like in ancient times or the Middle Ages, they often tried to do these buying and selling tasks on holidays or festival days, so it wouldn’t interrupt their main production work.

When capitalists (business owners who employ others) handle a large amount of goods, the buying and selling they do still doesn’t turn into value-creating work. It’s not like magic. This is true even if the capitalist hires other people specifically to do the buying and selling.

Buying and selling become major tasks for a capitalist. Since they control a large quantity of products made by others, they need to sell these products on a large scale. Then, they also need to buy the materials and labor needed for production on a large scale. But, it’s crucial to remember: buying and selling do not create any value, neither before production nor after. Sometimes it seems like they do because of how commercial capital (money used in buying and selling for profit) works, but we will discuss that topic later.

What is clear, though, is this:

• If a single merchant, using their own money, takes on the job of selling goods for many capitalists (this is a form of division of labor), they can reduce the time these capitalists need to spend on buying and selling.
• In this situation, the merchant acts like a machine that cuts down on wasted effort or helps make the overall production time shorter.
• However, this doesn’t change the basic nature of buying and selling. These activities still don’t create new value.

Let’s imagine this person doing the buying and selling is an employee of a manufacturer, and the manufacturer pays them for their labor. This employee makes a living by buying and selling, just like others make a living by spinning thread or making pills. They are doing a necessary job. They work like anyone else, but what they do in their work – the buying and selling – doesn’t create any new value or any new product.

This employee must be considered one of the costs of production. Their usefulness isn’t in changing unproductive work into productive work. Instead, their usefulness comes from reducing the total amount of labor power and work time spent on these unproductive tasks (like buying and selling).

Let’s take this further. Suppose this employee is just a regular wage worker, maybe even one who gets paid well. No matter what their salary is, they likely work some of their time for free for the capitalist. For example, they might get paid for eight hours of work but actually work for ten hours. These extra two hours of unpaid work (surplus labor) don’t create any value, just like their paid eight hours of work don’t create value. However, these unpaid hours do reduce the capitalist’s circulation costs. The costs of getting products to market, which the employee represents, are cut by one-fifth (the two unpaid hours out of ten). The capitalist’s expenses for circulation, which would normally come out of their income, are reduced because they don’t pay for those two hours of work.

The time spent on buying and selling is always a cost of circulation. It doesn’t add anything to the values being exchanged. It’s as if a part of the product itself were turned into a machine that then buys and sells the other parts. This “machine” (the buying and selling process or the person doing it) means a deduction from the total product, even though it might reduce the overall labor needed for circulation. It simply forms a part of the costs of getting goods to customers.

(B) Bookkeeping

Work time isn’t just spent on actually buying and selling. It’s also spent on bookkeeping. Bookkeeping, in turn, requires tools like pens, ink, paper, desks, and other office expenses. The situation with bookkeeping is similar to that of the labor involved in buying and selling.

As long as an individual producer just keeps track of their accounts in their head, or does it occasionally outside of their main production time, it’s clear that this activity, and the tools used (like paper), are a deduction from the time and tools they could use for actual production. This basic fact doesn’t change even if bookkeeping becomes a large-scale function or if specialized bookkeepers are hired to do it.

Even in very old societies, like ancient Indian communities, there were bookkeepers for agriculture. In those communities, bookkeeping became the full-time job of a specific official. This division of labor saved time, effort, and expense for everyone else. But the production of goods and the bookkeeping related to that production are still two separate things. It’s like the cargo on a ship and the bill of lading (the list of goods being shipped) – they are related but distinct. When a bookkeeper is employed, some of the community’s labor power is taken away from direct production. The costs of the bookkeeper’s job are not covered by any value their bookkeeping work itself creates; instead, these costs are subtracted from the community’s total product.

Ultimately, the situation is the same for a bookkeeper hired by a capitalist today as it was for the bookkeeper in an ancient Indian community: their work is a cost.

However, there’s a slight difference between the costs from bookkeeping and the costs from buying and selling:

• Buying and selling costs exist only because products are made as commodities (goods for sale). These costs would disappear if society organized production differently (e.g., if goods were made for direct use, not for sale in a market).
• Bookkeeping, on the other hand, is about controlling the production process and summarizing it. It becomes more necessary as the scale of production grows and becomes less of an individual effort.
  • Therefore, bookkeeping is more vital in a capitalist system of production than in simpler systems like individual craftwork or small-scale farming.
  • It would be even more necessary in a system where the community itself owns and manages production, compared to capitalism.
• But, the costs of bookkeeping tend to go down as production becomes more concentrated and efficient.

(C) The Cost of Money

Goods that are used as money, like gold and silver, are not used up in the way other products are consumed. When labor is used to create money, it’s social labor put into a form that just serves as a tool for circulation (buying and selling).

Besides the fact that a part of society’s wealth is tied up in this unproductive form (money), there’s another issue: money wears out. Because it wears out, it constantly needs to be replaced. For countries with highly developed capitalist economies, the cost of replacing worn-out money is significant. This is because the total amount of wealth that exists in the form of money is very large.

Gold and silver, when used as money, represent a cost of circulation for society. These costs come directly from the social system of producing goods as commodities (for sale). They are a part of society’s wealth that must be sacrificed just to keep the system of exchange going.

(D) Costs of Storage

For production and reproduction of goods to happen without interruption, a certain amount of commodities (like raw materials and tools) must always be available in the market. In other words, there always needs to be a supply on hand. Similarly, workers need to find most of the things they need to live (like food and clothing) readily available in the market.

To make this possible, certain things are necessary:

• Buildings, warehouses, and storage facilities.
• Stocks of commodities.
• Money invested in these facilities and stocks (constant capital).
• Labor power paid to manage and store the commodities.

Furthermore, commodities can spoil or be damaged over time, for example, by the weather. To protect them, more capital is needed. This extra capital is spent on tools and equipment for protection and on labor power.

These costs of storage are different from the costs of buying/selling, bookkeeping, and money we’ve already discussed. This is because, to some extent, storage costs can become part of the value of the commodities.

Here’s how to understand this:

• If the costs of storing goods come only from the time it takes to change the goods from their commodity form into money (i.e., to sell them), then these costs are like the ones discussed earlier (buying/selling, bookkeeping, money). They don’t add value.
• However, the situation is different if, during storage, the product itself (its use-value or usefulness) is subjected to processes that involve additional labor. This labor helps to maintain or preserve the product’s usefulness. (Remember, activities like bookkeeping or buying and selling don’t directly affect a product’s use-value.)
  • In this case, the actual usefulness of the product might not increase; in fact, it might even decrease slightly (like food aging). But, its decrease in usefulness is limited, and the product remains usable.
  • The original value already in the commodity doesn’t increase either. But, new labor (both labor embodied in materials/tools used for storage and the direct labor of workers storing it) is added to the commodity’s value.

(E) Transport

We don’t need to go into all the details of every circulation cost, like packing, sorting, and so on. The general rule is this: none of the circulation costs that come only from changing the form of a commodity (e.g., from a good into money) add any value to that commodity. They are simply the expenses involved in changing the commodity’s form and are considered extra costs of production. These costs have to be covered by the surplus product (the extra output beyond basic costs). For the capitalist class as a whole, these costs are a deduction from their total surplus-value or surplus product. It’s similar to how, for a worker, the time spent buying their food and supplies is lost time that could have been used for other things.

However, the costs of transport play such an important role that we need to look at them more closely.

It’s important to understand a few distinctions:

• Commodities can be bought and sold (circulate) without physically moving. For example, if person A sells a house to person B, the commodity (the house) circulates, but it doesn’t move from its location. Movable goods, like stored cotton or iron, can also stay in the same warehouse while being bought and sold many times by different speculators. In this case, what really moves is the legal right to own the commodity (the property title), not the commodity itself.
• On the other hand, products can be transported without any circulation of commodities happening. For example, the transport industry was very important in the ancient Inca empire for moving goods around, even though their economic system was different from one based on buying and selling commodities.

Transporting products doesn’t usually increase the amount of those products. Also, any changes to their physical qualities caused by transport (with a few exceptions) are generally not intended to make them more useful. Often, these changes are unavoidable downsides.

But the usefulness of things (their use-value) is only realized when they are consumed or used. And consumption often requires products to be moved from where they are made to where they will be used. Therefore, transport can be seen as completing the process of production.

The productive capital (money, equipment, labor) invested in the transport industry adds value to the transported commodity. This happens in two ways:

1. Partly by transferring existing value from the means of transport (e.g., the wear and tear on a truck, the fuel used).
2. Partly by adding new value through the labor of the workers involved in the transport.

This last addition of value (from labor) is divided, just like in all capitalist production:

• One part replaces the wages paid to the transport workers.
• The other part becomes surplus-value (profit for the capitalist).

Within every type of production, moving the object being worked on, the tools, and the labor power is an important part. For instance:

• Cotton is moved from the carding room to the spinning room in a textile factory.
• Coal is moved from deep in the mine up to the surface.

The transport of a finished product (as a finished commodity) from one production site to another, often distant, location is just a larger-scale example of the same idea. After products are moved between production sites, the finished commodities are then transported from the world of production into the world of consumption. A product is only truly ready for people to use when it has gone through this final transport process.

CHAPTER EIGHT

COMMERCIAL CAPITAL AND THE WORK OF THE COMMERCIAL EMPLOYÉS

As we’ve discussed, any capital used in production must go through a cycle: finished goods need to be turned into money, and that money, in turn, needs to be used to buy means of production (like materials and machinery) and labor. In simple terms, businesses that make things must constantly buy and sell. Merchants, who have their own independent capital (money invested in their business), can take over these buying and selling tasks for the producers.

Let’s imagine a merchant has £3,000. With this money, they buy 30,000 yards of linen from a linen manufacturer. The merchant then sells these 30,000 yards, aiming for a profit of, say, ten percent. With the money they get from the sale, they buy more linen, and sell that too. The merchant keeps repeating this process of buying in order to resell, without actually producing any linen themselves.

For the linen manufacturer, the situation is this: they have received the value of their linen in cash from the merchant. If things go as planned, the manufacturer can use this cash to once again buy yarn, coal, labor, and so on, and continue producing more linen.

However, even though the manufacturer has sold the linen, the linen itself hasn’t reached its final buyer. It’s still out in the market as a commodity waiting to be sold. The only thing that has really happened to the linen so far is that its owner has changed—from the manufacturer to the merchant.

Now, what if the merchant doesn’t manage to sell the first 30,000 yards of linen before the manufacturer has the next 30,000 yards ready? In this scenario, the merchant can’t buy the new batch of linen from the manufacturer. Production could then stop or be interrupted for the manufacturer. Of course, the manufacturer might have other money available to keep production going. But the key point is that the production process, using the capital from the first batch, can’t continue for now.

This example clearly shows that the merchant’s role is simply to take on the task of selling the commodity. If the manufacturer didn’t use a merchant, they would have to do this selling themselves. If, instead of an independent merchant, the manufacturer had an employee whose only job was buying and selling, this point would be immediately obvious.

If the linen manufacturer had to wait until their goods actually reached the final customer (the person who will use the linen), their cycle of production and making more goods would be interrupted. To avoid this, the manufacturer would have to do less business or keep a larger amount of money in reserve. The merchant’s involvement doesn’t make this division of the manufacturer’s capital (some for production, some tied up in goods for sale) disappear. But without the merchant, the manufacturer would need a much larger money reserve, and therefore, the scale of their production would likely be smaller. At the same time, by using a merchant, the manufacturer saves the time they would have spent selling and can use that time to oversee the production process.

If the merchant’s capital operates within necessary limits, we can expect a few things:

1. Reduced Capital for Selling: Because of the division of labor (where merchants specialize in selling), the total capital tied up only in buying and selling will be smaller. This capital includes not just money to buy goods, but also money for storage, buildings, transport, and wages for sales employees. This specialized commercial capital is less than what manufacturers would need if they each handled all their own sales.
2. Faster Sales: Because merchants focus exclusively on selling, manufacturers’ goods are turned into money more quickly. The commodity-capital (capital existing in the form of goods) finds a buyer faster than if the manufacturer tried to sell it.
3. Efficient Capital Rotation: When we look at all the commercial capital in relation to all the capital used for production, one merchant’s capital can handle the sales for several different producers. This can happen in a single industry or across different industries. For instance, if a linen merchant sells one manufacturer’s linen quickly, before that manufacturer has more linen ready, the merchant can use their capital to buy and sell linen from other manufacturers in the meantime. Or, after selling linen, while waiting for new linen stock, the merchant might sell silk.

So, the same amount of merchant capital can help turn over the invested capital of many different producers one after another. As a result, it does more than just replace the individual money reserve each manufacturer would otherwise need. For example, after a merchant sells a farmer’s corn, they can use the same money to buy and sell corn from a second farmer. This is efficient because the farmer’s own capital turnover is limited by their production time, which might be a whole year, not counting the time it takes to sell.

The faster this commercial capital turns over (buys and sells), the smaller the portion of society’s total money it represents. Conversely, the slower the turnover, the larger the portion of total money is tied up as commercial capital.

We’ve already seen that the acts of buying and selling don’t create new value or surplus-value (the source of profit). In fact, they put limits on how much value and surplus-value can be formed. This truth doesn’t change if these buying and selling tasks are done by merchants instead of by the industrial capitalists (the producers) themselves.

So, if we set aside all the functions that aren’t strictly commercial – like storage, forwarding, carrying, sorting, and retailing, which are often extensions of the production process – and focus on commercial capital’s real job of buying in order to sell, it becomes clear: commercial capital creates neither value nor surplus-value. It simply acts as a go-between to help transform available goods into money.

Nevertheless, commercial capital must earn the average yearly profit.

• If commercial capital were to make a higher annual profit than capital used in production, some productive capital would shift into commerce.
• If it were to make a lower annual profit, capital would leave commerce. No type of capital can change its function more easily than commercial capital.

Since commercial capital itself creates no surplus-value, it’s clear that the surplus-value it receives as its average profit must be a part of the total surplus-value created by all productive capital (capital invested in making things). But this raises a question: How does commercial capital manage to draw its share of this surplus-value to itself?

The idea that commercial profit is simply made by raising the price of goods above their actual value is an illusion.

It’s obvious that a tradesman (or merchant) can only get their profit from the price of the goods they sell. It’s also obvious that this profit, which they make when selling, must be the difference between the selling price and the purchase price.

It’s possible that after a merchant buys a commodity but before they sell it, extra costs are incurred (these are costs of circulation, like short-term storage or handling). If this happens, then the difference between the selling price and purchase price isn’t pure profit. To make our analysis easier for now, let’s assume no such extra costs occur.

So, how is it possible for the tradesman to sell commodities at a higher price than they paid for them?

We’ve already answered a similar question for the capitalist who produces goods. Their cost price is equal to the capital actually used up in production (let’s call this c for constant capital like materials and machinery, plus v for variable capital like wages). To this cost price, the average profit is added. This sum gives us the manufacturer’s selling price, which we’ve called the “price of production.” If we add up all the prices of production for all available commodities, this total sum will be equal to the real value of all those commodities. This means it’s equal to the total amount of labor effectively contained in them. So, at this stage of our discussion, manufacturers’ selling prices, when taken all together, are equal to the value of the commodities (the amount of labor in them). Their cost prices, however, are only equal to the part of that labor that is actually paid for as wages.

But things are different for the dealer in commodities, the tradesman. They don’t produce anything. They only continue the process of selling the goods that the manufacturer started. Even before the sale to the merchant, the manufacturer effectively holds the surplus-value in the form of the finished commodities. Through the sale to the merchant, the manufacturer simply transforms this surplus-value into money. The tradesman, then, must make their profit by selling. This only seems possible if the tradesman increases the manufacturer’s price of production even further. Since the total of all prices of production is equal to the total value of all commodities, it would appear that tradespeople can only make a profit by selling commodities for more than they are truly worth.

This kind of additional charge on the price is very easy to imagine. But if we look at it more closely, we find this is only an illusion (we are always talking about averages here, not individual special cases).

Why do we assume that a tradesman can only make a profit of, say, 10% on their goods if they sell them at 10% above their prices of production? It’s because we’ve assumed that the manufacturer sells the commodities to the tradesman at their full price of production. But remember, the price of production is the cost price plus the average profit. This means we have incorrectly assumed that the tradesman pays the manufacturer a price of production that was calculated as if the average profit rate was determined without any consideration for commercial capital at all! We have assumed that commercial capital plays no part in forming the general rate of profit for the whole economy. But this is a completely absurd assumption.

Let’s use an example. Suppose the total productive capital advanced in a year is 720c (for materials, machinery, etc.) + 180v (for wages) = 900 (let’s say these are thousands of pounds). Further, let’s assume the rate of surplus-value is 100% (meaning workers create twice the value of their wages). So, the surplus-value (s) produced is 180. The total value of the product is 720c + 180v + 180s = 1080. If only this productive capital existed, the rate of profit for this total capital would be 180 (surplus-value) / 900 (total capital) = 20%. This would be the average rate of profit.

But now, let’s assume that in addition to the 900 of productive capital, there is also 100 of commercial capital required, and it gets the same share of profit relative to its size. This commercial capital (100) is one-tenth of the new total capital (900 + 100 = 1000). Therefore, it takes a one-tenth share of the total surplus-value (180). So, commercial capital gets a profit of 18 (which is 18% of its 100 capital). As a result, the profit remaining to be divided among the other nine-tenths of the total capital (the 900 of productive capital) is 180 - 18 = 162. This 162 profit on a capital of 900 is also 18% (162 / 900 = 0.18). So, the new general average rate of profit for all capital (productive and commercial) is 18%.

This means the price at which the producers (owners of productive capital) sell all their commodities to the merchants is 720c + 180v + 162s (the producers’ share of profit) = 1062. The merchant buys the goods for 1062. If the merchant then adds their average profit of 18 (which is 18% of their invested commercial capital of 100) to this cost, they sell the commodities for 1062 + 18 = 1080. Notice that 1080 is the actual total value of the commodities. So, the merchant sells the commodities at their value, even though they only make their profit through the process of circulation (buying and selling) and only from the difference between their selling price and their purchase price.

Therefore, in the formation of the general average rate of profit, commercial capital participates according to its size relative to the total capital. The share of the total profit that goes to commercial capital is already accounted for in this average rate of profit.

The price of production at which the productive capitalist (the manufacturer) sells to the merchant is therefore smaller than what the “price of production” of the commodity would be if commercial capital wasn’t factored in. Or, looking at the total amount of commodities, the prices at which the productive class of capitalists sells them to merchants are less than their total value. In the example above, the tradesman buys goods that cost him (as part of a larger batch representing his capital of 100) effectively 100 and sells them for 118 (to make his 18% profit). He adds 18% to his cost. But, because the commodity he bought for 100 (as part of the total 1062 purchase price) was already valued at 118 (as part of the total 1080 value), he does not sell it above its value when he makes his profit. In simpler terms: Producers sell goods to merchants for slightly less than their full value. This allows merchants to then sell the goods at their full value and still make the average rate of profit.

Now, a new question arises: What is the situation of the commercial wage-laborers (employees) whom the tradesman hires?

From one perspective, such a commercial employee is a wage-laborer like any other.

• The tradesman uses their variable capital (money for wages, part of their business investment) to buy the employee’s labor power. This money is not for the tradesman’s personal living expenses.
• The employee’s labor power is bought not for private service but to help the tradesman use their commercial capital effectively.
• The value of the employee’s labor power, and therefore their wages, are determined (like for all other wage laborers) not by the product of their labor, but by the costs of keeping them able to work (their living expenses).

However, there must be the same kind of difference between a commercial employee and workers directly employed by productive capital (factory workers) as there is between commercial capital and productive capital, or between a tradesman and a manufacturer. Since the tradesman or merchant only acts as a go-between for selling commodities and produces neither value nor surplus-value themselves, their commercial employees also cannot directly produce surplus-value for the merchant. (This assumes, like with productive laborers, that wages are set by the value of labor power, so the tradesman isn’t getting rich by simply underpaying their employees).

The challenging part with commercial employees isn’t explaining how they directly produce profit for their employer, even though they don’t directly produce surplus-value. This question is already answered by understanding where commercial profit comes from:

• Productive capital makes a profit by selling labor that is embodied in goods, for which it has not fully paid (this is surplus labor).
• Commercial capital makes its profit because it pays productive capital for only a part of this unpaid labor (by buying goods below their full value, a value that includes all surplus-value). But, when commercial capital sells the commodities, it gets paid for that unpaid labor portion too (by selling at the full value). So, productive capital creates surplus-value by directly taking unpaid labor. Commercial capital, on the other hand, causes a part of this already existing surplus-value to be transferred to itself.

For an individual tradesman, the amount of profit they make depends on the amount of capital they can use for buying and selling. And, the more unpaid labor they can get from their employees, the larger this amount of effectively utilized capital will be. The actual function (buying and selling) through which commercial capital earns profit is mostly handed over by the tradesman to their employees. The unpaid labor of these employees, even though it doesn’t create new surplus-value, still enables the tradesman to appropriate (take a share of) existing surplus-value. In practice, for individual commercial capitals, this amounts to the same thing as creating profit. Therefore, this unpaid labor is a source of profit for these commercial capitals. Commercial transactions could never be carried out on a large scale, and could never develop on a capitalist basis, without this. Just as the unpaid labor of the productive worker directly creates surplus-value for their employer, the unpaid labor of the commercial employee helps commercial capital get a share of that surplus-value.

The difficulty with the commercial employee lies more in this area: The tradesman’s own labor creates no value (even though it helps them get a share of already existing surplus-value). So, what about the variable capital (wages) they pay to their employees?

• Should this variable capital be counted as part of the commercial capital they advance when calculating their profit rate?
• If it’s not counted, this seems to go against the law of profit rates tending to equalize across different sectors. What capitalist would invest, say, 150 (100 in goods, 50 in wages) if they could only count 100 as the capital on which their profit is calculated?
• If, on the other hand, this variable capital is counted, this seems to conflict with the very nature of commercial capital. Commercial capital is supposed to make its profit because it buys and sells, not by directly putting the labor of others into motion in a value-creating way.

If every merchant only had enough capital to turn over what they could manage with their own personal labor, commercial capital would be greatly fragmented and inefficient. This inefficiency would get worse as productive capital increases its scale of production and the scope of its operations. This would lead to a growing imbalance between the two: capital would become more centralized in production but more decentralized in circulation (selling). The productive capitalist (manufacturer) would then be forced to spend much more time, labor, and money on purely commercial activities. For instance, instead of dealing with 100 large tradespeople, they might have to deal with 1000 small ones. In this way, the advantages of having commercial capital as a separate, specialized function would be largely lost. Not only would the purely commercial costs (like time spent negotiating) increase, but also the other costs of circulation, such as sorting, forwarding, and so on. This would be the situation from the perspective of productive capital.

Now let’s consider the commercial capital itself. First, looking at purely commercial activities: It doesn’t take more time to do calculations with large numbers than with small ones. It takes ten times longer to make ten separate purchases for £5 each than it does to make a single purchase for £50. It costs ten times as many letters and stamps, and ten times as much paper, to communicate with ten small-scale tradespeople than it does to communicate with one large firm.

Even a limited division of labor in commercial businesses, where different employees handle tasks like bookkeeping, cashier duties, correspondence, buying, selling, or traveling, saves a huge amount of work time. This means the number of commercial workers in a wholesale business is often surprisingly small compared to the size of the business. This is because in commerce, much more than in industry, the same function (like making a sale or writing a letter) takes about the same amount of labor time, whether it’s done on a large or small scale. (This is why large, concentrated businesses appeared earlier in history in commerce than in industry.)

Then there’s the money spent on constant capital (things like offices, equipment, etc.). One hundred small, separate offices are much more expensive to run than one single large office. Similarly, one hundred small storerooms cost much more than one large warehouse, and so on. Transportation costs, which merchants often have to pay upfront, also increase if businesses are scattered and small instead of being concentrated.

If the productive capitalist (the manufacturer) had to handle all the commercial parts of their business themselves, they would have to spend more labor and more money. If the same amount of commercial capital were spread out among many small tradespeople, it would require many more laborers to do the same work, simply because it’s so fragmented. A larger total amount of commercial capital would also be needed to sell the same amount of goods.

Let’s say B is the total commercial capital a merchant invests in buying goods, and b is the additional capital they advance to pay the wages of their commercial employees. The total B + b is actually smaller than the total commercial capital B would need to be if b didn’t exist – that is, if every tradesman had to do all the work themselves without any employees to achieve the same results. Hiring employees makes the operation more efficient.

But we still haven’t solved the main problem.

The price at which commodities are sold must be enough, first, to pay the average profit on the merchant’s total investment, B + b. You might pause here. We generally assume that the selling price is equal to the value of the commodities. We saw earlier how commercial capital B (invested in goods) gets its share of the average profit. That profit is therefore included in the selling price. But what about b (the capital for wages)? Where does the profit on this additional capital b come from, on top of the profit already figured for B? It might look like the profit on b is just an extra, arbitrary increase in the price. However, we must remember that the total B + b (with employees) is smaller than the capital B would have to be without employees to do the same job. The average profit made with the more efficient combination of B and b is therefore enough to also provide a profit for the b portion.

But there’s a second requirement for the selling price: it must also be enough to get back the sum b itself – that is, to cover the actual amount advanced for the commercial employees’ wages. And this is where the real difficulty lies.

If the selling price of commodities simply represents their value, then (based on our discussion so far) that price contains enough money to:

1. Pay the manufacturer’s cost price and average profit.
2. Cover the merchant’s capital (B) used to buy the goods, plus the merchant’s average profit on B. This commercial profit on B is already understood to be large enough to also cover a profit on the sum b (wages) because B+b is efficient.

But how does the sum b itself – the tradesman’s variable capital paid as wages – get included in the selling price so it can be recovered? Can the tradesman just add the amount they spent on wages to the selling price simply because they hired people? Or must they pay these wages out of their profit on B, which would then reduce that profit?

What the tradesman buys with b (wages) is, according to our assumption, only commercial work. This is labor needed to change commodities into money, and money back into commodities. So, it’s labor that transforms values but doesn’t create new values. However, if this labor isn’t performed, commercial capital cannot do its job. And if it can’t do its job, it doesn’t get a share in regulating the general rate of profit – meaning it doesn’t get any dividend from the total profit generated in the economy.

Let’s imagine:

• Merchant’s capital for buying goods (B) = 100.
• Merchant’s capital for employee wages (b) = 10.
• Rate of profit = 10%. (We’ll ignore other business costs like rent for the office to keep the calculation simple. These costs don’t change the specific problem we’re looking at here. The merchant’s constant capital for office expenses is, at most, just as large as, but actually often smaller than, what the manufacturer would need if they did their own selling.)

If the tradesman employed nobody (so, no b), the work their employees would have done still needs to be done. The tradesman would have to do it themselves. To buy or sell goods worth B (100), the tradesman would have to spend their own time – let’s assume it’s all the time they have. The commercial work represented by b (10) would, in this case, effectively be a cost borne by the profit generated by a larger or less efficient operation. It implies that to achieve the same turnover without employees, the merchant might need to think of their effort as equivalent to managing a larger notional capital. This implies the overall capital or effort to achieve the same sales volume would be greater.

Since commercial capital is really just a specialized part of productive capital that has become independent, let’s try to find a solution by imagining that this separation hasn’t happened yet. In reality, manufacturers also employ commercial staff in their offices. So, let’s first consider the variable capital b (wages) that a manufacturer pays for these office employees.

This office is always very small compared to the industrial factory. It’s clear that as production grows, the number of commercial activities also grows. These activities are necessary to allow the productive capital to turn over – to sell the product, buy the materials and equipment, and keep track of the whole business. These activities include things like:

• Calculating prices
• Bookkeeping
• Managing finances
• Correspondence

The employment of commercial wage-laborers therefore becomes necessary, and these people make up the office staff. The money spent on these employees, even though it’s in the form of wages, is different from the variable capital spent on the wages of productive laborers (factory workers). This spending on office staff increases the manufacturer’s total expenses and the amount of capital they need to advance, but it doesn’t directly increase the surplus-value produced. Like all similar expenses, this spending reduces the rate of profit because the total amount of capital advanced increases, but the surplus-value doesn’t increase proportionally. Consequently, the manufacturer tries to keep these office expenses – just like their expenses for machinery and materials (constant capital) – as low as possible, reducing them to a minimum.

So, productive capital (the manufacturer’s capital) has a different attitude towards its commercial employees than towards its productive wage-laborers:

• The more productive workers there are (all else being equal), the greater the amount produced, and the greater the quantity of surplus-value or profit.
• On the other hand, the more production develops, the greater the quantity of goods that must be sold to realize their value and surplus-value. This means office expenses also increase (in absolute terms, if not always as a percentage of total costs), leading to a kind of division of labor within the office.

The fact that these office expenses are recovered out of the profit – and therefore presume that profit already exists – is shown by things like commercial salaries often being paid, at least in part, as a percentage of the profits, especially as these salaries grow. It’s not that a lot of commercial work creates a lot of value. It’s the other way around: because, and if, a large quantity of values has to be calculated and turned over (sold and bought), then a lot of commercial work is required. It’s the same with other costs of circulation. To measure, weigh, pack, and transport a large quantity of goods, that large quantity must first exist. The amount of labor needed for packing and shipping depends on the quantity of goods to be packed and shipped, not the other way around.

The commercial employee does not directly produce surplus-value. But the price of their labor power (their wage) is determined by its value (i.e., its cost of production – what they need to live). However, the exercise of that labor power – like with all wage-laborers in any category – is not limited by its value. They work more or provide more effort than what their wage directly compensates. Therefore, their wages are by no means necessarily proportionate to the amount of profit they help the capitalist turn into money. What the employee costs the capitalist, and what the capitalist gets out of the employee, are two different amounts. The employee is valuable to the capitalist because – through work that is partly unpaid (working more hours or with more intensity than their wage represents) – they help to reduce the costs involved in converting the produced surplus-value into actual money.

The commercial employee, strictly speaking, often belongs to the class of better-paid wage-laborers – those whose labor is considered skilled and stands higher than average labor. Nevertheless, their wages have a tendency to fall as the capitalist system of production develops, even relative to average labor. This happens for a couple of reasons:

1. Division of labor in the office: This leads to employees developing very specific, one-sided skills. Developing this specific skill on the job costs the capitalist very little, as the employee’s skill improves automatically with practice, and improves more rapidly the more specialized the task becomes due to increasing division of labor.
2. Spread of education: Preparatory education, knowledge of business routines, foreign languages, and other commercial skills are constantly becoming more widespread. They are acquired more rapidly, more easily, and more cheaply with every advance in science and education systems. This is especially true as the capitalist mode of production encourages more practical methods of education. The spread of education allows businesses to recruit commercial employees from groups of people who were previously excluded from such jobs and who might be used to a lower standard of living. In this way, the “democratization” of education (making it more widely available) leads to an oversupply of candidates and sharpens competition within the commercial profession.

With few exceptions, therefore, the value of commercial employees’ labor power tends to diminish as the capitalist system of production develops. Their wages often sink, while their capacity for work (their productivity) increases.

If we consider commercial work in connection with productive capital (i.e., within a manufacturing company), it’s quite clear that this work cannot be a source of surplus-value. No one would suggest that the costs of running a factory’s office are anything other than expenses that reduce the profits by the full amount of those costs.

Apparently – but only apparently – it is different for a wholesale merchant. In the merchant’s case, the money spent on circulation costs (like running their office, marketing, etc.) seems much larger. This is because that part of the capital that all manufacturers would otherwise have to spend individually on these commercial functions is now concentrated in the hands of a few specialized tradesmen. But, of course, this concentration cannot change the basic nature of these costs. Costs of circulation appear to productive capital (manufacturers) as what they truly are: costs. To the tradesman (merchant), these same costs appear as the source of their profit. This is because, assuming a general average rate of profit exists in the economy, the merchant’s profit will be in proportion to the amount of these costs (meaning, their invested capital). For commercial capital, these costs of circulation are a productive investment. Therefore, the commercial labor bought by such capital is directly productive for the commercial capital itself, as it enables the merchant to carry out their function and claim their share of the total profit.

CHAPTER NINE

THE INFLUENCE OF COMMERCIAL CAPITAL ON PRICES

Let’s explore how the money used by merchants (commercial capital) affects the prices of goods.

How Production Costs Affect a Merchant’s Pricing

Imagine a merchant wants to sell sugar. Let’s say it costs $1 to produce one pound of sugar. If the merchant invests $100, they can buy 100 pounds of sugar. Suppose the average profit rate for businesses is 15% per year. The merchant expects to make a $15 profit on their $100 investment ($100 * 15% = $15). To do this, they add $15 to their total cost of $100. This means they add $0.15 profit to each pound of sugar ($15 / 100 pounds). So, they would sell each pound of sugar for $1.15 ($1 production cost + $0.15 profit).

Now, what if the production cost of sugar drops to $0.50 per pound? With the same $100 investment, the merchant can now buy 200 pounds of sugar ($100 / $0.50). They still aim for a $15 profit for the year on their $100 investment. To get this $15 profit from 200 pounds, they add $0.075 profit to each pound ($15 / 200 pounds). So, they would sell each pound of sugar for $0.575 ($0.50 production cost + $0.075 profit).

In both cases, the merchant makes $15 profit on their $100 investment. The difference is:

• When the sugar’s production cost was high, they sold fewer pounds (100 lbs).
• When the sugar’s production cost was low, they sold more pounds (200 lbs).

(For this explanation, we are ignoring other business costs like shipping or storage. We are only looking at the costs of buying and selling the goods.)

So, whether the production cost is high or low does not change the merchant’s overall profit rate (like the 15% in our example). However, the production cost is very important for figuring out how much profit is added to each single item sold. This is the extra amount the merchant adds to the original cost of an item.

Limits on a Merchant’s Selling Price

It’s a common mistake to think merchants can simply choose their profit strategy. Some believe merchants can decide to either:

• Sell many items with a small profit on each, OR
• Sell a few items with a large profit on each.

This idea is generally wrong, unless the merchant has a monopoly. A monopoly means they control the entire supply of a product, perhaps even its production. An old example is the Dutch East India Company, which had immense control over certain trade routes and goods. But for typical businesses, merchants don’t have this kind of freedom.

There are two main limits on their selling price:

1. The production cost of the item: The merchant doesn’t usually control this cost.
2. The average profit rate in the economy: The merchant also doesn’t control this general rate.

(We are talking about regular buying and selling here, not wild financial speculation.)

Productive Capital vs. Commercial Capital

Now, let’s look at the difference between two types of capital: productive capital and commercial capital.

Productive Capital: Making Goods Productive capital is the money invested in actually making things. Think of a factory owner who uses money for buildings, machines, and raw materials to produce goods.

The key idea here is turnover (or rotation). This means how quickly the invested money goes through the whole cycle:

1. Money is used to make products.
2. Products are sold.
3. Money comes back to the producer.
4. This money can then be used to make more products.

For productive capital:

• The more times this cycle (turnover) happens in a year, the more profit is made by that productive capital.
• It’s true that the economy tends to spread total profits among businesses based on how much capital they have, not just how much they produce. This is due to an average profit rate.
• However, if the total productive capital in the whole economy turns over faster, then the total amount of profit made in the economy will be larger.
• And, if other factors stay the same, this means the average rate of profit can also increase.

Commercial Capital: Buying and Selling Goods Now let’s consider commercial capital. This is the money merchants use to buy goods that have already been made, and then sell them.

Things work differently for commercial capital:

• The profit rate for commercial capital is usually seen as a set amount. This rate is influenced by:

  1. The amount of profit being made by productive capital (the businesses actually producing goods).
  2. The total amount of commercial capital being used by all merchants, compared to all the capital in the economy.

• The number of turnovers (how quickly merchants buy and sell their goods) is also very important for commercial capital.

• Here’s why: If merchants can turn over their capital quickly (sell goods fast), they don’t need to have as much money tied up in inventory at any one time.

• This means that the faster commercial capital turns over, the less actual money is needed for commerce.

• So, the proportion of the economy’s total capital that is tied up as commercial capital can be smaller.

How Turnover Affects Commercial Profit

Let’s assume the total amount of commercial capital (relative to all capital in the economy) stays the same. In this situation, even if different types of trading businesses have different turnover speeds, this doesn’t change:

• The total amount of profit that goes to all commercial businesses combined.
• The general average profit rate for the economy.

A merchant’s profit is based on the amount of money they initially invest, not on the value of the goods they are currently holding or selling. Let’s go back to our merchant with $100 and a 15% annual profit rate. Their goal is $15 profit for the year.

• Scenario 1: Capital turns over once a year.

  • The merchant uses their $100 to buy goods.
  • They sell these goods for $115.
  • Their profit is $15 for the year.

• Scenario 2: Capital turns over five times a year.

  • The merchant still invests $100. They still aim for $15 total profit for the year.
  • Since the capital turns over 5 times, each turnover needs to generate $3 profit ($15 / 5).
  • So, each time, they use $100 to buy goods and sell them for $103.
  • Over the year, they do this five times.
  • Total value of goods bought and sold: 5 x $100 = $500.
  • Total sales revenue: 5 x $103 = $515.
  • Their total profit is still $15 for the year ($515 sales - $500 cost).

This shows that the merchant makes $15 profit on their initial $100 investment, regardless of these turnover differences. If it worked differently—for example, if faster turnover for merchants led to much higher profit rates—then commercial capital would earn far more than industrial capital. This would go against the basic idea that profit rates tend to equalize across different types of capital in the economy.

Turnover Speed and Price Markups

So, how quickly commercial capital turns over directly affects the selling price of individual items.

• The faster a merchant’s capital turns over during the year (meaning they sell goods quickly and reinvest)…
• …the smaller the amount of profit they need to add to each batch of goods they sell.

Let’s say the target annual profit for commercial capital is 15% on the money invested. The actual percentage markup added to the price of the goods will change based on how many times the capital turns over:

• If the capital turns over once a year: The merchant adds a 15% markup to the cost of the goods. (To make 15% profit on capital in one go).
• If the capital turns over five times a year: The merchant adds only a 3% markup to the cost of the goods each time they sell. (Because 5 turnovers * 3% markup = 15% annual profit on capital).

Industrial vs. Commercial Turnover: Impact on Value

This is different for industrial capital (money used to make goods). For industrial capital:

• The speed of turnover does not change the value of each individual item produced. For example, a chair has a certain value based on the labor and materials used, regardless of how fast the factory makes chairs.
• However, the speed of turnover does affect the total amount of value and profit (called surplus-value) that a given amount of industrial capital can produce in a certain time. This is because faster turnover means more labor is being used over that period.
• This relationship can sometimes be hidden when we look at prices of production. (Prices of production are the factory gate prices, which can be different from the strict “labor value” of items due to how profits are averaged out across industries – this is a complex topic from earlier in the original text).
• But if we look at the bigger picture – the total amount of goods produced by all industrial capital – we see the general rule: faster turnover allows more labor to be used, which creates more total value and profit.

How Turnover Shapes Perceptions of Price

So, to recap:

• When we look closely at industrial capital, how turnover speed affects value creation leads us back to a fundamental idea in economics: that the value of goods is determined by the amount of labor time needed to produce them.
• With commercial capital, however, the way turnover affects profit can make things look different. It can seem like prices are set almost arbitrarily.
  • It might look like merchants simply decide they want to make a certain annual profit (e.g., 15% on their investment).
  • Then, they just adjust the markup on each sale to reach that annual goal (e.g., adding 3% to prices if they expect 5 turnovers, to hit their 15% annual target).
• Because of this effect of turnover, it can appear as if the process of buying and selling itself (called circulation) determines the prices of goods, largely independent of the actual production process (at least within certain limits).

Common Misunderstandings about Capitalism

This leads to some common misunderstandings about how capitalism works:

• Merchants, stock market speculators, and bankers often have incorrect ideas about the system. Their view is shaped by the buying and selling process, where prices can seem to be set by the desire for a certain annual profit.
• Manufacturers (those who produce goods) also can have a skewed understanding. This is due to:
  • The way their own capital goes through the cycle of production and sale.
  • The way profits tend to average out across the economy (the general rate of profit).
  • As a result, their view of how competition works is often wrong.

The author believes that to truly understand prices and profits, you need to start with two basic concepts:

1. Value: The idea that goods have a value based on the labor needed to make them.
2. Surplus-value: The profit that is generated during production.

If you understand these limits (value and surplus-value), then it’s easier to see how competition among businesses does the following:

• It transforms the basic values of goods into prices of production (the prices at which manufacturers can sell their goods and make an average profit).
• It further transforms these into trading prices (the prices merchants charge).
• It transforms surplus-value (the total profit from production) into an average profit rate across the economy.

However, if you don’t consider these underlying limits of value and surplus-value, it’s impossible to explain why the average profit rate settles at one level (say, 15%) rather than another (like 1500%). Competition can push different profit rates towards a single average level. But competition itself cannot determine what that average level will be. That level depends on the creation of value and surplus-value in the production process.

Therefore, from the viewpoint of a merchant (commercial capital), it really looks like the speed of turnover itself determines prices.

Turnover, Profit, and Competition

Consider an industrial capital (a factory, for example).

• If this factory manages to turn over its capital four times a year instead of twice (meaning it produces and sells its goods twice as fast), it will generate twice as much surplus-value and therefore twice as much profit. (This assumes other things, like its equipment and labor ratio, stay the same).
• This becomes very obvious if the factory has a monopoly on a new, faster way of producing things. They can speed up their turnover and directly reap more profit before competitors catch up.

But for commercial capital (merchants), the situation with turnover is different:

• The profit a merchant makes on a particular batch of goods they sell is inversely related to how many times their money turns over.
• Faster turnover of their invested money means a smaller slice of profit is taken on each sale of goods.
• This is why you often hear the phrase: “A large turnover and small profits.” This saying seems especially true for small retail shop owners, who often rely on selling many items with a small profit on each.

It’s important to understand that this rule (“large turnover and small profits”) applies to the average turnover rate for all commercial capital invested in a particular line of business (like all grocery stores, or all electronics stores).

• Within that line of business, one merchant (let’s call them Merchant A) might turn over their capital faster than another (Merchant B). If Merchant A is faster than average, others might be slower, so the overall average for the sector remains consistent.
• This difference in individual turnover speed doesn’t change the big picture for the entire branch of trade.
• But, it’s extremely important for the individual merchant.
  • If a merchant can turn over their capital faster than the average, they can make surplus profit—that is, more profit than the average.
  • If competition forces them to, such a merchant could sell their goods cheaper than their competitors and still make at least the average rate of profit, thanks to their faster turnover.
  • Sometimes, the things that allow for faster turnover can be bought. For example, a shop in a very busy location might lead to faster sales.
  • In such cases, the merchant might have to pay extra for that advantage (like higher rent for the prime location). This extra cost means that a part of their potential surplus profit goes to the landlord as rent.

CHAPTER TEN

THE HISTORICAL DEVELOPMENT OF COMMERCIAL CAPITAL

How did the capital used by merchants (commercial capital) develop throughout history? Let’s explore its journey.

A Different View: Historical vs. Scientific

If we look at how the average profit rate is formed like a scientist studying the current system, it seems to start with productive capital. Productive capital is the money used for making things (in factories, farms, etc.). Competition between these producers helps set the profit rate. Later, commercial capital (money used by merchants for buying and selling) comes in and adjusts this rate.

However, if we look at it from a historical point of view, the opposite happened. Commercial capital often played a more foundational role much earlier in history.

What is Commercial Capital?

It’s a mistake to think of commercial capital as just another type of productive capital, like mining, farming, or manufacturing. Think about it: businesses that make things (productive capital) also perform commercial functions. They have to sell their products and buy raw materials. This basic observation shows that commercial capital isn’t simply a category of production.

Instead, commercial capital is a specialized part of the overall capital system. It branched off and became independent. Its main job is to handle the processes that turn goods into money, and money back into goods.

The Ancient Roots of Commercial Capital

So far, we’ve mainly discussed commercial capital as it exists within the modern capitalist system. But trade itself, and the commercial capital involved in it, are much older than capitalism. In fact, commercial capital is historically the oldest free form of capital – money used to make more money.

How Trade Shapes Production

Commercial capital deals only with buying, selling, and moving goods. For it to exist, it mainly needs goods to be available for sale and money to circulate. (This is beyond very simple societies that might just barter goods directly).

The way goods are produced doesn’t stop commercial capital from existing. It can operate whether production is organized by:

• Primitive communities
• Societies based on slavery
• Peasant farmers working their own land
• Small-scale “plebeian” (common people’s) production
• Modern capitalist factories

It also doesn’t matter if all goods are for sale, or only the extra goods that producers don’t need for themselves. As long as some goods are being sold and exchanged, commercial capital can play its role as the go-between.

The amount of products that enter into trade, and thus fall into the hands of merchants, depends heavily on the system of production.

• This amount is highest in a fully developed capitalist system. In such a system, almost everything produced is a commodity – a good made specifically for sale, not just for the producer’s own direct use.

On the other hand, no matter the production system, trade encourages producers to make more than they need for themselves. They do this to exchange their surplus goods for treasure, other useful items, or things they enjoy. So, once trade begins in a society, it starts to push production more and more towards creating exchange-value. This means focusing on making goods because of what they can be traded for, not just for their direct usefulness to the maker.

The Merchant’s Goal: Making Money from Money (M-C-M’)

No matter how a society is organized, when a merchant helps exchange its goods:

• The merchant’s wealth is typically in the form of money.
• This money always acts as capital – its purpose is to make more money, or surplus-value (profit).

The merchant’s main reason for using money to buy and sell goods is to end up with more money than they started with. This was true in ancient societies just as it is in capitalism. The process looks like this:

1. Start with Money (M)
2. Buy Commodities (C)
3. Sell those Commodities for More Money (M’)

The buying (M—C) and selling (C—M’) are just steps in the overall goal of transforming M into M’ (money into more money). This M—C—M’ cycle is the classic movement of commercial capital.

This is different from when producers trade among themselves. Their cycle is often C—M—C:

1. Start with a Commodity (C) they produced
2. Sell it for Money (M)
3. Use that Money to buy a different Commodity (C) that they need. Here, the main goal is to exchange one type of useful item for another.

Merchants and Wealth in Early Societies

The less developed a society’s production system is, the less money producers themselves will likely have. In such societies, a large portion of the money-wealth tends to be concentrated in the hands of merchants. This money-wealth is a distinct form of trading capital.

Trade: The Main Focus of Early Capital

So, in all times before capitalism (pre-capitalist eras):

• Trade seemed to be the main job of capital.
• Making more money through trade appeared to be capital’s primary, and perhaps only, real goal.

This was especially true when most production was for subsistence – meaning people mostly made what they needed to survive. At that time, there wasn’t really any other kind of capital besides commercial capital. In contrast, during the capitalist era, capital takes control of the production process itself. It profoundly changes how things are made. As a result, commercial capital becomes just one specific function of capital, existing alongside other functions like industrial capital.

Commercial Capital: A Stepping Stone to Capitalism

It’s easy to see why commercial capital appears in history long before capital takes over the actual production of goods. In fact, commercial capital had to exist and reach a certain level of development for the capitalist system of production to even begin. There are two main reasons for this:

1. Concentration of Money: Commercial capital was necessary to gather and concentrate large amounts of money in fewer hands.
2. Wholesale Trade: Capitalist production relies on wholesale distribution – selling large quantities of goods, not just selling to individual consumers one by one. This requires merchants who act as intermediaries, buying goods not for their own needs but to supply many other people.

Furthermore, any development of commercial capital tends to push society’s production further towards exchange-value. This means more and more products are made as commodities for sale. However, the development of commercial capital by itself is not enough to cause or fully explain the shift from one major system of production to another (like the shift from feudalism to capitalism).

Commercial Capital Under Capitalism

Within the capitalist system of production:

• Commercial capital loses the independent, dominant role it once had.
• It becomes just one particular way to invest money (capital).
• The general tendency for profit rates to equalize across the economy brings the merchant’s profit rate down to the average level.
• From this point on, commercial capital mainly acts as an agent of productive capital – it helps the producers of goods to sell their products and buy their supplies.

The unique social conditions that arose when commercial capital was developing and dominant are no longer the deciding factors. On the contrary, if you find a place where commercial capital is still the most dominant force, it usually means that older, less developed (“archaic”) economic conditions still exist there. This can even be true for different areas within the same country. For instance, purely trading towns often look more like societies from the past than modern factory towns do.

Independent Commercial Capital vs. Economic Development

When commercial capital develops independently and becomes the main form of capital in a society, it usually means that capital has not yet taken full control of the production process itself. So, the independent development of commercial capital often happens in inverse proportion to the general economic development of a society. In simpler terms, the more a society relies on purely commercial capital (without a strong production base controlled by capital), the less economically developed it tends to be overall.

The Carrying Trade: Merchants Exploiting Nations

This pattern is very clear in the history of the carrying trade. This was the business of transporting goods for other countries or communities.

• Cities like Venice, Genoa, and countries like Holland became famous for this.
• For them, exporting their own products was often a secondary source of income.
• Their main profits came from acting as middlemen, exchanging products for communities whose own trade and economies were still undeveloped. They often exploited both the producing and consuming countries.

Here we see commercial capital in its purest form: separate from the production processes it connected. This was a major way commercial capital first arose. However, this monopoly over the carrying trade (and the trade itself) shrinks as the nations that were exploited become more economically developed.

A clear example of how commercial capital operates when it directly dominates production can be seen in:

• Colonization in general.
• Specifically, the methods of the old Dutch East India Company, which controlled production and trade in its colonies for its own profit.

How Commercial Profit First Appeared

At first glance, it seems impossible for merchants to make a profit if products are always sold at their true value (a value based, for example, on the labor needed to make them). The common idea of trade is “buy cheap and sell dear,” not “exchange things of equal value.”

Initially, the quantities in which products were exchanged might have been quite random or based on chance. But as products were exchanged more continuously, and therefore regularly produced for exchange, this randomness gradually decreased. However, for the producers and consumers, the terms of exchange might still have seemed random at first. The person who first saw a pattern was the merchant – the intermediary. The merchant could compare money prices in different places or times and keep the difference as profit.

Early Trade and “Uncivilized” Producers

The trade of the first independent and highly developed trading peoples and towns in ancient times was often a simple carrying trade. It was based on the less developed state (“lack of civilization”) of the producing peoples, for whom these traders acted as intermediaries.

Trade’s Impact on Old Societies

In the early stages of capitalist society – for example, in Western Europe during the Middle Ages – trade tended to dominate industry. In modern nations, the opposite is usually true (industry leads trade).

Trade naturally has an effect on the communities it connects:

• It makes production increasingly focus on exchange-value (making goods for sale).
• It makes people’s enjoyment and even their basic survival depend more on selling what they produce and buying what they need, rather than directly using everything they make.
• This process helps to end older ways of life and economic organization.
• It increases the circulation of money.
• Trade doesn’t just take hold of the surplus goods produced; it gradually invades the production process itself. One by one, it can make whole branches of production dependent on merchants and markets.

However, how much this “dissolving influence” of trade breaks down an existing community depends a lot on the nature of that community and its production system.

Plunder and Profit in Early Commerce

As long as commercial capital is just acting as a go-between for the exchange of products between undeveloped communities, commercial profit doesn’t just seem to involve cheating and trickery. In fact, a large part of its profit does come from these sources.

When commercial capital achieves a dominant position, it often creates a system of plunder. The historical development of trade among many peoples, both ancient and modern, is linked with:

• Extortion (forcing people to pay)
• Piracy
• Stealing people for slavery
• Colonial oppression (exploiting colonies)

This was seen in places like Carthage and Rome, and later with the Venetians, Portuguese, and Dutch.

Trade’s Power to Change Societies

The development of trade and commercial capital everywhere increases the tendency for production to focus on exchange-value. At the same time, it:

• Widens the range and variety of products.
• Makes production more international (“cosmopolitan”).
• Helps develop money into world money (money used for international trade).

Trade, therefore, tends to break down the existing ways of making things in the societies it touches. These older systems were usually focused on use-value (making things for direct use, not primarily for sale).

The extent to which this breakdown happens depends mainly on how strong and well-organized the old system of production was. And the final result – what kind of new system replaces the old one – doesn’t just depend on trade. It depends heavily on the nature of the old system itself.

• In the ancient world: The growth of trade and commercial capital often led to slavery. Depending on the starting point, this might have been a shift from an older type of slavery (where enslaved people produced for the household’s needs) to a system where they were forced to produce surplus-value (extra goods for profit).
• In modern times: The development of commercial capital is linked to the rise of the capitalist system of production.

It’s clear that these outcomes were also shaped by other factors beyond just the development of commercial capital.

Cities, Industry, and Trade

It’s natural that once industries in cities became distinct from farming in the countryside, the goods made in cities were, from the start, commodities meant to be sold. Their sale required trade. So, it’s clear that:

• Trade relies on the growth of towns and cities.
• Urban development (city growth) depends on trade.

However, how much industrial development happens alongside this growth of trade and cities depends on completely different circumstances.

• For example, in the later days of the Roman Republic, commercial capital was more developed than ever before in the ancient world. But there wasn’t a matching boom in industrial development.
• In contrast, in Corinth and other Greek towns in Europe and Asia Minor, highly developed industry grew alongside flourishing trade.
• On the other hand, sometimes a strong “spirit of trade” and developed commercial capital can be found even among nomadic peoples (groups who move from place to place), quite separate from city development.

The Great Commercial Shift (16th-17th Centuries)

There’s no doubt that the huge changes in trade during the 16th and 17th centuries were a key reason for the transition from the feudal system to the capitalist system of production. (This fact has sometimes led to incorrect views about how these changes happened.) These transformations were driven by geographic explorations and discoveries, which greatly sped up the development of commercial capital.

Several factors contributed massively to breaking free from the limits that feudalism had placed on production:

• The sudden expansion of the world market.
• The wide variety of new goods being traded.
• Competition between European nations to get Asian products and American treasures.
• The colonial system.

How Capitalism Changed Trade

Nevertheless, the modern way of production, in its first phase (the “manufacturing period”), only really developed in places where the right conditions had already been created during the Middle Ages. (Compare, for example, Holland with Portugal at that time.)

And while the massive expansion of trade and the opening of a new world market in the 16th and 17th centuries greatly influenced the fall of the old feudal system and the rise of capitalism, something else happened once capitalism was established:

• The capitalist system itself began to drive the expansion of the world market. The world market became the foundation for this new way of producing.
• The built-in need for capitalist production to constantly grow led to a continuous expansion of the world market.
• So, in this new phase, it’s not so much that trade revolutionizes industry, but rather that industry constantly revolutionizes trade.

The dominance of trade is now linked to how advanced modern industry is in a country.

• Compare England and Holland: Holland was once the leading trading nation. Its decline as a trade leader is the story of its commercial capital becoming secondary to industrial capital (as England’s industry grew stronger).

Resistance to Change: The Cases of India and China

The power of trade to dissolve older, pre-capitalist national production systems met resistance. This is clear in England’s relations with India and China.

• In these places, the economic foundation was often a combination of small-scale farming and domestic industry (people making goods at home).
• In India, there were also village communities often based on collective (shared) ownership of land. This was also an early form of organization in China.

To break down these small economic communities in India, the English used both political power (as rulers) and economic power (as landowners collecting rent).

• If English trade managed to affect India’s production system, it was mainly because the cheaper prices of English factory goods could destroy local spinning and weaving industries. This, in turn, helped to tear the village communities apart.
• Even so, this process of breakdown was very slow and gradual.

In China, where the English did not have direct political power, they were even less successful in disrupting the local economy.

• The traditional Chinese system, combining farming directly with manufacturing, was very efficient in its use of time and labor. This offered strong resistance to imported factory goods, whose prices were higher due to the costs of shipping and trade.

Two Paths from Feudalism to Capitalism

The change from the feudal way of producing things to the capitalist way generally happens in two main ways:

1. The producer becomes a merchant and capitalist. This is the truly revolutionary path, where the actual makers of goods transform their own operations and become business owners in the new capitalist sense.
2. The merchant takes direct control of production. This path also acts as a transition. An example is the 17th-century English “clothier.” This merchant would sell wool to independent weavers and then buy the finished cloth from them. However, this second way doesn’t, by itself, completely change the old way of making things. Instead, it often preserves the old production methods because its own business depends on them.

For instance, up to the mid-19th century:

• In the French silk industry, and in the English stocking (hosiery) and lace industries, the “manufacturer” was often a manufacturer in name only.
• In reality, this person was just a merchant. They let the weavers continue working as they always had, each in their own small workshop. The merchant simply acted as a trader for whom these weavers effectively worked.
• The same was true for industries like ribbon making, lace trimming, and silk weaving along the Rhine river.

CHAPTER TEN

THE HISTORICAL DEVELOPMENT OF COMMERCIAL CAPITAL

How did the capital used by merchants (commercial capital) develop throughout history? Let’s explore its journey.

A Different View: Historical vs. Scientific

If we look at how the average profit rate is formed like a scientist studying the current system, it seems to start with productive capital. Productive capital is the money used for making things (in factories, farms, etc.). Competition between these producers helps set the profit rate. Later, commercial capital (money used by merchants for buying and selling) comes in and adjusts this rate.

However, if we look at it from a historical point of view, the opposite happened. Commercial capital often played a more foundational role much earlier in history.

What is Commercial Capital?

It’s a mistake to think of commercial capital as just another type of productive capital, like mining, farming, or manufacturing. Think about it: businesses that make things (productive capital) also perform commercial functions. They have to sell their products and buy raw materials. This basic observation shows that commercial capital isn’t simply a category of production.

Instead, commercial capital is a specialized part of the overall capital system. It branched off and became independent. Its main job is to handle the processes that turn goods into money, and money back into goods.

The Ancient Roots of Commercial Capital

So far, we’ve mainly discussed commercial capital as it exists within the modern capitalist system. But trade itself, and the commercial capital involved in it, are much older than capitalism. In fact, commercial capital is historically the oldest free form of capital – money used to make more money.

How Trade Shapes Production

Commercial capital deals only with buying, selling, and moving goods. For it to exist, it mainly needs goods to be available for sale and money to circulate. (This is beyond very simple societies that might just barter goods directly).

The way goods are produced doesn’t stop commercial capital from existing. It can operate whether production is organized by:

• Primitive communities
• Societies based on slavery
• Peasant farmers working their own land
• Small-scale “plebeian” (common people’s) production
• Modern capitalist factories

It also doesn’t matter if all goods are for sale, or only the extra goods that producers don’t need for themselves. As long as some goods are being sold and exchanged, commercial capital can play its role as the go-between.

The amount of products that enter into trade, and thus fall into the hands of merchants, depends heavily on the system of production.

• This amount is highest in a fully developed capitalist system. In such a system, almost everything produced is a commodity – a good made specifically for sale, not just for the producer’s own direct use.

On the other hand, no matter the production system, trade encourages producers to make more than they need for themselves. They do this to exchange their surplus goods for treasure, other useful items, or things they enjoy. So, once trade begins in a society, it starts to push production more and more towards creating exchange-value. This means focusing on making goods because of what they can be traded for, not just for their direct usefulness to the maker.

The Merchant’s Goal: Making Money from Money (M-C-M’)

No matter how a society is organized, when a merchant helps exchange its goods:

• The merchant’s wealth is typically in the form of money.
• This money always acts as capital – its purpose is to make more money, or surplus-value (profit).

The merchant’s main reason for using money to buy and sell goods is to end up with more money than they started with. This was true in ancient societies just as it is in capitalism. The process looks like this:

1. Start with Money (M)
2. Buy Commodities (C)
3. Sell those Commodities for More Money (M’)

The buying (M—C) and selling (C—M’) are just steps in the overall goal of transforming M into M’ (money into more money). This M—C—M’ cycle is the classic movement of commercial capital.

This is different from when producers trade among themselves. Their cycle is often C—M—C:

1. Start with a Commodity (C) they produced
2. Sell it for Money (M)
3. Use that Money to buy a different Commodity (C) that they need. Here, the main goal is to exchange one type of useful item for another.

Merchants and Wealth in Early Societies

The less developed a society’s production system is, the less money producers themselves will likely have. In such societies, a large portion of the money-wealth tends to be concentrated in the hands of merchants. This money-wealth is a distinct form of trading capital.

Trade: The Main Focus of Early Capital

So, in all times before capitalism (pre-capitalist eras):

• Trade seemed to be the main job of capital.
• Making more money through trade appeared to be capital’s primary, and perhaps only, real goal.

This was especially true when most production was for subsistence – meaning people mostly made what they needed to survive. At that time, there wasn’t really any other kind of capital besides commercial capital. In contrast, during the capitalist era, capital takes control of the production process itself. It profoundly changes how things are made. As a result, commercial capital becomes just one specific function of capital, existing alongside other functions like industrial capital.

Commercial Capital: A Stepping Stone to Capitalism

It’s easy to see why commercial capital appears in history long before capital takes over the actual production of goods. In fact, commercial capital had to exist and reach a certain level of development for the capitalist system of production to even begin. There are two main reasons for this:

1. Concentration of Money: Commercial capital was necessary to gather and concentrate large amounts of money in fewer hands.
2. Wholesale Trade: Capitalist production relies on wholesale distribution – selling large quantities of goods, not just selling to individual consumers one by one. This requires merchants who act as intermediaries, buying goods not for their own needs but to supply many other people.

Furthermore, any development of commercial capital tends to push society’s production further towards exchange-value. This means more and more products are made as commodities for sale. However, the development of commercial capital by itself is not enough to cause or fully explain the shift from one major system of production to another (like the shift from feudalism to capitalism).

Commercial Capital Under Capitalism

Within the capitalist system of production:

• Commercial capital loses the independent, dominant role it once had.
• It becomes just one particular way to invest money (capital).
• The general tendency for profit rates to equalize across the economy brings the merchant’s profit rate down to the average level.
• From this point on, commercial capital mainly acts as an agent of productive capital – it helps the producers of goods to sell their products and buy their supplies.

The unique social conditions that arose when commercial capital was developing and dominant are no longer the deciding factors. On the contrary, if you find a place where commercial capital is still the most dominant force, it usually means that older, less developed (“archaic”) economic conditions still exist there. This can even be true for different areas within the same country. For instance, purely trading towns often look more like societies from the past than modern factory towns do.

Independent Commercial Capital vs. Economic Development

When commercial capital develops independently and becomes the main form of capital in a society, it usually means that capital has not yet taken full control of the production process itself. So, the independent development of commercial capital often happens in inverse proportion to the general economic development of a society. In simpler terms, the more a society relies on purely commercial capital (without a strong production base controlled by capital), the less economically developed it tends to be overall.

The Carrying Trade: Merchants Exploiting Nations

This pattern is very clear in the history of the carrying trade. This was the business of transporting goods for other countries or communities.

• Cities like Venice, Genoa, and countries like Holland became famous for this.
• For them, exporting their own products was often a secondary source of income.
• Their main profits came from acting as middlemen, exchanging products for communities whose own trade and economies were still undeveloped. They often exploited both the producing and consuming countries.

Here we see commercial capital in its purest form: separate from the production processes it connected. This was a major way commercial capital first arose. However, this monopoly over the carrying trade (and the trade itself) shrinks as the nations that were exploited become more economically developed.

A clear example of how commercial capital operates when it directly dominates production can be seen in:

• Colonization in general.
• Specifically, the methods of the old Dutch East India Company, which controlled production and trade in its colonies for its own profit.

How Commercial Profit First Appeared

At first glance, it seems impossible for merchants to make a profit if products are always sold at their true value (a value based, for example, on the labor needed to make them). The common idea of trade is “buy cheap and sell dear,” not “exchange things of equal value.”

Initially, the quantities in which products were exchanged might have been quite random or based on chance. But as products were exchanged more continuously, and therefore regularly produced for exchange, this randomness gradually decreased. However, for the producers and consumers, the terms of exchange might still have seemed random at first. The person who first saw a pattern was the merchant – the intermediary. The merchant could compare money prices in different places or times and keep the difference as profit.

Early Trade and “Uncivilized” Producers

The trade of the first independent and highly developed trading peoples and towns in ancient times was often a simple carrying trade. It was based on the less developed state (“lack of civilization”) of the producing peoples, for whom these traders acted as intermediaries.

Trade’s Impact on Old Societies

In the early stages of capitalist society – for example, in Western Europe during the Middle Ages – trade tended to dominate industry. In modern nations, the opposite is usually true (industry leads trade).

Trade naturally has an effect on the communities it connects:

• It makes production increasingly focus on exchange-value (making goods for sale).
• It makes people’s enjoyment and even their basic survival depend more on selling what they produce and buying what they need, rather than directly using everything they make.
• This process helps to end older ways of life and economic organization.
• It increases the circulation of money.
• Trade doesn’t just take hold of the surplus goods produced; it gradually invades the production process itself. One by one, it can make whole branches of production dependent on merchants and markets.

However, how much this “dissolving influence” of trade breaks down an existing community depends a lot on the nature of that community and its production system.

Plunder and Profit in Early Commerce

As long as commercial capital is just acting as a go-between for the exchange of products between undeveloped communities, commercial profit doesn’t just seem to involve cheating and trickery. In fact, a large part of its profit does come from these sources.

When commercial capital achieves a dominant position, it often creates a system of plunder. The historical development of trade among many peoples, both ancient and modern, is linked with:

• Extortion (forcing people to pay)
• Piracy
• Stealing people for slavery
• Colonial oppression (exploiting colonies)

This was seen in places like Carthage and Rome, and later with the Venetians, Portuguese, and Dutch.

Trade’s Power to Change Societies

The development of trade and commercial capital everywhere increases the tendency for production to focus on exchange-value. At the same time, it:

• Widens the range and variety of products.
• Makes production more international (“cosmopolitan”).
• Helps develop money into world money (money used for international trade).

Trade, therefore, tends to break down the existing ways of making things in the societies it touches. These older systems were usually focused on use-value (making things for direct use, not primarily for sale).

The extent to which this breakdown happens depends mainly on how strong and well-organized the old system of production was. And the final result – what kind of new system replaces the old one – doesn’t just depend on trade. It depends heavily on the nature of the old system itself.

• In the ancient world: The growth of trade and commercial capital often led to slavery. Depending on the starting point, this might have been a shift from an older type of slavery (where enslaved people produced for the household’s needs) to a system where they were forced to produce surplus-value (extra goods for profit).
• In modern times: The development of commercial capital is linked to the rise of the capitalist system of production.

It’s clear that these outcomes were also shaped by other factors beyond just the development of commercial capital.

Cities, Industry, and Trade

It’s natural that once industries in cities became distinct from farming in the countryside, the goods made in cities were, from the start, commodities meant to be sold. Their sale required trade. So, it’s clear that:

• Trade relies on the growth of towns and cities.
• Urban development (city growth) depends on trade.

However, how much industrial development happens alongside this growth of trade and cities depends on completely different circumstances.

• For example, in the later days of the Roman Republic, commercial capital was more developed than ever before in the ancient world. But there wasn’t a matching boom in industrial development.
• In contrast, in Corinth and other Greek towns in Europe and Asia Minor, highly developed industry grew alongside flourishing trade.
• On the other hand, sometimes a strong “spirit of trade” and developed commercial capital can be found even among nomadic peoples (groups who move from place to place), quite separate from city development.

The Great Commercial Shift (16th-17th Centuries)

There’s no doubt that the huge changes in trade during the 16th and 17th centuries were a key reason for the transition from the feudal system to the capitalist system of production. (This fact has sometimes led to incorrect views about how these changes happened.) These transformations were driven by geographic explorations and discoveries, which greatly sped up the development of commercial capital.

Several factors contributed massively to breaking free from the limits that feudalism had placed on production:

• The sudden expansion of the world market.
• The wide variety of new goods being traded.
• Competition between European nations to get Asian products and American treasures.
• The colonial system.

How Capitalism Changed Trade

Nevertheless, the modern way of production, in its first phase (the “manufacturing period”), only really developed in places where the right conditions had already been created during the Middle Ages. (Compare, for example, Holland with Portugal at that time.)

And while the massive expansion of trade and the opening of a new world market in the 16th and 17th centuries greatly influenced the fall of the old feudal system and the rise of capitalism, something else happened once capitalism was established:

• The capitalist system itself began to drive the expansion of the world market. The world market became the foundation for this new way of producing.
• The built-in need for capitalist production to constantly grow led to a continuous expansion of the world market.
• So, in this new phase, it’s not so much that trade revolutionizes industry, but rather that industry constantly revolutionizes trade.

The dominance of trade is now linked to how advanced modern industry is in a country.

• Compare England and Holland: Holland was once the leading trading nation. Its decline as a trade leader is the story of its commercial capital becoming secondary to industrial capital (as England’s industry grew stronger).

Resistance to Change: The Cases of India and China

The power of trade to dissolve older, pre-capitalist national production systems met resistance. This is clear in England’s relations with India and China.

• In these places, the economic foundation was often a combination of small-scale farming and domestic industry (people making goods at home).
• In India, there were also village communities often based on collective (shared) ownership of land. This was also an early form of organization in China.

To break down these small economic communities in India, the English used both political power (as rulers) and economic power (as landowners collecting rent).

• If English trade managed to affect India’s production system, it was mainly because the cheaper prices of English factory goods could destroy local spinning and weaving industries. This, in turn, helped to tear the village communities apart.
• Even so, this process of breakdown was very slow and gradual.

In China, where the English did not have direct political power, they were even less successful in disrupting the local economy.

• The traditional Chinese system, combining farming directly with manufacturing, was very efficient in its use of time and labor. This offered strong resistance to imported factory goods, whose prices were higher due to the costs of shipping and trade.

Two Paths from Feudalism to Capitalism

The change from the feudal way of producing things to the capitalist way generally happens in two main ways:

1. The producer becomes a merchant and capitalist. This is the truly revolutionary path. Here, the actual makers of goods transform their own operations. They become business owners in the new capitalist sense.
2. The merchant takes direct control of production. This path also helps society transition. An example is the 17th-century English “clothier.” This merchant would sell wool to independent weavers. Then, the merchant would buy the finished cloth from them. However, this second way doesn’t, by itself, completely change the old way of making things. Instead, it often preserves the old production methods. Its own business depends on these old ways continuing.

Problems with Merchants Controlling Production Indirectly

This system, where merchants control production without changing the methods, is an obstacle to true capitalist development. It tends to disappear as real capitalism grows. This system makes things worse for workers. They become wage earners, but often under tougher conditions than workers directly employed by larger capitalist firms. The merchant takes the value of the workers’ extra labor (their profit) while still using the old production methods.

A similar situation existed in parts of the London furniture industry around the mid-19th century.

• This industry was split into many independent branches. One branch made only chairs, another only tables, and so on.
• These branches often operated on a small handicraft basis. A small master craftsman worked with a few apprentices.
• However, they produced too much to sell directly to individual customers. Their main buyers were the owners of large furniture shops.
• Every Saturday, the small master would go to these shops to sell his products. The master and the shop owner would haggle over the price, much like people bargaining at a pawnshop.
• These small masters had to sell their goods weekly. They needed the money to buy raw materials for the next week and to pay their workers’ wages.
• In this setup, the small masters were really just go-betweens for the shop owner (the merchant) and their own workers.
• The shop owner was the real capitalist. The shop owner pocketed most of the profit (the surplus value).

This situation is like earlier transitions. It’s similar to when old handicraft businesses or rural side-jobs began to change into larger-scale manufacturing. As such small workshops improve their technology – for instance, when they start using machines that can still fit into a craft-style setup – the shift to modern industry begins. Instead of being powered by hand, machines might be driven by steam. This happened, for example, in the English stocking (hosiery) industry.

Three Ways a Society Moves to Capitalist Production (Revisited)

So, the transition to capitalist production happens in three main ways:

1. The merchant directly becomes an industrial producer. This happens in industries that grow out of trade. A key example is luxury goods. In the 15th century, merchants brought luxury items, raw materials, and skilled workers from places like Constantinople to Italy. Then, they started producing these goods there themselves.
2. The merchant makes the small master craftsperson their intermediary, or buys directly from the person who makes the goods. The merchant lets these small producers remain independent in name only. The merchant does not change their old system of production.
3. The industrial producer (the person making goods) becomes a merchant. They start producing goods in large quantities (wholesale) specifically for trade, not just for individual orders.

Producers, Merchants, and Markets: An Evolving Relationship

In the Middle Ages, merchants mainly just moved goods around. These goods were produced by members of guilds or by peasants. Sometimes, the merchant became an industrial producer. More often, the merchant arranged for craftspeople, especially those in small rural industries, to make goods for him.

On the other hand, the producer could also become a trader.

• For example, a cloth weaver might stop receiving small amounts of wool from a merchant and working for that specific merchant.
• Instead, the weaver might buy wool or yarn themselves. Then, they would sell their finished cloth to various merchants.
• In this case, the cloth weaver starts producing for the wider trading world, not just for one merchant or a few specific customers. The producer themselves becomes a trader.

Originally, trade was a necessary first step for changing older ways of production. It helped transform guild-based industries, rural home-based crafts, and feudal farming into capitalist businesses. Trade did this by:

• Creating a market for products.
• Supplying new raw materials and other necessary supplies.
• Starting new types of production that were based on trade from the very beginning.

Later, as manufacturing and especially modern industry developed, they began to create their own markets. They conquered these markets with their new types of goods. At this point, trade starts working for industrial production. A continually growing market is essential for industry. Mass production on an ever-increasing scale creates more goods than the current market can easily absorb. This pushes businesses to constantly find or create larger markets.

This large-scale production is not limited simply by trade (which often just reflects existing demand). Instead, it’s limited by:

• The amount of money (capital) available to invest in production.
• How efficiently workers can produce goods (the level of labor productivity).

The productive capitalist (the factory owner or industrial businessperson) always has to think about the world market. They must constantly compare their own production costs with market prices, not just in their own country, but across the whole world.

In earlier times, this job of comparing prices and understanding markets was mostly done by merchants. This gave merchant capital an advantage and a kind of supremacy over industrial capital.

CHAPTER ELEVEN

INTEREST AND PROFIT FROM BUSINESS OPERATIONS

Let’s explore the concepts of interest and the profit that comes from businesses.

Money as Capital: Making Profit

Money represents a certain amount of value. This value could also be in the form of goods. In a capitalist system, money can be used as capital. When used as capital, it can grow and become more valuable. This happens because capitalists can get workers to perform some labor that they are not paid for. The capitalist keeps the value of this unpaid work. Because it can do this, money used as capital has a special usefulness: the ability to make profit. When money has this ability to make profit, it acts like a special kind of good that can be bought or sold.

What is Interest?

Imagine a person has $100. Let’s say the average annual profit rate is 20%. This means they could use the $100 to make $120 (a $20 profit). Now, imagine this person (the lender) gives the $100 to someone else (the borrower) for a year. The borrower uses this $100 as capital to run a business. The lender has given the borrower the means to make that $20 profit.

If, at the end of the year, the borrower pays the lender, say, $5. This $5 is part of the $20 profit made using the original $100. By paying this $5, the borrower is paying for the usefulness of the $100 – its ability to function as capital and make profit. This part of the profit ($5 in this example) that is paid to the lender is called interest. So, interest is just a specific name for a share of the profit.

It’s clear that owning the $100 gives the lender the power to take a share of the profit made with their money. This share is the interest. If the lender hadn’t provided the $100, the borrower couldn’t have made that profit.

What Lenders “Sell” and Borrowers “Buy”

What does the money lender (often called a money capitalist) give to the borrower (often an industrial capitalist, who uses the money in production)? What does the lender actually sell?

Think about a typical sale. What is being sold? It’s not the value of the item. The value just changes form. For example, if you sell a chair for $50, the chair (value) becomes $50 (value). The seller still has the value, but now as money. What the seller actually gives up, and what the buyer gets to use up or consume, is the use-value of the item – its usefulness (like the ability to sit on the chair).

So, what is the special use-value that the money lender sells to the borrower for the period of the loan? It is the ability of that money to create surplus-value (extra value or profit). And importantly, the original amount of money (the principal) remains intact. Think about other goods: their usefulness is eventually used up. For example, food is eaten, fuel is burned. The item itself disappears, and so does its value. But the ‘good’ we call capital is different. When you use its special ability (its use-value to make profit), its original value isn’t just preserved – it actually grows.

The Price of Borrowed Capital

So, what does the industrial capitalist (the borrower) pay for this loan? And what is the price of the borrowed capital? The price is a portion of the profit that can be made using that capital.

How is the Interest Rate Decided?

How much of the profit goes to the lender as interest? How much is left for the borrower as their own profit? This division – the ‘price’ of the borrowed capital – is determined by supply and demand, meaning by competition. This is similar to how market prices for everyday goods are set.

But there’s an important difference here. For ordinary goods: When supply and demand are balanced, the market price usually equals the price of production. (The price of production includes the cost to make the item plus an average profit.) So, for goods, their price seems to be set by underlying economic laws of production, with competition just causing temporary changes. Fluctuations caused by supply and demand just explain why market prices might go above or below the price of production. Over long periods, these ups and downs average out, and the average market price equals the price of production. The author says something similar happens with wages. If the supply of workers and the demand for workers are balanced, wages tend to equal the value of the workers’ ability to work (labor power).

Is There a “Natural” Rate of Interest?

However, it’s different for the interest paid on borrowed money. Here, competition doesn’t just cause prices to wiggle around some basic level. Instead, competition is the only thing that determines how profit is divided between lender and borrower. This is because, as we’ll see, there’s no such thing as a ‘natural’ rate of interest. There are no natural limits to how high or low the interest rate can be.

Limits of the Interest Rate

Interest is just a part of the total profit made. It’s the part the borrower pays to the lender. So, the highest possible limit for the interest rate would be the total profit itself. In that case, the borrower who actually runs the business would get zero profit. Ignoring rare cases where interest might temporarily be higher than the profit (and thus can’t actually be paid from it), we could say the maximum interest is the entire profit, minus a certain amount that could be considered payment for managing the business (sometimes called wages of superintendence).

The lowest possible limit for interest is completely open. It could theoretically fall to any level. However, if it gets too low, other economic forces usually step in and push it back up.

The average interest rate in a country cannot be figured out using any fixed economic law. There isn’t a ‘natural’ rate of interest in the same way some economists talk about a ‘natural’ rate of profit or a ‘natural’ level of wages. Even if we assume an average profit rate exists, the balance of supply and demand for loans doesn’t tell us what the interest rate should be. There’s no specific reason why the balance point between lenders and borrowers should lead to an interest rate of 3%, 4%, 5%, or any other particular number.

Why No Fixed Law for Average Interest?

Why aren’t there general rules for the average interest rate? The answer lies in what interest actually is: it’s just a share of the average profit. How the two people entitled to this profit (the lender and the borrower) decide to split it is, in itself, somewhat random or arbitrary. It’s like how business partners in a company decide to split their shared profits – there’s no single ‘natural’ way to do it.

Interest Rate vs. Profit Rate: What Seems Clearer?

Even so, the interest rate often seems more consistent, clear, and easy to identify than the general rate of profit.

When the interest rate is influenced by the profit rate, it’s always the general average rate of profit across the whole economy that matters. It’s not determined by the specific profit rates in certain industries (like tech or agriculture), and definitely not by any extra profits a particular business might make.

It’s true that interest rates do change based on things like:

• The collateral or security provided by the borrower (how risky the loan is).
• How long the loan is for. But for each specific category of loan (like a 30-year mortgage with good credit, or a short-term business loan), the rate is generally the same for everyone in that category at any particular time.

The average interest rate in a country often looks like a stable, constant number over many years. This is because the general rate of profit also tends to change only slowly, over long stretches of time. This happens even though profit rates in specific industries might be going up and down all the time (these changes tend to cancel each other out in the overall average).

Market Interest Rate vs. General Profit Rate

However, the actual market interest rate that changes from day to day must be seen as a fixed number at any specific moment. This is because, in the money market, all the available money for loans (loanable capital) as a whole constantly meets all the businesses and individuals wanting to borrow (active capital). So, the relationship between the total supply of loanable money and the total demand for it determines the market interest rate at that instant. This becomes even more true as credit systems develop and banks concentrate large amounts of loanable money, offering it all at once on the market.

On the other hand, the general rate of profit is more like an underlying trend. It emerges from the way different profit rates in various industries balance out over time. Competition among capitalists here means slowly moving money out of industries where profits are low and into industries where profits are high. Or, it means distributing new investment money differently among these branches. This involves a constant, gradual shifting of capital, not large, simultaneous transactions like those that set the interest rate in the money market.

The average profit rate isn’t something you can easily see or know directly. It’s the end result of many opposing changes evening out, and you can only figure it out after careful study. The interest rate is different. It is usually (at least in a specific area) widely applicable, fixed at a certain level (at any given moment), and generally known. Businesses, whether they make things or just trade them, include the interest rate in their financial planning. Stock market reports show the interest rate as clearly and precisely as weather reports show temperature and air pressure. And this reported rate isn’t just for one person’s money; it’s for the total pool of money available for loans in the market.

The Money Market: Where Capital is Just Money

In the money market, lenders and borrowers face each other directly. The ‘good’ being traded (loaned) has only one form: money. All the different ways capital might be used – in making cars, growing food, or selling clothes – disappear in this market. Here, capital is just a uniform amount of value, in the form of money. Competition between different industries stops. All industries, from the perspective of needing capital, become part of one big group: money borrowers. And the capital itself (the money being lent) is initially indifferent to how it will be specifically used by the borrower. In the money market, capital really acts like a shared pool of funds for the entire business class, its price (interest rate) determined by overall supply and demand.

Bankers and Concentrated Capital

It’s also important to note that as modern industry grows, the money available for loans in the market is less and less likely to come from individual wealthy people lending out their personal funds. Instead, it increasingly appears as a large, organized pool of money. This pool is largely controlled by bankers, who act as managers of this ‘social capital’ (the combined available money of society). This control by bankers is much more centralized than the control over actual production (which is spread across many businesses). As a result:

• On the demand side (people wanting to borrow), it’s like an entire class of borrowers is facing this concentrated supply of loanable money.
• On the supply side (money available to be lent), capital itself appears as one huge mass of loan money.

Why Interest Seems More Definite Than Profit

These are some reasons why the general rate of profit can seem fuzzy and unclear, especially when compared to the interest rate. The interest rate does change, but because it tends to change for all borrowers at the same time, it always feels like a definite, fixed number to those who need to borrow.

How Profit Splits into “Interest” and “Business Profit”

How does this simple numerical split of profit – some for the lender (interest), some for the borrower (net profit) – turn into a distinction of type or quality? In other words, why does even a capitalist who uses their own money, not borrowed money, still mentally separate a part of their gross profit and call it ‘interest’? And why is all capital, whether borrowed or not, thought of as earning ‘interest,’ as distinct from the capital that earns ‘net profit’ (the profit from running the business)?

(It’s worth noting that not every way of dividing profit creates such a difference in type. For example, when business partners share the profits of their company, they usually just see it as different portions of the same kind of income.)

Consider a productive capitalist – someone running a business – who uses borrowed money. Their total (gross) profit is split into two parts:

• Interest: This must be paid to the lender.
• Their own share: This is the surplus profit left over after paying the interest.

No matter how large the total profit is, the amount of interest is usually set by the general interest rate. It’s often known or agreed upon even before production starts and any profit is actually made. So, how much profit is left for the business owner depends on this pre-set interest payment. Therefore, this remaining part of the profit seems to the capitalist to come directly from using the capital in their business (whether it’s making things or trading). In contrast to interest (which goes to the lender), this leftover profit for the business owner takes on the appearance of industrial profit (if they make things), commercial profit (if they trade), or more generally, undertaker’s profit (the profit of the entrepreneur running the business).

The Capitalist’s View: Profit from Ownership vs. Profit from Activity

We already know that the rate of profit (and therefore the total gross profit) doesn’t just depend on surplus-value (the unpaid labor part). It also depends on many other things, such as:

• The cost of raw materials, machinery, and other means of production.
• Using highly efficient production methods.
• Being careful and economical with equipment and materials (constant capital).

And beyond the basic price of production, profit also depends on:

• Especially good market conditions or lucky breaks.
• How smart and active the capitalist is in every business deal – for instance, whether they manage to buy supplies below the usual price or sell their goods above it.

So, it starts to look like the interest the business owner pays to the money lender is due to the lender simply for being the owner of the capital. In contrast, the profit that remains for the business owner (the undertaker’s profit) now seems to come only from their own actions and efforts in running the industry or trade.

From the capitalist’s perspective:

• Interest seems to be purely the reward that capital gives just by existing (as something owned), even if its owner isn’t ‘working’ it.
• Undertaker’s profit, on the other hand, seems to be purely the reward for the functions the business owner performs – the result of their own personal activity, compared to the ‘inactivity’ of the money lender (who just lends the money).

This creates a separation between the two parts of the total profit. It makes them seem as if they come from two completely different sources. Each part (interest and undertaker’s profit) appears to become ‘fixed’ and independent of the other. This idea of them being separate and independent becomes established for the entire capitalist class and for all capital. It doesn’t matter if the business owner is using borrowed money or their own money.

The profit on any capital (and therefore, the average profit in general) is thought of as being split into two distinct types of income, each with its own rules:

• Interest
• Undertaker’s profit

A capitalist using their own money makes the same mental split with their profit:

• Interest is what’s ‘due’ to them as the owner of the capital (as if they are lending it to themselves).
• Undertaker’s profit is what’s ‘due’ to them for actively running the business.

So, capital itself seems to be divided based on the type of profit it generates:

• Ownership capital: Capital that stays ‘outside’ production (like money lent out) and earns interest.
• Functional capital: Capital actively used ‘inside’ the production process, earning undertaker’s profit.

Interest-Bearing Capital: A Historical View

Interest-bearing capital (money that earns interest) and interest itself (which is really just a slice of surplus-value or overall profit) have existed for a very long time. They were around even before modern capitalist production and its specific ideas about capital and profit. Because of this long history, many people see interest-producing capital as capital par excellence – meaning capital in its purest or most essential form. For the same reason, it was long believed that interest was simply a payment for the use of money itself. The fact that money lent out earns interest, whether the borrower actually uses it as productive capital or not, strengthens this belief that interest-bearing capital is a separate and independent thing.

The Individual vs. The Whole System

So, to a capitalist, interest looks like extra value (surplus-value) that capital produces all by itself. It seems like capital would earn this interest even if it wasn’t used to make anything. In practice, this view makes sense for an individual capitalist. They have a choice: either lend their money out for interest, or use it themselves to run a productive business.

But from a broader perspective, looking at all the capital in society, this idea is completely wrong (even though some economists have tried to base all profit on it). It’s obviously absurd to think that all capital could just be lent out as loan money. If that happened, there would be no one left to actually buy tools, materials, and hire labor to make things. If too many capitalists tried to just lend their money, the value of loanable money would plummet, and interest rates would drop dramatically. Many lenders would find they couldn’t live on their interest anymore and would be forced to go back to being industrial capitalists (running businesses).

But again, for the individual capitalist, the choice is real. So, even if they use their own capital in their business, they tend to think of the part of their profit that equals the average interest rate as being a reward from their capital itself, separate from the production process. Interest-bearing capital is seen as property-capital (capital as ownership). This is contrasted with capital as a function (capital actively working in production).

The “Work” of the Active Capitalist

The producing (or active) capitalist justifies their claim to the undertaker’s profit based on the idea that their capital is actively functioning – not just being passively owned. Unlike the owner of interest-bearing capital (the lender, who might not do much), the person managing the functioning capital doesn’t have an easy job (it’s ‘no sinecure’). The active capitalist directs both how goods are made (production) and how they are bought and sold (circulation). Overseeing productive labor takes a lot of effort, whether the capitalist does it themselves or hires managers to do it. So, their undertaker’s profit, unlike interest, doesn’t seem to them to come from mere ownership. It appears to come from non-ownership (in the sense of not being a passive owner) – it seems like a result of their activity, as if they are ‘laborers’ themselves in a way.

The Business Owner’s “Wage”

So, the active capitalist tends to imagine that their undertaker’s profit is not something that contrasts with the wages paid to workers. They don’t see it as coming from the unpaid labor of others. Instead, they see it as a form of ‘wages’ for their own efforts, that is…

So, the active capitalist tends to imagine that their undertaker’s profit is not something that contrasts with the wages paid to workers. They don’t see it as coming from the unpaid labor of others. Instead, they see it as a form of ‘wages’ for their own efforts, that is, the wages of superintendence (payment for managing the business).

Undertaker’s Profit as “Work”

Just as interest looks like the part of the extra value (surplus-value) that capital creates on its own, the undertaker’s profit (the business owner’s profit) seems to come directly from the act of production. So, the business owner appears to create this extra value, not specifically because they are a capitalist (an owner of capital), but because, in addition to owning capital, they also perform actual work.

The idea that the business owner’s profit is really just ‘wages for managing’ (wages of superintendence) gets more support because a portion of the profit can indeed be separated and paid out as a wage. This happens, for example, with the salary paid to a company manager. Or, you could say, a part of what is paid as wages (to a manager) looks like it comes out of the profit.

The Two Sides of Management Work

The work of managing and supervising people is always necessary whenever many individuals work together on a shared task or for a common goal. This management work has two different aspects.

1. Coordination: First, when many people work together, someone needs to coordinate their efforts to make sure the whole process works smoothly. This requires a guiding direction and tasks that focus on the overall project, not just individual jobs. Think of an orchestra conductor who leads all the musicians. This kind of coordinating work is productive and essential whenever people collaborate.
2. Control due to Conflict: Second, this management work also becomes necessary in any system where there’s a fundamental conflict of interest between the workers and the owners of the tools, factories, and materials (the means of production). The stronger this conflict, the more supervision is needed. It’s similar to how governments in authoritarian states operate. They manage essential common tasks, but also perform special functions that arise from the conflict between the government and the people.

Historical Views on Management

Ancient writers, who observed slavery firsthand and wrote about it, described these two sides of management work in much the same way as some economists who see the capitalist system as timeless and unchanging. Aristotle, for example, pointed out that any form of rule, whether political or economic, requires those in power to do the work of governing. In the economy, this means they must know how to manage labor effectively. Aristotle also added that managing wasn’t a very glamorous job. So, as soon as a master became wealthy enough, they were happy to pass on the ‘honor’ of these duties to an overseer or manager.

The idea that masters or owners have to manage because they are exploiting the labor of others has often been used to defend that very exploitation. Similarly, taking the unpaid labor of others has often been described as a fair payment (a legitimate wage) for the management work done by the capitalist or owner. This argument was clearly made by a lawyer named O’Connor, who defended slavery in the United States in a speech in 1859. He argued, to much applause, that:

• Nature made Black people for servitude, giving them strength but not the will to work or the ability to govern themselves.
• Nature also gave them a master to force them to work and make them useful.
• Therefore, it was not unjust to keep Black people enslaved and provide them with a master.
• Forcing them to work was justified because it provided the master with fair compensation for the effort and skill the master used in governing them, supposedly making the enslaved person useful to themselves and society.

The argument suggests that, like an enslaved person, a wage-worker also needs a master to make them work and to govern them. If we accept the idea that this relationship between rulers and the ruled is permanent, unchangeable, and essential for production, then it would seem logical that wage-workers should have to produce enough value not only to cover their own wages but also to pay for the ‘wages of superintendence’ of their employers. This, in turn, would ‘furnish his master with an adequate compensation for the labour and talent expended by the master in governing him, and in thus rendering him useful to himself and to society’—echoing the justification used for slavery.

Separating Management from Ownership

However, the kind of management work that arises from capital’s control over labor (the second aspect we discussed) is not automatically and permanently tied to the productive tasks that come from people working together (the first aspect). Even within the capitalist system, these can be separated.

Historically, the pay for a manager (like an ‘epitropos’ in ancient Greece or a ‘régisseur’ in feudal France) was distinct from the owner’s profit. It was simply a wage for skilled work, paid when a business was large enough to hire such a manager. Capitalist production itself has led to management work becoming a job that can be hired – completely separate from owning the capital. You can find managers ‘on the street’ (available for hire). An orchestra conductor doesn’t need to own the orchestra’s instruments. Dealing with the other musicians’ pay isn’t part of their job as a conductor.

Cooperative factories (factories owned and run by workers) demonstrate that the capitalist owner can become unnecessary as a manager in the production process. After economic crises in England’s manufacturing areas, it was common to see former factory owners working for low wages as managers in the very factories they used to own. The new owners were often the people or banks they owed money to.

Public financial reports from cooperative factories in England showed something interesting. Even after paying the manager’s salary (which, like other workers’ wages, is part of the costs for labor, or variable capital), the profit was often larger than the average profit in privately owned factories. This happened even though these cooperatives sometimes paid much higher interest on loans than private factory owners did. In these cases, the increased profit usually came from being more economical in using materials and equipment. What’s most important for our discussion, however, is that this clearly shows that the average profit (which includes both interest and the business’s own ‘undertaker’s profit’) is a sum completely separate from any salary paid for management. Since the total profit in these cooperatives was higher than average, their ‘undertaker’s profit’ was also larger than usual.

We can see the same thing in some regular capitalist businesses, like joint-stock banks (banks owned by shareholders). In these banks, not only the manager’s salary but also the interest paid to people who deposit money are subtracted from the total (gross) profit. Yet, a very large ‘undertaker’s profit’ (the bank’s own profit) often still remains.

The Disappearing Excuse for Confusion

The confusion between the business owner’s profit (undertaker’s profit) and wages for managing arose initially from the obvious difference between interest (paid to lenders) and the leftover part of the profit. This confusion grew because profit was often portrayed not as surplus-value (value from unpaid labor), but as the capitalist’s own ‘wages’ for the work they did. Socialist thinkers then challenged this: if profit is supposedly a wage for the capitalist’s management work, then it should be valued like any other wage. This was an uncomfortable idea for capitalists because actual wages for management – like all other wages – were constantly being pushed down by competition and because education was becoming more widespread and cheaper (making managers less scarce).

With the growth of worker cooperatives and joint-stock companies (where owners might not be the managers), the last excuse for mixing up the business’s profit with management wages disappeared. Management became a clearly defined, paid job.

In joint-stock companies (owned by shareholders), a new kind of financial trickery related to ‘management wages’ has emerged. Often, besides the actual manager who runs the company, a number of directors and administrators are appointed. For these individuals, ‘managing’ or ‘supervising’ is often just an excuse to enrich themselves at the expense of the shareholders (the real owners). For example, one historical case showed a Mr. Timothy Abraham Curtis, who was a director for many companies including the Bank of England and the East India Company. His personal records, revealed after he went bankrupt, showed he earned a significant annual income just from these directorship fees. Companies were eager to have well-known figures like him as directors. Directors of such companies often receive a fee for each weekly board meeting. However, evidence from bankruptcy courts often revealed that these ‘wages for supervising’ were generally the opposite of how much real supervision these directors actually provided – the less they did, the more they sometimes seemed to be paid, or rather, high pay didn’t guarantee actual work.

CHAPTER TWELVE

CREDIT AND BANKS

Let’s look at how credit and banks work within a capitalist system.

The Costs of Handling Money

Business owners (capitalists) constantly need to pay money to many people. They also constantly receive money from many people. These tasks of paying and receiving money involve work. However, this work itself doesn’t create new value. It’s considered one of the costs of circulation – the expenses involved in moving money and goods.

Additionally, businesses must always keep a certain amount of their capital available as a treasure. This is a reserve of money for making purchases and payments. It’s like unemployed capital, waiting to be used. Keeping this reserve fund safe, along with managing payments and bookkeeping, is another special kind of work.

Specialization in Handling Money

These technical tasks involved in handling money, and the work and costs they create, can be reduced. This happens when a particular group of agents or capitalists (early bankers) takes over these functions for the entire business community. Through a division of labor (where different people specialize in different tasks), these money-handling jobs become the special function of this group. Like commercial (merchant) capital, these functions become concentrated and are carried out on a large scale. Within this specialized banking process, there’s even further division of labor. This leads to:

• Different, independent branches of banking.
• Specialized roles within each branch, such as handling payments, managing accounts, bookkeeping, and taking deposits.

Origins of Money Trade and Early Credit

Money first developed from barter (direct trade) between different communities. The money trade – meaning the trade in money itself as a commodity – therefore first grew out of international business. When different countries have different types of coins, merchants doing business abroad need to exchange their local coins for the coins of the country they are trading with, and vice-versa. Or, they might need to exchange various coins for uncoined gold and silver, which act as world money (money accepted internationally). This currency exchange was a key foundation for the modern business of dealing in money. Out of these exchange activities, discount banks developed. In these banks, gold or silver (acting as world money, sometimes called bank money or trade money) were treated differently from everyday local coins.

This business of exchanging money, or trading in money, was one of the reasons credit developed. (We won’t go into a detailed study of credit and all its tools, like credit money. We’ll only cover a few key points that are typical of the capitalist system, focusing on commercial credit and banking credit. We won’t discuss how these relate to government borrowing or public credit.)

How Credit Arises in Trade

We’ve seen before that money starts to act as a means of payment (not just an immediate means of exchange) as the circulation of goods develops. This is how relationships of creditor (someone owed money) and debtor (someone who owes money) are formed between those who produce goods and those who sell them.

Here’s how it happens:

• Different goods take different amounts of time to produce.
• The production of various goods also depends on different seasons of the year.
• Some goods might be sold right where they are made, while others have to travel a long way to reach their market.
• Because of these factors, one owner of goods might be ready to sell before another is ready to buy.
• When the same people regularly do business with each other, the terms of sale start to match the conditions of production (e.g., payment terms might reflect how long it takes to make the goods).
• Also, sometimes the use of a good is sold for a specific period. For example, someone might rent a house. In this case, the buyer only fully receives the use-value (the benefit of living in the house) over time, often paying for it after they have already started using it. The seller becomes a creditor, and the buyer becomes a debtor.

Credit in a Capitalist System

As trade and the capitalist system of production develop – where goods are made primarily for sale and circulation – the system of credit expands, becomes more complex, and is used more widely. In general, money in these credit transactions functions mainly as a means of payment. This means goods are often not sold for immediate cash but for a written promise to pay at a future date. (For simplicity, we’ll call all such promises of payment bills of exchange.) Until these bills are due, they can themselves circulate as a form of payment. They become what is properly called trade money or commercial money.

The Network of Credit

In every country, most credit transactions happen within the world of industry itself.

• The producer of raw materials might supply them to a manufacturer and receive a promise of payment for a future date.
• Once the manufacturer has processed the materials, they might then supply the improved goods to another manufacturer under similar credit terms for further processing.
• This way, credit stretches further and further, from one person to another, all the way to the final consumer.
• Wholesale dealers provide goods on credit to retail shop owners. The wholesalers themselves often receive advances from manufacturers or sales agents.

Everyone is borrowing with one hand and lending with the other. Sometimes it’s money, but more often it’s products being advanced. So, in the industrial world, there’s a constant flow of these advances, moving in all directions, supporting and sometimes conflicting with each other. The development of credit lies precisely in the growth and variety of these mutual advances. This is the real source of credit’s power.

Concentration of Money Operations

Another aspect of credit is linked to the growth of the money trade. In a capitalist system, as the trade in goods grows, the trade in money naturally grows with it. The tasks of:

• Storing the reserve funds of the business world.
• Handling the technical side of receiving and paying out money.
• Making international payments (and therefore, trading in gold and silver bullion). all become concentrated in the hands of money dealers (who we would today call bankers).

Early Banking Practices

Early bankers or “cashiers” provided services to business people.

• A business person would deposit money with the cashier.
• The cashier would open a “credit account” for them in their books.
• Businesses would also send the cashier their claims for money owed to them by others. The cashier would collect these sums and credit their account.
• On the other hand, the cashier would make payments on behalf of the business, according to their instructions, and debit their account.
• The cashier charged a small fee for these services. This fee could only provide enough income if the cashier handled a large volume of transactions.
• If two businesses using the same cashier needed to make payments to each other, it could be done easily by simply adjusting the entries in their accounts. Cashiers would then settle their mutual claims with each other daily.

For instance, in Venice, where carrying large amounts of cash was particularly risky and inconvenient, wholesale merchants formed “associations of depositors.”

• Members deposited money with these associations, which had rules for security and management.
• When a member needed to pay a creditor, they would give a payment order.
• The association would then debit the debtor’s account in its books and credit the creditor’s account. These were the early beginnings of deposit banks and clearing banks (banks that settle mutual claims).

The Role of Bankers

Managing interest-bearing capital (money capital) thus becomes a special job for these money dealers or bankers. Borrowing and lending money becomes their specialty. They act as intermediaries between the actual lender of money and the borrower.

In general terms, the banking business involves:

• Concentrating large amounts of loanable capital (money available for lending) in the hands of bankers.
• Instead of individual moneylenders, bankers represent all moneylenders as a group when dealing with industrial and commercial businesses.
• They become the universal managers of money capital.
• Conversely, they also concentrate all the borrowers, effectively borrowing on behalf of the entire commercial world from all the lenders.
• Typically, a bank’s profit comes from borrowing money at a lower interest rate than the rate at which they lend it out.

How Banks Accumulate Loanable Capital

Banks get the loanable capital they use in several ways:

1. Business Deposits: They act as cashiers for industrial and commercial businesses. The reserve money that these businesses keep, or the payments they receive, are deposited with banks. This concentrates the business world’s reserve funds, reducing the total amount needed. Money that would otherwise sit idle can then be loaned out.
2. Deposits from Money Capitalists: Wealthy individuals (money capitalists) who want to lend their money out but don’t want to manage the loans themselves deposit their cash with banks.
3. Savings from All Classes: Once banks start paying interest on deposits, savings from all levels of society, and any money that is temporarily not being used, are deposited with them. Small sums of money, which individually might be too small to act as capital, are gathered into large amounts, creating significant financial power.
4. Gradually Spent Incomes: Money that people receive as income but plan to spend only gradually over time is also often deposited in banks.

How Banks Lend Money

Banks make loans in several ways:

• Discounting bills of exchange: This means they buy these written promises of future payment from businesses, paying cash for them upfront (minus a fee or “discount”) before the bill is actually due.
• Advances: They provide various kinds of advances or direct loans, sometimes based only on personal credit.
• Loans on Securities: They lend money against the security of various types of interest-bearing documents, especially certificates showing ownership of goods, stocks, bonds, etc.

Nature of Bank Capital and Profit

It’s clear that the money capital banks deal with is simply the circulating capital of merchants and industrial businesses. The operations banks undertake are essentially the operations of these businesses, with banks acting as intermediaries.

It’s also clear that bank profits are just a deduction from surplus-value (the overall profit created in the economy). This is because banks deal with values that have already been created – even if these values currently exist only as claims of debt. (However, businesses and producers still have to carry out some of the technical tasks related to money circulation themselves.)

Key Effects of Credit

Here’s a summary of important observations about credit:

I. Credit helps to equalize the rate of profit across different industries.

II. Credit reduces the costs of circulating money and goods.

1. Money is saved in three main ways:
   • A) Less cash needed: Credit means cash isn’t required for a large number of transactions.
   • B) Faster circulation: Money moves more quickly. This is due to efficient banking methods and because credit can speed up how fast goods are bought and sold.
   • C) Paper money: Credit allows paper money (like banknotes) to be used instead of gold or silver coins for many transactions.
2. Credit shortens the different phases of buying, selling, and production, speeding up the entire economic cycle (the process of reproduction). On the other hand, because credit allows buying and selling to be separated by longer periods, it also provides a basis for speculation.
3. Credit reduces the amount of money that businesses need to keep as a reserve fund. This means less money is tied up being idle.

III. Credit leads to the formation of joint-stock companies (corporations). This has several effects:

1. Larger Scale: It allows for a huge expansion in the scale of production. Businesses can be started that would be too large for any single individual’s capital.
2. Social Capital: Capital itself is based on many people contributing. In a joint-stock company, capital directly takes the form of social capital (owned jointly by many shareholders), as opposed to private capital (owned by one person or a few partners). This is like a partial suppression of capital as private property, even within the capitalist system.
3. Separation of Ownership and Management:
   • The capitalist who actually runs the business (the functioning capitalist) often becomes a mere director or manager in a joint-stock company, administering other people’s capital.
   • The owners of the capital (shareholders) become simply money capitalists – passive investors.
   • Even if their dividends (shareholder payments) include both interest and the profit from the business operations (undertaker’s profit), this total profit is received mainly in the form of interest. (The director’s salary is, or should be, just a wage for their work).
   • Profit for the owners thus looks like a payment simply for owning capital. Ownership of capital becomes completely separated from its actual function in producing goods and services.
   • This separation of ownership from function is a result of highly developed capitalist production. The author sees it as an essential stepping-stone towards transforming capital back into the property of the producers themselves – not as private property of individuals, but as social property owned by society or the workers. It’s also a step towards making all functions tied to private capital ownership into social functions.
   • When profit takes the form of interest in this way, businesses can still operate as long as they can make enough to pay this interest.
   • This situation is like an “abolition of capitalist production within the capitalist system itself” – a strange contradiction that seems like a temporary phase leading to a new form of production.

IV. Credit gives power to individual capitalists.

• Apart from joint-stock companies, credit gives an individual capitalist (or someone acting like one) significant control over the capital and labor of others, within certain limits.
• The capital a person actually has, or is believed to have, becomes the foundation for obtaining much more through credit. This is especially true in wholesale trade.
• A speculating wholesale trader often risks not their own property, but social property (money borrowed from others).
• The old idea that capital comes from individual saving also becomes outdated, because the trader using credit is essentially demanding that others save money for them to use.

Cooperative Factories as a New Development

The cooperative factories started by working-class people are a first positive break from the old system of production, even though they still show some defects of the current system in their organization. In these cooperatives, the conflict between capital and labor is overcome, at least initially, because the workers, as members of the cooperative, become their own capitalists. These cooperative factories show how a new way of producing things can naturally develop out of the old one, once the forces of production (technology, skills) and the ways of organizing production reach a certain level.

Stepping Stones to a Social System

Capitalist joint-stock companies, like worker cooperatives, can be seen as stepping-stones leading from the capitalist system to a more social system of production.

• In joint-stock companies, the conflict between owners and workers is “negatively” suppressed (by separating ownership from management and making ownership widespread, though still private).
• In cooperatives, this conflict is “positively” suppressed (by workers themselves becoming the owners).

What Bank Capital Consists Of

Bank capital is made up of:

1. Cash: Either gold or banknotes.
2. Securities: These are financial documents. They can be divided into two types:
   • Commercial papers: These include bills of exchange. They are “floating values” that become due for payment at specific times. The main business of banking involves discounting these bills (paying cash for them before they are due, minus a fee).
   • Public and financial securities: These include items like government treasury notes, shares of all kinds – basically, any interest-bearing paper that is different from a short-term bill of exchange. Mortgages can also be included here.

This combined capital comes from the banker’s own invested capital and from deposits made by customers. For banks that issue their own banknotes, these notes form a third part of their liabilities. (For now, we will set aside further discussion of deposits and banknotes.)

How Interest-Bearing Capital Changes Perceptions

The existence of interest-bearing capital makes any definite and regular income tend to look like it’s interest earned on some capital. This happens whether the income actually comes from capital or not. Similarly, any sum of money that is not immediately spent as income starts to look like a principal sum of capital. It’s seen in contrast to the possible or real interest it could earn.

The idea is simple. Let us assume the average rate of interest to be 5 percent yearly.

CHAPTER TWELVE

CREDIT AND BANKS

Let’s look at how credit and banks work within a capitalist system.

The Costs of Handling Money

Business owners (capitalists) constantly need to pay money to many people. They also constantly receive money from many people. These tasks of paying and receiving money involve work. However, this work itself doesn’t create new value. It’s considered one of the costs of circulation – the expenses involved in moving money and goods.

Additionally, businesses must always keep a certain amount of their capital available as a treasure. This is a reserve of money for making purchases and payments. It’s like unemployed capital, waiting to be used. Keeping this reserve fund safe, along with managing payments and bookkeeping, is another special kind of work.

Specialization in Handling Money

These technical tasks involved in handling money, and the work and costs they create, can be reduced. This happens when a particular group of agents or capitalists (early bankers) takes over these functions for the entire business community. Through a division of labor (where different people specialize in different tasks), these money-handling jobs become the special function of this group. Like commercial (merchant) capital, these functions become concentrated and are carried out on a large scale. Within this specialized banking process, there’s even further division of labor. This leads to:

• Different, independent branches of banking.
• Specialized roles within each branch, such as handling payments, managing accounts, bookkeeping, and taking deposits.

Origins of Money Trade and Early Credit

Money first developed from barter (direct trade) between different communities. The money trade – meaning the trade in money itself as a commodity – therefore first grew out of international business. When different countries have different types of coins, merchants doing business abroad need to exchange their local coins for the coins of the country they are trading with, and vice-versa. Or, they might need to exchange various coins for uncoined gold and silver, which act as world money (money accepted internationally). This currency exchange was a key foundation for the modern business of dealing in money. Out of these exchange activities, discount banks developed. In these banks, gold or silver (acting as world money, sometimes called bank money or trade money) were treated differently from everyday local coins.

This business of exchanging money, or trading in money, was one of the reasons credit developed. (We won’t go into a detailed study of credit and all its tools, like credit money. We’ll only cover a few key points that are typical of the capitalist system, focusing on commercial credit and banking credit. We won’t discuss how these relate to government borrowing or public credit.)

How Credit Arises in Trade

Money starts to act as a means of payment (not just an immediate means of exchange) as the circulation of goods develops. This is how relationships of creditor (someone owed money) and debtor (someone who owes money) are formed between those who produce goods and those who sell them.

Here’s how it happens:

• Different goods take different amounts of time to produce.
• The production of various goods also depends on different seasons of the year.
• Some goods might be sold right where they are made, while others have to travel a long way to reach their market.
• Because of these factors, one owner of goods might be ready to sell before another is ready to buy.
• When the same people regularly do business with each other, the terms of sale start to match the conditions of production (e.g., payment terms might reflect how long it takes to make the goods).
• Also, sometimes the use of a good is sold for a specific period. For example, someone might rent a house. In this case, the buyer only fully receives the use-value (the benefit of living in the house) over time, often paying for it after they have already started using it. The seller becomes a creditor, and the buyer becomes a debtor.

Credit in a Capitalist System

As trade and the capitalist system of production develop – where goods are made primarily for sale and circulation – the system of credit expands, becomes more complex, and is used more widely. In general, money in these credit transactions functions mainly as a means of payment. This means goods are often not sold for immediate cash but for a written promise to pay at a future date. (For simplicity, we’ll call all such promises of payment bills of exchange.) Until these bills are due, they can themselves circulate as a form of payment. They become what is properly called trade money or commercial money.

The Network of Credit

In every country, most credit transactions happen within the world of industry itself.

• The producer of raw materials might supply them to a manufacturer and receive a promise of payment for a future date.
• Once the manufacturer has processed the materials, they might then supply the improved goods to another manufacturer under similar credit terms for further processing.
• This way, credit stretches further and further, from one person to another, all the way to the final consumer.
• Wholesale dealers provide goods on credit to retail shop owners. The wholesalers themselves often receive advances from manufacturers or sales agents.

Everyone is borrowing with one hand and lending with the other. Sometimes it’s money, but more often it’s products being advanced. So, in the industrial world, there’s a constant flow of these advances, moving in all directions, supporting and sometimes conflicting with each other. The development of credit lies precisely in the growth and variety of these mutual advances. This is the real source of credit’s power.

Concentration of Money Operations

Another aspect of credit is linked to the growth of the money trade. In a capitalist system, as the trade in goods grows, the trade in money naturally grows with it. The tasks of:

• Storing the reserve funds of the business world.
• Handling the technical side of receiving and paying out money.
• Making international payments (and therefore, trading in gold and silver bullion). all become concentrated in the hands of money dealers (who we would today call bankers).

Early Banking Practices

Early bankers or “cashiers” provided services to business people.

• A business person would deposit money with the cashier.
• The cashier would open a “credit account” for them in their books.
• Businesses would also send the cashier their claims for money owed to them by others. The cashier would collect these sums and credit their account.
• On the other hand, the cashier would make payments on behalf of the business, according to their instructions, and debit their account.
• The cashier charged a small fee for these services. This fee could only provide enough income if the cashier handled a large volume of transactions.
• If two businesses using the same cashier needed to make payments to each other, it could be done easily by simply adjusting the entries in their accounts. Cashiers would then settle their mutual claims with each other daily.

For instance, in Venice, where carrying large amounts of cash was particularly risky and inconvenient, wholesale merchants formed “associations of depositors.”

• Members deposited money with these associations, which had rules for security and management.
• When a member needed to pay a creditor, they would give a payment order.
• The association would then debit the debtor’s account in its books and credit the creditor’s account. These were the early beginnings of deposit banks and clearing banks (banks that settle mutual claims).

The Role of Bankers

Managing interest-bearing capital (money capital) thus becomes a special job for these money dealers or bankers. Borrowing and lending money becomes their specialty. They act as intermediaries between the actual lender of money and the borrower.

In general terms, the banking business involves:

• Concentrating large amounts of loanable capital (money available for lending) in the hands of bankers.
• Instead of individual moneylenders, bankers represent all moneylenders as a group when dealing with industrial and commercial businesses.
• They become the universal managers of money capital.
• Conversely, they also concentrate all the borrowers, effectively borrowing on behalf of the entire commercial world from all the lenders.
• Typically, a bank’s profit comes from borrowing money at a lower interest rate than the rate at which they lend it out.

How Banks Accumulate Loanable Capital

Banks get the loanable capital they use in several ways:

1. Business Deposits: They act as cashiers for industrial and commercial businesses. The reserve money that these businesses keep, or the payments they receive, are deposited with banks. This concentrates the business world’s reserve funds, reducing the total amount needed. Money that would otherwise sit idle can then be loaned out.
2. Deposits from Money Capitalists: Wealthy individuals (money capitalists) who want to lend their money out but don’t want to manage the loans themselves deposit their cash with banks.
3. Savings from All Classes: Once banks start paying interest on deposits, savings from all levels of society, and any money that is temporarily not being used, are deposited with them. Small sums of money, which individually might be too small to act as capital, are gathered into large amounts, creating significant financial power.
4. Gradually Spent Incomes: Money that people receive as income but plan to spend only gradually over time is also often deposited in banks.

How Banks Lend Money

Banks make loans in several ways:

• Discounting bills of exchange: This means they buy these written promises of future payment from businesses, paying cash for them upfront (minus a fee or “discount”) before the bill is actually due.
• Advances: They provide various kinds of advances or direct loans, sometimes based only on personal credit.
• Loans on Securities: They lend money against the security of various types of interest-bearing documents, especially certificates showing ownership of goods, stocks, bonds, etc.

Nature of Bank Capital and Profit

It’s clear that the money capital banks deal with is simply the circulating capital of merchants and industrial businesses. The operations banks undertake are essentially the operations of these businesses, with banks acting as intermediaries.

It’s also clear that bank profits are just a deduction from surplus-value (the overall profit created in the economy). This is because banks deal with values that have already been created – even if these values currently exist only as claims of debt. (However, businesses and producers still have to carry out some of the technical tasks related to money circulation themselves.)

Key Effects of Credit

Here’s a summary of important observations about credit:

I. Equalizing Profit Rates: Credit helps to create a way for the rate of profit to become more equal across different industries.

II. Reducing Circulation Costs: Credit lowers the costs involved in circulating money and goods.

1. Money is saved in three main ways:
   • A) Less cash needed: Credit means cash isn’t required for a large number of transactions.
   • B) Faster circulation: Money moves more quickly. This is due to efficient banking methods and because credit can speed up how fast goods are bought and sold.
   • C) Paper money: Credit allows paper money (like banknotes) to be used instead of gold or silver coins for many transactions.
2. Credit shortens the different phases of buying, selling, and production. This speeds up the entire economic cycle (the process of reproduction).
3. On the other hand, because credit allows buying and selling to be separated by longer periods, it also provides a basis for speculation (making risky financial bets).
4. Credit reduces the amount of money that businesses need to keep as a reserve fund. This means less money is tied up being idle.

III. Formation of Joint-Stock Companies (Corporations): Credit helps in the creation of joint-stock companies. This has several major effects:

1. Larger Scale Production: It allows for a huge expansion in the scale of production. Businesses can be started that would be too large for any single individual’s capital.
2. Social Capital: Capital itself is based on many people contributing. In a joint-stock company, capital directly takes the form of social capital (owned jointly by many shareholders), as opposed to private capital (owned by one person or a few partners). The author sees this as a kind of partial challenge to private capital, even within the capitalist system.
3. Separation of Ownership and Management:
   • The capitalist who actually runs the business (the functioning capitalist) often becomes a mere director or manager in a joint-stock company, administering other people’s capital.
   • The owners of the capital (shareholders) become simply money capitalists – passive investors.
   • Even if their dividends (shareholder payments) include both interest and the profit from the business operations (undertaker’s profit), this total profit is received mainly in the form of interest. (The director’s salary is, or should be, just a wage for their work). Profit for the owners thus looks like a payment simply for owning capital.
   • Ownership of capital becomes completely separated from its actual function in producing goods and services.
   • The author views this separation as an essential stepping-stone. It could lead towards transforming capital back into the property of the producers themselves – not as private property of individuals, but as social property owned by society or the workers. It’s also a step towards making all functions tied to private capital ownership into social functions.
   • When profit takes the form of interest in this way, businesses can still operate as long as they can make enough to pay this “interest” to shareholders.
   • The author sees this development within capitalism as a strange contradiction. It seems like a temporary phase leading to a new form of production.

IV. Credit Gives Power to Individual Capitalists:

• Apart from joint-stock companies, credit gives an individual capitalist (or someone acting like one) significant control over the capital and labor of others, within certain limits.
• The capital a person actually has, or is believed to have, becomes the foundation for obtaining much more through credit. This is especially true in wholesale trade.
• A speculating wholesale trader often risks not their own property, but social property (money borrowed from others).
• The old idea that capital comes from individual saving also becomes outdated. This is because the trader using credit is essentially demanding that others save money for them to use.

Cooperative Factories as a New Development

The cooperative factories started by working-class people are a first positive break from the old system of production. This happens even though they naturally show some defects of the current system in their organization. In these cooperatives, the conflict between capital and labor is overcome, at least initially. This occurs because the workers, as members of the cooperative, become their own capitalists. These cooperative factories show how a new way of producing things can naturally develop out of the old one. This can happen once the forces of production (technology, skills) and the ways of organizing production reach a certain level.

Stepping Stones to a Social System

Capitalist joint-stock companies, like worker cooperatives, can be seen as stepping-stones. They lead from the capitalist system to a more social system of production.

• In joint-stock companies, the conflict between owners and workers is “negatively” suppressed (by separating ownership from management and making ownership widespread, though still private).
• In cooperatives, this conflict is “positively” suppressed (by workers themselves becoming the owners).

What Bank Capital Consists Of

Bank capital is made up of:

1. Cash: Either gold or banknotes.
2. Securities: These are financial documents. They can be divided into two types:
   • Commercial papers: These include bills of exchange. They are “floating values” that become due for payment at specific times. The main business of banking involves discounting these bills (paying cash for them before they are due, minus a fee).
   • Public and financial securities: These include items like government treasury notes, shares of all kinds – basically, any interest-bearing paper that is different from a short-term bill of exchange. Mortgages can also be included here.

This combined capital comes from the banker’s own invested capital and from deposits made by customers. For banks that issue their own banknotes, these notes form a third part of their liabilities. (For now, we will set aside further discussion of deposits and banknotes.)

How Interest-Bearing Capital Changes Perceptions

The existence of interest-bearing capital makes any definite and regular income tend to look like it’s interest earned on some capital. This happens whether the income actually comes from capital or not. Similarly, any sum of money that is not immediately spent as income starts to look like a principal sum of capital. It’s seen in contrast to the possible or real interest it could earn.

The idea is simple. Let us assume the average rate of interest to be 5 percent yearly. A sum of $500 would then earn $25 in interest each year if it were used as interest-bearing capital. So, any regular yearly income of $25 is often thought of as being the interest on a capital of $500. But this is just an illusion, unless the source of that $25 income can actually be transferred or sold – whether that source is a right of ownership, a debt claim (like a bond), or a real productive asset like a piece of land.

Let’s look at two examples: government debt and workers’ wages.

• Government Debt: The government borrows money and must pay its lenders (creditors) a certain amount of interest each year. The lender usually cannot demand the original sum back directly from the government at any time. Instead, they can only sell their claim (their government bond) to someone else. The original money lent to the government has usually been spent – it no longer exists as a lump sum. What the government’s creditor holds is:

  1. A promise from the government to pay a certain amount (say, the face value of the bond, like $100).
  2. A claim on the government’s future income (from taxes) for a yearly interest payment (say, $5 or 5%).
  3. The ability to sell this bond to someone else. In such cases, the ‘capital’ that seems to be producing the interest paid by the government is purely an illusion – it’s fictitious capital. Not only is the original loaned money gone, but it was never intended to be invested by the government as productive capital in the first place.

• Workers’ Wages: Now let’s consider labor power (a person’s ability to work). Sometimes, wages are also thought of in this ‘capitalized’ way, as if they are interest. If so, then labor power itself is seen as the ‘capital’ that produces this ‘interest’ (the wage). For example, if a worker’s annual wages are $2,500, and the interest rate is 5%, then their labor power might be ‘valued’ as a capital of $50,000 (because $2,500 is 5% of $50,000). The author believes this way of thinking reaches the height of absurdity. This foolish idea is easily shown to be wrong for two reasons:

  1. The worker must actually work to receive their ‘interest’ (their wages).
  2. The worker cannot sell the supposed ‘capital value’ of their ability to work as a lump sum of cash by transferring it to someone else.

Capitalization and Its Illusions

This method of calculating a ‘capital value’ from a regular income is called capitalization. Any steady income is ‘capitalized’ by figuring out how much capital, if lent out at the average interest rate, would produce that income. When people think this way, the connection to the actual process of using capital to produce things gets lost. It reinforces the mistaken idea that capital somehow grows or multiplies on its own, through some mysterious internal process.

Even when a financial paper (a security) isn’t representing purely fictitious capital (like government debt), its ‘capital value’ as a traded item can still be misleading. Shares in companies like railways, mines, or shipping lines do represent real capital – the money actually invested in those businesses (buildings, equipment, etc.). But this real capital doesn’t exist twice – once as the value of the shares, and again as the actual assets of the company. It only exists in its physical form as the company’s operational assets. A share certificate is simply a legal claim to a portion of the profits (surplus-value) that the company makes using its real capital.

These paper securities (scrip) can be bought and sold, so they become commodities. Their prices move in particular ways.

• For company shares: The price of a company’s shares tends to go up if its profits increase. For example, if a share originally represented an investment of $100, and the company’s profit rate on its capital doubles (say, from 5% to 10%), the share’s market price might rise to $200 (assuming other things, like the general interest rate, stay the same at 5%). The opposite happens if the company’s profits fall.
• For securities with fixed income (like bonds, or shares if profits are stable): If the actual use of the company’s capital stays the same, or if there’s no real capital behind the security (like with government debt), the price of the security moves in the opposite direction to the general interest rate. For example, if a bond guarantees a $5 annual interest payment:
  • If the general interest rate rises from 5% to 10%, that $5-a-year bond is now only ‘worth’ a capital of $50 (because $5 is 10% of $50). Its price will fall.
  • If the general interest rate falls to 2.5%, that same $5-a-year bond now represents a ‘capital’ of $200 (because $5 is 2.5% of $200). Its price will rise.
• During bad times in the money market, these securities can fall in price for two reasons:
  • First, general interest rates often rise.
  • Second, many people try to sell these securities at the same time.

All such paper securities, in fact, represent nothing but accumulated claims or rights of ownership to future production and profits.

The Fictitious Nature of Much Bank Capital

So, a large part of what bankers consider their ‘capital’ is purely fictitious. It consists of:

• Debt claims (like bills of exchange owed by businesses).
• Government securities (which represent capital that was spent long ago).
• Company shares (which are essentially claims on future profits).

With the growth of the credit system, all capital can seem to be doubled, or even tripled. This is because the same single amount of real capital can be represented by many different claims – like debts or ownership rights (shares) – held by various people in different forms. A large part of the capital that supposedly exists is just an illusion, a kind of financial smoke and mirrors (‘phantasmagoria’). This is also true for bank ‘reserve funds,’ which people might think are solid, real money.

The Broader Impact of Banking and Credit

From an organizational viewpoint, the banking system is the most complex and highly developed product of capitalist society. This explains the huge influence that institutions like central banks can have on trade and industry. This influence exists even though the actual day-to-day operations of trade and industry are separate from the bank, which often takes a passive role. It’s true that banking creates the appearance of a general system for keeping track of society’s resources and distributing them. But it’s often just the appearance, not the full reality of social control.

We’ve seen that an individual capitalist’s average profit isn’t just from the direct surplus labor their own capital extracts. Instead, it’s a share of the total surplus-value created by all capital. Each business gets its dividend from this total pool. This social character of capital (where capital operates as an interconnected system, not just isolated units) becomes fully clear only with the full development of credit and banking.

The effects of credit and banking go even further:

• The system makes all of society’s temporarily idle money available to productive businesses and merchants. This means that often neither the person lending the money nor the person using it is its original owner or creator.
• In this way, the system reduces the purely private nature of capital. It even hints at – but only hints at – the possibility of overcoming capital itself as a private force.
• Through banks, the distribution of capital is taken away from individual private lenders and moneylenders. It becomes a kind of special social function.

But precisely because of this power, credit and banks are also the primary tools that:

• Push the capitalist system of production beyond its own natural limits.
• Become powerful tools for causing economic crises and encouraging financial fraud.

Credit as a Tool for Transition?

Finally, there’s no doubt that credit could be a powerful tool during a transition from the capitalist way of producing things to a system based on social labor (where workers collectively control production). However, credit can only be such a tool if it’s combined with other deep, fundamental changes in the way production itself is organized. On the other hand, mistaken beliefs about credit and banks having some magical power to create a more social society come from a complete misunderstanding of how capitalist production actually works, and how the credit system is just one part of that.

CHAPTER THIRTEEN

CRISES

To understand how economic crises can happen, we first need to look at how an economy replaces what it uses up and how goods are consumed.

Let’s consider all the goods and services – the commodity product – that a society supplies over a year. This total product includes:

1. Parts that go to replace the capital (tools, machines, materials, etc.) that was used up in making these goods.
2. Parts that are meant for consumption – things that workers and capitalists will actually use and consume.

Two key questions arise:

• How is the value of the capital that was consumed during production replaced from the year’s total product?
• How is this replacement process connected with capitalists consuming their profits (surplus-value) and workers consuming their wages?

Setting the Stage: Simple Reproduction

To begin, we’ll make a few simplifying assumptions:

1. Simple Reproduction: We’ll assume the economy is reproducing itself on a simple scale. This means it’s not expanding or growing. It just continues to produce the same amount as before.
2. Value-Based Exchange: We’ll assume products are exchanged for each other based on their true values.
3. Stable Capital Values: We’ll assume that the values of the different parts of productive capital (like machines or raw materials) don’t change.

(Even if prices in the real world differ from these underlying values, or if values change, the basic rules for how different parts of the annual product must fit together to keep the system going would still apply. The amounts might change, but not the fundamental relationships.)

Replacing Value and Physical Goods

When part of the yearly product is used to replace used-up capital, and another part is used for consumption by capitalists and workers, we are not just replacing abstract value. We are also replacing the actual physical things – the matter. This process depends on two things:

• The values of the different parts of society’s total product relative to each other.
• The physical form of these parts (e.g., a machine can’t be eaten, and food can’t directly make more food).

A Necessary Simplification

It’s important to remember that simple reproduction (an economy staying the same size) doesn’t really happen in a capitalist society.

• Capitalism is usually about accumulation – growing and expanding production. So, assuming no accumulation is a bit unrealistic.
• Also, the exact conditions of production (like technology or resource availability) aren’t identical every year.

However, even when the economy is growing (accumulation), simple reproduction is still a part of that growth. If a business is expanding, it still first needs to replace its worn-out tools and materials (simple reproduction) before it can add new ones. So, understanding simple reproduction on its own is a useful first step.

Two Main Sectors of Production

We can divide society’s total product, and therefore its total production, into two main departments:

• Department I: Produces Means of Production. These are goods that are intended to be used in further production. Examples include machinery, tools, raw materials, and factory buildings. They are “productively consumed.”
• Department II: Produces Means of Consumption. These are goods that are intended for people to consume directly. Examples include food, clothing, housing, and entertainment. They are “individually consumed” by workers and capitalists.

Capital in Each Department

In each of these two departments, the capital used can be broken down into two parts:

1. Variable Capital (v):
   • From a value point of view, this is equal to the total value of the labor power employed in that department. This means it’s equal to the total wages paid to workers.
   • From a material point of view, it consists of the actual labor power being used – the workers themselves actively working.
2. Constant Capital (c):
   • This is the value of all the means of production used up in that department.
   • The means of production themselves include:
     • Fixed capital: Long-lasting items like machines, tools, buildings, etc.
     • Circulating constant capital: Materials used up quickly, like raw materials, fuel, and semi-finished goods.

The Value of the Annual Product: c + v + s

The value of the goods produced each year in each of these two departments can also be broken down. Part of the value comes from the constant capital (c) that was consumed (used up), with its value transferred to the new products. The rest of the value is new value added by the labor performed during the year. This newly added value, in turn, splits into two portions:

• One portion replaces the variable capital (v) that was paid out as wages.
• The other portion is the surplus-value (s), which is the profit for the capitalists.

So, just like the value of any single commodity, the value of the annual product from each department can be expressed as: c + v + s.

(A Note on Constant Capital): The ‘c’ in the product’s value represents the constant capital consumed during production. This is not always the same as the total value of constant capital applied or used in production. For instance, raw materials are usually completely consumed, and their full value is transferred to the product. However, only a part of the fixed capital (like a machine) is “consumed” in a single year (through wear and tear), and only that portion of its value is transferred to the year’s product. The rest of the machine still exists and continues to function. For our initial analysis, we will mostly focus on the constant capital that is fully used up or replaced physically within the year, simplifying some complexities of fixed capital wear and tear for now.

A Model of Simple Reproduction

To study simple reproduction, let’s use the following example. We’ll assume:

• c = constant capital
• v = variable capital
• s = surplus-value
• The rate of surplus-value (s/v) is 100%, meaning surplus-value is exactly equal to the wages paid (s = v). (The numbers can be thought of as millions of dollars or any other currency unit.)

Department I: Production of Means of Production (mp)

• Capital Invested: 4000c + 1000v = 5000
• Annual Product: 4000c + 1000v + 1000s = 6000 (This product exists in the physical form of means of production: machines, raw materials, etc.)

Department II: Production of Means of Consumption (mc)

• Capital Invested: 2000c + 500v = 2500
• Annual Product: 2000c + 500v + 500s = 3000 (This product exists in the physical form of means of consumption: food, clothing, etc.)

Total Annual Product of Society:

• Department I Product: 6000 (mp)
• Department II Product: 3000 (mc)
• Total Value = 9000 (This calculation excludes the value of any fixed capital, like long-lasting machines, that still exists in its physical form at the end of the year and wasn’t fully replaced.)

Necessary Exchanges for Simple Reproduction (Without Money)

Now, let’s see what exchanges must happen for this system to simply reproduce itself, assuming all surplus-value is consumed (not reinvested for growth). First, let’s ignore money and just look at the movement of goods and values.

1. Consumption within Department II:

   • The workers in Department II earn 500v in wages. The capitalists in Department II get 500s in surplus-value.
   • Both workers and capitalists in Department II need to spend this income (500v + 500s = 1000) on means of consumption (mc).
   • Conveniently, Department II produces 3000 in mc. The 1000 value (500v + 500s) within Department II is exchanged for 1000 worth of its own mc product. This replaces the 500v originally paid as wages and allows capitalists to realize their 500s as consumable goods.
   • So, 1000 worth of mc from Department II is consumed within Department II itself.

2. Consumption by Department I, Supply to Department II:

   • The workers in Department I earn 1000v in wages. The capitalists in Department I get 1000s in surplus-value.
   • Both workers and capitalists in Department I also need to spend this income (1000v + 1000s = 2000) on means of consumption (mc).
   • These mc must come from Department II.
   • This 2000 worth of income from Department I must be exchanged for 2000 worth of Department II’s product. This matches exactly the constant capital value (2000c) of Department II.
   • In return for its mc, Department II receives 2000 worth of means of production (mp) from Department I. (This 2000mp from Department I represents the I(v) and I(s) components). This allows Department II to replace its used-up constant capital.

3. Replacement within Department I:

   • After the above exchanges, Department I is left with 4000c worth of its product (means of production).
   • These means of production are used within Department I itself. Capitalists in Department I exchange these mp among themselves to replace their own consumed constant capital (the original 4000c).

(This is a simplified overview to help understand the more detailed exchanges that follow.)

The Main Exchange Between Departments

The crucial exchange happens between Department I and Department II:

• The income of Department I (1000v + 1000s = 2000), which exists in the physical form of means of production (mp), is exchanged for the constant capital value of Department II (2000c), which exists in the physical form of means of consumption (mc).

Through this exchange:

• Capitalists in Department II convert their constant capital back from the form of mc (which they produced) into the form of mp (which they need to continue producing mc next year).
• Workers and capitalists in Department I get the mc they need for their personal consumption, in exchange for the mp that embodied their wages and surplus-value.

Introducing Money into the Exchanges

These exchanges of goods are carried out using money. Money circulation makes the underlying process a bit harder to see, but it’s vital because wages (variable capital) must always be paid in money form. In all businesses, whether in Department I or II, wages are paid in cash. To get this cash for wages, capitalists must first sell their products.

Money Flow for Department I’s Wages (I v):

1. Capitalists in Department I pay $1000 in wages (1000v) to their workers. (This $1000 was part of the value created by workers, which initially exists in the mp produced by Department I).
2. The workers in Department I take their $1000 in wages and buy means of consumption (mc) from the capitalists in Department II.
3. This $1000 cash now flows to the capitalists of Department II.
4. The capitalists of Department II, in turn, use this $1000 to buy means of production (mp) from the capitalists of Department I.
5. Now, the $1000 cash has returned to the capitalists of Department I. They can use it to pay wages for the next production cycle. Essentially, the capitalists in Department I initially advanced this $1000 for wages.

Money Flow for Department I’s Surplus-Value (I s) and Part of Department II’s Constant Capital (II c): More money is needed for the capitalists in Department I to spend their surplus-value ($1000s, currently in the form of mp) on means of consumption (mc) from Department II. This exchange also helps Department II replace the remaining part of its constant capital ($2000c in total, $1000c already covered above).

This additional money must come from capitalists, as workers have already spent their wages.

• Some capitalists in Department II might use their own money reserves (beyond their production capital) to buy mp from Department I.
• Alternatively, some capitalists in Department I might use money from their personal spending reserves to buy mc from Department II. Capitalists must have some money reserves on hand, either for reinvestment or personal spending, for the system to work smoothly.

Let’s assume, for simplicity, that half of this remaining exchange ($500) is initiated by Department II capitalists buying mp, and the other half ($500) by Department I capitalists spending their surplus-value on mc.

• The flow of $1000 from Department I workers to Department II (for mc) allowed Department II to buy $1000 of mp.
• Now, if Department II capitalists advance another $500 cash to buy more mp from Department I, Department II has now replaced $1500 of its $2000c in physical form.
• Department I capitalists receive this $500. They then might spend $500 of their own surplus-value (which they want to consume) by buying mc from Department II. This $500 cash returns to Department II.
• Department II now has this $500 cash back (which it had advanced) and can use it to buy the final $500 worth of mp from Department I.
• Now, Department II has fully replaced its constant capital of $2000 in physical goods (mp).
• Department I capitalists have spent their entire surplus-value ($1000s) on mc.

In this slightly more complex scenario involving capitalist reserves, a larger volume of commodity exchanges is facilitated by a flow of money. The key is that:

• Department II successfully exchanges its constant capital (initially as mc) for the mp it needs.
• Department I gets its variable capital (wages paid) back in money form, ready to hire workers again. It also manages to spend its surplus-value on mc. The money advanced by capitalists for these circulation processes eventually returns to them through the sale of their products.

Summary of Department I’s Variable Capital Flow: The money paid as wages by Department I capitalists doesn’t come back to them directly from their own workers (who buy mc, not mp). It goes first to Department II capitalists (when workers buy mc). Only when Department II capitalists use that money to buy mp from Department I does the wage-money return (indirectly) to Department I capitalists.

The Key Condition for Simple Reproduction

For simple reproduction to occur smoothly (where the economy just replaces itself without growing or shrinking), a fundamental condition must be met:

• The part of Department I’s annual product that represents its workers’ wages (v) plus its capitalists’ surplus-value (s) must be equal in value to the constant capital (c) used up in Department II.
• This can be written as: I (v + s) = II c

Using our example: I (1000v + 1000s) = 2000. This must equal II c, which is 2000c. So, the condition holds.

Consumption Within Department II

Now let’s look at the wages (v) and surplus-value (s) components of Department II’s product.

• Workers in Department II receive wages from their capitalist employers. They use this money to buy back a part of what they themselves produced (means of consumption).
• This way, the capitalists in Department II get back, in money form, the capital they advanced as wages. (It’s as if they paid their workers in tokens that could only be spent on the company’s own goods.)

Department II, which produces means of consumption, can be thought of in two main subdivisions:

• A) Necessary Means of Consumption: These are goods needed by workers (food, basic clothing, housing). They also form part of what capitalists consume. For our purposes, we can group all items habitually consumed by workers here, whether strictly “physiologically necessary” or not (like tobacco, if it’s a common item of consumption).
• B) Luxury Means of Consumption: These are goods consumed exclusively by capitalists. They can, therefore, only be exchanged for surplus-value (profits), not for workers’ wages.

Money Flow for Necessities vs. Luxuries:

• Necessary Goods (IIA): When capitalists in subdivision IIA (producing necessities) pay wages, this money returns to them directly when their workers buy these essential goods. The workers’ spending provides the means for this money to circulate back.
• Luxury Goods (IIB): It’s different for subdivision IIB (producing luxuries). Workers do not buy these luxury items. So, if the wages paid to workers making luxuries are to return to the IIB capitalists in money form, it can’t happen directly. An intermediate step or exchange is needed (for example, IIB capitalists sell luxuries to other capitalists, who might have received their money from selling necessities to workers, or from Department I capitalists spending their surplus-value). A balanced proportion is needed between the production of necessary goods and luxury goods for the system to work smoothly, similar to the main condition between Department I and II.

Assuming simple reproduction, we come necessarily to the following result: 1.

Assuming simple reproduction, we come necessarily to the following result:

1. The newly created value in Department I (which is the sum of wages and surplus-value, I(v+s), and exists in the physical form of means of production) must be equal in value to the constant capital used up in Department II (IIc).

   • If the value of I(v+s) were smaller than the value of IIc, then Department II (which makes means of consumption) could not buy enough means of production to fully replace what it used up. Therefore, Department II could not continue producing at the same level as before.
   • If, on the other hand, the value of I(v+s) were larger than the value of IIc, then there would be a surplus of means of production from Department I that would not be used.

2. The total wages paid to workers who are engaged in producing luxury goods (Department IIB) must be less than the total surplus-value (profit) made by those capitalists who produce necessary means of consumption (Department IIA).

   • This means that the funds available from the profits of necessity-good producers (which are partly spent on luxuries) must be enough to cover the wages of workers in the luxury sector. If the wages in the luxury sector were greater, it would imply an imbalance, as the primary consumers of luxuries are capitalists (using their surplus-value).