The Communist Manifesto and Das Kapital

INTRODUCTION

A Meeting That Changed History

In 1844, two brilliant young thinkers met in a Paris café. Their names were Karl Marx and Friedrich Engels. They spent ten days talking, debating, and drinking wine. This meeting sparked a close friendship that lasted 40 years. Together, they wrote powerful books about economics and society. Their ideas would go on to inspire revolutions, challenge economic systems, and ultimately change the course of history.

Marx and Engels Today

For a long time, the ideas of Marx and Engels were often ignored or called irrelevant. But recently, people have started paying attention to them again. It seems Karl Marx and Friedrich Engels are making a comeback. Marx is known for his detailed study of capitalism in his massive book, Das Kapital. Engels, his co-author, is known for calling for a complete change in society in The Communist Manifesto.

The Communist Manifesto: A Call to Action

The Communist Manifesto, published in 1848, is a short and powerful book. Its ideas are easy to grasp. It was written during a time of great change and conflict in Europe. Kings and business owners (the bourgeoisie) were trying to stop the growing communist movement.

The Manifesto famously begins: “A spectre is haunting Europe. The spectre of communism.” These words excited people who wanted freedom from the control of the rich and powerful. The book explained capitalism’s place in history. It clearly described the battle between classes, why it needed to happen, and who should win. This message resonated with people then and continues to inspire people today.

Engels admitted that Marx was the main writer, calling him a “genius.” Engels saw himself as playing “second fiddle.” But together, they created a short booklet that perfectly captured the historical moment. For many people interested in anti-capitalist ideas, the Manifesto is the most widely read work by Marx and Engels, sometimes the only one they read.

Das Kapital: Understanding Capitalism Deeply

Das Kapital is very different. The first volume came out in 1867. Engels published the next two volumes after Marx died. Unlike the Manifesto, Das Kapital was not written for everyone. It’s a deep dive into how capitalism works, exploring details that were often hidden or misunderstood.

It’s a scientific and technical book, though it does have moments of sharp humor. When a workers’ rights advocate was given a copy, he said, “I feel like a man who has just been given an elephant as a gift.” It’s true – Das Kapital is huge and complex. It was written mainly for other thinkers, economists, and leaders of the communist movement. Reading it can be very challenging. Some parts are almost as hard to read as Marx’s famously messy handwriting! His wife, Jenny, had to copy his writing clearly before it could be printed.

The shorter version included here is a great help for anyone who wants to understand Marx’s economic ideas more deeply but doesn’t have years to spend studying the full work.

Why Marx Matters Now

Today, just like back then, capitalism and communism represent opposing ideas. Many other political and economic systems exist somewhere in between. So, why are people interested in Karl Marx again?

In the United States and elsewhere, current economic policies (often called neoliberalism) haven’t worked well for millions of people. Inequality is rising dramatically. When Marx wrote The Communist Manifesto, he predicted that the ruling classes would “tremble” because communism would inevitably rise. Today, with capitalism so powerful, that prediction might seem like a fantasy. It might seem like his warning was empty, something easily dismissed. After all, capitalist democracies seemed to have won the historical battle.

However, people across the world are challenging the current system from different sides. We see a scary rise in right-wing extremism, nationalism, and neo-fascism. At the same time, there’s a new wave of socialist organizing on the left.

Marx believed that society’s problems stem from its economic system – how things are made and distributed (mode of production). In the 1800s, millions lived in terrible poverty. Today, extreme inequality is soaring again. And just like then, wealth often translates into too much political power. In 1864, Marx wrote, “To conquer political power has therefore become the duty of the working classes.”

His comment in the Manifesto that “the executive of the modern state is but a committee for managing the common affairs of the whole bourgeoisie” feels very relevant today. It means he thought the government mainly serves the interests of the business-owning class. The deep inequality present in capitalism was obvious in Marx’s time, and it is obvious again in ours.

This situation makes us ask important questions, just as people did back then:

• Does society have to be organized this way?
• Can we find better ways to structure our lives and work? Marx attempts to answer these questions and more in the writings collected in this book.

Karl Marx: The Man Behind the Ideas

Karl Marx was born on May 5th, 1818, in Trier, a city in western Germany. He grew up fairly comfortable. His father, Heinrich, had converted from Judaism to Christianity to help his law career, as being Jewish made practicing law difficult in Germany at the time.

Karl was expected to become a lawyer like his father. However, at university in Bonn and Berlin, he became fascinated by philosophy and radical politics. He joined a group called the Young Hegelians. They followed the ideas of the famous philosopher Hegel, especially his concept of the dialectic.

Hegel’s dialectic proposed that:

1. Any current reality (thesis) is challenged by an opposing idea (antithesis).
2. The conflict between them leads to a new reality that combines elements of both (synthesis).
3. This synthesis then becomes a new thesis, which gets challenged, and the process continues forever.

This meant the world wasn’t fixed; it was always changing. Marx got involved in left-wing movements, which eventually led to him being forced out of Germany and other European countries. Finally, in 1849, he settled in London with his wife and children, where he lived for the rest of his life. His body rests in Highgate Cemetery in London.

Life in London was incredibly hard. They lived in poverty on Dean Street in the rough Soho neighborhood. Marx constantly struggled with debt. Tragically, three of his children died, likely due to the cold, damp conditions in their small apartment and lack of food. Supporting his family was a daily fight. They might not have survived without financial help from his friend, Friedrich Engels.

Friedrich Engels: Partner in Revolution

Friedrich Engels, like Marx, came from a wealthy German family. His parents were religious Christians, and his father owned successful factories. Engels was very smart, especially with languages (he eventually spoke nine!). But his father took him out of school at 17 to work in the family business.

Friedrich took charge of his own education. He rejected religion and, like Marx, became influenced by Hegel’s ideas about change through conflict. But Engels wasn’t just a thinker; he was also active and energetic. He was a skilled horse rider and dancer. In 1841, at age 21, he joined the army, happy to get away from office work. He became known affectionately as “The General.”

Engels spent time in Manchester, England, managing one of his father’s factories. What he saw there among the working class deeply affected him. This experience led him to write his first major book, The Condition of the Working Class in England.

Their Shared Vision: Ending Class Struggle

Marx’s own poverty and their shared observations of the terrible struggles faced by workers in London and Manchester fueled their passion for changing society. They believed a better world was possible. Marx wrote about creating “an association, in which the free development of each is the condition for the free development of all.”

They argued that capitalism prevented people from developing freely. They saw communism as the way to end the endless cycle of one class dominating and exploiting another. For Marx, Engels, and their followers, capitalism had internal problems. It tended to fall into regular crises and treated workers inhumanely. They believed it was just a stage in history that had served its purpose and was now outdated. History itself, following the pattern of the dialectic, pointed towards its end.

Marx applied Hegel’s dialectic idea to the history of economic systems. He looked back and saw a pattern: there was always a ruling class and an exploited class. This led him to one of his most famous ideas: “The history of all hitherto existing societies is the history of class struggle.” He argued that earlier systems like slavery and feudalism also had internal conflicts that eventually caused them to collapse, just like capitalism would.

After Marx: Twists and Turns

Marx believed in a constantly changing society made up of “freely associated Men.” However, after his death, his ideas were often misunderstood. Tragically, some leaders who claimed to follow Marx created rigid, controlling, and totalitarian states. This was completely opposite to Marx’s emphasis on consent and freedom. Often, these harsh measures were brutal attempts to protect a new revolution from collapsing. The idea that “the ends justify the means” went against Marx’s core principles.

As we can see, the communist states formed after Marx died (March 14, 1883) moved further and further away from his original ideas. His work was misinterpreted, applied wrongly, or simply ignored. These attempts at communism also faced intense opposition from powerful capitalist countries.

Despite this, many people over the years kept fighting for Marx’s original vision. They tried to rescue his ideas from distortion. Today, many around the world still promote the Marxist ideals of cooperation and democracy for workers. They build on his theories about freedom from exploitation and feeling disconnected from one’s work (alienation). It’s very likely that Karl Marx himself would strongly condemn the dictatorships that falsely called themselves communist.

Marxism Reborn?

Today, society is deeply divided. People are searching for better ways to structure our economy. This has led to a new interest in Marx and socialism. This interest is so strong that Bernie Sanders, who openly calls himself a socialist, was able to run for US president and win primary elections in several states.

While Sanders isn’t strictly a Marxist, his success shows a major shift in public opinion. For a significant number of Americans, Marx and socialism are no longer taboo subjects; they are worth discussing again. Given the economic realities in the US today, the Manifesto’s statement about history being a “history of class struggle” feels incredibly relevant.

Marx believed that people’s material circumstances – their economic situation and daily life – fundamentally shape how they see the world. The economic challenges and realities faced by many people in Western countries at the start of the 21st century are likely driving this renewed interest in Marxism.

Disturbingly, the difficult economic lives of average workers have also led some people to explore right-wing ideas, authoritarianism, nationalism, and even Nazism as responses to the failures of the current system (neoliberalism).

The communist experiments that began with hope in the late 19th century, inspired by the Manifesto and Das Kapital, often went wrong. The initial vision of power for the workers (the “dictatorship of the proletariat”) and true democracy (“freely associated men”) often turned into power concentrated in the hands of a single leader, party, or committee.

Why Read Marx Now?

We are living in a time of rising right-wing extremism. At the same time, socialism is being discussed more openly than it has been in decades. The problems caused by capitalism are all around us. This makes it the perfect time to revisit Marx’s most important works.

More and more people are drawn to Marx’s sharp analysis of society’s problems and his hopeful message for change. His ideas aimed for liberation from oppression – from colonialism, imperialism, and capitalism. In an era of “post-truth,” “fake news,” soaring inequality, and environmental crises, finding alternatives is urgent. Marx’s writings can make a powerful contribution to that search.

Has the battle of ideas been lost, or is it still ongoing? Will Karl Marx ultimately win out over Adam Smith (a key thinker of capitalism)? What new economic system will emerge from today’s divisions? What will the economic history of the 21st century look like? Only time will tell.

Until then, we all have a part to play in this historical moment. Hopefully, this collection of writings will help you understand these important ideas and guide your actions.

PREFACE TO THE 1888 ENGLISH EDITION

This preface was written by Friedrich Engels in 1888 for the English version of The Communist Manifesto.

How the Manifesto Came About

The Communist Manifesto was written as the official statement of beliefs for the Communist League. This group started as an association of German working men, but it later became international. Before 1848, political conditions in Europe forced groups like this to operate in secret.

In November 1847, the League held a meeting (a Congress) and asked Marx and Engels to write a complete program for the party. This program needed to cover both their theories and practical plans.

They wrote the Manifesto in German in January 1848. The text was sent to a printer in London just a few weeks before the revolution started in France on February 24th, 1848.

A French translation was published in Paris shortly before the workers’ uprising there in June 1848. The first English translation was done by Miss Helen Macfarlane. It appeared in a London newspaper called the Red Republican in 1850. Danish and Polish versions were also published around that time.

A Setback for Workers

The workers’ uprising in Paris in June 1848 was defeated. This was the first major battle between the working class (the proletariat) and the business-owning class (the bourgeoisie). This defeat pushed the political goals of European workers into the background for a while.

After that, the main power struggles were once again between different groups within the wealthy, property-owning class. The working class lost influence. They were left fighting just for the basic space to participate in politics, often acting as the most radical supporters of middle-class political groups.

Any independent movements by workers that still showed signs of life were harshly suppressed. For example, the Prussian police tracked down the leaders of the Communist League, who were based in Cologne at the time. The members were arrested. After being held in prison for 18 months, they went on trial in October 1852. This famous “Cologne Communist Trial” lasted until November 12th. Seven of the workers were sentenced to prison terms of three to six years. Right after the trial, the remaining members officially shut down the League. It seemed like the Manifesto would be forgotten.

The Workers Rise Again: The First International

Years later, European workers had gathered enough strength to challenge the ruling classes again. This led to the creation of the International Working Men’s Association (often called the First International).

The main goal of the International was to unite all fighting workers across Europe and America into one organization. Because it included many different groups, the International couldn’t immediately adopt the specific principles laid out in the Manifesto. Its program needed to be general enough to be accepted by various groups, including:

• English trade unions
• Followers of Proudhon (a socialist thinker) in France, Belgium, Italy, and Spain
• Followers of Lassalle (another socialist thinker) in Germany

Marx wrote the program for the International. He managed to create something that satisfied all these different groups. Marx strongly believed that the working class would develop a deeper understanding of their situation through working together and discussing ideas. He thought that the actual events of the struggle against capitalism – the ups and downs, even the defeats more than the victories – would show workers that their favorite simple solutions weren’t enough. This would lead them to a better understanding of what was truly needed for the working class to achieve freedom.

And Marx was right. When the International eventually broke up in 1874, the workers involved were very different people than they were when it started in 1864. The ideas of Proudhon in France and Lassalle in Germany were fading away. Even the generally conservative English trade unions were changing. Most had left the International long before, but they were slowly moving towards accepting socialist ideas. Just last year (in 1887), the president of the trade unions said at their meeting in Swansea that “Continental socialism has lost its terror for us.” Clearly, the principles of the Manifesto had gained significant ground among workers in all countries.

The Manifesto Returns

Because of this renewed workers’ movement, the Manifesto itself became important again.

• The original German text had been reprinted several times since 1850 in Switzerland, England, and America.
• In 1872, it was translated into English in New York and published in a newspaper there.
• A French version was created based on this New York English translation.
• Since then, at least two other English translations were published in America, though they were incomplete or altered. One of these was reprinted in England.
• The first Russian translation was done by Bakunin and published around 1863. A second Russian translation, by the heroic Vera Zasulich, came out in 1882.
• A new Danish edition appeared in 1885, and a new French translation in 1886.
• A Spanish version, based on the 1886 French one, was published in Madrid in 1886.
• There have been too many German reprints to count easily – at least twelve in total.
• An Armenian translation was supposed to be published in Constantinople a few months ago. But Engels heard it didn’t happen because the publisher was afraid to release a book with Marx’s name on it, and the translator refused to claim it as his own work.

Engels had heard about other translations into different languages but hadn’t seen them himself.

He concluded: The history of the Manifesto reflects the history of the modern working-class movement. Today, it is surely the most widely spread and most international work in all of socialist writing. It serves as a common statement of beliefs recognized by millions of workers from Siberia to California.

Why “Communist”?

Engels then explained why they called it a Communist Manifesto back in 1847, not a Socialist Manifesto.

In 1847, the word “Socialists” referred to two main groups:

1. Followers of Utopian systems: These included people like the Owenites in England and the Fourierists in France. These groups had grand ideas for perfect societies but were already becoming small, isolated sects that were slowly disappearing. They were generally not part of the working-class movement and tended to look for support from the “educated” classes.
2. Various kinds of “social quacks”: These were people who promised to fix social problems with all sorts of small changes (“tinkering”). They claimed they could do this without threatening the profits or power of capitalists. Like the Utopians, these people were outside the working-class movement.

On the other hand, the parts of the working class who felt that just changing politics wasn’t enough, and that society needed a complete overhaul, called themselves Communists. This early communism was basic, rough, and based more on instinct than theory. But it got to the heart of the matter and was powerful enough among workers to inspire movements like those led by Cabet in France and Weitling in Germany.

So, in 1847:

• Socialism was mostly a middle-class movement. On the European continent, it was considered “respectable.”
• Communism was a working-class movement. It was considered the opposite of respectable.

Marx and Engels believed from the very beginning that “the emancipation of the workers must be the act of the working class itself.” Therefore, they felt they had no choice but to use the name “Communist.” They never stopped using it and never wanted to reject it.

The Main Idea (Marx’s Contribution)

Engels emphasized that the Manifesto was a joint effort. However, he felt obligated to state that the core, fundamental idea belongs to Marx.

That main idea is this:

• In every historical period, the main way that goods are produced and traded (the economic system) and the way society is organized because of it, form the foundation for that period’s history.
• The political events and intellectual ideas of any period can only be explained by understanding this economic foundation.
• Because of this, the entire history of humankind (since the time early societies stopped sharing land communally) has been a history of class struggles. These are conflicts between those who exploit and those who are exploited; between ruling classes and oppressed classes.
• The history of these class struggles is a series of developments. Today, we have reached a stage where the exploited and oppressed class – the working class (the proletariat) – cannot achieve its freedom from the control of the exploiting and ruling class – the business-owning class (the bourgeoisie) – without achieving something more. At the same time, they must free all of society, once and for all, from every form of exploitation, oppression, class division, and class struggle.

Engels believed this idea would do for the study of history what Charles Darwin’s theory of evolution did for biology. Both he and Marx had been developing this idea for several years before 1845. Engels noted that his own book, The Condition of the Working Class in England, showed how far he had progressed toward this idea independently. But when he met Marx again in Brussels in the spring of 1845, Marx had already fully worked out the idea. Marx explained it to Engels in terms almost as clear as Engels stated them here in this preface.

Updating the Manifesto (Revisiting the 1872 Preface)

Engels then included points from the preface he and Marx wrote together for the German edition of 1872. He summarized their thoughts from that earlier preface:

• Even though things had changed a lot in the 25 years between 1847 and 1872, the general principles laid out in the Manifesto were still basically correct.
• However, some details might need improvement.
• How these principles should be put into practice depends on the specific historical situation at any given time and place. The Manifesto itself says this.
• For this reason, the specific revolutionary actions suggested at the end of Section II of the Manifesto were not emphasized as being universally applicable. That section would be written very differently today (in 1872, and even more so in 1888).
• Why? Because industry had advanced enormously since 1848, and the working class had become better organized alongside it. Also, workers had gained practical experience, first in the French Revolution of 1848, and even more importantly, during the Paris Commune of 1871. During the Commune, the working class held political power for two whole months for the first time.
• The Paris Commune especially proved one key thing: “the working class cannot simply lay hold of the ready-made state machinery, and wield it for its own purposes.” In other words, workers can’t just take over the existing government structure and use it as is; they need to create their own forms of power. (Marx discussed this further in his work The Civil War in France).
• It was also clear (in 1872) that the Manifesto’s critique of other socialist writings was incomplete for the present time, because it only covered works published before 1847.
• Similarly, the comments on how Communists should relate to other opposition parties (in Section IV) were still correct in principle, but outdated in practice. The political situation had totally changed, and history had removed most of the political parties mentioned in the Manifesto.

But, Marx and Engels concluded in 1872, the Manifesto had become a historical document. They no longer had the right to change the original text.

About This 1888 Translation

Engels finished by mentioning the specifics of this English edition:

• The translation was done by Mr. Samuel Moore. Moore also translated most of Marx’s Das Kapital.
• Engels reviewed the translation together with Moore.
• Engels added a few footnotes to explain some of the historical references in the text.

FREDERICK ENGELS January 30, 1888, London

CHAPTER ONE

Bourgeoisie and Proletariat: The Two Great Classes

This chapter explains the relationship between the two main classes in modern society: the Bourgeoisie (the owners of businesses, factories, and capital) and the Proletariat (the modern working class who sell their labor to survive).

History is Class Struggle

All of history, up until now, is fundamentally a story of struggles between different social classes.

Throughout time, we see opposing groups:

• Freeman and slave
• Patrician (aristocrat) and plebeian (commoner) in ancient Rome
• Lord and serf in the Middle Ages
• Guild-master (owner of a craft workshop) and journeyman (skilled worker)

In simple terms: oppressor and oppressed. These groups have always been in conflict. Their fight has been continuous – sometimes hidden, sometimes out in the open. Each fight ended in one of two ways: either society was completely rebuilt in a revolutionary way, or both fighting classes were destroyed.

In earlier times, societies almost everywhere had complex structures with many different ranks and classes. For example:

• Ancient Rome: Had patricians, knights, plebeians, and slaves.
• Middle Ages: Had feudal lords, vassals (serving the lords), guild-masters, journeymen, apprentices, and serfs (farm workers tied to the land). Within most of these main classes, there were further subdivisions and ranks.

The Rise of the Modern Ruling Class (Bourgeoisie)

Modern society, led by the bourgeoisie, grew out of the collapse of the old feudal system. But this new society did not get rid of class conflicts. Instead, it created:

• New classes
• New ways of oppressing people
• New forms of struggle

However, our current era – the era of the bourgeoisie – has one unique feature: it has simplified class conflicts. Society is splitting more and more into just two huge, opposing groups: Bourgeoisie and Proletariat.

Where did the modern bourgeoisie come from?

• It started with the townspeople (burghers) who emerged from the serfs of the Middle Ages.
• Major world events gave this rising class a huge boost:
  • The discovery of America
  • Sailing around the southern tip of Africa (the Cape)
  • New markets in East India and China
  • Colonization of America
  • Increased trade with colonies
  • More money and goods available for exchange
• These developments fueled commerce, shipping, and industry like never before. This rapid growth helped the revolutionary forces within the failing feudal society.

The old feudal way of organizing industry, where production was controlled by closed guilds, could no longer keep up with the demand from these new markets. The manufacturing system took its place.

• The old guild-masters were pushed aside by the new manufacturing middle class.
• Instead of work being divided between different guilds, it was now divided within each individual workshop.

But markets kept growing, and demand kept rising. Even the manufacturing system wasn’t enough. Then came steam power and machinery, which completely revolutionized industrial production. Manufacturing was replaced by Modern Industry – giant factories and large-scale production. The manufacturing middle class was replaced by industrial millionaires, the leaders of huge “industrial armies” – the modern bourgeoisie.

Modern industry created the world market, which the discovery of America had prepared the way for. The world market led to enormous growth in:

• Commerce (trade)
• Navigation (shipping)
• Land communication (like railways)

This growth, in turn, further boosted industry. And as industry, commerce, navigation, and railways expanded, the bourgeoisie became more powerful, increased its wealth (capital), and pushed all the older classes left over from the Middle Ages into the background.

So, we can see that the modern bourgeoisie itself is the result of a long process of development, involving a series of revolutions in how goods are produced and exchanged.

The Political Rise of the Bourgeoisie

Every step the bourgeoisie took in economic development was matched by a step up in political power for that class. They went from:

• Being an oppressed class under feudal nobles…
• To forming armed, self-governing groups in medieval towns…
• To sometimes being independent city-republics (like in Italy and Germany)…
• Or being the tax-paying “third estate” under a monarchy (like in France)…
• To serving monarchies against the nobility during the manufacturing period…
• Finally, since the rise of Modern Industry and the world market, they have gained exclusive political control in modern representative states.

Key Idea: Modern governments are essentially just committees that manage the shared business interests of the entire bourgeois class.

How the Bourgeoisie Changed Everything

Historically, the bourgeoisie has played an incredibly revolutionary role.

Wherever it gained power, the bourgeoisie:

• Ended Old Relationships: It destroyed all the old feudal ties based on loyalty, tradition, and personal connection. It left only one connection between people: naked self-interest, based purely on money (“cash payment”).
• Changed Values: It replaced deep religious feeling, knightly enthusiasm, and simple sentimentality with cold, selfish calculation. It reduced a person’s worth to their value in the market (“exchange value”). Instead of many hard-won freedoms, it established just one ruthless freedom: Free Trade. In short, it replaced exploitation hidden by religious and political beliefs with naked, shameless, direct, brutal exploitation.
• Transformed Professions: It removed the special status from respected jobs. Doctors, lawyers, priests, poets, and scientists became nothing more than paid workers for the bourgeoisie.
• Changed the Family: It stripped away the emotional sentimentality of family life and reduced family relationships to mere money relations.
• Showed What Humans Can Achieve: It revealed how the impressive energy seen in the Middle Ages often went hand-in-hand with extreme laziness. The bourgeoisie was the first to show what human activity could really accomplish. It created wonders far greater than Egyptian pyramids, Roman aqueducts, or Gothic cathedrals. It led expeditions far bigger than past migrations of peoples or crusades.

Constant Change is Essential for Capitalism

The bourgeoisie cannot survive without constantly revolutionizing:

1. The tools of production (technology, machines)
2. The methods of production (how work is organized)
3. And therefore, all relationships in society.

In contrast, all earlier ruling classes needed to keep the old ways of production exactly the same to maintain their power. The bourgeois era is completely different. It is defined by:

• Constant change in production
• Non-stop disruption of social conditions
• Everlasting uncertainty and agitation

All old, established relationships and the traditional ideas and opinions that went with them are swept away. Even newly formed relationships and ideas become outdated before they can solidify. “All that is solid melts into air, all that is holy is profaned.” This constant upheaval eventually forces people to face their real life conditions and their true relationships with each other in a clear-headed way.

Capitalism Spreads Worldwide

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

• Settle everywhere
• Establish itself everywhere
• Create connections everywhere

By exploiting the world market, the bourgeoisie has made production and consumption global in every country. This upsets traditionalists greatly, as it pulls the national foundation out from under industry.

• Old national industries are destroyed or being destroyed daily.
• They are replaced by new industries that use raw materials from the farthest corners of the world. This becomes a matter of life and death for all civilized nations.
• These new industries produce goods consumed not just at home, but everywhere on Earth.
• Instead of old needs met by local products, we now have new needs that require products from distant lands.
• Instead of local and national isolation and self-sufficiency, we have connections in every direction and a universal interdependence of nations.

This applies to ideas as well as physical goods. The intellectual creations of individual nations (like literature, science, art) become common property shared by the world. National narrow-mindedness becomes increasingly impossible. A world literature and global culture emerge from many national and local ones.

The bourgeoisie uses rapid improvements in technology and communication to draw all nations, even those considered “barbarian,” into its system (which it calls “civilization”).

• Its cheap goods are like powerful weapons (“heavy artillery”) that break down all resistance (even “Chinese walls”).
• It forces even the most stubborn anti-foreigner nations to adopt its ways.
• It compels all nations to adopt the bourgeois mode of production or face extinction. It forces them to become bourgeois themselves.
• In short, it creates a world in its own image.

Capitalism Reshapes Society

The bourgeoisie has made the countryside dependent on the cities.

• It has built enormous cities and greatly increased the urban population compared to the rural population.
• This has rescued many people from the isolation and limited perspective (“idiocy”) of rural life.
• Just as it made the countryside dependent on towns, it has made less developed (“barbarian” and “semi-barbarian”) countries dependent on developed (“civilized”) ones. It made nations of peasants dependent on nations of bourgeois; the East dependent on the West.

The bourgeoisie increasingly overcomes the scattered state of population, production tools, and property.

• It has brought people together in large populations (agglomerated population).
• It has brought production tools together under centralized control (centralised the means of production).
• It has concentrated property and wealth into the hands of a few (concentrated property).
• The inevitable result of this was political centralization. Independent or loosely connected regions with different interests, laws, governments, and taxes were forced together into one nation, with:
  • One government
  • One set of laws
  • One national class interest
  • One border
  • One customs system (tariff)

Capitalism’s Great Power (And Its Big Problem)

In its short rule of barely 100 years, the bourgeoisie has created productive forces more massive and gigantic than all previous generations combined. Think about:

• Controlling nature’s forces (like steam power)
• Machinery
• Applying chemistry to industry and farming
• Steamships
• Railways
• Electric telegraphs
• Clearing whole continents for farming
• Building canals
• Causing huge population growth (“whole populations conjured out of the ground”)

No earlier century could have even imagined that such productive power lay hidden within society’s labor.

So, we see that the means of production and exchange (the tools, factories, markets, etc.) that formed the foundation for the bourgeoisie were actually created within feudal society.

At a certain point, the old feudal system – its rules about farming, manufacturing, and property – could no longer keep up with the powerful new productive forces that had developed. These old rules became chains (“fetters”) holding back progress. They had to be broken, and they were broken.

Free competition took their place, along with a social and political system designed for it, giving economic and political power to the bourgeois class.

Capitalism’s Internal Conflict: Crises

A similar process is happening right now, before our eyes. Modern bourgeois society, with its advanced production, exchange, and property systems, has created enormous productive power. But it’s like a sorcerer who can no longer control the powerful spirits he has summoned.

For decades now, the history of industry and trade has been the story of modern productive forces rebelling against modern conditions of production – specifically, against the bourgeois property relations that allow the bourgeoisie to exist and rule.

The clearest sign of this rebellion is the commercial crises (economic depressions or recessions). These crises return periodically, each time threatening the existence of the entire bourgeois society more severely. During these crises:

• A large part of existing products are destroyed.
• A large part of the previously created productive forces (factories, machines) are also destroyed.
• An “epidemic” breaks out that would have seemed absurd in earlier times: the epidemic of over-production.

Suddenly, society finds itself thrown back into a temporary state of barbarism. It’s as if a famine or a devastating war has cut off all supplies. Industry and commerce seem destroyed. Why? Because there is too much civilization, too much food, too much industry, too much trade.

The productive forces available to society no longer help bourgeois property relations grow. Instead, they have become too powerful for these conditions. The conditions now act as chains (“fetters”) holding them back. As soon as the productive forces overcome these chains, they throw all of bourgeois society into chaos and endanger the existence of bourgeois property. The conditions of bourgeois society are simply too narrow to contain the wealth created by them.

How does the bourgeoisie deal with these crises?

1. By forcefully destroying a large amount of productive forces (closing factories, laying off workers).
2. By conquering new markets.
3. By exploiting existing markets more intensely.

But doing this only prepares the way for even larger and more destructive crises in the future. It also reduces the means available to prevent crises.

The Birth of the Working Class (Proletariat)

The weapons the bourgeoisie used to destroy feudalism are now turned against the bourgeoisie itself.

But the bourgeoisie has not only created the weapons that will bring about its own end. It has also created the people who will wield those weapons: the modern working class – the proletarians.

Life as a Worker Under Capitalism

The proletariat develops in step with the bourgeoisie (i.e., with capital). The proletariat is a class of workers who:

• Can only live as long as they can find work.
• Can only find work as long as their labor increases capital (makes profit for the owner).

These workers must sell themselves bit by bit to employers. They are a commodity, just like any other item bought and sold. They are subject to all the ups and downs of competition and the fluctuations of the market.

Because of the widespread use of machinery and the division of labor (breaking jobs into small, repetitive tasks), the work of proletarians has lost all individual character and enjoyment. The worker becomes just another part (appendage) of the machine. Only the simplest, most monotonous, and easiest-to-learn skills are required.

Therefore, the cost of employing a worker (their wage) is pushed down to the bare minimum needed for the worker to survive and to raise children to replace them (means of subsistence). The price of any commodity, including labor, tends to equal its cost of production. So, as work becomes more unpleasant and alienating, wages tend to decrease.

Furthermore, as machinery and the division of labor increase, the burden of work also increases. This happens through:

• Longer working hours
• More work demanded in a given time
• Increased speed of machinery

The Factory System and Worker Enslavement

Modern Industry transformed the small workshop of the past into the giant factory of the industrial capitalist.

• Masses of workers are crowded into the factory.
• They are organized like soldiers in an industrial army.
• They are placed under the command of a hierarchy of managers and supervisors (like officers and sergeants).

Workers are enslaved in multiple ways:

• They are slaves of the bourgeois class as a whole.
• They are slaves of the bourgeois state (government).
• They are enslaved daily and hourly by the machine, the supervisor, and, above all, by the individual factory owner.

The more openly this system declares profit as its ultimate goal, the more petty, hateful, and bitter it feels to the workers.

Changes in the Workforce

As modern industry develops, less physical skill and strength are needed for many jobs. Therefore, men’s labor is increasingly replaced by women’s labor. For the working class, differences in age and sex no longer have much social significance. All workers are simply instruments of labor, costing different amounts to employ based on their age and sex.

More Exploitation Outside the Factory

As soon as the worker finishes their work for the factory owner and receives their wages, they are immediately exploited by other parts of the bourgeoisie:

• The landlord (rent)
• The shopkeeper (goods)
• The pawnbroker (loans)
• And others.

How the Working Class Grows and Begins to Fight

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

• Small tradespeople
• Shopkeepers
• Retired tradesmen
• Handicraftsmen (artisans)
• Peasants (small farmers)

This happens for two main reasons:

1. Their small amount of capital is not enough to compete with large-scale Modern Industry.
2. Their specialized skills become worthless because of new production methods.

Thus, the proletariat grows by recruiting people from all classes of the population.

The proletariat goes through different stages of development in its struggle against the bourgeoisie. This struggle begins as soon as the working class comes into existence.

Early Stages of Struggle:

• At first, individual workers fight back.
• Then, the workers in a single factory might protest together.
• Then, all the workers in a particular trade in one location might organize against the specific bosses who directly exploit them.
• In these early stages, workers often direct their attacks not against the capitalist system itself, but against the instruments of production. They might:
  • Destroy imported goods that compete with their labor.
  • Smash machinery.
  • Set factories on fire.
  • Try to forcefully bring back the lost status and security of workers from the Middle Ages.

Workers Begin to Unite

At this early stage, workers are still a disorganized group, scattered across the country. They are often broken up by competing against each other for jobs. If they do manage to unite into stronger groups sometimes, it’s usually not because of their own efforts yet. Instead, it’s often because the bourgeoisie (the ruling business class) organizes them. The bourgeoisie needs to get the entire proletariat (working class) moving to achieve its own political goals, and for a time, it has the power to do this.

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

• The remaining supporters of absolute monarchy
• Landowners
• Business owners not involved in large-scale industry
• The petty bourgeoisie (small shopkeepers, artisans, etc.)

All historical progress seems to be controlled by the bourgeoisie. Every victory won in these fights is really a victory for the bourgeoisie.

The Growing Strength of Unions

But as industry develops, things change:

• The number of workers grows.
• Workers become concentrated in larger groups (in factories and cities).
• Their collective strength increases, and they become more aware of this strength.
• Life becomes more similar for workers across the board. Machinery eliminates differences in types of labor, and wages are pushed down to the same low level almost everywhere.
• Growing competition among the business owners, and the economic crises that result, make workers’ wages increasingly unstable.
• Constant improvements in machinery, developing ever faster, make workers’ livelihoods more and more uncertain.
• Conflicts between individual workers and individual bosses start looking more like conflicts between two distinct classes.

Then, workers begin to form unions (“combinations”) to stand against the bosses. They join together to try to keep wages up. They create permanent organizations to prepare for these occasional protests and strikes. Sometimes, the conflict breaks out into riots.

Why Class Struggle Becomes Political Struggle

Now and then, the workers win a victory, but these wins are usually temporary. The real benefit of their battles isn’t the immediate result (like a temporary wage increase). It’s the ever-growing unity of the workers.

This unity is helped by the better means of communication created by modern industry, like railways and the telegraph. These connect workers in different locations. This connection is exactly what’s needed to bring together the many local struggles, which are all similar in nature, into one national struggle between classes.

Key point: Every class struggle is also a political struggle.

The unity that medieval townspeople, with their terrible roads, needed centuries to achieve, modern workers can achieve in just a few years thanks to railways.

Workers Organize Politically

This organization of workers into a unified class, and eventually into a political party, is constantly being disrupted. The main challenge is competition between the workers themselves. But the organization always rises again, each time stronger, firmer, and more powerful.

By taking advantage of divisions within the bourgeoisie, this worker organization forces lawmakers to recognize specific workers’ interests. For example, the law limiting the workday to ten hours in England was passed this way.

How the Ruling Class Helps Workers Organize

Conflicts between the classes of the old society actually help the working class develop in many ways. The bourgeoisie finds itself constantly battling:

• First, against the old aristocracy.
• Later, against parts of its own class whose interests conflict with industrial progress.
• Always, against the bourgeoisie of other countries.

In all these battles, the bourgeoisie finds it necessary to appeal to the working class for help. By doing so, it drags workers into the political world. Therefore, the bourgeoisie itself gives the working class elements of its own political and general education. In other words, it provides the workers with weapons to fight the bourgeoisie.

Who Joins the Working Class?

Furthermore, as we’ve seen, the advance of industry pushes entire sections of the ruling class down into the proletariat, or at least threatens their way of life. These people (like struggling small business owners or educated professionals who can’t find work) also bring fresh ideas and knowledge (“elements of enlightenment and progress”) to the working class.

Defectors from the Ruling Class

Finally, when the class struggle reaches its critical point, the process of breakdown within the ruling class becomes intense and obvious. A small section of the ruling class then breaks away and joins the revolutionary class – the class that holds the future in its hands (the proletariat).

This is similar to how, in the past, a section of the nobility went over to the side of the rising bourgeoisie. Now, a portion of the bourgeoisie, especially some bourgeois thinkers who have studied history and understand the overall movement, goes over to the proletariat.

Why Only Workers are Truly Revolutionary

Of all the classes that currently oppose the bourgeoisie, the proletariat alone is a truly revolutionary class. The other classes (like the lower middle class) decay and will eventually disappear because of Modern Industry. The proletariat, however, is Modern Industry’s special and essential product.

What About Other Classes?

• The Lower Middle Class: Small manufacturers, shopkeepers, artisans, peasants – they fight the bourgeoisie only to save their existence as part of the middle class. They are not revolutionary, but conservative. Worse, they are often reactionary, trying to turn back history. If they do act in a revolutionary way, it’s only because they see they are about to sink into the proletariat. In that case, they are defending their future interests, not their present ones, and adopting the viewpoint of the proletariat.
• The “Dangerous Class” (Lumpenproletariat): This refers to the social outcasts or underclass – the passively rotting lowest layer of society (like criminals, beggars, long-term unemployed). They might sometimes get swept into a workers’ revolution. However, their life conditions generally make them much more likely to be bribed and used as tools by forces trying to stop progress (reactionary intrigue).

The Unique Position of the Working Class

The conditions faced by the proletariat already reflect the destruction of the old society’s ways.

• The proletarian has no property.
• Their relationship with their wife and children is completely different from bourgeois family relations (which are tied to property and inheritance).
• Modern industrial labor, the modern experience of being controlled by capital – which is the same in England, France, America, or Germany – has stripped the worker of any national character.
• To the worker, law, morality, and religion seem like bourgeois prejudices. They see these as hiding the self-serving interests of the bourgeoisie.

The Goal: Abolish Old Property Systems

All previous classes that gained power tried to solidify their position by forcing the rest of society to accept their way of owning things (conditions of appropriation).

The proletarians, however, cannot become masters of society’s productive forces (factories, land, technology) without abolishing their own current way of being owned (as wage labor selling themselves). And by doing that, they must also abolish every other previous system of ownership.

Workers have nothing of their own to protect or strengthen. Their mission is to destroy all existing security and insurance for individual private property.

A Movement of the Vast Majority

All previous historical movements were led by minorities or were in the interest of minorities. The proletarian movement is different. It is the self-aware, independent movement of the immense majority, acting in the interest of the immense majority.

The proletariat is the lowest layer of current society. It cannot move, cannot rise up, without blowing apart the entire structure of official society built above it.

The Path to Revolution

Though the content of the struggle is international, its form is initially national. The workers of each country must, naturally, first settle matters with their own bourgeoisie.

By describing the general stages of the working class’s development, we have traced the hidden civil war that is raging within society. This civil war leads up to the point where it breaks out into open revolution. This revolution, involving the violent overthrow of the bourgeoisie, lays the foundation for the rule of the proletariat.

Why Capitalism is Doomed

Up to now, every society has been based on the conflict between oppressing and oppressed classes. But to oppress a class, the rulers must guarantee conditions that at least allow the oppressed class to survive, even in their enslaved state.

• The serf under feudalism could sometimes work their way up to become a member of the town commune.
• The petty bourgeois under feudal monarchy could manage to develop into a full bourgeois.

But the modern worker is different. Instead of rising with industrial progress, they sink deeper and deeper, below the living standards of their own class. They become paupers (people living in extreme poverty), and poverty grows even faster than population and wealth.

This makes it clear: the bourgeoisie is no longer fit to be the ruling class. It cannot impose its own conditions of existence (profit-making through wage labor) as the overriding law for society. It is unfit to rule because:

• It cannot even guarantee a basic existence for its “slaves” (the workers) within the system of slavery (wage labor).
• It allows workers to sink into such a state that the bourgeoisie has to feed them (through charity or welfare) instead of being fed by them (through profits generated by their labor).

Society can no longer live under the rule of the bourgeoisie. In other words, the existence of the bourgeoisie is no longer compatible with the well-being of society.

The Inevitable Result

What is the essential condition for the existence and power of the bourgeois class? It is the creation and growth of capital. And what is the condition for capital? Wage labor.

Wage labor depends entirely on competition between workers. When workers compete, they remain isolated.

But the advance of industry – which the bourgeoisie promotes without meaning to – replaces the workers’ isolation with their revolutionary unity, achieved through association (like unions).

Therefore, the development of Modern Industry cuts the very foundation out from under the bourgeoisie’s feet – the foundation on which it produces goods and owns property.

Conclusion: What the bourgeoisie produces, above all, are its own gravediggers – the united, revolutionary proletariat.

The fall of the bourgeoisie and the victory of the proletariat are equally inevitable.

CHAPTER TWO

Proletarians and Communists: Working Together for Change

This chapter explains the relationship between Communists and the broader working class (the proletariat). It also outlines the main goals of Communism and answers common criticisms.

How Communists Relate to Workers

What is the connection between Communists and all working people?

• Communists do not form a separate political party that competes with other working-class parties.
• They have the exact same interests as the entire working class (the proletariat).
• They don’t try to force the workers’ movement to follow any narrow, specific rules they invented.

So, what makes Communists different from other working-class parties? Only two things:

1. In the struggles happening in different countries, Communists always point out and fight for the common interests of all workers everywhere, no matter their nationality.
2. Through all the different stages of the struggle between the working class and the ruling class (the bourgeoisie), Communists always represent the interests of the movement as a whole.

Therefore, Communists are:

• Practically: The most determined and forward-thinking section of the working-class parties in every country. They push everyone else onward.
• Theoretically: They have an advantage over the rest of the working class because they clearly understand the path forward, the conditions needed for success, and the ultimate goals of the workers’ movement.

The Main Goal: Ending Bourgeois Rule

The immediate goal of the Communists is the same as that of all other working-class parties:

• Help the working class become a unified, conscious group (form the proletariat into a class).
• Overthrow the ruling power of the bourgeoisie.
• Achieve political power for the working class.

The core ideas of Communism are not based on theories invented by some would-be savior of the world. They simply describe, in general terms, the real situation resulting from the existing class struggle – from the historical changes happening right now. Changing existing property systems is not something unique to Communism; it has happened throughout history.

For example, the French Revolution got rid of feudal property and replaced it with bourgeois (capitalist) property.

The Specific Goal: Abolishing Bourgeois Property

The key feature of Communism is not abolishing property in general. It is the abolition of bourgeois private property – the private ownership of things like factories, land, and resources by the capitalist class.

Why focus on this? Because modern bourgeois private property is the final and most complete form of a system built on class conflict – a system where the few exploit the many.

In this specific sense, the entire theory of the Communists can be summed up in one phrase: Abolition of private property (meaning, the private property owned by the capitalist class).

Answering Objections About Property

We Communists have been criticized for wanting to abolish the right to own property that you earned through your own hard work – property that is supposedly the foundation of all personal freedom, action, and independence.

• “Hard-won, self-earned property!” Are you talking about the property of the small artisan or the small farmer? That kind of property existed before capitalism. We don’t need to abolish that – the development of industry has already destroyed much of it and continues to destroy it every day.
• Or are you talking about modern bourgeois private property?

Let’s be clear: Does working for wages create any property for the worker? Not at all. It creates capital – the kind of property that exploits wage labor. Capital can only grow by creating a new supply of wage labor that it can exploit again. Property in its current form depends on the conflict between capital and wage labor. Let’s look at both sides.

• What is Capital? Being a capitalist means having more than just a personal role; it’s a social position within the system of production. Capital (factories, money used to make more money, resources) is a collective product. It can only be put to use by the combined actions of many people – ultimately, by the combined actions of everyone in society. Therefore, capital is not just personal; it is a social power.
• What Happens When Capital Becomes Common Property? When capital is turned into common property, owned by everyone in society, personal property does not disappear. Only the social character of property changes. It loses its class character – it stops being a tool for one class to exploit another.

Now let’s look at wage labor:

• The average price for wage labor is the minimum wage. This is just enough money to keep the worker alive and able to continue working.
• So, what the wage worker gets from their labor is only enough to keep themselves barely alive and reproduce.
• We absolutely do not want to abolish this personal taking of the products of labor, which is necessary for human life and leaves nothing extra to control anyone else’s labor.
• What we do want to get rid of is the miserable way this happens under capitalism. Workers live only to increase capital, and they are only allowed to live as long as it serves the interests of the ruling class.

How Capitalism and Communism Differ

• In Bourgeois Society: The work people do today (“living labor”) is just a way to increase the wealth created in the past (“accumulated labor,” or capital). The past dominates the present. Capital is independent and has “individuality,” while the living person (the worker) is dependent and has no real individuality.
• In Communist Society: Accumulated labor (the wealth and resources created by past work) will be used to make the worker’s life better – broader, richer, and more fulfilling. The present dominates the past.

What About Freedom and Individuality?

The bourgeoisie claims that abolishing this system means abolishing individuality and freedom. And they are right, in a way! We definitely aim to abolish bourgeois individuality, bourgeois independence, and bourgeois freedom.

Under current bourgeois conditions, “freedom” mostly means free trade – the freedom to buy and sell. But if buying and selling disappear, then “free” buying and selling also disappear. All the talk from the bourgeoisie about “freedom” only really makes sense when compared to the restrictions of the Middle Ages. It has no meaning when used against the Communist goal of abolishing buying and selling, the capitalist system of production, and the capitalist class itself.

• “You want to abolish private property!” You are horrified by this idea. But look at your own society: private property is already abolished for nine-tenths of the people. The only reason the wealthy few have property is precisely because those nine-tenths have none. So, you criticize us for wanting to abolish a type of property whose existence requires that the vast majority of society has no property at all.
• You blame us for wanting to get rid of your property. Exactly! That is precisely what we intend.

You say that individuality disappears the moment labor can no longer be turned into capital (bourgeois property). By saying this, you admit that the only “individual” you recognize is the bourgeois – the middle-class owner of property. Yes, this type of “individual” must be eliminated.

Communism doesn’t stop anyone from taking their share of the products of society. It only stops them from using that share to control and exploit the labor of others.

What About Laziness?

It has been argued that if private property is abolished, all work will stop, and universal laziness will result.

According to this logic, bourgeois society should have collapsed from laziness long ago. Why? Because in capitalism, those who work don’t acquire wealth, and those who acquire wealth don’t work. This whole objection just restates the obvious: you can’t have wage labor if there’s no capital for it to work for.

What About Culture?

All the arguments made against the Communist way of producing and owning material goods are also made against the Communist approach to intellectual products (culture, ideas).

• Just as the bourgeois thinks that the disappearance of class property means the end of production itself…
• …they also think that the disappearance of class culture (the culture that serves their class) means the disappearance of all culture.

But the culture whose loss the bourgeois regrets is, for the vast majority of people, nothing more than training to act like a machine.

Stop arguing with us using your bourgeois standards of freedom, culture, law, etc., to judge our plan to abolish bourgeois property. Your very ideas are simply the result of your capitalist system of production and property. Your legal system is just the will of your class made into law – a will shaped by the economic conditions of your class.

You suffer from a selfish misunderstanding: you think that your current social structures – based on your way of producing things and owning property – are eternal laws of nature and reason. But these are just historical systems that arise and disappear as production changes. Every ruling class before you had the same misunderstanding about their own system. You can see clearly that ancient Roman property and feudal property were temporary, but you refuse to admit the same about your own bourgeois form of property.

What About the Family?

• “Abolition of the family!” Even the most radical people get upset about this supposedly terrible Communist proposal.

On what foundation is the current family – the bourgeois family – based? On capital and private profit. In its fully developed form, this kind of family exists only among the bourgeoisie. But it has two counterparts:

1. The practical lack of family life among the working class.
2. Public prostitution.

The bourgeois family will naturally vanish when its counterparts vanish. And both will vanish when capital vanishes.

• “You want to stop parents from exploiting their children!” Yes, to this crime, we plead guilty.
• “You destroy the most sacred relationships by replacing home education with social education!”

What about your education? Isn’t it also social? Isn’t it determined by social conditions, by the influence of society through schools, etc.? Communists didn’t invent society’s role in education. We just want to change the character of that role and rescue education from the influence of the ruling class.

All the hypocritical bourgeois talk about family, education, and the sacred bond between parent and child becomes more disgusting as Modern Industry tears apart all family ties among the workers, turning their children into mere items of trade and tools of labor.

What About Sharing Women?

• “But you Communists want to introduce community of women (sharing women)!” screams the entire bourgeoisie together.

The bourgeois man sees his wife as merely an instrument of production. He hears that instruments of production (like factories) are going to be used in common (shared). Naturally, he concludes that women will also be shared by everyone.

He has no idea that the real goal is to eliminate the status of women as mere instruments of production.

Besides, nothing is more ridiculous than the fake moral outrage of the bourgeoisie about this supposed “community of women” that they pretend Communists want to establish officially. Communists don’t need to introduce community of women – it has existed unofficially almost forever.

Our bourgeois men are not content with having the wives and daughters of their workers available to them (not to mention prostitutes). They also take great pleasure in seducing each other’s wives.

Bourgeois marriage, in reality, is a system of wives in common. So, the most Communists could possibly be accused of is wanting to replace a hypocritically hidden system of sharing women with an openly legalized one. Beyond that, it’s obvious that abolishing the current system of production must also lead to the abolition of the community of women that arises from it – meaning, both public and private prostitution.

What About Nations and Countries?

• “Communists want to abolish countries and nationality!”

Working men have no country. We cannot take from them what they do not have.

Since the working class must first gain political power, become the leading class of the nation, and establish itself as the nation, it is, in that sense, national – but not in the way the bourgeoisie understands the term.

National differences and conflicts between peoples are already disappearing more and more every day, thanks to:

• The development of the bourgeoisie
• Freedom of trade
• The world market
• Uniformity in industrial production and the ways of life it creates

The rule of the working class will make these differences vanish even faster. United action, at least by the leading civilized countries, is one of the first conditions for the liberation of the working class.

• Just as the exploitation of one individual by another will end…
• …the exploitation of one nation by another will also end.
• Just as conflict between classes within a nation vanishes…
• …hostility between nations will come to an end.

What About Religion and Morality?

The criticisms against Communism made from religious, philosophical, or general ideological viewpoints don’t deserve serious attention.

Does it take deep insight to understand that a person’s ideas, views, and understanding – in short, their consciousness – change as their material living conditions, social relationships, and social life change?

What does the history of ideas prove? It proves that intellectual production (ideas, culture) changes its character as material production changes. The ruling ideas of any era have always been the ideas of its ruling class.

When people talk about ideas that revolutionize society, they are just expressing the fact that elements of a new society have been created within the old one. The breakdown of old ideas happens at the same pace as the breakdown of old living conditions.

• When the ancient world was collapsing, ancient religions were overcome by Christianity.

• When Christian ideas lost ground to rationalist ideas in the 18th century, feudal society was fighting its final battle against the rising revolutionary bourgeoisie.

• Ideas like religious liberty and freedom of conscience simply reflected the rule of free competition in the world of knowledge and belief.

• “But surely,” someone might say, “religious, moral, philosophical, and legal ideas have changed over time, but religion, morality, philosophy, political science, and law themselves have always survived.”

• “Besides, there are eternal truths like Freedom, Justice, etc., that are common to all societies. But Communism abolishes these eternal truths! It abolishes all religion and morality instead of reshaping them. Therefore, it contradicts all past historical experience!”

What does this accusation really amount to? The history of all past societies involved the development of class conflicts, which took different forms in different eras.

But whatever form these conflicts 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 variety, moves within certain common forms or general ideas. These common forms cannot completely disappear until class conflicts totally disappear.

The Communist revolution represents the most radical break with traditional property relations. It’s no surprise that its development involves the most radical break with traditional ideas.

The Workers’ Revolution: First Steps

But let’s be done with the bourgeois objections to Communism.

We saw earlier (in Chapter One) that the first step in the working-class revolution is to raise the proletariat to the position of the ruling class – to win the battle for democracy.

The proletariat will use its political power to:

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

Possible Measures After the Revolution

Of course, in the beginning, this can only be done by using forceful (“despotic”) actions against property rights and the conditions of bourgeois production. These actions might seem economically inadequate or temporary, but during the movement, they will lead to further necessary steps against the old social order. They are unavoidable measures for completely revolutionizing the way production is organized.

These measures will, naturally, be different in different countries.

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

1. Abolition of private ownership of land. All rents from land will be used for public purposes.

2. A heavy progressive or graduated income tax (meaning higher earners pay a larger percentage).

3. Abolition of all rights of inheritance.

4. Confiscation of the property of all emigrants (those who have fled the country to oppose the revolution) and rebels.

5. Centralization of credit in the hands of the state, through a national bank with state capital and an exclusive monopoly.

6. Centralization of credit in the hands of the state. This would be done through a national bank owned by the state, which would have an exclusive monopoly (sole control) over banking.

7. Centralization of the means of communication and transport in the hands of the state. (e.g., state control over internet infrastructure, railways, airlines, etc.)

8. Expansion of factories and means of production owned by the state. Bringing unused land into cultivation and improving soil quality according to a national plan.

9. Everyone required to work. Establishment of “industrial armies,” especially for agriculture, to organize labor.

10. Combination of agriculture with manufacturing industries. Gradual elimination of the distinction between town and country by spreading the population more evenly across the land.

11. Free education for all children in public schools. Abolition of child factory labor in its current form. Combination of education with practical, industrial production.

The Goal: A Society Without Classes

When, over time, class distinctions have disappeared, and all production is controlled by a huge association of the entire nation (not just the state acting for one class), then public power will lose its political character.

What is political power, really? It’s just the organized power of one class used to oppress another class.

If the working class (proletariat) is forced by its struggle with the bourgeoisie to organize itself as a class… If, through a revolution, it makes itself the ruling class… And if, as the ruling class, it forcibly sweeps away the old conditions of production (like bourgeois private property)… Then, along with these old conditions, it will also sweep away the reasons for class conflicts and for the existence of classes altogether. By doing this, the proletariat will abolish its own rule as a separate class.

In place of the old bourgeois society, with its classes and class conflicts, we will have a new kind of association or community.

In this community, the ultimate goal is a society where the free development of each person is the condition for the free development of all people.

CHAPTER THREE

Socialist and Communist Literature: A Critical Look

This chapter examines different types of writings that called themselves “Socialist” or “Communist” around the time the Manifesto was written (1847). Marx and Engels analyze these viewpoints to show how their own approach is different and, in their view, more accurate.

1. Reactionary Socialism

Reactionary socialists look backward. They react against the rise of the modern ruling class (the bourgeoisie) by trying to restore older social systems or by criticizing capitalism from the viewpoint of classes that were losing power.

A. Feudal Socialism

• Who wrote it? This was written mainly by members of the old aristocracies (nobility) in France and England. They had lost their power to the rising bourgeoisie (the “hateful upstart”). After political defeats like the French Revolution of 1830 and political reforms in England, they couldn’t fight politically anymore. Writing pamphlets became their only remaining weapon.
• What did they write? To gain support, these aristocrats pretended to forget their own interests and wrote criticisms of the bourgeoisie supposedly only in the interest of the exploited working class. They took revenge by writing insults (“lampoons”) about their new masters and spreading rumors of disaster (“sinister prophesies”).
• What was it like? Feudal Socialism was a strange mix: partly complaining about the past, partly insulting the present; partly echoing history, partly threatening the future. Sometimes its criticism was sharp, witty, and cut the bourgeoisie deeply. But it always ended up looking ridiculous because its authors were completely unable to understand the direction of modern history.
• Trying to win over the people: The aristocracy tried to rally the people by waving the workers’ need for charity (“proletarian alms-bag”) like a banner. But whenever the people joined them, they saw the aristocrats’ old feudal symbols (“coats of arms”) on their backsides and left, laughing disrespectfully. Certain groups in France (the Legitimists) and England (“Young England”) demonstrated this.
• What they forgot: When arguing that their old way of exploiting people was different from the bourgeoisie’s, the feudalists forgot two things:
  1. They exploited people under completely different circumstances that are now outdated.
  2. The modern working class (proletariat) didn’t exist under their rule because the modern bourgeoisie itself is the necessary result of the feudal system they represented.
• Their real complaint: They barely hide their backward-looking (reactionary) views. Their main accusation against the bourgeoisie isn’t just that it created a working class, but that it created a revolutionary working class – one destined to destroy the old order of society completely.
• In practice: Feudal socialists joined in all forceful actions against the working class. And in everyday life, despite their fancy talk, they eagerly pursued capitalist profits (like trading wool, beet-sugar, and potato alcohol) – picking up the “golden apples” dropped by industry.
• Clerical Socialism: Just as priests often sided with landlords, Clerical Socialism went hand-in-hand with Feudal Socialism. It’s easy to give Christian ideas a socialist twist. Didn’t Christianity speak out against private property, marriage, and the state? Didn’t it preach charity, poverty, celibacy, self-denial, and devotion to the Church instead? Christian Socialism is basically just “holy water” used by priests to make the aristocrats’ bitter feelings seem noble.

B. Petty-Bourgeois Socialism

• Who does it represent? This type of socialism speaks for the petty bourgeoisie. This class includes small business owners, shopkeepers, artisans, and small peasants. They sit between the big bourgeoisie and the working class (proletariat). In less developed countries, they still exist alongside the rising bourgeoisie.
• Their problem: In modern developed countries, this class is constantly being crushed by competition from big businesses. Its members are always being pushed down into the working class. They see that they might disappear completely as an independent group, replaced by managers, supervisors, and clerks in large companies, farms, and stores.
• Where it arose: It was natural for this kind of socialism to appear in countries like France, where peasants made up more than half the population. Writers who sided with the workers against the bourgeoisie often used the standards of the peasant and petty bourgeois to criticize the system. Sismondi was the leading figure of this school, in both France and England.
• What it did well: This school of socialism was very sharp in analyzing the contradictions and problems of modern capitalism.
  • It exposed the fake justifications used by economists who defended capitalism.
  • It proved, without doubt, the harmful effects of machinery and the division of labor.
  • It highlighted the concentration of wealth (capital) and land in the hands of a few.
  • It pointed out overproduction and economic crises.
  • It showed the inevitable ruin of the small owner and peasant, the misery of the working class, the chaos (“anarchy”) in production, the huge inequalities in wealth distribution, the destructive economic wars between nations, and the breakdown of old moral values, family ties, and national identities.
• What it wanted (its flaws): In its positive goals, however, this type of socialism was flawed. It aimed either:
  1. To restore the old ways of producing and exchanging goods, along with the old property relations and the old society. (This is Reactionary).
  2. Or, to squeeze modern production and exchange methods back into the framework of the old property relations – a framework that modern methods had already destroyed and were bound to destroy. (This is both Reactionary and Utopian – unrealistic).
• Its final proposals: “Corporate guilds for manufacturing; patriarchal relations in agriculture.” (Looking back to pre-capitalist models).
• Its end: Eventually, when harsh historical facts destroyed their self-deception, this form of socialism faded away in a sad state of depression (“miserable fit of the blues”).

C. German or “True” Socialism

• Its strange origin: Socialist and Communist writings from France – which arose from the struggle against a powerful French bourgeoisie – were brought into Germany. This happened at a time when the German bourgeoisie was just starting its own fight against feudalism and absolute monarchy.
• How Germans misused it: German philosophers and writers eagerly grabbed this French literature. But they forgot one crucial thing: when these writings came to Germany, the French social conditions that produced them did not come along. In the German context, the French ideas lost all their immediate practical meaning and became purely abstract and literary. For example, 18th-century German philosophers saw the demands of the French Revolution not as the demands of a specific rising class, but as the abstract demands of “Practical Reason” or “true human Will.”
• The German “translation”: The German writers’ work consisted only of trying to fit the new French ideas into their old philosophical systems. Or rather, they attached French ideas to their own philosophy without really changing their viewpoint. They adopted these ideas like someone learns a foreign language – often by translating awkwardly.
• Philosophical nonsense: It’s known how monks in the Middle Ages sometimes wrote religious stories over older classical manuscripts. The German writers did the reverse with French political writing. They wrote their philosophical nonsense underneath the French original text. For example:
  • Underneath the French critique of money, they wrote “Alienation of Humanity.”
  • Underneath the French critique of the capitalist state, they wrote “Dethronement of the Category of the General.”
• Fancy names: They called this combination of French ideas and German philosophy names like “Philosophy of Action,” “True Socialism,” “German Science of Socialism,” or “Philosophical Foundation of Socialism.”
• Emptying out the French ideas: In this process, the French socialist and communist ideas were completely stripped of their real meaning and power (“emasculated”). Since the ideas, in German hands, no longer expressed the struggle of one class against another, the German writers thought they had overcome “French one-sidedness.” They believed they were representing not the real needs of workers, but the abstract needs of “Truth”; not the interests of the proletariat, but the interests of “Human Nature,” of “Man in general” – a mythical figure belonging to no class, having no reality, existing only in the fog of philosophy.
• False importance: This German socialism took its homework very seriously and promoted its poor quality ideas like a traveling salesman selling fake medicine (“mountebank fashion”). Over time, it gradually lost its naive, academic (“pedantic”) innocence.
• Political timing: The fight of the German bourgeoisie against feudalism and absolute monarchy (the liberal movement) became more serious. This gave “True” Socialism the opportunity it wanted: to confront the political movement with socialist demands. It threw its usual curses (“anathemas”) against liberalism, representative government, bourgeois competition, freedom of the press, bourgeois laws, liberty, and equality. It preached to the masses that they had nothing to gain and everything to lose from this bourgeois movement. German Socialism conveniently forgot that the French criticism it was echoing depended on the existence of modern bourgeois society – the very thing the German struggle was trying to achieve!
• Helping the old rulers: “True” Socialism became a welcome tool (“scarecrow”) for the absolute governments (kings, princes, supported by priests, professors, landowners, officials) to use against the rising, threatening bourgeoisie. It was a “sweet finish” offered by these governments after they had brutally suppressed German working-class uprisings with floggings and bullets.
• Representing German conservatives: While helping the government fight the German bourgeoisie, “True” Socialism also directly represented a reactionary interest: the interest of the German Philistines (the conservative, self-satisfied petty bourgeoisie). In Germany, this class, left over from the 16th century, was the real social foundation of the existing political system. Preserving this class meant preserving the status quo in Germany. The petty bourgeoisie felt threatened with destruction from two sides: the concentration of capital by the big bourgeoisie, and the rise of a revolutionary working class. “True” Socialism seemed like a way to defeat both threats at once. It spread like an epidemic.
• Obscure style: The German Socialists wrapped their flimsy “eternal truths” (which were all skin and bone) in fancy, abstract language (“robe of speculative cobwebs”), embroidered with flowery rhetoric and soaked in weak sentimentality. This fancy wrapping helped sell their ideas to the public.
• Its real role: German Socialism increasingly recognized its calling as the loudmouthed representative of the petty-bourgeois Philistine. It declared the German nation the model nation, and the German petty Philistine the typical human. It gave a hidden, “higher,” socialist meaning to every nasty, mean-spirited trait of this model person – an interpretation completely opposite to reality. It went so far as to directly oppose the “brutally destructive” tendency of Communism and proclaim its own “supreme and impartial” contempt for all class struggles.
• Conclusion (1847): With very few exceptions, almost all the so-called Socialist and Communist publications circulating in Germany at that time belonged to this category of foul and weakening literature.

2. Conservative or Bourgeois Socialism

• Who supports it? A part of the bourgeoisie itself wants to fix certain social problems (redress social grievances) but only to guarantee the continued existence of bourgeois society. This section includes: economists, philanthropists, humanitarians, people working to improve conditions for the working class, charity organizers, animal rights activists, temperance fanatics, and all sorts of minor reformers. This type of socialism has even been developed into complete systems. Proudhon’s book Philosophy of Poverty is given as an example.
• What do they want? These “Socialistic bourgeois” want all the benefits of modern society (wealth, industry) without the struggles and dangers that necessarily come with it (like revolution). They want the existing state of society minus its revolutionary and destructive elements. They essentially wish for a bourgeoisie without a proletariat.
• Their worldview: The bourgeoisie naturally thinks the world it rules is the best possible world. Bourgeois Socialism turns this comfortable idea into various systems. When it asks the working class to follow such a system and march into a “social New Jerusalem” (a promised paradise), what it really wants is for workers to stay within the boundaries of existing society but simply give up their hateful ideas about the bourgeoisie.
• A more practical version: A second type of Bourgeois Socialism is less systematic but more practical. It tries to make workers dislike any revolutionary movement by telling them that no mere political change, but only a change in their material living conditions (economic relations), could possibly help them. However, by “changes in material conditions,” this socialism does not mean abolishing the bourgeois system of production (which requires a revolution). It only means administrative reforms carried out on top of the existing system. These reforms, therefore, don’t affect the fundamental relationship between capital and labor at all. At best, they just reduce the cost and simplify the administrative work of the bourgeois government.
• Empty words: Bourgeois Socialism only finds its true expression when it becomes mere rhetoric, an empty phrase. Examples:
  • Free trade: for the benefit of the working class!
  • Protective tariffs: for the benefit of the working class!
  • Prison Reform: for the benefit of the working class!
• The bottom line: This is the final and only seriously meant message of bourgeois socialism. It can be summed up as: the bourgeois is a bourgeois – for the benefit of the working class. (This is meant ironically, highlighting the self-serving nature).

3. Critical-Utopian Socialism and Communism

• What this is NOT: Marx and Engels clarify they aren’t talking here about the writings that emerged during great revolutions (like the French Revolution) which voiced the demands of the early working class (like the writings of Babeuf). Those first direct attempts by workers to achieve their own goals failed. This was because the working class itself was undeveloped at the time, and the necessary economic conditions for their freedom didn’t exist yet (those conditions would only be created by the rise of the bourgeoisie). The revolutionary writings accompanying those early movements were often backward-looking (“reactionary”), preaching universal self-denial (“asceticism”) and a crude form of making everyone equal (“social levelling”).
• Who this IS: This section discusses the actual Socialist and Communist systems developed by thinkers like Saint-Simon, Fourier, Owen, and others. These systems emerged during the early, undeveloped period of the struggle between the working class and the bourgeoisie (described in Chapter 1).
• What they saw: The founders of these systems did recognize class conflicts and the problems within the existing society.
• What they missed: But they saw the working class (proletariat) as being in its infancy – a class without any historical power of its own or any independent political movement. Because class conflict was just beginning to develop alongside industry, the economic situation didn’t yet offer them the real conditions needed for the working class to achieve freedom.
• What they did instead: Therefore, they searched for a new social science and new social laws that they believed could create these conditions. They believed:
  • Historical change should give way to their personal inventive plans.
  • Historically created conditions for freedom should be replaced by imagined (“fantastic”) ones.
  • The gradual, natural organization of the workers as a class should be replaced by a special social organization designed by these inventors.
  • For them, future history was just about spreading their ideas and putting their social plans into practice.
• Their focus: In creating their plans, they were primarily concerned with the interests of the working class, seeing them as the most suffering class. The working class existed for them only from this viewpoint.
• Their attitude: Because the class struggle was undeveloped, and because of their own social background, these socialists considered themselves far above all class conflict. They wanted to improve the condition of every member of society, even the richest. So, they typically appealed to society as a whole, without making class distinctions. In fact, they preferred appealing to the ruling class. They believed that if people just understood their system, they would see it as the best possible plan for the best possible society.
• Rejection of political action: Therefore, they rejected all political action, especially revolutionary action. They wanted to achieve their goals peacefully. They relied on small experiments and the power of example – efforts doomed to fail.
• Their visions: Their imaginative pictures of future society were created when the working class was still very undeveloped and had only vague ideas about its own position. These pictures reflected the workers’ first instinctive desires for a complete rebuilding of society.
• Their value: But these writings also contain critical elements. They attacked every principle of existing society. This provided valuable material for educating the working class. Their positive proposals about the future – like abolishing the difference between town and country, abolishing the family, abolishing private profit, abolishing the wage system, proclaiming social harmony, and turning the functions of the state into simple administration of production – all pointed towards the eventual disappearance of class conflict (which was only just beginning at the time). Therefore, these positive proposals were purely Utopian (idealistic but unrealistic).
• Their decline: The importance of Critical-Utopian Socialism and Communism decreases as history progresses. As the modern class struggle takes shape, these thinkers’ fanciful ideas of standing above the struggle lose all practical value and theoretical basis.
• Their followers: Although the founders were often revolutionary in their thinking, their disciples usually form reactionary sects. They cling rigidly to their masters’ original views, even when the working class has moved forward historically. They try to weaken the class struggle and patch up conflicts. They still dream of setting up their social utopias (“phalanstères” [Fourier], “home colonies” [Owen], “Icaria” [Cabet] – names of specific utopian communities) through experiments. To fund these, they have to appeal to the generosity of the bourgeoisie. Gradually, they sink into the same category as the reactionary or conservative socialists described earlier. They differ mainly by being more systematic and academic (“pedantic”) and having a fanatical, superstitious belief in the miracle-working power of their particular social science.
• Their opposition to workers: Because of this, they fiercely oppose all independent political movements by the workers. They believe such movements result from workers being blind to the truth of their new “gospel.” (Examples: Owenites in England opposed the Chartists; Fourierists in France opposed the Réformistes – these were contemporary working-class political movements).

How can people, once they understand their system, fail to see it as the best possible plan for the best possible society?

Therefore, these socialists reject all political action, especially revolutionary action. They want to achieve their goals by peaceful means. They hope to pave the way for their new social ideas (“Gospel”) through the force of example and by setting up small experiments. These efforts are bound to fail.

These imaginative pictures of future society were created at a time when the working class (proletariat) was still very undeveloped. Workers had only unrealistic (“fantastic”) ideas about their own situation. These utopian visions matched the first instinctive desires of the working class for a complete rebuilding of society.

The Value and Limits of Utopian Ideas

However, these Socialist and Communist writings also contain valuable criticisms. They attack every basic principle of existing society. Because of this, they are full of important material for educating the working class.

The practical measures they proposed – such as:

• Abolishing the difference between town and country
• Abolishing the family (as it existed under capitalism)
• Ending industries run by private individuals
• Abolishing the wage system
• Proclaiming social harmony
• Turning the function of the state into simply overseeing production

All these proposals point toward the disappearance of class conflict. At the time these systems were created, class conflict was only just beginning to emerge. These writings recognized it only in its earliest, vaguest forms. Therefore, these specific proposals are purely Utopian – idealistic but not based on the real conditions needed to achieve them.

Why Utopian Socialism Becomes Outdated

The importance of Critical-Utopian Socialism and Communism is related inversely to historical development. This means:

• As the modern class struggle grows and takes clearer shape…
• …these unrealistic ideas about standing apart from the struggle, and these unrealistic attacks on it, lose all practical value and all theoretical justification.

Therefore, even though the founders of these systems were revolutionary in many ways, their followers have always formed backward-looking (reactionary) sects. They cling to their masters’ original views, opposing the ongoing historical development of the working class. They consistently try to weaken the class struggle and smooth over class conflicts.

They still dream of setting up their social Utopias through experiments: founding isolated communities (“phalanstères,” based on Fourier’s ideas), establishing “Home Colonies” (like Owen’s), or creating a “Little Icaria” (based on Cabet’s ideas) – like small, pocket-sized versions of the ideal society (“duodecimo editions of the New Jerusalem”). To build these “castles in the air,” they have to appeal to the sympathy and money of the bourgeoisie.

Gradually, these followers sink into the category of the reactionary or conservative Socialists described earlier. They differ only by being more academic and rigid (“systematic pedantry”) and by having a fanatical, superstitious belief in the supposed miraculous power of their particular social science.

Because of this, they fiercely oppose all independent political action by the working class. They believe such action can only come from blind disbelief in their “new Gospel.”

For example, the Owenites in England opposed the Chartists (a working-class political movement), and the Fourierists in France opposed the Réformistes (another reform movement).

CHAPTER FOUR

Position of the Communists in Relation to Various Existing Opposition Parties

Chapter Two explained how Communists relate to existing working-class parties, like the Chartists in England and the Agrarian Reformers in America. This chapter discusses how Communists work with other opposition parties.

General Strategy: Present and Future

• Communists fight to achieve the immediate goals and protect the current interests of the working class.
• But, within the current movement, they also represent and safeguard the future of that movement.

Specific Country Examples (as of 1848)

• France: Communists ally with the Social Democrats against the conservative and radical sections of the bourgeoisie. However, they reserve the right to criticize the phrases and illusions handed down from the time of the great French Revolution.
• Switzerland: Communists support the Radicals, while remembering that this party is made up of conflicting groups: some are Democratic Socialists (like the French), and some are radical bourgeois.
• Poland: Communists support the party that insists an agrarian revolution (major land reform) is the main requirement for national freedom. This was the party that encouraged the uprising in Cracow in 1846.
• Germany: Communists fight alongside the bourgeoisie whenever the bourgeoisie acts in a revolutionary way against the absolute monarchy, the feudal landowners, and the petty bourgeoisie.

The Strategy in Germany: A Two-Stage Fight

But Communists in Germany never stop doing one crucial thing: teaching the working class the clearest possible understanding of the fundamental conflict (hostile antagonism) between the bourgeoisie and the proletariat.

Why? So that the German workers can immediately use the social and political conditions created by bourgeois rule (like parliamentary government, free press, etc.) as weapons against the bourgeoisie itself.

The goal is that, as soon as the reactionary classes in Germany are overthrown, the fight against the bourgeoisie itself can begin immediately.

Why Germany is Key

Communists focus their attention mainly on Germany for these reasons:

1. Germany is on the verge of a bourgeois revolution (a revolution led by the bourgeoisie to overthrow feudalism/monarchy).
2. This revolution is bound to happen under more advanced conditions of European civilization and with a much more developed working class than existed during the English revolution (17th century) or the French revolution (18th century).
3. Therefore, the bourgeois revolution in Germany will be merely the short introduction (prelude) to an immediately following proletarian revolution (a revolution led by the working class).

Universal Approach: Revolution and Unity

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

In all these movements, they bring the property question to the forefront as the leading issue, no matter how developed that question is at the time.

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

Conclusion: Open Aims and a Call to Action

Communists consider it beneath them to hide their views and aims. They openly declare that their goals can only be achieved by the forcible overthrow of all existing social conditions.

Let the ruling classes tremble at the idea of a Communist revolution.

The proletarians (workers) have nothing to lose but their chains. They have a world to win.

Working Men of All Countries, Unite!

CHAPTER ONE

The Accumulation of Capital

(A) Keeping Production Going (Reproduction)

This section explains how capitalist production keeps itself going continuously.

Production Must Continue

A society cannot stop producing things, just like it cannot stop consuming things. To keep producing continuously, any society must constantly use a part of its products as new means of production. These are things like tools, equipment, raw materials, and other necessary supplies.

To maintain its wealth at the same level (simple reproduction), a society must replace 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.

Simple Reproduction Under Capitalism

In a capitalist society, all means of production also serve as capital. This is because they allow their owner (the capitalist) to make a profit (surplus-value) by hiring wage-labor (workers). The capitalist doesn’t just want to make surplus-value once; they want to make it continuously from the capital they invested.

Imagine a capitalist consumes all the surplus-value they make each year for their personal expenses. In this case, production would just repeat itself at the same scale year after year. This is called simple reproduction. But even this simple repetition changes things over time.

Where Do Wages Really Come From?

The production process starts when the capitalist buys a worker’s ability to work (labor power) for a set period. However, the worker usually gets paid after they have already worked. During that work, they produce goods that contain not only the value of their own labor power but also extra value – the surplus-value for the capitalist.

This means the worker produces the surplus-value (the source of the capitalist’s profit) before they receive their wages. In fact, the worker produces the very fund from which they are paid. Their job only lasts as long as they keep reproducing this fund for the capitalist.

Therefore, wages are just a portion of the value continuously created by the worker themselves.

The capitalist pays the worker in money, it’s true. But this money is just the transformed shape of the product of the worker’s labor. The money represents the value created by the worker’s labor last week or last year, which now pays for their labor this week or this year.

This reality is hidden by the use of money. But if we look at the whole capitalist class and the whole working class, the illusion disappears.

• The capitalist class constantly gives the working class payment slips (money).
• These slips give workers a claim on a portion of the goods they produced (which the capitalists have taken).
• The workers constantly give these payment slips back to the capitalist class to get their share of their own product. The fact that products are commodities (goods for sale) and payment is in money obscures this underlying process.

Where Does Capital Come From?

The idea that wages are paid out of the capitalist’s original funds disappears when we look at production as a continuous cycle. But the process had to start somehow. Let’s assume, for a moment, that a capitalist once got money without exploiting anyone – maybe through their own work. They used this money to start hiring workers.

However, the mere continuation of production (simple reproduction) leads to some surprising changes over time. These changes affect the entire capital.

• Example: Suppose a capitalist starts with £1,000. This capital generates £200 in surplus-value each year. If the capitalist spends the entire £200 every year, after 5 years, they will have consumed £1,000 (5 x £200). This equals the amount of the original capital.
• If they only consumed half the surplus-value (£100) 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 size of the capital and how much surplus-value is consumed), the value of the capital originally invested has been completely consumed by the capitalist.

The capitalist thinks they are just spending the surplus-value (the profit from unpaid labor) while keeping their original capital safe. But their thoughts don’t change the facts. After enough time, the capital value they possess is actually equal to the total amount of surplus-value they have taken from workers over those years. And the total value they have personally consumed is equal to the value of their original capital.

Yes, they still have capital (factories, machines, etc.), some of which might be the same physical items they started with. But we are talking about the value of the capital.

• Analogy: Imagine a person spends all their property’s value by taking out debts equal to that value. Their property now really just represents the total amount of their debts.
• It’s the same with the capitalist. When they have consumed the equivalent value of their original capital, the value of their current capital represents nothing but the total surplus-value they have taken from workers without payment. Not a single bit of the value of the original capital still exists.

Conclusion: The simple act of continuing production (simple reproduction), sooner or later, necessarily turns every capital into capitalized surplus-value. Even if the capitalist originally earned their starting money through personal labor, that capital eventually becomes value taken without payment – the unpaid labor of others turned into money or other assets.

Keeping the System Going: Reproducing the Worker

To turn money into capital and exploit others’ labor, the capitalist originally needed to find workers in the market who lacked any means of production or survival. This separation between owners and workers was the real starting point of capitalist production.

But the simple continuation of the production process constantly reproduces these conditions:

• On one hand: Production constantly turns material wealth into capital – into tools for capitalists to create more wealth and enjoyment for themselves.
• On the other hand: The worker leaves the production process just as they entered it – as a source of wealth for the capitalist, but without any means to make that wealth their own.

Since the worker’s labor was already given up (“alienated”) by selling their labor power before starting work, and since it was taken by the capitalist and combined with capital, the product created also belongs to the capitalist. This ongoing reproduction, this perpetuation of the worker as a wage laborer, is an essential condition for capitalist production.

How the Worker Consumes

The worker consumes things in two ways:

1. Productive Consumption: While working, the worker “consumes” the means of production (uses up raw materials, wears down tools) and turns them into products with a higher value than the capital invested. This consumption is productive for the capitalist who bought the worker’s labor power. In this role, the worker acts as the driving force of capital and belongs to the capitalist.
2. Individual Consumption: The worker uses the money (wages) paid to them to buy necessities like food, clothing, and housing. This is their personal consumption. In this role, the worker belongs to themselves and performs necessary life functions outside the production process.

The result of productive consumption is that the capitalist lives and profits. The result of individual consumption is that the worker lives.

Sometimes, workers are forced to make their individual consumption just another part of production. They eat and rest only to maintain their ability to work, like supplying coal and water to a steam engine or oil to a wheel. Marx considers this an abuse, not an essential feature of the system itself.

Individual Consumption as Reproduction of Capital

The situation looks different when we consider the capitalist class and the working class as whole groups, not just individuals, and look at capitalist production on its actual social scale.

By exchanging part of his capital for labor power (paying wages), the capitalist increases the value of his total capital. He profits not only from what the worker produces, but also from what he pays the worker. Here’s how:

• The capital exchanged for labor power (wages) is turned into necessities (food, housing, etc.).
• By consuming these necessities, the workers’ muscles, nerves, bones, and brains are reproduced, allowing them to continue working.
• New workers (children) are also created.

Therefore, within the limits of what is strictly necessary, the individual consumption of the working class is actually the process of turning the means of subsistence (paid for by capital) back into fresh labor power that capital can exploit. It is the production and reproduction of the most essential means of production for the capitalist: the worker themself.

So, the worker’s individual consumption – whether it happens inside the workplace or outside, during production or not – becomes a factor in the production and reproduction of capital. It’s similar to cleaning machinery, which helps production whether it’s done while the machine is running or stopped.

The fact that the worker consumes for their own purposes, not to please the capitalist, doesn’t change this. A work animal consuming food is still a necessary part of production, even if the animal enjoys eating.

The maintenance and reproduction of the working class is always a necessary condition for the reproduction of capital. But the capitalist can safely leave this task to the workers’ basic instincts for survival and having children. All the capitalist cares about is reducing the worker’s individual consumption to the absolute minimum necessary. They are far from wanting workers to eat more food to be stronger (unlike some brutal slave owners in South America mentioned by Marx), because that would increase costs.

The Capitalist Viewpoint

Because of this, the capitalist and their intellectual supporters (political economists) consider only one part of the worker’s individual consumption to be “productive”: the part needed to keep the working class going so that capital always has labor power available. Any consumption beyond this bare minimum, which the worker does for their own pleasure, is considered “unproductive consumption.”

The Worker: An Essential Part of Capital

From a social point of view, therefore, the working class, even when not directly working, is just as much an attachment (“appendage”) of capital as are the physical tools and machines. Even the workers’ individual consumption is, within certain limits, just a factor in the reproduction of capital.

The system makes sure that these “self-aware instruments” (workers) don’t just leave. It constantly turns their product into the property of capital as soon as it’s made. Individual consumption achieves two things:

1. It provides the means for workers to survive and reproduce.
2. By using up these necessities, it ensures the worker must continually reappear in the labor market to sell their labor power again.

The Roman slave was held by physical chains. The wage-laborer is bound to their owner (capital) by invisible threads. The appearance of independence is maintained by constantly changing employers and the legal formality (“fictio juris”) of an employment contract.

Capital’s Control Over Workers

In the past, capital sometimes used laws to enforce its ownership rights over “free” laborers. For example, until 1815 in England, it was illegal, with severe penalties, for mechanics skilled in machine-making to emigrate.

Skilled Labor as Capital’s Asset: The Cotton Famine Example

The reproduction of the working class also involves the transmission and accumulation of skills from one generation to the next. Capitalists consider this skilled workforce part of the productive factors that belong to them. This becomes very clear during crises that threaten the loss of these skilled workers.

• The Situation: During the American Civil War, a “cotton famine” occurred because supplies from the US were cut off. Most cotton factory workers in Lancashire, England, were thrown out of work.
• The Debate: People from the working class and other social ranks called for government aid or private donations to help the unemployed workers emigrate to the colonies or the United States.
• The Manufacturer’s Response: The Times newspaper published a letter on March 24, 1863, from Edmund Potter, a former president of the Manchester Chamber of Commerce. This letter was called the “manufacturers’ manifesto” in Parliament. Here are key points where Potter bluntly asserts capital’s claim over labor power:
  • Potter acknowledges the supply of cotton workers might be too large and need reducing.
  • He notes public opinion favors emigration.
  • But, he states, the “master” (the factory owner) “cannot willingly see his labour supply being removed.” He thinks emigration is “wrong and unsound.” He protests using public funds for it.
  • He argues the cotton trade is vital to England (major exporter) and will recover and expand again soon.
  • He asks: “Is the trade worth retaining?” “Is it worth while to keep the machinery [meaning the workers] in order?” His answer is YES. He thinks it’s “the greatest folly” to consider letting the workers go.
  • He admits workers are not literal “property” of Lancashire or the masters, but insists “they are the strength of both; they are the mental and trained power which cannot be replaced for a generation.” He claims the physical machinery could be replaced or improved much faster.
  • He warns: If you let the “working-power” emigrate, what happens to the capitalist? Taking away the “cream of the workers” will devalue factories (“fixed capital”), and investors (“floating capital”) won’t risk struggles with a smaller supply of less-skilled labor.
  • He acknowledges workers want to emigrate (“Very natural”).
  • He claims reducing the workforce harms everyone: small shopkeepers, landlords (cottage rents), small farmers, landowners. Exporting the best workers weakens the nation and destroys capital value.
  • Potter’s two types of “machinery”: He distinguishes between two kinds of machinery belonging to the capitalist:
    1. Inanimate machinery: Located in the factory, wears out, becomes outdated quickly due to technology.
    2. Living machinery: The workers, housed outside the factory at night and on Sundays. This machinery gets better the longer it lasts, as skills accumulate over generations.
• The Times’ Reply: The newspaper criticized Potter:
  • Potter is so focused on cotton masters that he’d keep half a million workers trapped “in a great moral workhouse” against their will.
  • The paper agrees the trade is worth retaining by honest means.
  • But it hesitates on “keeping the human machinery in order.” It says it’s not “worth while,” or even possible, to just shut up human machinery and keep it oiled until needed.
  • “Human machinery will rust under inaction… get the steam up of its own accord, and burst or run amuck in our great towns” (meaning workers will deteriorate or protest/riot if left idle).
  • The Times suggests that while reproducing skilled workers might take time, England could always find enough “thrifty, hard, industrious men” to quickly create more master manufacturers than needed (implying the capitalists are more easily replaceable than the skilled workforce).

Mr. Potter talks about the cotton trade recovering ‘in one, two, or three years,’ and asks the public not ‘to encourage or allow (!) the working power to emigrate.’ He admits it’s natural for the workers to want to leave, but he thinks the nation should force this half million workers, plus their 700,000 dependents, to stay “shut up” in the cotton districts. The Times pointed out the obvious consequence: the nation would then have to keep the workers quiet by force, support them with charity (“alms”), all on the mere chance that the cotton factory owners might need them again someday. The Times concluded: “The time is come when the great public opinion of these islands must operate to save this ‘working power’ from those who would deal with it as they would deal with iron, and coal, and cotton.”

However, Marx notes that The Times article was just a clever piece of writing (“jeu d’esprit”). In reality, “great public opinion” actually agreed with Mr. Potter – the factory workers were treated as movable equipment belonging to the factories. Their emigration was prevented. They were effectively locked up in the “moral workhouse” of the cotton districts, where they remain, as before, the “strength” of the Lancashire cotton manufacturers.

The Never-Ending Cycle of Capitalism

Therefore, capitalist production, by its very nature, automatically reproduces the separation between the workers (labor power) and the tools and materials needed for work (means of labor). By doing this, it constantly reproduces and continues the conditions necessary for exploiting the worker.

• It continuously forces workers to sell their ability to work simply to survive.
• It continuously enables the capitalist to buy that labor power in order to get richer.

It’s no longer just an accident that the capitalist and the worker meet in the market as buyer and seller. The system itself constantly throws the worker 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 someone else (the capitalist) can buy them.

So, capitalist production, viewed as a continuous cycle (a process of reproduction), produces not only goods and profits (surplus-value), but it also produces and reproduces the capitalist relationship itself: the capitalist on one side, the wage-worker on the other.

(B) Making Capital Grow from Profits (Accumulation). Capitalist Property.

So far, we’ve looked at how profit (surplus-value) comes from capital. Now we need to see how capital itself grows from surplus-value. Using surplus-value as capital – reinvesting it to make more profit – is called accumulation of capital.

How Accumulation Works for an Individual Capitalist

Let’s look at this from the viewpoint of a single capitalist. Suppose a factory owner (a spinner) starts with a capital of £10,000.

• £8,000 (four-fifths) is spent on cotton, machinery, etc. (means of production).
• £2,000 (one-fifth) is spent on wages.

Let’s say they produce 240,000 lbs. of yarn each year, worth £12,000. If the rate of surplus-value (the rate of profit extracted from labor) is 100%, then the surplus-value is contained in the extra product – 40,000 lbs. of yarn (one-sixth of the total). This extra product is worth £2,000 when sold.

£2,000 is just £2,000. Looking at the money itself, we can’t see or smell that it came from surplus-value. Knowing that a certain value is surplus-value tells us how the owner got it, but it doesn’t change what value or money fundamentally are.

To turn this extra £2,000 (the profit) into new capital, the factory owner will do the same as before (assuming conditions stay the same):

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

Then, this new capital of £2,000 starts working in the factory and, in turn, generates its own surplus-value (say, £400, if the rate stays the same).

Changing Forms

The original £10,000 capital value was first advanced as money. When the yarn produced is sold, the capital value returns to its money form. Surplus-value, however, starts as the value contained in a part of the physical product (the extra yarn). When this extra yarn is sold, the form of the surplus-value changes from yarn-value to money.

From that moment on, both the original capital value (£10,000) and the surplus-value (£2,000) are sums of money. Turning them back into working capital happens in exactly the same way. The capitalist uses both sums to buy the commodities (machines, materials, labor power) needed to start producing again, this time on a larger scale. But to buy these commodities, they must already be available in the market.

What Must Be Produced for Accumulation?

Commodities bought in the market must have been produced beforehand. Market transactions only exchange the different parts of the year’s total product, moving them between people. The market itself cannot increase the total amount produced or change the types of things produced.

The total annual production must first supply all the things needed to replace the materials and tools used up during the year. After subtracting these replacement goods, what’s left is the net product or surplus product. This surplus product contains the surplus-value.

What does this surplus product consist of? Is it just luxury items for the capitalists to consume? If so, they would use up all the surplus-value, and no accumulation could happen.

Except by a miracle, you can only turn things into new capital if they are:

1. Items that can be used in the work process (i.e., means of production).
2. Items suitable for workers to live on (i.e., means of subsistence).

Therefore, part of the surplus labor performed each year must have been used to produce additional means of production and additional means of subsistence, beyond what was needed just to replace the original capital. In other words, surplus-value can only be turned into capital because the surplus product (whose value it represents) already contains the physical things needed to create new capital.

The Need for More Labor

Now, for these extra materials and tools to actually function as new capital, the capitalist class needs additional labor. If the workers already employed aren’t exploited more (working longer hours or more intensely), then additional labor power must be found.

The capitalist system provides for this in advance. Wages are generally enough not only for workers to survive but also for the working class to grow in number. Capital simply needs to combine this additional labor power (supplied each year by the working class as new workers of all ages) with the surplus means of production created. When that happens, the conversion of surplus-value into capital – accumulation – is complete.

The Snowball Effect

Let’s go back to our example. It’s the old story: Abraham had Isaac, Isaac had Jacob, and so on.

• The original £10,000 capital creates £2,000 in surplus-value. This is turned into new capital (capitalized).
• The new £2,000 capital creates £400 in surplus-value. This is also capitalized, becoming a second piece of additional capital.
• This £400 capital then produces a further surplus-value of £80. And the process continues, like a snowball rolling downhill.

We are ignoring the part of the surplus-value the capitalist consumes personally. It also doesn’t matter right now whether the new capital is added to the original or operates independently, or whether the same capitalist uses it or lends it to someone else. We just must remember that alongside the newly formed capital, the original capital keeps reproducing itself and producing surplus-value. The same is true for all accumulated capital.

Where Does Accumulated Capital Really Come From?

The original £10,000 capital was invested. Where did the owner get it? Political economists usually answer: “By his own labor and that of his ancestors.” (Marx implies this is often a myth).

But the origin of the additional capital of £2,000 is completely different. We know exactly where it came from: it is capitalized surplus-value. Every single bit of its value owes its existence to unpaid labor.

The means of production (cotton, etc.) bought with this additional capital, and the necessities bought to feed the additional workers, are simply parts of the surplus product – the tribute demanded yearly from the working class by the capitalist class. Even if the capitalist buys the additional labor power at its full market price (exchanging equivalent value for equivalent value), the whole transaction is still like the old trick of every conqueror: buying things from the conquered people using the very money the conqueror previously stole from them.

Workers Create the Capital That Employs (or Replaces) Them

If the additional capital employs the same person who produced the surplus-value it came from, that worker must not only keep increasing the value of the original capital but must also essentially buy back the results of their previous labor with more labor than it originally cost.

Looking at the transaction between the capitalist class and the working class as a whole, it makes no difference if additional workers are hired using the unpaid labor created by previously employed workers. The capitalist might even use the additional capital to buy a machine that throws the very worker who made it out of a job, replacing them with a few children.

In every case, the working class creates, through its surplus (unpaid) labor in one year, the capital that is destined to employ additional labor (or machines) in the following year. This is accumulation.

Past Unpaid Labor Buys Present Unpaid Labor

Accumulating the first £2,000 required the capitalist to already possess £10,000 (supposedly from “primitive labor”). But accumulating the second additional capital of £400 only required the previous accumulation of the £2,000 (which was capitalized surplus-value).

The ownership of past unpaid labor becomes the only requirement for taking control of living unpaid labor on a constantly growing scale. The more the capitalist has already accumulated (from past unpaid labor), the more they are able to accumulate (by commanding present unpaid labor).

How Property Rights Get Flipped

Through this process – the constant growth of capital using previous profits, part of which is always used to buy new labor power – the nature of private property based on producing and selling commodities gets turned into its complete opposite.

The exchange of equivalents (paying a fair price) becomes only an apparent exchange. This is because:

1. The capital exchanged for labor power is itself just a part of the product of other people’s labor, taken without payment.
2. This capital must not only be replaced by the worker who receives it as wages, but replaced along with a surplus (profit).

The exchange between capitalist and worker becomes a mere formality, hiding the real transaction. The constant buying and selling of labor power is just the outer form. What really happens is this: the capitalist again and again takes a portion of others’ labor (already existing in products) without payment, and exchanges it for an even greater quantity of living labor.

At first, property rights seemed to be based on a person’s own labor. That idea was necessary when only independent commodity owners with equal rights faced each other, exchanging their own products. But now, property turns out to be the right, for the capitalist, to take the unpaid labor of others (or its product), and the impossibility, for the worker, of owning their own product. The separation of property from labor becomes the result of a system that seemed to start with them being linked.

Accumulated Capital Dwarfs Original Capital

We saw that even with simple reproduction, all capital eventually becomes capitalized surplus-value. But in the ongoing flood of production and accumulation, the capital originally invested becomes insignificant (“a vanishing quantity”) compared to the capital accumulated directly from surplus-value – whether that accumulated capital is used by the person who accumulated it or by someone else.

The Choice: Consume or Accumulate

It’s clear that only a portion of the surplus-value can be turned into new capital. Another portion must be used for the capitalist’s own living expenses. The larger one part is, the smaller the other must be. The less the capitalist consumes personally, the greater the accumulation will be.

Why Capitalists Accumulate

• Historical Role: The historical value and justification of the capitalist lie in the fact that they ruthlessly force the human race to produce just for the sake of producing. By doing this, they force the development of society’s productive powers. They create the material conditions (technology, industry) that are the only possible foundation for a higher form of society – one where the full and free development of every individual is the main principle.
• Necessity & Competition: The development of capitalist production constantly requires increasing the amount of capital invested in any given business. Competition forces each individual capitalist to constantly expand their capital just to survive. But they cannot expand it except through ongoing (progressive) accumulation.

CHAPTER TWO

How Capital Accumulation Affects the Working Class — The Industrial Reserve Army — The Theory of Growing Poverty

This chapter examines how the process of growing capital (accumulation) impacts workers.

(Extracted from Capital, Vol. 1, Chapter 25)

How Accumulation Affects Demand for Workers

When a part of the profit (surplus-value) is turned back into capital and used as additional capital, it’s clear that this additional capital also needs labor to function.

Let’s assume, for now, that other factors stay the same. Let’s also assume that a certain amount of equipment and materials (constant capital) always needs the same amount of labor power (variable capital) to be put to work.

Under these simple assumptions, the demand for labor will increase as capital increases. The faster capital grows, the faster the demand for labor will rise. Here’s why demand might grow quickly:

• Capital produces surplus-value every year.
• Part of this surplus-value is added to the original capital each year (accumulation).
• This surplus-value grows each year because the total capital grows.
• Special events, like opening new markets or developing new social needs that create new investment opportunities, can encourage capitalists to consume less personally and accumulate even more surplus-value.

For all these reasons, the need for labor to fuel capital accumulation might grow faster than the number of available workers. When this happens, wages may rise.

If the simple conditions we assumed above continued indefinitely, wages must eventually rise. Since more workers are hired each year than the year before, a point would eventually be reached where the demand for workers outstrips the usual supply, causing wages to go up. Complaints about this were common in England during the 15th century and the first half of the 18th century.

However, whether workers live and reproduce under slightly better or worse circumstances doesn’t change the basic nature of capitalist production. Just as simple reproduction constantly recreates the relationship between capitalists and wage-workers, reproduction on a larger scale (accumulation) reproduces this relationship on a larger scale: more or bigger capitalists at one end, more wage-workers at the other.

Therefore, accumulation of capital means an increase in the proletariat (the working class).

Early Views on Workers and Wealth

Writers recognized early on that capital needs workers:

• As early as 1696, John Bellers wrote: “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.”
• Bernard de Mandeville wrote at the beginning of the 18th century (1728): “It would be easier… 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… 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… The only thing then that can render the labouring man industrious, is a moderate quantity of money, for as too little will… either dispirit or make him desperate, so too much will make him insolent and lazy… in a free nation, where slaves are not allowed of, the surest wealth consists in a multitude of laborious poor… To make the society… happy… it is requisite that great numbers of them should be ignorant as well as poor…”

Mandeville, an honest and clear thinker for his time, didn’t yet see that the process of accumulation itself increases the number of “labouring poor” (wage-workers) along with the amount of capital.

Why Wage Increases Are Limited

Even under the conditions most favorable to workers (when accumulation is rapid and wages rise), their dependent relationship on capital continues, perhaps in a more bearable form. A larger part of their own surplus product (which is constantly turned into additional capital) comes back to them as wages. This allows them to:

• Expand their range of enjoyments slightly.
• Buy more clothes, furniture, etc.
• Save small amounts of money.

But just as better food, clothing, treatment, or a small personal fund (“peculium”) don’t eliminate the exploitation of a 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 golden chain the worker has already made for themselves is loosened slightly. Higher wages, at best, only mean a small reduction in the amount of unpaid labor the worker must provide. This reduction can never reach the point where it threatens the capitalist system itself.

Two things can happen:

1. Wages keep rising because the rise doesn’t stop accumulation. This isn’t surprising. As Adam Smith noted (1774), even if profit rates fall, the total amount of capital can still increase, maybe even faster than before (“A great stock, though with small profits, generally increases faster than a small stock with great profits”). In this case, reduced unpaid labor doesn’t stop capital from expanding its control.
2. Accumulation slows down because wages rise too high, reducing the incentive (profit) for capitalists. The rate of accumulation decreases. But this simultaneously reduces the demand for labor (which was high because of accumulation), and wages fall again. The mechanism of capitalist production automatically removes the temporary obstacles (high wages) it creates.

It’s About Capital, Not Population

So we see:

• In the first case, it’s not that the labor supply grew too slowly, causing a capital surplus. Instead, the surplus of capital made the available labor seem insufficient.
• In the second case, it’s not that the labor supply grew too fast, causing a capital shortage. Instead, the relative slowdown of capital accumulation made the labor supply (or rather, its price) seem excessive.

These changes in the accumulation of capital appear as changes in the supply of labor, making it seem like the labor supply is moving independently. It’s a serious mistake to explain these patterns by simply saying there are sometimes too few workers and sometimes too many.

Therefore, it’s not the total amount of social wealth or the size of existing capital that causes wages to rise. It’s the constant growth of accumulation and how fast that growth happens.

The Real Driver: Changing How Work Is Done (Increased Productivity)

So far, we’ve assumed that the productivity of labor stays the same – meaning the same amount of labor power is needed to work the same amount of means of production. We also assumed the division of capital into constant (c) and variable (v) parts remains unchanged.

However, a closer look shows this assumption is wrong. The productive power of labor is increased by accumulation. As Adam Smith said, the same cause that raises wages (increase of capital or “stock”) also tends to increase labor’s productive power, allowing fewer workers to produce more goods.

But increasing productivity means that the same amount of labor power (v) now uses up a larger quantity of means of production (c). The internal, technical structure of capital must change during accumulation. A relatively larger share of capital is invested in means of production (c), and a relatively smaller share in labor power (v).

• Example: Originally, a capital might be 50% constant (machines/materials) and 50% variable (wages). Later, with higher productivity, it might become 80% constant and 20% variable.
• Evidence: This law of progressively increasing constant capital relative to variable capital is confirmed everywhere – by comparing prices across different economic eras or different nations in the same era.

Value vs. Material Composition

This changing value composition (the c/v ratio) only roughly shows the change in the physical makeup of capital.

• Example: Today’s spinning capital might be 7/8 constant value and 1/8 variable value. In the early 18th century, it might have been 1/2 constant and 1/2 variable.
• However, the physical amount of raw material, tools, etc., used by one spinning worker today is many hundreds of times greater than in the early 18th century.
• Reason: With rising productivity, the mass of means of production used increases, but their value compared to their mass decreases (machines become cheaper relative to what they can do).
• So, while the value difference between c and v increases, the physical difference between the mass of means of production (c) and the mass of labor power (v) increases much more rapidly.

Absolute vs. Relative Need for Workers

Even though accumulation reduces the relative share of capital spent on labor (v), it does not prevent the absolute amount spent on labor from rising.

• Example: Suppose a capital starts at £6,000, divided 50% constant (£3,000) and 50% variable (£3,000). Later, it grows to £18,000 and is divided 80% constant (£14,400) and 20% variable (£3,600).
• Even though the variable part dropped from 50% to 20%, its absolute amount increased from £3,000 to £3,600.
• Impact: However, before, a 20% increase in total capital (£1,200) would have increased the demand for labor by 20% (£600). Now, to increase the demand for labor by the same absolute amount (£600), the original capital needs to triple (from £6,000 to £18,000).

How Accumulation and Production Reinforce Each Other

We know that developing the productive power of labor requires:

• Cooperation on a large scale.
• Organization of division and combination of labor.
• Economizing means of production through concentration.
• Using large-scale instruments of labor (like machine systems).
• Harnessing natural forces (like steam power).

Under commodity production (where means of production are private property and workers sell labor power), large-scale cooperation can only happen through the growth of individual capitals. It requires transforming social means of production and subsistence into the private property of capitalists. Commodity production only allows large-scale production in the capitalist form.

Therefore, a certain amount of capital accumulation in the hands of individuals is necessary before specifically capitalist production can begin.

But once capitalist production starts, the methods used to increase labor’s productivity are also methods for increasing the production of surplus-value (profit). More surplus-value, in turn, fuels more accumulation.

So, the continuous turning of surplus-value back into capital appears as an increasing amount of capital entering the production process. This larger capital allows for:

• Larger scale production.
• Improved methods for raising productivity.
• Faster production of surplus-value.

Conclusion: If some accumulation is needed to start capitalist production, capitalist production, in turn, causes accelerated accumulation. These two factors work together, reinforcing each other. This combined effect drives the change in the technical composition of capital, making the variable part (labor) continually smaller compared to the constant part (means of production).

Growing Businesses: Concentration and Centralization

Every individual capital represents a concentration of means of production, controlling a corresponding number of workers. Every act of accumulation allows for new accumulation. As the total mass of wealth functioning as capital grows, accumulation increases the concentration of that wealth in the hands of individual capitalists. This widens the base for large-scale production and specifically capitalist methods.

The growth of total social capital happens through the growth of many individual capitals. At the same time:

• Parts of original capitals break off to become new, independent capitals (e.g., through inheritance splitting property within families). The number of capitalists tends to grow.
• The growth of each existing capital is limited by the formation of new capitals and the splitting of old ones.

So, accumulation appears, on one hand, as increasing concentration (more means of production and control over labor in fewer, larger units). On the other hand, it appears as repulsion (many individual capitals pushing away from each other, splitting up).

Centralization: Big Fish Eat Little Fish

This splitting up (repulsion) is counteracted by attraction – the centralization of capitals. This means:

• Concentration of capitals already formed.
• Destruction of the individual independence of smaller capitals.
• Expropriation of capitalist by capitalist (one capitalist taking over another’s capital).
• Transformation of many small capitals into a few large capitals.

This process of centralization differs from accumulation because it only involves rearranging the distribution of existing capital. Its scope isn’t limited by the growth of total social wealth. Capital grows huge in one place because it has been lost by many in another place. This is centralization proper, distinct from accumulation and concentration (which refers more to the physical gathering of means of production).

Competition, Credit, and Bigger Companies

The battle of competition is fought by making commodities cheaper. Cheaper goods depend (mostly) on labor productivity, which depends on the scale of production. Therefore, larger capitals beat smaller capitals.

Also, as capitalism develops, the minimum amount of capital needed to run a business under normal conditions increases. Smaller capitals get pushed into industries that modern industry hasn’t fully taken over yet. Here, competition inevitably leads to the ruin of many small capitalists. Their capitals partly pass into the hands of the winners and partly disappear.

Beyond this, a new force emerges: the credit system.

• It’s a powerful new weapon in the battle of competition.
• Through invisible threads, it draws scattered amounts of available money from all over society into the hands of individual or associated capitalists.
• It is the specific mechanism for the centralization of capitals.

Centralization intensifies as capitalist production and accumulation develop. In turn, centralization becomes a major driver (“lever”) of this development. It helps accumulation by enabling capitalists to expand their businesses even further.

The expansion of businesses, made possible by centralization, provides the starting point for organizing large numbers of workers together and developing the material forces of production more broadly.

Centralization: Faster than Accumulation

It’s clear that accumulation (the gradual growth of capital by reinvesting profits) is a slow process compared to centralization. Centralization simply pulls together existing capitals and rearranges them.

• Example: The world would still be waiting for railways today (in 1874) if it had depended on individual businesses slowly accumulating enough capital on their own. Centralization, using tools like joint-stock companies (where many investors pool their money), allowed railways to be built much faster.

While centralization speeds up the effects of accumulation, it also expands and quickens the technological changes within capital. These changes increase the share of capital spent on machines and materials (constant capital) at the expense of the share spent on wages (variable capital). This reduces the proportional demand for labor.

Centralized Capital Grows Even Faster

Masses of capital brought together overnight through centralization reproduce themselves and grow just like other capitals, but even more rapidly. They become powerful new engines (“levers”) driving further accumulation.

Constantly Revolutionizing Production

The increasing size of individual blocks of capital becomes the material basis for an ongoing revolution in the way things are produced.

• Capitalism continually takes over branches of industry it hadn’t fully controlled before.
• At the same time, new industries that couldn’t exist without capitalism grow up.
• Finally, even in established capitalist industries, labor productivity is rapidly increased, like plants forced to grow in a hothouse.

Fewer Workers Needed Proportionally

In all these cases, the number of workers employed falls in proportion to the amount of means of production they use.

• An ever-increasing part of capital is turned into means of production.
• An ever-decreasing part is turned into labor power (wages).
• As the scale, concentration, and technical efficiency of the means of production increase, they become progressively less a source of employment for workers.
• Example: A steam plough is vastly more efficient than an ordinary plough, but the capital invested in it employs far fewer people than the same amount of capital spent on many ordinary ploughs.

How Capital Reduces Its Workforce

Initially, simply adding new capital to old capital allows businesses to expand and introduce technical changes. But soon, these changes in composition and technology affect all the old capital as it wears out and needs to be replaced.

This has two effects:

1. The additional capital created through accumulation attracts fewer and fewer workers relative to its size.
2. The old capital, when replaced with new technology, pushes away (“repels”) more and more of the workers it previously employed.

Productivity Grows Faster Than Capital

The increase in labor productivity, and the resulting change in the structure of capital (more machines, relatively less labor), doesn’t just keep pace with accumulation (the growth of total wealth). It develops much faster.

Why? Because the simple growth of total capital (accumulation) is accompanied by centralization (mergers, takeovers). Also, changes in the technology of new capital force similar changes in old capital when it’s replaced.

The Changing Ratio: More Machines, Less Labor Power

As accumulation progresses, the proportion of constant capital (c) to variable capital (v) changes. If it was originally, say, 1:1 (equal parts), it might become successively 2:1, 3:1, 4:1, 5:1, 7:1, and so on.

This means that as total capital increases, instead of half its value being turned into labor power (wages), only 1/3, then 1/4, 1/5, 1/6, 1/8, etc., is used for labor. Correspondingly, 2/3, 3/4, 4/5, 5/6, 7/8, etc., is turned into means of production.

Falling Demand for Labor (Relatively)

Since the demand for labor is determined only by the variable part of capital (v), that demand falls progressively relative to the size of the total capital. It does not rise in proportion to total capital, as we might have initially assumed. This relative fall in demand accelerates as the total capital grows larger.

While the total amount of variable capital (and thus the labor power employed) might still increase as total capital grows, it increases in a constantly diminishing proportion. The periods where accumulation simply means expanding production using the same technology become shorter and shorter.

The Need for Speed

It’s not just that faster accumulation is needed to absorb additional workers. Because old capital is constantly being transformed and shedding workers, accelerated accumulation (growing at an ever-increasing rate) is needed even just to keep the existing workforce employed.

This increasing accumulation and centralization, in turn, becomes a source of new changes in capital’s composition, leading to an even faster relative decrease in the variable part compared to the constant part.

Creating the “Unemployed Army”

This rapid relative decrease in the part of capital used for labor makes it look like the working population is increasing faster than jobs are.

But Marx argues that, in fact, capitalist accumulation itself constantly produces a working population that is larger than needed for capital’s own expansion at any given moment. Workers, by producing capital accumulation, also produce, to an ever-increasing degree, the very means by which they themselves are made relatively unnecessary (“superfluous”).

This is a law of population specific to the capitalist mode of production. Every historical economic system has its own specific population laws, valid only within its own time. (Abstract laws of population only really apply to plants and animals, as long as humans haven’t interfered).

The Industrial Reserve Army: Fuel for Accumulation

If a surplus working population is a necessary product of capitalist accumulation, this surplus population, in turn, becomes a crucial tool (“lever”) for further accumulation. It is even a necessary condition for the capitalist system to exist.

This surplus population forms a disposable industrial reserve army – a pool of unemployed or underemployed workers that belongs completely to capital, as if capital had raised it itself. This reserve army provides a mass of human labor ready for exploitation, independent of the limits of natural population growth, meeting capital’s constantly changing needs for expansion.

The Reserve Army and the Business Cycle

As accumulation and productivity grow, so does capital’s power for sudden expansion. When markets suddenly expand, or new industries (like railways) emerge, the large amounts of available social wealth that can be turned into capital rush into these areas.

In such cases, businesses must be able to throw large numbers of workers suddenly into decisive points without crippling other industries. The over-population (the reserve army) supplies these masses of workers.

The typical pattern (“course”) of modern industry is a business cycle, roughly ten years long (with smaller ups and downs). This cycle involves periods of:

• Average activity
• Production at high pressure (boom)
• Crisis (crash)
• Stagnation (slump)

This entire cycle depends on the constant formation, absorption (hiring), and re-formation (laying off) of the industrial reserve army.

Why Modern Industry Needs the Reserve Army

This cyclical movement is unique to modern industry; it didn’t happen in earlier historical periods or in the early days of capitalism.

In early capitalism, the composition of capital (c vs. v) changed very slowly. Accumulation was slow, and the demand for labor generally grew at a similar pace. Growth was limited by the natural size of the available working population.

Modern industry, however, expands in sudden bursts (“fits and starts”), which requires readily available labor independent of natural population growth. This extra labor comes from the simple process of constantly “setting free” (making redundant) a part of the workforce through technological changes that reduce the number of workers needed relative to output.

Therefore, the entire way modern industry operates depends on constantly transforming part of the working population into unemployed or half-employed workers. Capitalist production cannot function freely without an industrial reserve army independent of natural limits.

Getting More Work from Fewer Workers

Up to now, we’ve mostly assumed that changes in variable capital directly correspond to changes in the number of workers employed. But this isn’t always true.

The number of workers commanded by capital can stay the same, or even fall, while the variable capital (total wages paid) increases. This happens if the individual worker provides more labor (longer hours, faster pace), leading to higher individual wages, even if the rate of pay per hour or per piece stays the same or falls slightly.

It is in the absolute interest of every capitalist to get a certain amount of labor out of fewer workers rather than more workers, if the cost is roughly the same. Why? Hiring more workers means spending more on constant capital (more machines, factory space). Getting more work out of fewer workers increases constant capital costs much more slowly. This motive becomes stronger as the scale of production grows with accumulation.

Intensification and Deskilling Swell the Reserve Army

We’ve seen that the development of capitalism and productivity (which are both cause and effect of accumulation) allows the capitalist:

• To get more labor out of workers with the same total wage bill (variable capital) by exploiting each worker more intensely.
• To buy more labor power with the same capital by replacing skilled workers with less skilled, experienced workers with inexperienced, men with women, and adults with young people or children.

So, as accumulation progresses:

• On one hand, a larger total wage bill (variable capital) sets more labor in motion, often without hiring more laborers.
• On the other hand, the same total wage bill sets more labor in motion using the same number of workers (through intensification).
• Finally, by replacing higher-paid workers with lower-paid ones, capital can employ a greater number of workers for the same wage bill, while increasing overall exploitation.

Therefore, the creation of a relative surplus population (the “setting free” of workers) happens even faster than the technological revolution and the corresponding relative decrease of the variable part of capital. As productivity increases, capital increases its supply of available labor (by displacing workers and intensifying work) more quickly than its demand for laborers.

Overwork Creates Unemployment

The over-work of the employed part of the working class directly swells the ranks of the reserve army (the unemployed). In turn, the greater pressure from the reserve army (competing for jobs) forces employed workers to submit to overwork and accept capital’s demands.

The situation where one part of the working class is condemned to forced idleness because the other part is overworked becomes a tool for enriching individual capitalists. It also speeds up the creation of the industrial reserve army on a scale that matches the overall progress of social accumulation.

• Example (England, 1867): England had huge technical means for “saving” labor. Nevertheless, Marx argued, if tomorrow work were reduced to a reasonable amount and distributed fairly according to age and sex, the existing working population would be totally insufficient to carry on national production at its current scale. The vast majority of workers currently considered “unproductive” (e.g., servants, some administrators, the unemployed) would have to become “productive.”

The Reserve Army Regulates Wages

Taking everything together, the general movements of wages are regulated exclusively by the expansion and contraction of the industrial reserve army. These fluctuations correspond to the periodic changes of the industrial cycle.

Wage levels are not determined by changes in the absolute number of the working population. They are determined by:

• The changing proportions in which the working class is divided into the active army (employed) and the reserve army (unemployed/underemployed).
• The increase or decrease in the relative size of the surplus population.
• The extent to which this surplus population is currently being absorbed into production or set free from it.

Critique of Economists’ Population Theory

For modern industry with its cycles, it would be ridiculous (“a beautiful law”) to claim that capital’s actions depend on absolute changes in population numbers. The reality is the opposite: the expansion and contraction of capital regulates the demand and supply of labor. The labor market appears relatively under-supplied when capital is expanding rapidly, and over-supplied when capital is contracting.

Yet, the dogma of the economists claims the reverse:

• Wages rise because capital accumulates.
• Higher wages encourage workers to have more children faster.
• This continues until the labor market is over-supplied.
• Wages fall.
• Falling wages cause the working population to be gradually reduced (“decimated”).
• Capital is then again plentiful relative to workers.
• Or, alternatively: falling wages increase profits, speeding up accumulation again, while low wages also check population growth.
• Then the time comes again when labor supply is short, wages rise, and the cycle repeats.

Marx calls this a “beautiful mode of motion” for developed capitalism, meaning it’s completely unrealistic. Before any significant positive increase in the working population could actually happen due to a temporary rise in wages, the time needed for an industrial boom and bust cycle would have passed many times over.

Real-World Example: English Agriculture (1849-1859)

During this period, wages rose slightly in English agricultural districts. This rise was mostly nominal (meaning prices might have fallen, so real purchasing power increased slightly). For example, wages went from 7 shillings a week to 8 or 9 shillings.

• Cause: This was the result of an unusual departure (“exodus”) of farm workers due to demands from war, massive railway construction, factory growth, mines, etc. It was not caused by the wage increase itself stimulating population growth.
• Significance: When starting wages are very low, even a small increase looks like a large percentage rise (e.g., 7s to 9s is over 28%).
• Farmers’ Reaction: Farmers complained loudly. The London Economist seriously described these near-starvation wages as “a general and substantial advance.”
• Did farmers wait for workers to multiply? No. They introduced more machinery. Instantly, workers became redundant again, in numbers satisfactory to the farmers.
• Outcome: More capital was invested in agriculture, but in a more productive form (using machines). The demand for labor fell, not just relatively, but absolutely (fewer workers needed overall).

Economists Confuse General Laws with Specific Movements

The economists’ dogma confuses the laws that regulate the general movement of wages (tied to the reserve army and the overall cycle of capital) with the laws that distribute the working population between different sectors of the economy.

• Example: If accumulation becomes very active in one particular industry (e.g., tech startups today), profits there rise above average, attracting more capital. Demand for labor in that sector rises, and wages go up.
• These higher wages draw workers away from other sectors into this favored industry until it is full (“glutted”) with labor power.
• Then, wages in that sector fall back to the average level, or even below it if too many workers moved in.
• At that point, workers stop moving into that industry; instead, they start moving out (“emigration”).

The political economist mistakenly sees this movement of workers between sectors – attracted by temporarily higher wages – as proof of the general theory: that higher wages cause an absolute increase in workers, and lower wages follow from that increase. They confuse a local redistribution with a general law of population driven by wages.

Mr. Potter argued that the cotton trade would revive ‘in one, two, or three years,’ and asked the nation not ‘to encourage or allow (!) the working power to emigrate.’ He admitted it was natural for workers to want to leave. But despite their wishes, he thought the nation should keep this half million workers and their 700,000 dependents effectively trapped in the cotton districts. The Times pointed out the necessary consequence: the nation would then have to use force to control their discontent and support them with charity, just on the chance that the cotton factory owners might want them again someday. The Times concluded that public opinion must step in to save this “working power” from employers who treated them like inanimate objects such as “iron, and coal, and cotton.”

However, Marx notes this Times article was just a witty remark (“jeu d’esprit”). Real public opinion sided with Mr. Potter; factory workers were indeed treated as movable parts of a factory. Their emigration was stopped. They were locked up in the “moral workhouse” of the cotton districts, continuing to be the “strength” of the cotton manufacturers.

Capitalism Constantly Reproduces Worker Dependence

So, capitalist production automatically reproduces the separation between workers (labor power) and the tools/materials (means of labor). This constantly recreates the conditions needed to exploit the worker.

• It forces workers repeatedly to sell their ability to work just to survive.
• It allows capitalists repeatedly to buy labor power to enrich themselves.

It’s no longer an accident that capitalists and workers meet in the market as buyers and sellers. The system itself constantly throws workers back onto the market to sell their labor power, and turns their own product into the means by which the capitalist can buy them again.

Therefore, capitalist production, as a continuous cycle, produces not only goods and profits (surplus-value), but it also produces and reproduces the capitalist relationship itself: the capitalist on one side, the wage-worker on the other.

How Accumulation Creates Unemployment (The Industrial Reserve Army)

We’ve seen how the structure of capital changes as it accumulates (more machines/materials relative to labor). Now let’s look at the consequences for workers.

The development of labor productivity and the resulting changes in capital’s composition (more machines, less direct labor) happen much faster than the overall growth of capital or social wealth. This speed difference is increased by centralization (mergers), which rapidly reorganizes capital.

As capital accumulates, the proportion used for labor power (variable capital, ‘v’) shrinks compared to the proportion used for means of production (constant capital, ‘c’). If the ratio was 1:1, it becomes 2:1, 3:1, 7:1, etc. This means a smaller fraction of the total capital (1/3, 1/4, 1/8) is used to hire workers, while a larger fraction (2/3, 3/4, 7/8) goes into machines and materials.

Falling Relative Demand for Labor

Since the demand for labor depends only on the variable part of capital, this demand falls progressively relative to the total capital size. It doesn’t rise proportionally with capital growth, as initially assumed. This relative fall accelerates as capital grows.

While the absolute number of workers might still increase if accumulation is fast enough, it increases in a constantly shrinking proportion relative to the total capital. The periods where growth simply means hiring more workers using the same technology get shorter.

Therefore, increasingly rapid accumulation is needed just to employ the same number of workers, let alone hire more, because technology constantly replaces labor. This faster accumulation and centralization, in turn, drives new technological changes, further reducing the relative need for labor.

Capitalism Creates Its Own Surplus Population

This rapid relative decrease in the demand for labor makes it look like the working population is growing faster than jobs are.

But in reality, capitalist accumulation itself constantly produces a population of workers that is larger than needed for capital’s expansion at that moment. The working class, while producing capital, also produces the means by which it becomes relatively superfluous (unneeded).

This is a law of population specific to capitalism. (Abstract population laws only apply to plants and animals).

The Industrial Reserve Army: A Tool for Capital

This surplus working population is a necessary product of capitalist accumulation. But it also becomes a vital tool (“lever”) for further accumulation and a necessary condition for capitalism to exist.

It forms a disposable industrial reserve army – a pool of unemployed and underemployed workers readily available for capital to exploit. This army provides a flexible source of labor, independent of natural population growth, allowing capital to expand rapidly when needed.

The Reserve Army and the Business Cycle

The ability of capital to expand suddenly grows with accumulation and productivity. When markets boom or new industries emerge (like railways historically, or tech sectors today), capital rushes into these areas. This requires hiring large numbers of workers quickly without disrupting other industries. The industrial reserve army supplies these workers.

The typical up-and-down business cycle of modern industry (boom, crisis, slump, recovery, repeated roughly every decade, with smaller fluctuations) depends entirely on the constant formation, hiring, and firing of the industrial reserve army.

This cycle is unique to modern industry. In early capitalism, capital changed slowly, labor demand grew slowly, and growth was limited by the existing population. Modern industry needs the reserve army for its characteristic bursts of expansion and contraction. This reserve is created by constantly “setting free” workers through technological changes that reduce labor needs relative to output.

Intensification and Deskilling Also Feed the Reserve Army

Capitalists also find ways to get more labor without hiring more people, or even while hiring fewer:

• Intensification: By making each worker work harder, longer, or faster, capitalists can increase output with the same or even smaller wage bill.
• Deskilling: By replacing higher-paid skilled workers with lower-paid, less-skilled workers, or replacing men with women, adults with children, capitalists can command more labor power for the same amount of variable capital.

These processes mean that the “setting free” of workers into the reserve army happens even faster than technological change alone would suggest. Capital’s supply of exploitable labor increases faster than its demand for laborers.

Overwork Creates Unemployment

The overwork of the employed part of the working class directly swells the ranks of the unemployed reserve army. In turn, the increased competition from the unemployed forces the employed workers to accept overwork and submit to capital’s demands.

Thus, forcing one part of the working class into idleness through the overwork of another part becomes a way for capitalists to get richer and to accelerate the growth of the reserve army.

• Example: Even in England (1867), with its advanced technology, if work were rationally distributed, the existing workforce wouldn’t be enough. Many currently “unproductive” people would need to become productive.

The Reserve Army Sets Wages

The general level of wages is regulated only by the expansion and contraction of the industrial reserve army, which follows the business cycle. Wages are not determined by the absolute number of workers. They depend on the changing proportion of employed versus unemployed workers.

Critique of Mainstream Economics

Economists typically argue that wages rise, leading to population growth, which floods the market and lowers wages, causing population decline, and so on. Marx finds this explanation absurdly slow and disconnected from the reality of rapid industrial cycles driven by capital’s own expansion and contraction.

• Real-World Example (English Agriculture): A temporary wage rise (due to workers leaving for other jobs) was met not by waiting for population changes, but by farmers introducing machinery, which immediately made workers redundant and lowered absolute demand for labor. Economists mistook the temporary movement of workers between industries (attracted by higher wages in one booming sector) for proof of their general population theory.

The Reserve Army: A Tool of Control

During slumps and average times, the reserve army keeps wages down for employed workers. During booms, it prevents wage demands from getting too high. The reserve army is the pivot around which the supply and demand for labor operates, keeping it within limits convenient for capitalist exploitation. Capitalist production ensures that the growth of capital does not lead to a corresponding rise in the general demand for labor.

As soon as workers understand this “secret” – that producing more wealth makes their own employment more precarious, and that competition among them depends on the pressure of the unemployed – they try to organize (e.g., through unions) to manage the supply of labor between employed and unemployed. When they do this, capital and its economist defenders cry foul, claiming violation of the “sacred” law of supply and demand.

Yet, when circumstances prevent the formation of a reserve army (like in some colonies), making workers less dependent, capital itself demands state intervention to control the “inconvenient” actions of supply and demand.

Different Forms of the Reserve Army

The relative surplus population exists in various forms:

• Floating: Workers moving in and out of jobs, like youth discharged from factories at maturity. (This leads to contradictions like needing young workers but having unemployed adults). Workers are often “used up” by mid-life due to intense work and short lifespans in industry (shown by statistics comparing death ages of different classes).
• Latent: Surplus population in the countryside, constantly ready to move to cities when opportunities arise. Agricultural workers are kept at minimum wages, always near poverty.
• Stagnant: A category with extremely irregular employment (e.g., domestic/home-based workers). They form a reservoir of easily exploitable labor, characterized by maximum working hours and minimum wages. They often come from declining industries and reproduce themselves faster than other segments (poverty correlating with larger families – a “law” Marx finds perverse).
• Pauperism: The lowest layer. Excluding the “dangerous classes” (criminals, etc.), it includes:
  1. The able-bodied unemployed (numbers rise and fall with crises).
  2. Orphans and pauper children (recruits for the reserve army).
  3. The demoralized, disabled, elderly, and victims of industry (accidents, illnesses). Pauperism is the “hospital” for the active workers and the “dead weight” of the reserve. It’s a necessary outcome of producing the reserve army and thus a condition of capitalist production, though capitalists try to shift its costs onto workers and the lower middle class.

The Absolute General Law of Capitalist Accumulation

• The greater the social wealth, functioning capital, and its growth…
• …the greater the size of the working class and its productivity…
• …the greater is the industrial reserve army.
• The same causes that expand capital also expand the available labor force (by making workers redundant).
• The larger the reserve army relative to the active (employed) army…
• …the larger the mass of the permanently surplus population, whose misery is inversely related to how much they are forced to work (more misery when idle).
• The larger the poorest layers (“Lazarus-layers”) and the reserve army, the greater official pauperism becomes.

This is the absolute general law of capitalist accumulation. (It can be modified by specific circumstances).

Consequences of the Law

The economic advice telling workers to limit their numbers to match capital’s needs is foolish. Capitalism’s own mechanism constantly creates a relative surplus population (the IRA). The final result is misery for growing parts of the employed workforce, and the dead weight of pauperism.

The law that increasing productivity allows more production with less human labor expresses itself inversely under capitalism: the higher the productivity, the greater the pressure on workers for jobs, the more precarious their existence becomes. The fact that production grows faster than the working population appears as its opposite: the working population always grows faster than capital’s ability to profitably employ it.

Accumulation of Wealth = Accumulation of Misery

All methods for increasing productivity under capitalism harm the individual worker:

• They turn workers into fragments, machine appendages.
• They destroy job satisfaction, turning work into hated toil.
• They alienate workers from the mental aspects of work.
• They distort working conditions and impose tyranny.
• They turn workers’ lifetimes into work-time and crush their families (“Juggernaut of capital”).

But all methods for producing profit are also methods for accumulation, and accumulation drives the development of these methods.

Therefore, as capital accumulates, the condition of the laborer, whether their pay is high or low, must grow worse.

The law balancing the reserve army and accumulation binds the worker to capital more firmly than chains. It establishes an accumulation of misery that corresponds to the accumulation of capital.

Conclusion: Accumulation of wealth at one pole (capitalists) is therefore, at the same time, accumulation of misery, agony of toil, slavery, ignorance, brutality, [and] moral degradation at the opposite pole (the working class).

CHAPTER THREE

The So-Called Primitive Accumulation: Where Capitalism Began

This chapter explores the historical origins of capitalism, explaining how the initial conditions for it were created. This process is called primitive accumulation.

(Extracted from Capital, Vol. 1, Chapters 26-31)

The Chicken and Egg Problem

We’ve seen how capital makes profit (surplus-value), and how profit is turned back into more capital (accumulation). But this seems like a circle:

• To accumulate capital, you need surplus-value.
• To get surplus-value, you need capitalist production.
• To have capitalist production, you need large amounts of capital and available labor power already existing.

How did this system start? We must assume there was an initial, or primitive accumulation, that happened before capitalist accumulation began. This wasn’t a result of the capitalist system, but its starting point.

The Myth of Primitive Accumulation

Mainstream political economy often explains this starting point with a simple story, like an old fable:

• Once upon a time, there were two kinds of people.
• One group was hardworking, smart, and especially careful with money (the “elite”).
• The other group was lazy, wasted everything they had, and lived wildly.
• The story goes that the first group saved up wealth, while the second group eventually had nothing left to sell except their own ability to work (“their own skins”).
• This “original sin,” the story claims, explains why most people today are poor (having nothing to sell but themselves, despite working hard), while a few are rich and keep getting richer even though they stopped working long ago.

The Reality: Force and Robbery

Marx argues this story is childish and ignores the facts. Real history shows that conquest, enslavement, robbery, murder – basically, force – played the main role in creating the initial division between wealthy owners and propertyless workers. The gentle stories told by economists paint a picture of peaceful progress where “right” and “labor” were always the only ways to get rich (except, ironically, for what happens today). In reality, the methods of primitive accumulation were anything but peaceful and idyllic.

The Real Secret: Separating Workers from the Means of Production

The capitalist system requires one essential condition: the complete separation of workers from any ownership of the means (tools, land, materials) they need to do their work.

Once capitalist production gets going, it doesn’t just maintain this separation; it reproduces it on an ever-larger scale.

Therefore, the historical process that paved the way for capitalism could only be the process that took away the worker’s possession of their means of production.

Primitive accumulation is nothing more than the historical process of divorcing the producer (the worker) from the means of production.

How Feudalism Ended and Capitalism Began

The economic structure of capitalist society grew out of the structure of feudal society. When feudalism broke down, the elements needed for capitalism were set free.

Workers could only become “free” sellers of their labor power (able to work for whoever would hire them) after two things happened:

1. They were no longer tied to the land as serfs or bondsmen.
2. They escaped the control of the medieval guilds, with their strict rules for apprentices and journeymen.

Bourgeois historians often focus only on this side of the story – the worker’s “emancipation” or “freedom” from feudal bonds.

The Dark Side of “Freedom”

But there’s another side. These newly “freed” people could only become sellers of their own labor power after they had been robbed of all their own means of production (like small plots of land or tools) and all the safety nets provided by the old feudal system.

The history of this expropriation – the taking away of their property and means of survival – is written in the history books in “letters of blood and fire.”

The Rise of the Capitalists

The industrial capitalists, the new powerful figures, had to push aside not only the old guild masters but also the feudal lords who controlled the sources of wealth (mainly land). From this perspective, their rise looks like a victory against feudal power and restrictive guilds.

However, these “knights of industry” only managed to replace the “knights of the sword” (the feudal lords) by taking advantage of historical events they had little part in creating. They rose to power using methods just as unethical (“vile”) as those used by some freed slaves in ancient Rome to gain control over their former masters.

From Feudalism to Capitalism: A Change in Servitude

The development that created both the wage-laborer and the capitalist began with the worker being unfree (serfdom). The progress involved a change in the form of this lack of freedom – the transformation of feudal exploitation into capitalist exploitation.

We don’t need to go back too far to understand this. While early forms of capitalist production appeared here and there in Mediterranean towns in the 14th or 15th centuries, the real capitalist era began in the 16th century. By this time, serfdom had mostly disappeared in places where capitalism first took hold, and the powerful, independent towns of the Middle Ages were already in decline.

The Key: Kicking Peasants Off the Land

In the history of primitive accumulation, the most important moments are when large numbers of people are suddenly and violently torn away from their means of subsistence (their way of making a living, especially from land) and thrown onto the labor market as “free” proletarians – free, but with nothing to sell but their labor.

The expropriation of the peasant from the soil is the foundation of the entire process. We’ll look closely at how this happened in England.

England Before Capitalism (14th-15th Centuries)

• By the late 14th century, serfdom had practically disappeared in England.
• The vast majority of the population, especially in the 15th century, consisted of free peasant proprietors – farmers who owned their land (often called yeomanry).
• On the large estates owned by lords, free farmers managed the land instead of the old serf bailiffs.
• Agricultural wage-laborers were mostly:
  • Peasants who worked part-time on large estates.
  • A small, independent class of wage-workers who were also practically farmers, having cottages and about 4 acres of land, plus wages.
• Crucially, almost all peasants (including wage-laborers) had rights to use the common land. This provided pasture for animals, timber for building, firewood, turf for fuel, etc.
• Feudal production typically involved dividing the land among the greatest possible number of small holders. A lord’s power depended on the number of his subjects (peasants).
• Even though England after the Norman Conquest (1066) had huge estates (baronies), the land was mostly covered with small peasant holdings, with only occasional large lordly domains.
• These conditions, along with prosperous towns in the 15th century, allowed for widespread popular wealth, but they prevented the possibility of large-scale capitalist wealth.

The Beginning of the End for Feudalism (Late 15th - Early 16th Century)

The process that laid the foundation for capitalism began in the late 15th and early 16th centuries. A mass of free proletarians was thrown onto the labor market by:

1. Breaking up bands of feudal retainers: These were like private armies kept by lords, who filled castles and houses but were becoming useless. The royal government, seeking absolute power, forcibly sped up the dismissal of these retainers.
2. Forcible removal of peasants from the land: Acting against the king and parliament, the great feudal lords created an even larger proletariat by kicking peasants off the land (to which peasants had feudal rights similar to the lord’s) and by taking over the common lands (usurpation).

• The Trigger: The rapid growth of wool manufacturing in Flanders (modern Belgium) caused wool prices in England to rise sharply. This gave lords a direct economic incentive to convert farmland (arable land) into sheep pastures (sheep-walks), which required far fewer people.
• A New Nobility: The old nobility had been wiped out by feudal wars (like the Wars of the Roses). The new nobility was different – for them, money was the ultimate power. Their slogan became: Turn farmland into sheep pasture!
• Contemporary Accounts: Chroniclers like Harrison described how kicking out small peasants was ruining the country, destroying houses and farms, reducing the population fed by the soil, and causing towns to decay. While possibly exaggerated, these accounts show the shock caused by these changes.

Laws Passed in Vain

The government was alarmed by this revolution and tried to stop it.

• Bacon (writing about 1489) noted that enclosures (fencing off land, often common land or peasant holdings, for private use, especially sheep) became common, destroying farm tenancies and causing decay.
• An Act of Henry VII (1489) forbade destroying farmhouses with at least 20 acres attached.
• An Act of Henry VIII renewed this law, stating that consolidating farms for sheep farming had raised rents, reduced crop cultivation, led to demolished homes and churches, and deprived huge numbers of people of their livelihood. The Act ordered the rebuilding of farmsteads and set rules for balancing cropland and pastureland.
• An Act of 1533 limited the number of sheep one person could own to 2,000 (some owned up to 24,000). (Thomas More, in his book Utopia, famously wrote about sheep “devouring” men).

Result: For 150 years after Henry VII, the complaints of the people and the laws passed against the expropriation of small farmers and peasants were equally useless.

The Impact of the Reformation (16th Century)

The process of forcibly kicking people off the land got a terrifying new boost from the Protestant Reformation and the massive theft (“spoliation”) of church property that followed.

• The Catholic Church owned a huge amount of English land.
• Closing the monasteries threw their inhabitants into the proletariat.
• Church estates were largely given away to greedy royal favorites or sold very cheaply to speculators (farmers and townspeople).
• These new owners often evicted the long-term tenants (en masse) and combined the small holdings into large farms.
• The legally guaranteed right of the poor to receive a portion of the church’s tithes (a form of tax) was quietly stolen (“tacitly confiscated”).

The End of the Independent Farmer

• Even in the late 17th century, the yeomanry (independent peasants) were still more numerous than tenant farmers. They had been crucial supporters of Cromwell during the English Civil War and were seen, even by historians like Macaulay, as morally superior to the drunken local gentry (“squires”).
• Even agricultural wage-laborers still had rights to use common land.
• By around 1750, the yeomanry had disappeared.
• By the late 18th century, the last trace of common land rights for farm laborers was also gone.

Landowners Solidify Their Control (Post-1660)

After the monarchy was restored (the Restoration of the Stuarts), the landed proprietors used legal means to carry out a massive land grab.

• They abolished the feudal system of land tenure, freeing themselves from obligations to the state.
• They “compensated” the state by imposing taxes on the peasantry and the general population.
• They asserted modern private property rights over estates to which they previously only had feudal titles.
• They passed Laws of Settlement, which restricted the movement of agricultural workers, effectively tying them to specific parishes (similar to a Russian Tsar’s edict reinforcing serfdom).

The “Glorious Revolution” (1688) and More Theft

This revolution brought the landlord and capitalist classes firmly to power. They started the new era with enormous thefts of state lands, done more openly than before.

• These lands were given away, sold for almost nothing, or simply seized and added to private estates, often ignoring legal procedures.
• These stolen Crown lands, along with Church lands not lost during the earlier republic, form the basis of the vast estates owned by the English aristocracy (“oligarchy”) today.
• Why the Bourgeoisie Supported It: Bourgeois capitalists favored these actions because they helped:
  • Turn land into a commodity to be bought and sold.
  • Expand large-scale, commercial agriculture.
  • Increase the supply of “free” agricultural workers forced into the cities and factories.
• The new landed aristocracy naturally allied with the new powerful bankers (“bankocracy”), financiers, and large manufacturers (who benefited from protective tariffs).

Large Farms and “Freed” Workers

While independent yeomen were replaced by small tenant farmers on short leases (making them dependent and easily controlled), the systematic robbery of communal lands was especially important. Along with the theft of state lands, this helped create the large “capital farms” or “merchant farms” of the 18th century. This process also served to “set free” the agricultural population, turning them into proletarians available for manufacturing industry.

Common Lands Vanish

By the 19th century, the connection between farm workers and communal property was largely forgotten. Between 1801 and 1831 alone, over 3.5 million acres of common land were stolen from the agricultural population through Acts of Parliament – passed by landlords, for landlords – with zero compensation paid to the people who lost their rights.

The Final Step: “Clearing of Estates”

The last process of removing the agricultural population from the soil on a massive scale is the “clearing of estates” – literally sweeping people off the land. This was the culmination of all previous methods. Its true meaning is best seen in the Scottish Highlands.

• The Highland Clans: The Highland Celts were organized in clans, each traditionally owning the land it occupied. The clan chief was only the symbolic (“titular”) owner, like the Queen is the symbolic owner of all national land.
• Chiefs Change Tactics: After the English government stopped the clan wars, the chiefs didn’t give up their old ways entirely; they just changed form. On their own authority, they turned their symbolic right into a private property right. This brought them into conflict with their clansmen, whom they decided to drive out by force.
• (18th Century): Displaced Highlanders (“Gaels”) were even forbidden to emigrate, to force them into manufacturing towns like Glasgow.
• 19th Century Example: The Duchess of Sutherland
  • Upon taking control of her estates, she decided on a “radical economic cure”: turn the entire county into sheep pasture. The population had already been reduced to 15,000 by similar earlier clearances.
  • 1814-1820: These 15,000 people (about 3,000 families) were systematically hunted and forced out. Their villages were destroyed and burned; their fields turned into pasture. British soldiers enforced the evictions, leading to clashes. One old woman died burning in her hut because she refused to leave.
  • The Duchess took 794,000 acres of land that had belonged to the clan for centuries.
  • She assigned the evicted inhabitants about 6,000 acres of previously useless land on the seashore (about 2 acres per family).
  • With supposed generosity (“nobility of her heart”), she rented this land to the clansmen for 2 shillings 6 pence per acre – people whose ancestors had fought for her family for centuries.
  • She divided the stolen clan land into 29 huge sheep farms, each run by a single family, mostly imported English farm servants.
  • By 1825, the 15,000 Gaels had been replaced by 131,000 sheep.
  • The remaining original inhabitants, thrown onto the coast, tried to survive by fishing. Marx adds bitterly that they had to pay even more for their romantic loyalty to the clan chiefs.

CHAPTER THREE

Rich People Take Over Fishing Areas

Powerful people noticed the smell of fish coming from the Gaels’ villages. They realized they could make money from it. So, they rented out the sea-shore areas to big fish sellers from London. This forced the Gaels out of their homes and away from their livelihoods for a second time.

Sheep Farms Become Hunting Parks for the Rich

But the story doesn’t end there. Later, some of the land used for sheep farming was turned into private parks for hunting deer.

• England’s Lack of Forests: It’s well known that England doesn’t have many real, wild forests. The deer kept in the parks of the rich are basically tame animals, like well-fed city officials.
• Scotland’s Role: Because of this, Scotland became the main place for the wealthy to practice hunting, which they called the “noble passion.”

The Impact on the Gaels

Robert Somers wrote about this in 1848. He said that new hunting forests were appearing everywhere very quickly in the Scottish Highlands.

1. Pushed Onto Bad Land: First, turning land into sheep farms had already forced the Gaels onto poor, infertile land where it was hard to survive.
2. Deer Replace Sheep: Now, deer were replacing the sheep.
3. Even More Poverty: This change pushed the few remaining Gaels into even worse poverty.

People vs. Hunting Parks

Somers pointed out a clear conflict: deer hunting parks and people cannot exist in the same place. One must disappear. He warned that if the hunting parks kept expanding as they had been, the Gaels would vanish from their homeland.

Why the Change?

Why did landowners do this?

• Ambition: For some rich landowners, it was about status and showing off.
• Sport: Some genuinely loved hunting.
• Profit: Others were more practical. They saw deer hunting as a business. Renting out land as a hunting park could actually make more money than renting it as a sheep farm. Wealthy hunters would pay almost anything for a private hunting area, based only on how much money they had.

Cruelty and Loss of Freedom

The suffering caused in the Highlands was compared to the harsh actions of Norman kings centuries earlier.

• Deer were given more and more land.
• People were forced into smaller and smaller areas.
• Little by little, the people’s freedoms were taken away.
• This oppression was getting worse every day.

A Deliberate Process

Landowners treated the removal of people like a business decision. They saw it as a necessary step for agriculture, like clearing trees and bushes in wild areas of America or Australia. They carried out these evictions quietly and systematically.

The First Steps to Building Capital

These actions were part of what’s called primitive accumulation – the early stages of gathering wealth that would later fuel large-scale industry (capitalism). These methods included:

• Stealing property that belonged to the Church.
• Illegally selling off government land.
• Taking over common lands that communities used together.
• Seizing land that traditionally belonged to feudal lords or clans and turning it into modern private property, often using violence and terror.

The author calls these brutal methods “idyllic” (peaceful and charming) to be sarcastic and highlight how cruel they actually were.

Results of These Actions

These actions achieved several things:

1. They cleared the way for large-scale, profit-driven farming (capitalist agriculture).
2. They made land itself a form of capital (wealth that can be used to make more wealth).
3. They created a large group of people who had lost their land and rights (an “outlawed proletariat”) and needed work, supplying labor for city industries.

What Happened to the Landless People?

The large number of people forced off their land couldn’t all find jobs in the newly forming industries right away. There weren’t enough factories yet to hire everyone who had been displaced.

• Forced into Desperation: These people, suddenly torn from their usual way of life, couldn’t instantly adjust to the strict routines of factory work or city life. Many had no choice but to become beggars, robbers, or wanderers (vagabonds).
• Harsh Laws: Because of this, starting in the late 1400s and throughout the 1500s, governments across Western Europe passed very harsh laws against homelessness and wandering.
• Blaming the Victims: The ancestors of today’s working class were punished for being forced into becoming vagabonds and poor. The laws treated them as if they were choosing to be criminals. The government acted as if these people could simply choose to go back to their old way of working, even though those old ways and lands no longer existed for them.

Using Government Power to Control Workers

When the capitalist system was just beginning, the rising business class (the bourgeoisie) used the power of the government to control the working class. They used the state to:

• Set limits on wages (“regulate” them, usually keeping them low).
• Make the working day longer.
• Keep workers dependent on their employers.

This use of state power was a crucial part of the early accumulation of capital.

Early Workers Had Some Protections

The group of people who worked for wages first appeared in larger numbers in the second half of the 1300s. For the next century or so, they were still a small part of the overall population.

Their situation was somewhat protected by two factors:

1. Independent Farmers: In the countryside, many peasants still owned their own land and farmed independently.
2. Guilds: In towns, craft organizations called guilds offered structure and some protection for workers.

At this early stage, owners (masters) and workers in both farms and towns often lived and worked closely together, without the huge social gap that came later. Also, the amount of money spent on wages (variable capital) was much larger compared to the amount spent on tools and materials (constant capital). This meant that as businesses gathered more capital, the demand for workers grew quickly. However, the number of people available for wage work increased only slowly.

How Did Rich Farmers Emerge?

We’ve seen how a class of landless workers was created by force. But where did the first capitalists come from? Taking land from peasants mainly created large landowners, not necessarily business-minded farmers.

The rise of the capitalist farmer, however, was a slower process that happened over centuries. We can trace its steps:

1. The Bailiff: In England, the earliest form was the bailiff, who managed the lord’s land but was still a serf (not fully free).
2. The Early Tenant Farmer: In the late 1300s, the bailiff was replaced by a farmer who rented land. The landlord provided the seeds, animals, and tools. This farmer wasn’t much different from a peasant, but he hired more outside workers.
3. The Sharecropper (“Half-Farmer”): Soon, a type of sharecropping appeared. The farmer provided some of the equipment and supplies, and the landlord provided the rest. They split the harvest according to their agreement. This didn’t last long in England.
4. The Capitalist Farmer: This farmer was replaced by the farmer we think of today – someone who uses their own money (capital) to run the farm, hires workers, and pays rent (a share of the profit) to the landlord in money or goods.

Why Farmers Got Rich (15th & 16th Centuries)

During the 1400s, independent peasants and farm laborers who worked partly for themselves were doing okay. The situation for the tenant farmer was average.

But things changed dramatically with the agricultural revolution that started in the late 1400s and lasted through most of the 1500s. This period made farmers rich very quickly, while at the same time making the majority of farm workers poorer.

Several factors helped farmers get wealthy:

• Taking Common Lands: Seizing the common lands allowed farmers to raise many more animals at little cost. More animals meant more manure, which improved their crop fields.
• Inflation and Long Leases: In the 1500s, farm leases often lasted a very long time (sometimes 99 years). During this period, the value of gold and silver fell, meaning money became worth less (inflation). This was great for farmers because:
  • Rising Prices: The prices for their products (corn, wool, meat) kept going up, increasing their income in money terms without them doing anything extra.
  • Fixed Rent: They continued to pay rent based on the old, lower value of money.
  • Lower Real Wages: Inflation also meant that the wages they paid workers were worth less in real terms. A part of the workers’ wages effectively became extra profit for the farmer.

So, these farmers got rich by benefiting from rising prices while paying old rents to landlords and lower real wages to their workers. It’s no surprise that by the end of the 1500s, England had a class of wealthy capitalist farmers.

Feeding the Factories: Workers and Materials

As we saw, forcing people off the land (expropriation and expulsion) happened repeatedly. This constantly supplied city industries with workers who had no connection to the old town guilds.

The decrease in independent, self-sufficient peasants happened alongside the increase in city workers (the industrial proletariat). Interestingly, even though fewer people were farming the land, it produced just as much, or even more, food than before. This was because:

• Farming methods improved.
• There was more cooperation among workers on large farms.
• Tools and resources were concentrated in fewer hands.
• Hired farm workers were forced to work more intensely.
• The land that workers used to farm for themselves shrank.

From Home Use to Factory Input

When people were forced off the land, their source of food was also taken away. The peasants who lost their land now had to buy food with the wages they earned from their new bosses, the factory owners.

The same thing happened with raw materials grown on farms. Imagine some peasants in Westphalia, Germany, who all used to spin flax at home.

• Before: They grow flax, spin it themselves with their families, maybe pay taxes with some earnings. The flax supports their independent life.
• After: They are forced off their land. Some become day laborers for large farms. Others go to work in new large flax spinning and weaving factories for wages. The flax itself looks the same. But now it has a “new social soul.” It’s part of the factory owner’s constant capital (the materials and machinery needed for production).

What used to be grown and processed by many small producers independently is now gathered into the hands of one capitalist. This capitalist hires others (the former peasants) to spin and weave it for him.

• Before: The extra work spent spinning flax provided extra income for many peasant families.
• After: The extra work now generates profit for a few capitalists.

The spindles and looms, once scattered across the countryside in homes, are now packed together in large factory buildings (“labour-barracks”) along with the workers and the raw flax. The tools and materials have been transformed. They are no longer things that help people live independently. Instead, they are tools used by capitalists to control workers and extract unpaid labor (profit) from them.

When you look at large factories or large farms, you don’t immediately see that they were created by combining many small workshops or farms and by forcing out many small, independent producers.

Creating Customers: The Home Market

Forcing people off the land and taking away their means of production did more than just create workers and free up materials for industry. It also created the home market.

• Before: Peasant families produced most of their own food and raw materials (like wool or flax). They also made many of their own basic goods (like clothes) and consumed them themselves.
• After: These raw materials and food items became commodities – goods produced for sale in a market. The large farmer now sells them instead of the family consuming them. The market for these goods is found in the growing towns and cities where manufacturing happens.

Things like yarn, linen cloth, and rough woolen fabrics – which peasant families used to make at home from materials they could easily access – were now turned into factory-made products. These same country areas, now populated by landless workers needing to buy things, became markets for these factory goods.

So, the destruction of peasant self-sufficiency went hand-in-hand with the destruction of rural home-based industry (like spinning and weaving). Only by destroying this home-based production could a country develop the large and stable internal market needed for the capitalist way of production to thrive.

Machines Finalize the Change

However, the early period of manufacturing (before widespread machinery) didn’t fully complete this transformation. Rural home crafts still survived to some extent.

It was modern industry, with its machinery, that finally provided the solid foundation for capitalist agriculture.

• Machines radically pushed the vast majority of people out of farming.
• Machines completed the split between farming and rural home-based crafts by destroying the roots of those crafts (home spinning and weaving).
• Therefore, modern industry was the first force to completely win the entire home market for industrial capital (factory owners).

Where Did Factory Owners Come From?

The rise of the industrial capitalist (the factory owner) didn’t happen as gradually as the rise of the capitalist farmer.

• Slow Path: No doubt, some small guild masters, craftspeople, and even some wage workers managed to become small capitalists. By slowly hiring more workers and accumulating profits, some eventually became large capitalists.
• Faster Paths Needed: But this slow (“snail’s pace”) method was far too slow for the huge commercial needs of the new global market created by the great voyages of discovery at the end of the 1400s.
• Existing Capital: The Middle Ages had already developed two important forms of capital:
  1. Usurer’s Capital: Money accumulated through lending money at interest.
  2. Merchant’s Capital: Money accumulated through trade.

Old Rules Blocked New Factories

This existing money capital from moneylending and trade faced obstacles if it tried to become industrial capital (money invested in factories and production).

• In the Countryside: The feudal system (lords, serfs, land tied to obligations) got in the way.
• In the Towns: The guild organizations (which regulated crafts and trade) also blocked this transformation. They often restricted who could produce goods and how. For example, as late as 1794, small cloth makers in Leeds asked Parliament to pass a law preventing merchants from becoming manufacturers.

Breaking Down Barriers

These barriers started to disappear when:

• Feudal society broke down.
• The rural population was forced off the land (expropriated and evicted).

New factories were often set up in places outside the control of the old towns and their guilds:

• At seaports.
• In inland areas away from established municipal control.

This led to intense struggles between the old guild towns and these new industrial centers.

Global Exploitation Fuels Capitalism

The beginning of the era of capitalist production was marked by several key global events:

• The discovery of gold and silver in the Americas.
• The extermination (killing), enslavement, and forced mining labor of the native populations in the Americas.
• The beginning of the conquest and looting of India and the East Indies.
• The turning of Africa into a source for hunting and enslaving Black people.

The author sarcastically calls these violent and exploitative activities “idyllic proceedings.” These were crucial moments in primitive accumulation.

Following these events came the commercial wars between European nations, fought across the globe. This started with the Netherlands breaking away from Spain, grew much larger in England’s wars against revolutionary France, and continued in events like the Opium Wars against China.

England Systematizes Wealth Building

These different methods of primitive accumulation occurred at different times in countries like Spain, Portugal, Holland, France, and England.

By the end of the 1600s, England had combined these methods into a system that included:

• The Colonial System: Exploiting resources and labor in colonies.
• The National Debt: Government borrowing, often to finance wars and expansion.
• Modern Taxes: New ways of taxing the population.
• Protectionism: Using trade barriers to protect domestic industries from foreign competition.

Some of these methods, like the colonial system, relied heavily on brute force. But all of them used the power of the State (the government) to speed up the transition from the old feudal economic system to the new capitalist one. This was like using a greenhouse to force plants to grow faster.

Force plays a key role: the author states, “Force is the midwife of every old society pregnant with a new one. It is itself an economic power.” This means violence and state power are often necessary to bring about major economic change.

Criticizing Colonial Brutality

W. Howitt, a writer focused on Christianity, had this to say about the colonial system established by Europeans: “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.” He argues that the violence committed by European colonizers was worse than any other in history.

The Dutch Example: Violence and Greed

The history of Dutch colonial rule provides stark examples. Holland was the leading capitalist nation in the 1600s. Its colonial history is described as full of “treachery, bribery, massacre, and meanness.”

• Malacca: To capture the city of Malacca in 1641, the Dutch bribed the Portuguese governor. After he let them in, they went straight to his house and murdered him. Why? To avoid paying him the £21,875 they had promised for his betrayal.
• Java: Wherever the Dutch went, destruction and depopulation followed. For example, Banjuwangi, a province in Java, had over 80,000 people in 1750. By 1811, only 8,000 remained.

British Exploitation in India

The English East India Company gained political control over India. It also held exclusive monopolies on:

• The tea trade.
• Trade with China generally.
• Transporting goods between Europe and Asia.

But that wasn’t all. High-ranking Company officials also controlled:

• Shipping along the Indian coast and between islands.
• Internal trade within India.

Monopolies on essential goods like salt, opium, and betel nuts became sources of incredible wealth for these officials.

• Price Gouging: They set the prices themselves and freely plundered the Indian population.
• Corruption: Even the Governor-General participated in this private trade. His friends received contracts with terms that allowed them to make huge fortunes from nothing, like alchemists turning lead into gold. Fortunes appeared overnight. Primitive accumulation happened without needing any initial investment.
• Warren Hastings: The trial of Warren Hastings exposed many such cases. For instance, an opium contract was given to a Mr. Sullivan just as he was leaving for a mission far from the opium-growing region. Sullivan immediately sold the contract to a Mr. Binn for £40,000. Binn sold it the same day for £60,000. The final buyer who actually fulfilled the contract still made an enormous profit.
• “Gifts”: According to official lists shown to Parliament, the Company and its officials received £6,000,000 from Indians as “gifts” between 1757 and 1766.
• Manufactured Famine: Between 1769 and 1770, the English deliberately created a famine by buying up all the available rice and then refusing to sell it except at incredibly high (“fabulous”) prices.

Colonies Boosted European Wealth

The colonial system acted like a greenhouse, rapidly growing trade and shipping for the colonizing countries. Trading companies with monopolies were powerful tools for concentrating capital (wealth) in fewer hands.

• Markets: Colonies provided guaranteed markets for the products of Europe’s new factories.
• Accumulation: Market monopolies led to increased profits and faster accumulation of capital.
• Loot Becomes Capital: The treasures stolen from outside Europe through outright looting, enslavement, and murder flowed back to the home countries and were invested as capital.

Holland, which pioneered the colonial system, was at the peak of its commercial power by 1648. It dominated East Indian trade and trade routes across Europe. Its fishing industry, navy, and manufacturing were superior to any other country. Holland’s total capital was likely greater than all other European nations combined.

However, the author notes that Gülich (the source of the quote about Holland’s dominance) forgot to add something important: by 1648, the ordinary people of Holland were more overworked, poorer, and more brutally oppressed than the people in the rest of Europe.

Industry Becomes Key

Today (meaning the author’s time in the mid-19th century), being the leader in industry (manufacturing) is what leads to being the leader in commerce (trade).

Trade Power vs. Industrial Power

During the earlier manufacturing period, being powerful in trade was the key to being powerful in industry. This is why the colonial system was so important back then. Colonies gave nations the edge in trade.

The author describes the colonial system as a “strange God.” It appeared alongside the old powers of Europe. Then, one day, it violently pushed them aside. This new system declared that making profit (surplus-value) was the only goal for humanity.

Government Debt (Public Credit)

The system of government borrowing, creating national debts, started in Italian cities like Genoa and Venice during the Middle Ages. It spread across Europe during the manufacturing era.

• Fueled by Colonies: The colonial system, with its sea trade and trade wars, helped this system of debt grow quickly, like plants in a greenhouse. Holland was one of the first places where it really took hold.
• A Mark of Capitalism: National debts mean the government (whether ruled by a king, constitution, or republic) is essentially selling itself off piece by piece. This became a defining feature of the capitalist era.
• Debt as “Wealth”: The author sarcastically notes that the only part of the so-called “national wealth” that truly belongs to everyone in modern nations is their national debt.

Debt as a Tool for Early Capital Building

Public debt became a powerful tool for primitive accumulation.

• Making Money from Money: Like magic, it gave idle money the power to grow and multiply, turning it into capital. This happened without the risks involved in investing directly in industry or even in moneylending (usury).
• How it Works: People who lend money to the government don’t actually give up their wealth. Their loans are converted into government bonds. These bonds can be easily bought and sold, acting like cash in their hands.
• Who Benefits?: Besides creating a class of wealthy people living off interest payments (annuitants) and enriching financiers who acted as middlemen, government loans also helped others. Tax collectors, merchants, and factory owners often received large portions of these loans, like free capital falling from the sky.
• Sparking Finance: National debt also led to the creation of:
  • Joint-stock companies (early corporations).
  • Trading in all kinds of financial documents (negotiable effects).
  • Speculation (agiotage), basically stock market gambling.
  • The modern system of powerful banks (bankocracy).

The Rise of National Banks

From the very beginning, the big banks, often given national-sounding names, were really just groups of private speculators. They worked closely with governments. Because of special privileges they received, they could lend money to the state.

• Measuring Debt Growth: The growth of the national debt can be tracked by the rising value of the stock in these banks.
• Bank of England Example (1694): The Bank of England is a key example.
  1. It started by lending money to the government at 8% interest.
  2. Parliament also allowed it to create more money from the same capital. It did this by lending out bank notes (paper money it printed) to the public.
  3. It could use these notes to cash checks (discount bills), lend money against goods (advances on commodities), and buy gold and silver.
  4. Soon, this credit money, created by the bank itself, became the money the Bank used to make new loans to the government and pay the interest on behalf of the government for the existing debt.
• A Clever System: The bank gave money with one hand but took back more with the other. Even while receiving interest payments, it remained the nation’s permanent creditor.
• Center of Finance: Gradually, the Bank of England became the main storage place for the country’s gold and silver reserves and the central point for all business credit.
• Social Impact: Around the same time England stopped executing people for witchcraft, it started hanging people for forging banknotes. Writings from that era show how shocked people were by the sudden rise of these powerful bankers, financiers, brokers, and stock traders.

International Debt

Along with national debt, an international credit system grew. This system often hid how primitive accumulation happened in different countries. Wealth moved between nations through loans, sometimes based on shady dealings.

• Venice and Holland: For example, the dishonest financial system of Venice, even as it declined, secretly helped build Holland’s wealth because Venice lent large sums to the Dutch.
• Holland and England: Later, the same happened between Holland and England. By the early 1700s, Dutch manufacturing was falling behind. Holland was no longer the top trading and industrial nation. So, a major Dutch business became lending huge amounts of capital, especially to its main rival, England (from 1701-1776).
• England and USA (1867): The author notes that in his time (1867), a similar relationship existed between England and the United States, with England lending large sums to America.

Taxes Follow Debt

National debt requires government income (public revenue) to pay the yearly interest. Therefore, the modern system of taxation was necessary to support the system of national loans.

• Loans First, Taxes Later: Loans allow the government to cover large, unusual expenses without taxpayers feeling the burden immediately. But these loans require higher taxes later to pay them off.
• Debt Breeds More Debt: Higher taxes, caused by more and more debt, force the government to take out new loans to cover new major expenses.
• Taxes on Necessities: Modern tax systems often rely heavily on taxes on essential goods (like food and fuel), which increases their price. This system naturally tends to increase taxes over time (“automatic progression”). High taxes aren’t just an occasional problem; they are built into the system.
• Keeping Workers Down: In Holland, where this system started, the politician De Witt praised it. He thought it was the best way to make wage workers obedient, thrifty, hard-working, and forced to work excessively long hours.
• Forcing People Out: While the harmful effect on workers is important, the author is more focused here on how taxes forcibly take property away from peasants, artisans, and other members of the lower middle class, pushing them into the wage-labor force. Even standard economists agreed on this effect.
• Protectionism Helps: This process of pushing people out of self-employment and small property ownership is made even more effective by protectionism (using tariffs and trade barriers to protect home industries), which is part of the same system.

Protectionism: Building Industry by Force

The system of protectionism was an artificial way to:

• Create manufacturers (factory owners).
• Take away the independence of laborers (forcing them into wage work).
• Turn the nation’s resources and means of survival into capital.
• Speed up the change from the old medieval way of production to the modern capitalist one.

European countries fought fiercely over who had the best protectionist policies. Once these policies started serving the interests of profit-makers (surplus-value makers), governments used them to exploit their own people (indirectly via import taxes, directly via export subsidies). They also deliberately destroyed industries in the countries they controlled. For example, England destroyed the wool manufacturing industry in Ireland.

On the European continent, following the example of the French minister Colbert, the process was sometimes simpler: early industrial capital came directly from the government’s treasury.

Tools of the Era

The colonial system, public debts, heavy taxes, protectionism, trade wars – all these things started in the manufacturing period but grew enormously during the early stages of modern industry (the Industrial Revolution).

The Bloody Birth of Capital

It took all these forceful actions to separate workers from the tools and resources they needed to work independently. This process transformed resources into capital at one end, and the majority of people into wage workers at the other.

The author quotes Augier: “money… comes into the world with a congenital blood-stain on one cheek.” He then adds his own famous conclusion: “capital comes dripping from head to foot, from every pore, with blood and dirt.” This emphasizes the violence and exploitation involved in the origins of capitalism.

CHAPTER FOUR

WHAT CAPITALIST ACCUMULATION LEADS TO

(Extracted from Capital, vol. II, ch. 32.)

What is Primitive Accumulation Really About?

So, what is the historical origin (genesis) of capital really about? Unless it’s just slaves or serfs becoming wage workers (a change in form), it mainly means taking away the means of production from the immediate producers. It means the end of private property that was based on the owner’s own labor.

The Old Way: Small Independent Producers

Private property owned by the worker themselves – the tools, the land – is the basis of small-scale production (petty industry). This kind of small production is essential for developing society’s production and the free individuality of the worker.

This way of working existed under slavery and serfdom too. But it truly thrived and showed its full potential only when the worker owned their own means of production and used them themselves:

• The peasant owning the land they farmed.
• The artisan owning the tools they used skillfully.

Limits of Small Production

This system requires:

• Land divided into small plots.
• Other means of production (tools, materials) scattered among many owners.

Because it prevents the concentration of resources, it also prevents:

• Large-scale cooperation among workers.
• Complex division of labor within a single production process.
• Society controlling and using the forces of nature effectively.
• The free development of society’s productive power.

This way of life only works within narrow, somewhat primitive limits. Trying to keep it going forever would mean keeping everyone at a mediocre level.

Its Own Undoing

At a certain point, this small-scale system creates the conditions for its own destruction. New economic forces and social desires arise that the old system cannot handle. The old social structure holds back these new forces. It must be destroyed, and it is destroyed.

Capitalism Takes Over: The Prelude

The destruction of the old system involves:

• Transforming scattered, individual tools and resources into large, socially concentrated ones (factories, large farms).
• Turning the small property of many people into the huge property of a few.
• Taking away the land, means of survival, and tools from the great mass of people.

This terrible and painful process of expropriation (taking property away) from the masses is the beginning of the history of capital.

• Old Property: Private property earned by the worker themselves, based on the fusion of the independent worker with their tools and land.
• New Property: Capitalist private property, based on exploiting the labor of others who are legally free but must sell their labor to survive (wage labor).

The Next Stage: Expropriating the Capitalist

Once this transformation has broken down the old society, turned workers into proletarians (wage laborers), and turned their tools into capital; once the capitalist system is established – then the process takes a new form.

What happens next involves:

• Further socialization of labor (work becomes more cooperative and interconnected).
• Further transformation of land and resources into large-scale means of production.
• Further expropriation of private owners.

But now, the target is different. It is no longer the self-employed worker being expropriated, but the capitalist who exploits many workers.

How Capitalists Expropriate Each Other

This new expropriation happens through the internal laws of capitalism itself, mainly through the centralization of capital.

• Competition: Capitalists compete fiercely.
• One Kills Many: In this competition, larger capitalists destroy or absorb smaller ones. “One capitalist always kills many.”

Trends Accompanying Centralization

As capital becomes concentrated in fewer hands (expropriation of many capitalists by few), several other trends develop on an ever-larger scale:

• Cooperative Labor: Work becomes more organized and cooperative within large enterprises.
• Science & Technology: Science is consciously applied to production.
• Efficiency: Resources are used more efficiently through combined, socialized labor.
• Global Market: All nations become interconnected in the global market.
• International Capitalism: The capitalist system takes on a global character.

Growing Problems and Resistance

While the number of powerful capitalists (magnates of capital) who control everything keeps shrinking, the problems for the majority grow:

• Misery
• Oppression
• Slavery (in the sense of dependence and lack of control)
• Degradation
• Exploitation

But alongside this growing misery, something else grows:

• The Revolt of the Working Class: The working class grows larger. It becomes disciplined, united, and organized by the very way capitalist production works.

The Predicted Outcome: Capitalism’s End

The author argues that the monopoly of capital (control by a few) eventually becomes a barrier to the production system that grew up under it.

• Conflict: The concentration of resources and the social nature of labor eventually clash with the capitalist ownership structure (the “capitalist integument” or shell).
• System Breaks: This shell bursts apart.
• End of Capitalist Property: The time for capitalist private property is over (“The knell… sounds”).
• The Expropriators are Expropriated: Those who originally took property from the workers are now themselves expropriated.

A New Form of Property?

Capitalism, based on capitalist production and ownership, was the first negation (undoing) of individual private property based on the owner’s own labor.

But capitalist production, like a law of nature, inevitably creates its own negation (its own undoing).

• Not Old Property: This second negation doesn’t bring back the old system of small, individual property.
• New “Individual” Property: Instead, it creates a new kind of individual property based on what capitalism achieved:
  • Cooperation among workers.
  • Common ownership (possession in common) of land and the means of production that labor itself has created.

Comparing the Transformations

• First Transformation (Small Property to Capitalist Property): This was the change from scattered private property (based on individual work) to capitalist private property. It was a much longer, more violent, and more difficult process. It involved a few powerful people (usurpers) taking property from the masses.
• Second Transformation (Capitalist Property to Socialized Property): This is the predicted change from capitalist private property (which already relies on socialized production) to socialized property. The author suggests this will be much easier. It involves the masses taking property back from the few usurpers.

CHAPTER FIVE

MONEY

(Based on Capital, vol. I, ch. 2 & 3.)

Why People Exchange Goods

Goods, or commodities, can’t just go to the market and exchange themselves. People, the owners of these commodities, have to do it for them.

Think about why someone brings a commodity to the market:

• No Direct Use for Owner: The owner doesn’t have an immediate use for the commodity themselves. If they did, they wouldn’t sell it.
• Useful for Others: The commodity is useful to other people.
• Value for Owner: For the owner, the commodity’s main direct value is that it holds exchange-value. This means it can be traded for something else.

So, the owner wants to trade their commodity for other commodities that are useful to them.

In summary:

• All commodities are not directly useful to their owners (non-use-values).
• All commodities are useful to people who don’t own them (use-values).
• Therefore, commodities must change hands. This changing of hands is called exchange.

How Exchange Begins

Selling something useful only becomes possible when someone has more of it than they need. When this happens, the people involved simply need to see each other as private owners of these goods.

• Communal Societies: But in early societies where property was owned together (like a large family group, an ancient Indian community, or the Inca society in Peru), people were not independent owners in this way. They couldn’t exchange goods among themselves within the community.
• Starting at the Borders: Exchange first begins where these communities meet other communities or outsiders.
• Becoming Routine: Once exchanging things becomes a habit, it spreads within the community too. At first, how much of one thing trades for another might be random.
• Developing Needs: Over time, people start wanting useful items from outside their community more regularly. Repeated exchange becomes a normal part of social life.
• Producing for Exchange: Eventually, at least some things must be produced specifically for the purpose of being exchanged.
• Use-Value vs. Exchange-Value: At this point, a clear difference emerges between an object’s usefulness for consumption (use-value) and its usefulness for trading (exchange-value).
• Determined Proportions: Also, the amounts in which things are traded become less random. They start depending on how much labor it takes to produce them. Custom begins to mark them as having definite values.

The Need for a Universal Exchange Item

Every owner wants to trade their commodity only for other commodities that satisfy their specific needs.

However, an owner would be happy to trade their commodity for any other commodity that has the same value, even if their own commodity isn’t useful to the second owner. But this causes a problem: the second owner doesn’t want to trade for something they can’t use.

So, as exchange becomes common, a special commodity is needed. This commodity must be useful (or at least acceptable) to everyone, not just one or two people. It needs to be something that can be easily traded for any other commodity.

In simple terms, a general medium of exchange is required.

How Money Emerges

The solution appears alongside the problem. As trade develops, owners start comparing their goods to many different items. It becomes common practice for various goods to be traded for a third, common type of commodity that has an equivalent value.

• Temporary Money: This third commodity acts as a go-between for exchanging other goods. For a short time, it takes on the role of a general medium of exchange, but only within limited situations. This role might attach briefly to one commodity, then another.
• Permanent Money: But as exchange develops further, this role becomes permanently fixed to specific types of commodities. It “crystallizes” and takes the form of money.
• Definition of Money: Money is a commodity that all owners generally recognize and use as a medium for exchanging all their different goods.

What Becomes Money?

Which specific commodity becomes money initially happens by chance. But two factors are very important:

1. Important Imports: Money often becomes the most important item being traded from outside the community.
2. Major Local Wealth: Or, it becomes the main form of local wealth that can be easily traded, like cattle for nomadic peoples.

Nomadic groups often develop money first because:

• All their possessions are movable and easy to trade.
• Their way of life constantly brings them into contact with other groups, encouraging exchange.

Historically, humans themselves (as slaves) have sometimes been used as the first form of money. But land has never been used this way in early societies. The idea of using land as money only came about much later, in well-developed capitalist societies (around the late 1600s). The first attempt to use it nationally happened during the French Revolution a century later.

Precious Metals Become Money

As exchange grows beyond local areas, the role of money naturally attaches to commodities that are well-suited for this social job. These are the precious metals – gold and silver.

Why are they suitable?

• Uniform Quality: To represent any amount of exchange-value, the money material needs to be consistent. Every piece should have the same basic qualities.
• Divisible & Recombinable: Since differences in value are just about quantity (more or less), the money commodity must be easily divisible into smaller parts and easily combined back together.

Gold and silver naturally have these properties.

The Value of Money Itself

Even if we know gold is money and can be traded for anything, that doesn’t tell us the value of a specific amount of gold, like 10 pounds.

Like any other commodity, money can only express its own value relative to other commodities. Its value is determined by the labor time needed to produce it (e.g., mine it). This value is expressed by the quantity of another commodity that takes the same amount of labor time to produce.

This value determination happens at the source of production (like the gold mine) through simple barter. By the time gold enters circulation as money, its value is already established.

(Throughout this work, the author assumes gold is the main money commodity for simplicity.)

Money’s First Job: Measuring Value

Gold’s first main function is to provide the material for expressing the value of all other commodities. It represents their values as quantities of the same thing, making them qualitatively equal and quantitatively comparable.

In this role, gold serves as a universal measure of value. It only becomes money because it performs this function.

Important Point: Money doesn’t make commodities measurable against each other. It’s the other way around. Because all commodities represent human labor used to produce them (their value), they are already comparable. This comparability allows their values to be measured by one special commodity, which then becomes the common measure of value – money. Money as a measure is simply the necessary outward form of the value measure already inside commodities: labor-time.

Price: Value Expressed in Money

The expression of a commodity’s value in gold (or money) is its price.

• Example: A simple equation like “1 ton of iron = 2 ounces of gold” is enough to express the value of iron in a way that’s socially understood. It shows the iron’s value relative to all other commodities, because their values are also expressed in gold.
• Money Has No Price: Money itself doesn’t have a price. To give it a price, you’d have to compare it to itself, which is meaningless.

Price is the money-form of a commodity. Like value itself, it’s different from the physical object. It’s an ideal or mental form. The value of iron, linen, or corn exists within those items, even though you can’t see it. We make this value visible in our minds by comparing the item to an equivalent amount of gold. The value (amount of human labor) in a ton of iron is imagined as a quantity of gold containing the same amount of labor.

Following a Transaction: C-M-C

Let’s follow a commodity owner – say, a weaver with linen – to the market where exchange happens.

1. The Commodity (C): The weaver has 20 yards of linen. It has a definite price, say £2 (representing a certain amount of gold).
2. Sale (C-M): The weaver exchanges the linen for £2. For the weaver, the linen was just a commodity holding value. They trade it for gold, which is the value-form of the linen.
3. Purchase (M-C): The weaver then takes the £2 and buys a family Bible for the same price. They trade the money (the value-form) for a different commodity (the Bible). The Bible will go home with the weaver to be used.

This exchange involves two opposite but connected transformations (metamorphoses):

• Commodity into Money (C-M)
• Money back into Commodity (M-C)

For the weaver, this is one complete action: selling in order to buy.

The Result for the Weaver

The end result for the weaver is that they started with linen and ended with a Bible. They traded their original commodity for another commodity of the same value but with a different use. They do this to get all the other things they need for living and producing. From the weaver’s perspective, the whole process is simply exchanging the product of their labor for the product of someone else’s labor.

The Formula of Simple Circulation

The exchange process involves these changes in form:

Commodity — Money — Commodity C — M — C

The overall result for the objects is C—C: one commodity is exchanged for another. This is the circulation of materialized social labor. When this happens, the process is finished for that specific transaction loop.

Interconnected Circuits

The money used to buy something was received by selling something else earlier.

Let’s imagine the £2 the weaver got for the linen was originally obtained by someone selling wheat.

• The weaver’s sale of linen (C-M) is also the purchase of linen from the perspective of the person who sold the wheat (M-C).
• The weaver selling linen (Linen-Money) is the first step in their process (Linen-Money-Bible).
• The purchase of linen (Money-Linen) is the last step for the person who started with wheat (Wheat-Money-Linen).

So, one commodity turning into money (C-M) is always also another commodity turning back from money into a useful item (M-C).

The same happens in the other direction:

• The weaver’s process ends when they buy the Bible (Money-Bible).
• But suppose the Bible seller uses that £2 to buy brandy.
• The purchase of the Bible (M-C), which was the end for the weaver (Linen-Money-Bible), is also the start for the Bible seller (Bible-Money-Brandy).

Often, a producer sells one type of commodity, maybe in large amounts. But they need many different things, so they split the money received into many smaller purchases. One sale leads to many purchases. The final step for one commodity (being bought with money) is the first step for many other commodities (being sold for that money).

The Circulation of Commodities

The path each commodity takes (selling, then buying something else) is tangled up with the paths of all other commodities. The sum total of all these paths is the circulation of commodities.

Circulation vs. Direct Barter

Commodity circulation is different from direct barter (swapping goods directly) not just in form, but in its fundamental nature.

Look at what happens:

• The weaver exchanged linen for a Bible. That’s true for the weaver.
• But the Bible seller wanted brandy, not linen. They didn’t intentionally trade their Bible for linen.
• The person who bought the linen might have sold wheat, which the weaver never knew about.

Commodity B replaces Commodity A, but owners A and B don’t directly swap with each other. This shows:

1. Commodity exchange breaks the personal and local limits of barter. It allows the products of labor to circulate widely.
2. It creates a complex web of social relationships that individuals don’t control. The farmer selling wheat allows the weaver to sell linen, which allows the Bible seller to sell the Bible, which allows the distiller to sell brandy, and so on.

Money Keeps Moving

Unlike direct barter where the process ends when goods are swapped, the circulation process doesn’t stop when use-values change hands. Money doesn’t disappear when a particular commodity’s journey ends. It constantly drops into new spots in the circulation arena, filling places left empty by other commodities.

In the weaver’s full transaction (Linen-Money-Bible):

1. The linen drops out of circulation, money takes its place.
2. The Bible drops out of circulation, money takes its place again.

When one commodity replaces another, the money always ends up temporarily in the hands of a third person. Circulation sweats money from every pore.

Money’s Second Job: Medium of Circulation

By acting as the agent that makes circulation happen, money performs its function as a medium of circulation.

Money’s Path vs. Commodity’s Path

• Commodity: The path C-M-C is a circuit. It starts with a commodity and ends with a commodity (a useful item).
• Money: Money’s movement is not a circuit. It doesn’t return to its starting point in the same transaction. It keeps moving further away.

As long as the seller holds onto the money received, their commodity has only completed half its journey (C-M). As soon as they use the money to buy something else (M-C), the money leaves their hands.

If the weaver sells more linen after buying the Bible, money comes back to them. But this return isn’t part of the first linen’s circulation (that ended with the money in the Bible seller’s hands). The money returns only because a new commodity circulation process starts, which has the same outcome as the first.

So, the movement money gets directly from commodity circulation is a constant motion away from its starting point, passing from one owner to another. This ongoing course is its currency.

The Appearance vs. The Reality

The fact that money moves in one direction (away) while commodities move in two directions (sell, then buy) is hidden. The nature of circulation creates the opposite appearance.

• First step (C-M): We clearly see both the commodity and the money moving.
• Second step (M-C): It looks like only the money is moving.

Why?

1. In the first step (C-M), the commodity physically changes place with money.
2. Then the commodity, as a useful object, drops out of circulation and goes into consumption (even if resold multiple times, it eventually reaches a final consumer).
3. Money (the commodity’s value-form) takes its place.
4. The second step (M-C) happens using the money (gold form), not the original commodity’s physical form.

So, money alone keeps the movement going. The same overall movement, which involves two opposite steps for the commodity (sell, then buy), looks like a single, continuous process for the money (always changing places with new commodities).

Therefore, the result of circulation – one commodity replacing another – appears to happen because of money’s action. It looks like money circulates seemingly motionless commodities, pushing them around in the opposite direction to its own flow.

Conclusion: Although the movement of money is just the expression of commodities circulating, the circulation of commodities seems to be the result of the movement of money.

How Much Money is Needed for Circulation?

Every commodity enters circulation, changes form (is sold for money), only to fall out of circulation again (when bought) and be replaced by other commodities.

Money, however, acts differently when it’s the medium of circulation. It stays within the sphere of circulation, constantly moving around. This raises a question: How much money does the circulation sphere constantly hold or absorb?

Calculating the Amount of Money Needed

On any given day in a country, many sales and purchases happen simultaneously. Since money and commodities meet face-to-face in these transactions, the total amount of money needed depends on the sum of the prices of all these commodities being traded at that time.

• Effect of Gold’s Value: If the value of gold itself changes (making it cheaper or more expensive to produce), the prices of commodities will change. If gold’s value falls, prices rise, and more money is needed for circulation. If gold’s value rises, prices fall, and less money is needed.

  • Historical Misconception: When large amounts of gold and silver were discovered (like in the Americas), some economists in the 17th and 18th centuries mistakenly thought prices rose because there was more gold and silver money circulating.
  • The Reality: Actually, finding gold and silver more easily decreased their value. This decrease in gold/silver value caused commodity prices to rise. Naturally, more valuable (higher priced) commodities required more money to circulate them.
  • (From now on, we’ll assume the value of gold is stable.)

• Effect of Quantity of Goods: If we assume the price of each item is fixed, then the total sum of prices depends on the amount of goods being circulated. It’s simple logic:

  • If 1 quarter of wheat costs £2, then 100 quarters cost £200.
  • 200 quarters cost £400.
  • The amount of money needed increases as the quantity of goods increases.

• Effect of Price Changes: If the amount of goods stays the same, the quantity of money needed changes if prices fluctuate. If the sum of prices goes up (due to real value changes or just market swings), more money is needed. If the sum of prices goes down, less money is needed.

The Speed of Money (Velocity)

The above applies when sales and purchases happen at the same time. But what about when they happen one after another?

Imagine four items (wheat, linen, Bible, brandy), each priced at £2.

• Simultaneous Sale: If all four are sold at the exact same moment, £8 in money is needed to circulate them.
• Successive Sales: But consider the chain reaction we saw earlier:
  • Wheat is sold for £2.
  • That £2 is used to buy Linen.
  • That £2 is used to buy the Bible.
  • That £2 is used to buy Brandy. In this chain, the same £2 makes four moves. Only £2 is needed, which is just ¼ of the money required if they were all sold simultaneously.

The faster the same money moves (the greater the velocity of its currency), the less total money is needed for circulation.

The Law of Money Quantity:

The amount of money needed as a medium of circulation can be calculated:

Quantity of Money Needed = (Sum of Prices of Commodities) / (Number of Moves Made by Each Coin)

This is a general law.

• If coins move faster (more moves), fewer total coins are needed.
• If coins move slower (fewer moves), more total coins are needed.

Bankers know this well. Since the circulation can only absorb a certain amount of money at a given average speed, they can remove gold coins from circulation simply by issuing the same value in paper money (like £1 notes replacing gold sovereigns).

Velocity Reflects Circulation Speed

The speed of money circulation simply reflects the speed at which commodities are bought and sold. It doesn’t cause the speed of commodity circulation.

• If money circulates slowly, it means commodities are being exchanged slowly (stagnation).
• When the public sees money appearing and disappearing less often during a slowdown, they often wrongly blame a shortage of money itself. The circulation slowdown, however, gives no information about why the stagnation started.

Factors Balancing Money Supply

So, the total amount of money circulating depends on:

1. The sum of the prices of all commodities being circulated.
2. The speed (velocity) at which money moves.

The sum of prices, in turn, depends on:

1. The quantity of commodities.
2. The price of each commodity.

These three factors – prices, quantity of goods, and velocity of money – constantly change and can balance each other out. For example, if prices rise but money moves faster, the total amount of money needed might stay the same.

Because of this balancing effect, especially over long periods, the actual amount of money circulating in a country changes much less than you might expect (except during major economic crises).

Another False Idea

The mistaken idea that prices are determined by the amount of money circulating (and that this amount depends on how much gold/silver a country has) was based on an absurd assumption. Early proponents of this idea imagined that commodities have no price and money has no value when they first enter circulation. They thought that once in circulation, some random fraction of the goods pile was simply swapped for some random fraction of the metal pile. This is incorrect.

From Gold Bullion to Coins

Money needs to take the physical form of coins to function as a medium of circulation. The value represented mentally by prices must appear physically as coins of specific weights and names (denominations).

• Shape: The only real difference between gold bullion (bars) and gold coins is their shape. Gold can easily be changed from one form to the other (melted down or minted).
• Wear and Tear: But as soon as coins leave the mint, they start wearing down through use. Some wear down faster than others.
• Name vs. Substance: The coin’s name (e.g., “one pound”) gradually separates from its actual substance (the amount of gold it contains). Coins with the same name end up having different real values because they weigh different amounts.
• Symbolic Nature: Gold coins stop being a perfect real equivalent for the commodities they buy. Circulation naturally turns coins into mere symbols or tokens of the metal weight they are supposed to contain.

Tokens Replace Coins

This symbolic nature makes it possible to replace metal coins with tokens made of other materials.

• Practical Need: It’s hard to make tiny gold or silver coins for small values.
• Historical Practice: Historically, less valuable metals (copper, then silver) were used as the main measure of value and money before being replaced by more valuable ones (silver, then gold). These less valuable metals often continued as tokens (copper or silver tokens) substituting for gold coins in everyday transactions.
• Where Tokens Circulate: Tokens are used most where coins change hands rapidly and wear out fastest – in small, everyday purchases.
• Legal Limits: To prevent tokens from completely replacing gold, laws specify the maximum amount of tokens that must be accepted as payment for a debt.

Paper Money: The Pure Symbol

The metal weight in silver or copper tokens is set arbitrarily by law. They wear down even faster than gold. Their function as money becomes totally separate from their weight or actual metal value.

• Value Becomes Irrelevant: Gold’s function as a coin becomes completely independent of its value as metal.
• Paper Replaces Metal: Therefore, things with relatively no inherent value, like paper notes, can serve as coins instead. Metal tokens still partly hide this symbolic nature; paper money reveals it clearly.

(We are only talking about paper money issued by the government that people are legally required to accept – fiat money with compulsory circulation. This originates from metal currency. Money based on credit is a different topic.)

How Paper Money Works

The government issues paper notes with denominations printed on them (£1, £5, etc.).

• Replacing Gold: As long as these notes actually replace an equivalent amount of gold that would have circulated, they follow the same laws of currency as gold itself.
• The Key Law: A specific law applies only to paper money, related to how much gold it represents. Simply put: The total value of paper money issued must not be more than the amount of gold that would actually be circulating if the paper money wasn’t there.
• Fluctuating Need: The amount of gold the circulation can absorb constantly goes up and down around an average level. However, it never falls below a certain minimum amount (which can be figured out through experience).
• Minimum Can Be Paper: This minimum amount of gold needed can be safely replaced by paper symbols. The fact that the actual gold pieces making up this minimum are constantly changing doesn’t affect the total amount needed.
• Risk of Over-Issue: If too much paper money is issued – more than the circulation can absorb based on the need for gold – the system overflows. There’s no longer a reliable standard.
• Inflation: If the paper money exceeds its proper limit (the amount of gold it’s supposed to represent), it effectively represents less gold per note. For example, if twice as much paper is issued as needed, a £1 note might now only represent the value of 1/8 ounce of gold instead of 1/4 ounce. Prices expressed in this devalued paper money will double – what cost £1 before will now cost £2.

The Desire to Hoard Money

Very early in the development of commodity circulation, people develop a strong desire to hold onto money itself – the result of the first transformation (selling C-M).

• Commodities are sold not just to buy others (C-M-C), but specifically to turn the commodity into money (C-M becomes the goal).
• Money stops being just a means to circulate goods; holding it becomes the aim.
• Money taken out of circulation becomes a hoard, and the seller becomes a hoarder.

In the early stages, only surplus goods (extra use-values people didn’t need) were turned into money. Gold and silver naturally became the social symbols of surplus or wealth.

Why Hoarding Becomes Necessary

As commodity production develops further:

• Every producer needs to have money on hand as a guarantee or “social pledge.”
• Their own needs constantly require buying goods from others.
• Producing and selling their own goods takes time and depends on uncertain circumstances.
• To buy without selling, one must have previously sold without immediately buying.
• This leads to hoards of gold and silver building up everywhere.

The Psychology of Hoarding

• The possibility of storing up exchange-value in the form of money creates the greed for gold.
• As circulation expands, the power of money increases.
• To early traders or peasants, value often seems identical to its money-form. Increasing their hoard feels like increasing their actual value.
• To hoard gold, it must be kept out of circulation – not spent on enjoyment. The hoarder sacrifices desires to their “gold fetish.” They practice extreme self-denial.
• However, a hoarder can only take out of circulation the value they put in by selling commodities. The more they produce, the more they can sell and potentially hoard.
• The hoarder’s main virtues become: hard work, saving, and greed. Their economic strategy is: sell much, buy little.

Other Forms and Functions of Hoards

• Aesthetic Hoards: Besides hidden piles of money, hoarding takes an aesthetic form in owning gold and silver objects (jewelry, tableware). This grows as society gets wealthier. This creates:

  • A market for gold and silver separate from their money function.
  • A hidden reserve of metal that can be melted down and used as money during crises.

• Buffer Stock Function: Hoarding serves a key economic purpose. The amount of money needed in circulation constantly fluctuates. Total gold/silver in a country must be greater than the amount needed as active coin at any given time. Hoards fulfill this need. They act as reservoirs:

  • Supplying money to circulation when needed.
  • Withdrawing money from circulation when there’s too much. This keeps the active money supply from overflowing or running dry.

Money’s Third Job: Means of Payment

As circulation develops, situations arise where selling a commodity is separated in time from receiving the payment.

• Reasons for Delay:
  • Different goods take different lengths of time to produce.
  • Production depends on seasons.
  • Some goods must travel far to market.
  • Seller 1 might be ready to sell before Buyer 2 is ready to buy.
• Payment Terms: When the same people trade repeatedly, payment terms often adapt to production cycles.
• Paying for Use: Sometimes, the use of a commodity (like renting a house) is sold for a period. The buyer only gets the full use-value at the end. They buy before they pay.

In these cases:

• The seller becomes a creditor (owed money).
• The buyer becomes a debtor (owes money).
• Money gains a new function: it becomes the means of payment.

Debtors and Creditors

The roles of debtor and creditor arise directly from simple circulation. At first, these roles are temporary, just like buyer and seller.

However, these roles can become more fixed and exist independently of specific transactions.

• Historical Conflicts: Class struggles in the ancient world often took the form of conflicts between debtors and creditors. In Rome, this led to the ruin of the commoner (plebeian) debtors, who were replaced by slaves. In the Middle Ages, it ended with the ruin of feudal lords (debtors) who lost their economic base and political power.
• Deeper Issues: These historical debtor-creditor conflicts reflected deeper economic antagonisms between social classes.

How Means of Payment Works

Back to commodity circulation: When payment is delayed, the commodity and money don’t appear at the same time. Money functions in two stages:

1. Measure of Value: First, money acts as a measure of value when the price is agreed upon in the sales contract. This price measures the debtor’s obligation – the amount they must pay later.
2. Ideal Means of Purchase: Second, money acts as an ideal means of purchase. Even though it only exists as the buyer’s promise to pay, it allows the commodity to change hands.

The actual means of payment (the physical money) only enters circulation on the day the payment is due. It leaves the buyer’s hand and goes to the seller’s after the commodity has already left circulation.

Money Closes the Deal

When payment is delayed, the money doesn’t make the exchange happen. It simply finishes the process by settling the debt later on.

Selling a commodity now has different goals:

• The seller might want money to buy something they need.
• The hoarder wants money to keep wealth in its money form.
• The debtor needs money to pay what they owe. If they don’t pay, their goods could be seized and sold.

Getting money becomes the main goal of a sale. This isn’t just a personal choice; it’s a social need created by the way circulation itself works.

Buyer Gets Goods Before Paying

When buying on credit:

• The buyer gets the commodity before they have paid for it with money earned from selling their own commodity. They complete the second step (M-C, getting the useful item) before the first (C-M, selling their own item).
• The seller’s commodity circulates and its price is set, but only as a legal claim to receive money later (a debt). The item becomes useful to the buyer before the seller has actually received the money for it.
• The seller only completes their first step (C-M, commodity into money) later, when the payment is finally made.

Money Needed for Payments

The total value of payments due within a certain period equals the sum of the prices of the goods whose sale created those debts. How much actual money is needed to settle these debts depends mainly on the speed (velocity) at which the means of payment circulates.

Two things affect this speed:

1. Payment Chains: Debt relationships often form chains. For example, Person A receives money from their debtor (Person B) and immediately uses it to pay their own creditor (Person C), who then pays someone else, and so on.
2. Time Between Due Dates: The length of time between when different debts need to be paid also affects how quickly money moves to settle them.

This chain of payments is different from the interconnected buying and selling (C-M-C) we discussed before.

• Money moving as a circulating medium (buying goods for cash) creates the connection between buyers and sellers within the circulation process itself.
• Money moving as a means of payment expresses a social relationship (debtor-creditor) that already existed before the payment was made.

Clearing Payments Efficiently

When many payments need to happen in one place, special systems develop to handle them efficiently.

• Example: In the Middle Ages, Lyons had a system called virements. This involved comparing debts. If A owed B, B owed C, and C owed A, these debts could be matched against each other and cancelled out to some extent.
• Result: Only the remaining difference (the balance) needed to be paid in actual money. The more payments are concentrated and cleared this way, the smaller the final balance is compared to the total value of payments, and the less physical money is needed to circulate.

Calculating Total Money Needed

If we look at the total amount of money moving during a certain period, considering the speed of both the circulating medium (cash) and the means of payment (debt settlement), it equals:

(Sum of prices of goods needing immediate payment) PLUS (Sum of payments falling due) MINUS (Payments that cancel each other out through clearing) MINUS (The number of times the same coin is used first as cash and then as a payment, or vice-versa, within that period)

• Example: A farmer sells wheat for £2 (the £2 acts as circulating medium). On the day his debt is due, he uses that same £2 to pay the weaver for linen (the £2 now acts as means of payment). The weaver then uses the £2 cash to buy a Bible (the £2 acts as circulating medium again), and so on.

Therefore, the amount of money circulating on any given day doesn’t perfectly match the value of goods circulating that same day.

• Money is circulating to pay for goods that were bought and used long ago.
• Goods are circulating for which the money equivalent (payment) won’t appear until the future.
• Also, the total value of new debts created each day is different from the total value of old debts being paid off that day.

Credit Money Emerges

Credit money develops directly from money’s function as a means of payment.

• Instead of physical money changing hands immediately, certificates representing debts (like IOUs or modern checks and electronic transfers) circulate to transfer the obligation to pay from one person to another.
• As the credit system expands, money is increasingly used as a means of payment rather than just an immediate medium of circulation.

Payment Reserves Replace Hoarding

Because money develops into a means of payment that is needed on specific future dates, people and businesses must accumulate money reserves to meet these future obligations.

• While simple hoarding (piling up money just to have wealth) tends to disappear as society becomes more complex, the need to create reserves of the means of payment grows.

CHAPTER SIX

THE CIRCULAR COURSE OF CAPITAL AND THE TIME NEEDED FOR ITS CIRCULATION

(Based on Capital, vol. II, ch. 1, 2, 3, 4 German edition.)

From Simple Circulation to Capital Circulation

We’ve already learned about the basic nature of money. It physically represents the exchange-value of all other goods (commodities). This value comes from the human labor contained within those goods. We’ve also seen how money works in the simple circulation of commodities (selling to buy, C-M-C).

Now, we need to look at money when it acts as capital.

What is Capital?

Remember, capital means a sum of value that is used to produce, or should produce, surplus-value (extra value, or profit).

So, money capital is capital that exists in the form of money. It’s a sum of money used specifically to get surplus-value.

How Capital Gets Surplus-Value

We know surplus-value comes from the production of commodities. Therefore, money capital must be used for production. To do this, the owner of the money capital (the capitalist) must first buy the things needed for production:

1. Means of Production (Mp): Raw materials, tools, machinery, factory buildings, etc.
2. Labor Power (L): The ability of workers to perform labor.

Once these are bought, production can begin. When production is finished, the resulting products must be sold. Selling them brings back the original money capital plus the surplus-value created, returning it all to its money form.

The Three Phases of Money Capital’s Circuit

The circular path of money capital goes through three stages:

1. Phase 1: Buying (M—C)

   • The capitalist goes to the market (for goods and labor) as a buyer.
   • Their money (M) is exchanged for commodities (C) – specifically, means of production (Mp) and labor power (L).
   • This completes the first part of the circulation: M—C.

2. Phase 2: Producing (P)

   • The purchased commodities (Mp and L) are used in production. They are consumed in the process.
   • The result is new commodities (C’) that have an increased value.

3. Phase 3: Selling (C’—M’)

   • The capitalist returns to the market, now as a seller.
   • The new, more valuable commodities (C’) are exchanged for money (M’).
   • This completes the second part of the circulation: C’—M’.

The Formula for Capital Circulation

We can show this circular path with a formula:

M—C … P … C’—M’

• M—C: Money buys Commodities (Inputs: L + Mp)

• …P…: Circulation stops for Production (where surplus-value is added)

• C’—M’: New, more valuable Commodities are sold for more Money.

• The dots (…) show that circulation is interrupted by the production phase (P).

• C’ means the original value of commodities (C) plus surplus-value.

• M’ means the original money (M) plus surplus-value.

(We’ve already discussed the production phase (P) in detail before. Here we focus on the circulation phases: M—C and C’—M’.)

Simplifying Assumptions

For now, let’s ignore accidental factors. We will assume:

• Commodities are sold at their actual value.
• Market conditions remain stable during the circulation process (no sudden changes in value).

Phase 1: Buying Inputs (M—C)

In this first phase, the capitalist uses money (M) to buy commodities (C). But these aren’t just any commodities. They must be:

• Means of Production (Mp)
• Labor Power (L)

These inputs must also match each other:

• Qualitatively: The means of production must be the right kind for the specific labor power purchased. You need cotton thread for weavers, metal for machinists, etc.
• Quantitatively: There must be enough means of production to keep the purchased labor power busy for the entire contracted time, including the time spent generating surplus-value (surplus labor).

Let’s represent the process like this: M — C < (L) + (Mp)

Money (M) is split into two parts to buy Labor Power (L) and Means of Production (Mp).

Example:

• Suppose the daily value of a worker’s labor power is 3 shillings.
• Suppose this represents 5 hours of work needed to create that value.
• But under capitalist production, the 3 shillings pays for more work – say, 10 hours. (5 hours necessary labor + 5 hours surplus labor).
• If a capitalist hires 50 workers, they must provide 500 hours of work per day (50 workers x 10 hours).
• Of these 500 hours, 250 are surplus labor.
• The capitalist must buy enough Mp (materials, machine time, etc.) to cover the full 500 working hours, not just the 250 hours represented by the wages paid.

So, the money capital (M) must be divided between L and Mp in a specific ratio. When this is done, the capitalist has what’s needed to produce a useful item and to produce surplus-value. The money capital has become productive capital.

The Underlying Capitalist Relationship

Buying labor power (M—L) is the key part of this process because surplus-value comes from using labor power. Buying means of production (M—Mp) is only necessary to allow the labor power to actually work.

When the owner of money (capitalist) and the owner of labor power (worker) meet in the market (M—L), they seem like just a buyer and a seller. But the capital-relation – the relationship between capitalist and wage worker – is already present in this simple transaction.

Why? Because the worker usually lacks the conditions needed to use their labor power independently – they don’t own the necessary means of production (factories, tools, land, materials). The capitalist typically must own the means of production before hiring workers. As soon as the worker is hired, the Mp must be available for them to use.

So, the class relationship between capitalist and worker already exists, or is assumed, when they meet in the M—L transaction. This relationship exists because the conditions needed for work (necessities of life and means of production) are separate from, and outside the control of, the worker. The relationship seen clearly during production only becomes visible because it already exists fundamentally in the circulation process – in the economic positions of the buyer and seller.

Phase 3: Selling the Product (C’—M’)

After production, the capitalist has a batch of finished commodities (C’). Let’s say it’s 10,000 lbs of yarn. The value of C’ is greater than the value of the inputs (C = L + Mp) that went into making it. This increased value shows that the commodities now represent capital.

These commodities must now be sold (C’—M’).

• Need for Sale: As long as the yarn sits unsold in the market, the capital is tied up, and production stops.
• Speed Matters: The faster the capital changes back from commodity form (C’) to money form (M’), the more effectively the same capital value can be used to create new products and more surplus-value in the next cycle.
• Sell Everything: The entire batch (all 10,000 lbs) must be sold. It’s crucial that no part remains unsold if the capitalist wants to get the full capital value and the full surplus-value back in money form.

Once the sale is complete (C’—M’), the original capital value and the added surplus-value are both contained within the final sum of money (M’). The capitalist can now choose to separate the surplus-value (perhaps spend it) or add it back to the original capital to make it larger for the next round. The capital value has returned to its starting form (money) and can begin the circuit again.

Interruptions and Delays

The circulation of capital (M—C…P…C’—M’) can only proceed normally if the phases flow into each other smoothly. However, the process itself inevitably involves delays. Capital necessarily gets tied up (immobilized) for certain lengths of time in each phase:

• As money, waiting to buy inputs.
• As productive capital (inputs) during the production process.
• As commodities, waiting to be sold.

Production and Circulation are Linked

The complete circuit of capital shows how closely production and circulation (trade) are connected.

• Phase 1 (M—C): Capital needs the general circulation of commodities (the market) to acquire the inputs (L and Mp) it needs to start production.
• Phase 3 (C’—M’): Capital needs the market again to sell its output, get rid of the commodity form (which can’t restart the cycle), and return to the money form. It also needs this sale to separate the earned surplus-value from the original capital.

Money Capital Highlights the Goal

The money capital circuit (M—C…P…C’—M’) is the most obvious and characteristic form of industrial capital. It clearly shows the aim and driving force: expanding value, making money, and accumulation. Buying (M-C) in order to sell dearer (C’-M’) is the central theme.

Phase 1 (M-C) shows that the inputs for capitalist production come from the commodity market. It proves that capitalist production depends on circulation (trade). The whole circuit is only possible because circulation exists.

Storing Money for Capital Circulation

• Paying Workers vs. Suppliers: The capitalist usually has to pay workers their wages frequently (e.g., weekly). But they might buy means of production on credit, paying later. This means some money must be available for regular wage payments (completing M—L), while other money might be held back for future supplier payments (completing M—Mp later). The needs of circulation force the capitalist to keep some money stored up. Since money withdrawn from circulation takes the form of a hoard or treasure, treasuring-up money is essential for money capital to function smoothly.

• Accumulating Surplus-Value: Surplus-value earned from one cycle often needs to be added to the capital to expand production or start new ventures. But expansion isn’t arbitrary; it depends on technical requirements (e.g., needing a certain number of new machines and workers to go with them).

  • If the surplus-value from one cycle isn’t enough to meet this minimum requirement for expansion, it must be saved up over several cycles.
  • While being saved, this surplus-value sits idle as a treasure. It is potential money capital – money that could become capital but isn’t actively working as capital yet.

Dealing with Delayed Payments (Credit Sales)

If the capitalist sells their commodities (C’) on credit (payment comes later), the surplus-value part of C’ doesn’t immediately return as money. It returns as claims or debts owed by the buyer.

Reinvesting Surplus-Value

Whether the earned surplus-value (now in money form) is immediately added back to the productive capital depends on circumstances.

• Minimum Size: To start a separate business or expand the current one, the surplus-value must reach a minimum size needed to buy the necessary L and Mp.
• Technical Needs: For example, a spinner can’t just add a few spindles; they likely need matching carding machines, more cotton, and more wages for workers. Even small improvements might require larger investments in materials or related machinery.
• Accumulation Phase: Until the surplus-value reaches this minimum size, it must be accumulated as treasure over several cycles.

Capitalist Supply Must Exceed Demand

When the production process (P) is done, the capitalist puts commodities (C’) into circulation to sell. These commodities (C’) have more value than the inputs (C = L + Mp) bought at the start.

• By selling C’, the capitalist pulls more value (M’) out of circulation (in money form) than they originally put in (M).
• They can only do this because they put more value into circulation (in commodity form C’) than they took out (as inputs C).
• The “industrial” capitalist always supplies more commodity-value than they demand (in terms of inputs). If supply just equaled demand, capital wouldn’t grow.
• The Goal: The capitalist must “sell dearer than they bought.” This is possible because production transformed less valuable inputs into more valuable outputs. Profit grows as the value supplied (C’) exceeds the value demanded (C = L+Mp). Capitalists don’t aim for balance; they aim to maximize supply over demand.

This applies to the entire capitalist class. (Here, “demand” refers only to the demand needed for production: demand for L and Mp).

Analyzing Capitalist Demand vs. Supply

• The capital advanced (let’s call it Cp) is divided into constant capital (c, for Mp) and variable capital (v, for L). So, Cp = c + v.
• Capitalist demand for Mp is only ‘c’. This is less than the total capital advanced (c+v).
• Capitalist demand for L is ‘v’.
• As technology advances, demand for L (v) tends to decrease relative to demand for Mp (c).
• Indirect Demand: The demand for L (v) indirectly creates demand for consumer goods workers buy with wages. But this demand is only equal to ‘v’ (total wages), maybe even less if workers save.
• Total Capitalist Demand: The total demand for commodities by the capitalist acting as a producer is never more than Cp = c + v.
• Total Capitalist Supply: The total supply from production is C’ = c + v + s (where ‘s’ is surplus-value).
• The Gap: Supply (c+v+s) is always greater than production demand (c+v). The higher the rate of profit (the bigger ‘s’ is relative to ‘c+v’), the more supply exceeds demand.

An Example:

• Assume a capitalist has £50 capital. Constant part (c) = £40, variable part (v) = £10.
• Their demand for Mp from other capitalists is £40.
• If other capitalists have similar profit rates, they might supply £60 worth of Mp for every £50 of their capital.
• So, this capitalist’s demand (£40) only covers two-thirds of the relevant supply (£60) from others.
• Looking at their own business, their total demand (£50 = c+v) is only four-fifths of their own supply (£60 = c+v+s, assuming s=£10).

Consumption Doesn’t Close the Gap:

• What if the capitalist spends the entire surplus-value (s) on personal consumption instead of accumulating?
• Even then, their demand as a capitalist (for c + v = £50) is still less than their supply (£60). They consume the extra £10 (s) as a non-capitalist.

Why Accumulation is Necessary:

• But capitalists cannot just consume all the surplus-value. They must accumulate.
• Reserves: They need reserve capital to handle price changes and wait for good buying/selling opportunities.
• Expansion & Technology: They must accumulate capital to expand production and adopt new technologies to stay competitive.

Accumulation Requires Saving (Hoarding):

• To accumulate, the capitalist must save part of the surplus-value received as money (s). It must be held as treasure until it’s large enough for reinvestment.
• While this saving process happens, the capitalist’s demand for inputs (c+v) does not increase, even though they have received the surplus-value money.

When money is saved up (immobilized) for future investment, it means the capitalist took money out of the market by selling goods, but they are not immediately putting that money back into the market by buying other goods.

(We are ignoring credit for now. Depositing accumulating money in a bank for interest is a credit operation, which is a separate topic.)

Time is Money: Production Time vs. Circulation Time

The total time capital needs to complete its circular journey (M—C…P…C’—M’) is the sum of:

1. Production Time: The time spent in the production phase (P).
2. Circulation Time: The time spent buying inputs (M—C) and selling outputs (C’—M’).

Understanding Production Time

Production time is often longer than the actual labor time (when workers are actively working on the product). This is because:

• Natural Processes: Production might require interruptions where the product undergoes natural changes without direct labor (e.g., corn growing in the field, wine fermenting in a cellar, materials undergoing chemical processes like in tanning leather).
• Holding Stock: Capitalists need to keep a supply of raw materials ready.
• Idle Equipment: Tools, machines, and buildings are part of the production process and their value wears down over time, but they are not always actively being used.

During these non-labor periods, capital is lying idle.

• Maintenance Labor: If labor is performed during these idle times (like maintaining the stored materials), it is still productive labor that creates surplus-value, because part of that labor is unpaid (like all wage labor).
• Unproductive Interruptions: Normal interruptions needed for the product itself (like wood drying) create neither value nor surplus-value.

Because idle means of production don’t absorb any surplus labor, capitalist production always aims to shorten the production time that extends beyond the actual labor time. This is why things like night shifts are sometimes used – to keep the production process going without long interruptions.

Understanding Circulation Time

Capital must also spend time in the circulation phase (buying and selling). During this time:

• No commodities are being produced.
• No surplus-value is being created.

Therefore:

• The longer the circulation time, the less surplus-value is produced relative to the total time the capital is tied up.
• The more the capitalist can shorten the circulation time, the greater the surplus-value will be.

This might incorrectly suggest that surplus-value comes from circulation itself, but the author argues it is created only during production.

CHAPTER SEVEN

COMMERCIAL ACTIVITY

(Based on Capital, vol. II, ch. 6. German ed.)

(A) Purchase and Sale

The Act of Buying and Selling

Assuming commodities are bought and sold at their actual value, these transactions are simply about changing the form of that value – from commodity form to money form, or vice versa.

• (Even if things aren’t sold at their exact value, the total value exchanged in the economy remains the same. What one person gains above value, another loses.)

Costs of Buying and Selling

This process of conversion takes time and labor.

• No Value Creation: This labor doesn’t create new value. It only makes it possible to change the form of existing value. Trying to cheat or get an advantage over the other party doesn’t create value either – just like lawyers arguing in court doesn’t increase the value of whatever they are arguing about.
• Impact on Producers: For independent producers (like artisans or small farmers), the time spent buying and selling is time taken away from producing. Historically, they often tried to do these tasks on holidays.
• Scale Doesn’t Change Nature: When capitalists handle huge volumes of buying and selling, it doesn’t magically turn this non-value-creating activity into value-creating activity.
• Hiring Others: Hiring specific people (like salespeople) to handle buying and selling also doesn’t change the nature of their work; it still doesn’t create value.

The Role of Merchants (Briefly)

Buying and selling become major tasks for capitalists. Because they control large amounts of products, they need to manage large-scale sales and also buy large quantities of production inputs.

• Merchant Specialization: If a specialized merchant, using their own capital, handles the buying and selling for many capitalists, they can often do it more efficiently. This can shorten the circulation time for the producing capitalists.
• Merchant as “Machine”: In this role, the merchant acts like a machine that reduces wasted effort or helps shorten the overall production time (by speeding up the circulation part).
• Activity Still Unproductive: But this efficiency doesn’t change the basic nature of buying and selling. It remains an activity that does not create value.

(We will look at merchants and commercial capital in more detail later.)

The Salesperson as Worker

Let’s assume the person handling buying and selling is just an employee of the manufacturer.

• Necessary Function: They perform a necessary function, just like a spinner or a pill maker.
• No Value Creation: They work, but the content of their work (buying and selling) creates neither value nor a physical product.
• Circulation Cost: The salesperson must be counted as part of the costs of circulation (costs necessary to sell the product, which are deducted from the profit).
• Reducing Costs: Their usefulness isn’t in making unproductive work productive. It’s in reducing the total amount of labor time society spends on the unproductive (but necessary) tasks of buying and selling.
• Surplus Labor: Let’s assume the salesperson is a wage laborer. Like other workers, they might work longer hours than needed to cover their wages. For example, they get paid for 8 hours but work 10. These extra 2 hours are surplus labor.
  • However, this surplus labor in selling creates no more value than the necessary 8 hours did (which was also zero).
  • But, this unpaid surplus labor does reduce the circulation costs for the capitalist employer by 2 hours’ worth (2/10ths, or one-fifth in this example). The cost of employing the salesperson is lowered.

Summary of Buying/Selling Costs

Time and labor spent purely on buying and selling are circulation costs. They add nothing to the value of the goods being exchanged. It’s like taking a part of the product and turning it into a machine whose only job is to buy and sell the rest of the product. This machine is a necessary cost (a deduction from the product or profit), even if it helps reduce the overall labor needed for circulation.

(B) Bookkeeping

Another Circulation Cost

Besides active buying and selling, time is also spent on bookkeeping. This requires tools like pens, ink, paper, desks, and involves office expenses. The situation here is similar to the labor of buying and selling.

• Individual Producer: When a small producer does their own bookkeeping mentally or in their spare time, this activity and the materials used (paper, etc.) are clearly deducted from the time and resources available for actual production.
• Specialized Bookkeepers: Hiring professional bookkeepers or making it a specialized function doesn’t change the fundamental nature of the task.
• Historical Example (India): Ancient Indian communities had officials responsible for agricultural bookkeeping. This division of labor saved time and effort for others. But bookkeeping remained distinct from production, like a ship’s cargo is distinct from the bill of lading. The bookkeeper’s labor was withdrawn from production, and their costs were covered by the community’s total product. The capitalist’s bookkeeper is essentially in the same position.

Bookkeeping vs. Buying/Selling

There’s a key difference:

• Buying/Selling Costs: These arise only because products take the form of commodities to be exchanged in a market. They would disappear if production took a different social form (e.g., communal production without markets).
• Bookkeeping Costs: Bookkeeping, however, becomes more necessary as the scale of production grows and becomes more social (less individualistic). It’s needed to control the production process and summarize it mentally (“ideally”).
  • Therefore, bookkeeping is more necessary under capitalism than in small craft/peasant production.
  • It would be even more necessary in a future system of direct community production than under capitalism.
• Concentration Reduces Costs: The costs associated with bookkeeping tend to decrease as production becomes more concentrated in larger units.

(C) The Cost of Money

Commodities used as money (like gold and silver) are not used up in consumption. They represent social labor tied up in a form that only serves as an instrument of circulation.

• Unproductive Wealth: A part of society’s wealth is locked into this unproductive form.
• Replacement Costs: Money wears out through use and needs constant replacement. For developed capitalist countries, where vast amounts of wealth exist as money, the cost of replacing worn-out currency is significant.
• A Social Cost: Using gold and silver as money represents a cost of circulation for society that comes purely from the commodity-based form of production. It’s social wealth sacrificed just to make circulation possible.

(D) Costs of Storage

For production and reproduction (the ongoing cycle) to happen without interruption, a certain quantity of commodities must always be available on the market.

• Need for Inventory: Supplies (stocks) of means of production must be ready. Workers also need most of their means of subsistence (food, etc.) to be available for purchase.
• Storage Costs: This requires:
  • Buildings, warehouses, storage facilities (constant capital).
  • Labor power to manage and handle the stored goods.
• Deterioration Costs: Goods can spoil or be damaged while stored. Protecting them requires additional capital for better storage facilities and labor.

Do Storage Costs Add Value?

These storage costs are different from buying/selling or bookkeeping costs because they can, to some extent, enter into the value of the stored commodities.

• Circulation Cost Part: If storage is needed only because of the time it takes to sell the goods (turn C into M), the costs are purely circulation costs, like those discussed earlier (A-C). They don’t add value.
• Production Cost Part: However, if the storage process involves additional labor that preserves the product’s use-value (its usefulness), then these costs can add value. This might involve preventing spoilage or maintaining quality.
  • Note: This added labor usually doesn’t increase the use-value (often, it just limits its decrease), nor does it increase the existing value in the commodity.
  • But it does add new value (representing the new living labor and the value of materials used in the storage process).

(E) Transport

• Other Costs: Costs like packing, sorting, etc., are also part of circulation.
• General Law Reminder: Costs arising only from changing a commodity’s form (like selling it) add no value. They are incidental costs deducted from the surplus product.
• Transport is Special: The costs of transport are too important to ignore and work differently.

Understanding Transport

• Circulation vs. Movement: Goods can circulate (change owners) without physically moving (e.g., selling a house). Goods can move without circulating (e.g., speculators trading titles to cotton stored in a warehouse). Transport of goods can exist without commodity circulation (e.g., in the ancient Inca empire).
• Transport Doesn’t Increase Quantity: Transporting products doesn’t make more of them. Any changes to their physical qualities during transport are usually unavoidable downsides, not intended improvements (with rare exceptions).
• Transport as Part of Production: But, the use-value of things is only realized when they are consumed. Consumption often requires the product to be moved to the consumer. Therefore, transport is often the final step in the production process.
• Value Added by Transport: Capital invested in the transport industry adds value to the transported commodity. This happens in two ways:
  1. By transferring the value of the means of transport used up (e.g., fuel, wear and tear on vehicles).
  2. By adding new value through the labor required for transport.
• Surplus-Value in Transport: Like all capitalist production, the new value added by transport labor is divided into:
  • Replacement of the transport workers’ wages.
  • Surplus-value for the owner of the transport capital.

Transport Within and Between Production Stages

• Moving the object being worked on within a factory (e.g., cotton from carding to spinning room, coal from mine face to surface) is clearly part of the production process.
• Transporting a finished product from one factory to another distant one is just a larger-scale version of the same thing.
• Finally, transporting the finished commodity from the place of production to the place of consumption completes the journey. The product is only truly ready for consumption after this final transport.

CHAPTER EIGHT

COMMERCIAL CAPITAL AND THE WORK OF THE COMMERCIAL EMPLOYÉS

(Based on Capital, vol. III, part 1, ch. 16, 17. German ed.)

Introducing Commercial Capital

As we’ve seen, every capital involved in production must go through a cycle:

1. Sell finished goods to get money (C’—M’).
2. Use that money to buy means of production (Mp) and labor power (L) (M—C). This means constantly buying and selling.

Merchants (or tradespeople) using their own independent capital, called commercial capital, can take over these buying and selling functions for the producers.

How Merchants Operate

Imagine a merchant with £3,000.

1. They use it to buy 30,000 yards of linen from a manufacturer.
2. They sell this linen, aiming for a profit (say, 10%).
3. With the money received (original £3,000 + £300 profit), they buy more linen.
4. They sell this new batch.

The merchant constantly repeats this cycle of buying in order to sell, without actually producing anything themselves.

Impact on the Producer

• Gets Paid: The manufacturer receives the value of their linen from the merchant’s capital.
• Continues Production: If conditions remain the same, the manufacturer can immediately use this money to buy more yarn, coal, labor, etc., and keep producing without interruption.

The Commodity is Still on the Market

Even though the manufacturer has sold the linen, the linen itself hasn’t reached its final destination. It’s still on the market as a commodity waiting to be sold to the actual consumer. All that has happened so far is a change in who owns the linen.

Merchant’s Role in Keeping Production Flowing

What if the merchant can’t sell the first 30,000 yards before the manufacturer has produced the next 30,000 yards?

• The merchant won’t have the money to buy the second batch.
• The manufacturer’s production might have to stop or be interrupted (unless they have extra reserve funds).

This situation clearly shows the merchant’s role: they are simply handling the sale of the commodity, a task the manufacturer would otherwise have to do themselves. (If the merchant were just an employee of the manufacturer handling sales, this would be obvious.)

Benefits for the Manufacturer

If the manufacturer had to wait until the final consumer bought the linen, their production cycle (reproduction) would be constantly interrupted.

• To avoid this, they would have to produce less and keep a larger amount of money in reserve.
• The merchant’s intervention doesn’t eliminate the need for capital to be divided between production and circulation. But without the merchant, the manufacturer’s money reserve would need to be larger, and their scale of production smaller.
• Additionally, the manufacturer saves the time they would have spent on selling, allowing them to focus on managing production.

Efficiency of Commercial Capital

Assuming the merchant operates within necessary limits, their specialized role brings advantages:

1. Less Capital Needed Overall: Because of the division of labor (producers produce, merchants sell), the total capital tied up just in buying and selling (including the merchant’s costs for storage, transport, wages, etc.) is likely less than if each manufacturer handled their own sales.
2. Faster Sales: Merchants specialize in selling, so they can convert the manufacturer’s goods back into money more quickly and find markets faster.
3. Faster Rotation: A single merchant’s capital can handle the sales cycles (“rotations”) of several different producers.
   • Within one industry: If a linen merchant sells Manufacturer A’s linen quickly, they can use the same capital to buy and sell linen from Manufacturer B while waiting for A’s next batch.
   • Across different industries: After selling linen, the merchant might use the capital to buy and sell silk during the interval before more linen is available.
   • Example: A merchant selling corn for Farmer A can use the same money to buy and sell corn for Farmer B. The merchant’s capital rotates much faster than the farmer’s capital, which is tied up in a production cycle that takes a whole year.

Speed Matters

• The faster commercial capital rotates (completes its buy-sell cycle), the smaller the portion of society’s total capital needs to be tied up in commerce.
• The slower it rotates, the larger the portion must be.

Commercial Capital Creates No Value

We established earlier that the acts of buying and selling themselves create neither value nor surplus-value. They are necessary functions but place limits on the creation of value (which happens in production).

This fact doesn’t change just because a specialized merchant performs these acts instead of the producer.

• If we ignore functions that are really extensions of production (like storage, transport, sorting, final retail packaging) and focus only on the core commercial function of buying in order to sell, then commercial capital creates no value or surplus-value.
• Its role is simply to help transform commodities into money.

How Does Commercial Capital Make Profit?

Despite creating no value, commercial capital must earn the average yearly profit, just like productive capital does.

• If commercial capital earned more profit than productive capital, producers would shift their capital into commerce.
• If it earned less, merchants would shift their capital into production.
• Commercial capital is very flexible and can easily change its function.

Since commercial capital creates no surplus-value itself, where does its profit come from?

• Source: The profit of commercial capital must be a share of the total surplus-value created by productive capital (the capital used in factories, farms, etc.).

But how does commercial capital manage to draw this share to itself?

The Illusion of Simple Markups

It might seem like merchants simply make profit by adding a markup, selling commodities for more than their value.

• A merchant’s profit clearly comes from the price of the goods they sell.
• Profit equals the selling price minus the purchase price (plus any extra circulation costs incurred by the merchant).

If there are no extra costs, how can the merchant sell for more than they paid?

Producers, Merchants, and Prices

Recall how the producer’s selling price (the price of production) is determined:

• Price of Production = Cost Price (c+v) + Average Profit.
• The total value of all commodities equals the total labor embodied in them.
• The total prices of production at which manufacturers sell are, overall, equal to the total value of the commodities.
• But the manufacturers’ cost prices only cover the paid portion of the labor.

The merchant, however, doesn’t produce. They continue the selling process the manufacturer started. The manufacturer already possesses the surplus-value (in the form of the commodity) before selling it to the merchant. The merchant must make their profit by selling.

This makes it seem like the merchant must sell the commodity for more than the manufacturer’s price of production. Since the total prices of production equal the total value, it appears the merchant must sell goods above their value.

The Real Mechanism: Sharing the Surplus-Value

This idea of selling above value is an illusion (when looking at the average). Here’s why:

The mistake is assuming the manufacturer sells to the merchant at a price of production calculated without considering the role of commercial capital in the overall economy. We can’t assume commercial capital doesn’t affect the formation of the general rate of profit.

Commercial Capital and the Average Rate of Profit

Commercial capital does participate in forming the general (average) rate of profit, based on its proportion of the total capital in society.

Example:

1. Total Productive Capital = 900 (e.g., £900,000). Let it be 720c + 180v.

2. Assume Surplus-Value Rate = 100%. Then Surplus Value (s) = 180.

3. Total Value of Product = 720c + 180v + 180s = 1080.

4. Average Profit Rate (if only considering productive capital) = s / (c+v) = 180 / 900 = 20%.

5. Now, add Commercial Capital = 100.

6. Total Social Capital = 900 (Productive) + 100 (Commercial) = 1000.

7. Commercial capital is 1/10th of the total capital. It gets 1/10th of the total surplus-value (180).

8. Commercial Capital’s Profit = 180 / 10 = 18. (Profit rate = 18/100 = 18%).

9. Remaining Surplus-Value for Productive Capital = 180 - 18 = 162.

10. Productive Capital’s Profit Rate = 162 / 900 = 18%.

11. The new general average rate of profit for all capital is 180 / 1000 = 18%.

How the Prices Work:

• The productive capitalist sells the goods to the merchant at a price that includes only their share of the adjusted average profit (18% here, not the original 20%).
• Producer’s Selling Price = Costs (720c + 180v) + Producer’s Profit (162s) = 900 + 162 = 1062.
• The merchant buys for 1062. They add their average profit (18% on their 100 capital = 18).
• Merchant’s Selling Price = 1062 + 18 = 1080.

Conclusion:

• The merchant sells the commodity at its actual value (1080).
• The merchant makes profit because they buy the commodity from the producer for less than its full value (1062 instead of 1080). The producer sells below the full value to allow the merchant their share of the average profit.
• Commercial capital gets its profit by effectively receiving a transfer of part of the surplus-value originally created by productive capital.

The Role of Commercial Employees

What about the wage workers employed by the merchant (clerks, buyers, stock managers, etc.)?

• They are Wage Laborers: Like factory workers, their labor power is bought with the merchant’s variable capital. Their wages are set by the cost of reproducing their labor power.
• They Don’t Directly Create Surplus-Value: Since the merchant’s own activity (buying and selling) doesn’t create value or surplus-value, the commercial employees performing these tasks also cannot directly create surplus-value for the merchant.
• How They Help Generate Profit: How do they produce profit for their employer?
  • Remember: Commercial profit comes from obtaining a share of the surplus-value created elsewhere (in production).
  • Just as productive capital profits from the unpaid labor embodied in goods, commercial capital profits by effectively buying that embodied labor from the producer at a discount (paying 1062 for goods worth 1080 in our example).
  • The unpaid labor of the commercial employees (working hours beyond what their wages cover) allows the merchant to manage a larger volume of capital and transactions.
  • This larger scale enables the merchant to appropriate a larger absolute amount of the surplus-value generated elsewhere.
  • While the employee’s labor itself doesn’t create surplus-value, their unpaid work is crucial for the merchant to realize profit. From the merchant’s perspective, this unpaid labor is the source of their profit.
  • Large-scale capitalist commerce relies on this unpaid labor of commercial employees.

A Theoretical Wrinkle: Variable Capital in Commerce

This raises a question: Since commercial employees’ labor doesn’t create surplus-value, should the merchant’s variable capital (wages paid to them) be counted as part of the advanced commercial capital when calculating the average profit rate?

• If Yes: It seems odd, as commercial profit supposedly comes from buying/selling, not setting labor in motion.
• If No: It seems to violate the rule of equal profit rates (why would someone advance capital for wages if it doesn’t count towards the base for earning profit?).

(The author implies it IS counted, as it’s necessary for the function, but acknowledges the theoretical complexity.)

Why Commercial Employees are Necessary

• Efficiency: If every merchant could only use their own labor, commercial capital would be incredibly fragmented (millions of tiny businesses). This inefficiency would worsen as production scales up.
• Rising Costs: Producers would have to deal with countless small merchants, losing the benefits of specialized commercial capital. Costs for producers (time, effort) and circulation costs in general (sorting, shipping) would increase.
• Concentration Benefits: Concentrated commercial capital, using employees, is far more efficient. Less time is needed for large calculations than small ones. Dealing with one large firm is cheaper and faster than dealing with many small ones (less correspondence, paperwork, etc.).

Efficiency Through Specialization

The division of labor within commercial businesses saves a lot of time. One employee handles bookkeeping, another handles cash, others handle correspondence, buying, selling, traveling, and so on.

• Fewer Workers Needed: Because of this specialization, wholesale businesses employ surprisingly few workers relative to the large volume of business they handle. This is because in commerce, much more than in industry, performing the same function (like processing an order) takes about the same amount of time whether the transaction is large or small. (This efficiency is why large, concentrated businesses appeared earlier in history in commerce than in industry).
• Lower Constant Capital Costs: Concentration also saves on constant capital. One large office is much cheaper than 100 small ones. One large warehouse is cheaper than 100 small storerooms.
• Lower Transport Costs: Transport costs (which merchants often have to pay upfront) also decrease when commerce is concentrated instead of fragmented among many small dealers.

Costs Without Specialization

If producers had to handle all their own commerce:

• They would spend more of their own labor and money on these tasks.
• If the same amount of commercial capital were split among numerous small merchants, many more workers would be needed overall (due to inefficiency).
• More total commercial capital would be required to handle the same volume of goods.

The Capital Formula: B + b

Let’s use symbols:

• B = The commercial capital used to buy and sell commodities.
• b = The corresponding variable capital used to pay the wages of commercial employees.

The total capital needed when employees are used (B + b) is less than the total commercial capital (B alone) that would be needed if every merchant worked alone without employees (b = 0). This is because employing specialized workers makes the operation much more efficient.

The Remaining Difficulty: Paying for ‘b’

We still face a challenge in explaining the merchant’s profit.

The selling price of the commodities must be high enough to pay the average profit on the merchant’s total advanced capital, which is B + b.

• We saw how the profit on B comes from commercial capital getting its share of the total surplus-value created by producers. That profit is included in the final selling price (which equals the commodity’s value).
• But what about b (the capital used for wages)? Where does the profit on ‘b’ come from? And how is the amount ‘b’ itself recovered from the selling price?

It might seem like the profit on ‘b’, and ‘b’ itself, must come from the merchant adding an extra markup to the price. But remember, we assume the final selling price equals the commodity’s value.

The key is that the total capital needed is smaller when employees are used (B + b is less than B without b would be). The efficiency gained by employing workers (‘b’) allows the average profit rate (calculated on the total social capital, including B+b) to cover a profit for ‘b’ as well as ‘B’, without raising the final price above the commodity’s value.

But how is the wage capital ‘b’ itself recovered? If the selling price only contains the producer’s costs, the producer’s profit share, and the merchant’s profit share (on B+b), where does the money to replenish ‘b’ come from? Can the merchant just add their wage costs to the price? Or must wages be paid out of the merchant’s profit, reducing it?

Commercial Work is Necessary but Creates No Value

The work the merchant buys with ‘b’ is commercial work – labor needed to turn commodities into money (selling) and money into commodities (buying). This labor transforms value forms but doesn’t create new value.

However, without this labor, commercial capital cannot function. If it doesn’t function, it doesn’t get its share of the general profit pool.

Think Like a Producer

Since commercial capital is really just a specialized, independent part of productive capital, let’s imagine they haven’t separated yet. Consider the manufacturer’s own office staff (commercial employees).

• The office is usually small compared to the factory.
• As production grows, more commercial work is needed (calculating prices, bookkeeping, managing money, correspondence) to handle the increased volume of sales and purchases.
• Hiring commercial employees becomes necessary. These employees form the office staff.
• The money spent on their wages (‘b’) is different from the variable capital spent on factory workers.
  • Office wages increase the manufacturer’s total expenses (advanced capital) but don’t directly increase the surplus-value produced.
  • Like other overhead costs, office expenses reduce the rate of profit (because total capital increases while surplus-value doesn’t).
  • Therefore, the manufacturer tries to minimize these office costs.
• Different Relationship: Productive capital relates differently to office staff than to factory workers. More factory workers generally mean more production and more surplus-value/profit. More office staff means higher costs.
• Costs Paid from Profit: Office expenses must be paid out of the profit generated by production – they presuppose that profit exists. This is sometimes shown when commercial staff are paid partly through profit-sharing bonuses.
• Cause and Effect: Lots of commercial work doesn’t cause lots of value. Instead, because lots of value has been produced and needs to be managed and circulated, lots of commercial work is required. The same applies to other circulation costs (measuring, packing, shipping) – the amount of work depends on the quantity of goods, not the other way around.

How Commercial Employees Contribute to Profit

• The commercial employee doesn’t directly produce surplus-value.
• Their wage is determined by the value of their labor power (cost of living/reproduction).
• But the exercise of their labor power (the work they do) is not limited by the value of their wage – they perform unpaid labor, just like productive workers.
• Therefore, their wage isn’t necessarily proportional to the amount of profit they help the capitalist realize in money form. What they cost (wage) and what the capitalist gets (work) are different amounts.
• They help the capitalist by reducing the costs involved in turning surplus-value (embodied in goods) into money. Their unpaid labor lowers these circulation costs for the employer.
• In essence: The commercial employee’s unpaid labor helps the merchant appropriate a share of the surplus-value created elsewhere. This appropriation is the source of the merchant’s profit.

Falling Wages for Commercial Employees

Commercial employees often belong to the category of better-paid, skilled wage laborers. However, their wages tend to fall as capitalism develops, even relative to average (unskilled) labor. Why?

1. Division of Labor: Office work becomes highly specialized. This develops specific skills in workers quickly through practice, often without the capitalist having to pay much for training. But it’s a one-sided skill.
2. Easier Education: General education, commercial knowledge, languages, etc., become more widespread and easier/cheaper to acquire due to advances in science and public education systems. Capitalism pushes education methods to become more practical.
3. Increased Competition: Better, cheaper education allows people from classes previously excluded from these jobs (who may have lower standards of living expectations) to enter the field. This “democratization” increases the supply of commercial workers, leading to more competition for jobs.

Result: The value of commercial labor power tends to decrease. Wages fall, even while workers’ actual capacity for labor might increase due to experience and specialization.

Final View: Costs vs. Profit Source

• For Productive Capital: Circulation costs, including the office staff, are clearly seen as just expenses that reduce profit.
• For Commercial Capital: These same costs appear differently. To the merchant, they seem like the source of their profit. Why? Because the average rate of profit is calculated on the merchant’s total investment, including the costs of circulation (‘b’). The commercial labor bought with ‘b’ is essential for the merchant’s capital ‘B’ to perform its function and claim its share of the overall profit pool.
• Therefore: The commercial labor bought by the merchant is considered directly productive for the merchant, because it enables the realization and appropriation of profit.

CHAPTER NINE

How Buying and Selling Affect Prices

Let’s look at how merchants influence the prices of goods.

Example: Selling Sugar

Imagine it costs £1 to produce 1 pound (lb) of sugar. This is the price of production.

A merchant uses £100 to buy 100 lbs of sugar. Suppose the average profit rate for businesses in a year is 15%. To make this profit, the merchant needs to earn £15 on their £100 investment over the year.

• Scenario 1: Selling 100 lbs per year

  • The merchant invested £100.
  • They need £15 profit.
  • They add this £15 profit to the initial £100 cost.
  • The total selling price for the 100 lbs is £115.
  • This means the price per pound is £115 / 100 lbs = £1.15, or £1 and 3 shillings (since £0.15 is 3 shillings).
  • The merchant adds 3 shillings of profit to the £1 production cost of each pound.

• Scenario 2: Production cost drops

  • Now, imagine the production cost falls to only 1 shilling (£0.05) per pound.
  • With the same £100, the merchant can now buy 2000 lbs of sugar (£100 / £0.05 per lb = 2000 lbs).
  • The merchant still aims for the average yearly profit of 15%, which is £15 on their £100 investment.
  • To get £15 profit from selling 2000 lbs, they need to add £15 / 2000 lbs = £0.0075 profit to each pound.
  • The selling price per pound becomes the production cost (1 shilling = £0.05) plus the profit (£0.0075).
  • This equals £0.0575 per pound. (The original text calculates this as 1 shilling and 1.8 pence, which is equivalent).

Key Takeaway:

• The merchant’s yearly profit on their £100 investment remains £15 in both cases.
• However, the amount of sugar they need to sell changes dramatically (100 lbs vs. 2000 lbs).
• The markup (profit added per pound) also changes significantly (3 shillings vs. £0.0075 or 1.8 pence).

(Note: For simplicity, we are ignoring extra costs like shipping or storage. We’re focusing only on the buying and selling.)

Production Cost vs. Profit Rate

The actual cost to produce the sugar (high or low) doesn’t change the overall rate of profit (15% in our example).

However, the production cost does decide how much of the final selling price is the merchant’s profit markup.

• When production cost is high (£1), the markup per pound is large (3 shillings).
• When production cost is low (1 shilling), the markup per pound is small (1.8 pence).

Limits on Merchant Pricing

Some people think merchants can simply choose to sell lots of items with small profit margins, or few items with large profit margins. This is usually wrong, unless the merchant has a monopoly (controlling both supply and sales, like the old Dutch East India Company).

A merchant’s selling price is actually limited by two main things they don’t control:

1. The Price of Production: The cost to make the item in the first place.
2. The Average Rate of Profit: The standard profit percentage expected across the economy.

(We are talking about normal trade here, not gambling on price changes, which is speculation.)

Productive Capital vs. Commercial Capital

There’s a key difference between money used to make things (productive capital) and money used to buy and sell things (commercial capital).

• Productive Capital:

  • The faster this capital is used and reused (completes its cycle or “rotates”), the more total profit is created.
  • While the total profit gets spread out among all producers based on how much capital they have (not just how fast they produce), faster overall production still means more total profit for the economy. A faster rotation generally leads to a higher rate of profit overall, assuming other factors stay the same.

• Commercial Capital:

  • For merchants, the rate of profit is basically a given number. It depends on the total profit generated by producers and how much capital is tied up in commerce overall.
  • How fast a merchant’s capital rotates (how quickly they buy and sell their stock) is very important for determining how much capital needs to be in the commercial sector. Faster rotation means less money needs to be tied up in inventory at any one time.
  • Crucially: Assuming we know the total amount of commercial capital relative to all capital, the speed of rotation in different trades does not change the total amount of profit going to commerce or the average rate of profit.

How Rotation Affects Merchant Profit

A merchant’s profit depends on the amount of money they invest, not directly on the value of the goods they are turning over at any given moment.

Let’s use the 15% annual profit rate again with a £100 investment:

• Slow Rotation (Once per year):

  • The merchant invests £100.
  • Sells the goods for £115.
  • Yearly profit is £15 on £100 capital (15%).

• Fast Rotation (Five times per year):

  • The merchant invests £100.
  • They buy £100 worth of goods and sell them. They do this five times.
  • Each time, they sell the £100 worth of goods for £103 (£3 profit per rotation).
  • Total sales over the year: 5 x £103 = £515.
  • Total cost of goods over the year: 5 x £100 = £500.
  • Yearly profit is £515 - £500 = £15.
  • This is still £15 profit on the initial £100 capital (15%).

If faster rotation meant higher profit rates for merchants compared to producers, it would violate the principle of an average rate of profit across the economy.

Rotation Speed and Selling Prices

The number of times commercial capital rotates directly impacts the selling price of goods.

• The faster the merchant’s capital rotates (more sales cycles per year), the smaller the profit margin they need to add each time they sell their stock.

Example: Assume the yearly profit rate is 15%.

• If capital rotates once a year, the merchant adds a 15% markup to the cost price.
• If capital rotates five times a year, the merchant adds only a 3% markup each time (£15 total profit / 5 rotations = £3 profit per rotation, which is 3% of the £100 cost).

So, the same overall profit rate (15%) results in different percentage markups on the goods themselves, depending on how fast the merchant can sell and reinvest.

Contrast with Industrial Capital Again

For industrial capital (making goods), the rotation time affects the total amount of value and profit created in a given period because it affects how much labor is used. Faster production means more output and potentially more profit.

This connection is sometimes hidden when we look at individual “prices of production” because these prices are adjusted from the pure labor-time value due to how profit is averaged out. But if you look at the total output of all industrial capital, the basic rule holds: faster production creates more value.

Different Ways Rotation Affects Value and Price

• Industrial Capital: Looking closely at rotation brings us back to the basic idea that the value of goods comes from the labor time needed to make them.
• Commercial Capital: Looking at rotation here creates effects that seem different. It looks like prices are set somewhat arbitrarily based on the merchant needing to make a certain annual profit (e.g., needing 15% per year, so adding 3% markup five times).

Without understanding the whole system, it can appear as if the process of buying and selling (circulation) itself determines prices, independent of production.

Why People Misunderstand the System

• Merchants, Stock Speculators, Bankers: Their views on how capitalism works are often wrong because they primarily see the circulation of money and goods, where rotation speed seems to directly influence prices and profits.
• Manufacturers: Their views are also distorted by the way their capital moves through circulation and how profits are averaged across industries. They might misunderstand how competition really works.

Competition’s Real Role

Once you understand the limits set by the value created in production (including surplus-value or potential profit), it’s easier to see how competition does the following:

1. Turns basic labor values into “prices of production.”
2. Further adjusts these into actual market or trading prices.
3. Averages out the surplus-value into an average rate of profit for all capital.

But without knowing these limits from production, you can’t explain why the average profit rate settles at, say, 15% instead of 1500%. Competition can only level out the profit rate; it doesn’t determine the level itself.

Merchant’s View: Rotation Sets Prices

So, from the limited perspective of a merchant, the speed of rotation appears to be the main factor setting prices (through the necessary markup).

Final Contrast: Industrial vs. Commercial Rotation Effects

• If an industrial company finds a way to rotate its capital faster (e.g., produce goods twice as quickly) and keeps this advantage secret, it will make twice the profit because it’s creating twice the surplus-value.
• Differences in rotation speed in commerce, however, show up differently. Faster rotation for a merchant means the profit on a given batch of goods is lower compared to the number of times the capital turns over.

This leads to the merchant’s saying: “A large turnover and small profits.” This reflects the need for lower margins when capital rotates quickly.

Individual Merchant Differences

This rule about turnover and profit margins applies to the average rotation speed in a particular trade sector.

• An individual merchant (Merchant A) might turn over their capital faster or slower than the average (Merchant B).
• If Merchant A turns over capital faster, they make extra profit compared to the average.
• If competition is strong, Merchant A might use this advantage to sell cheaper than competitors while still making the average profit rate.
• If the reason for faster turnover can be bought (like a better store location), the merchant might pay extra rent. This means part of their extra profit goes to the landlord as ground-rent.

CHAPTER TEN

How Trading Capital Developed Over Time

Looking Back vs. Looking Now

If we study the modern capitalist system carefully, it seems like the average profit rate starts with the capital used for making things (productive capital) and competition between producers. Later, capital used for trading things (commercial capital) adjusts this rate.

However, if we look at history, the story happens in reverse. Trading came first.

Trading Capital Isn’t Production

It’s wrong to think of trading capital as just another type of productive capital, like mining, farming, or manufacturing.

Think about it: every producer also has to perform tasks similar to a trader when they sell their products and buy raw materials. This basic fact shows that trading is different.

Commercial capital is really a specialized part that broke off from productive capital. It focuses only on the tasks needed to turn goods into money, and money back into goods.

Trading is Older Than Capitalism

So far, we’ve discussed commercial capital within the modern capitalist system. But trade, and the money used for trade (commercial capital), existed long before capitalism. Historically, it’s the oldest independent form of capital.

What Trading Needs to Exist

Trading capital mainly deals with the circulation of goods. Therefore, it doesn’t need complex production systems to exist. All it requires are:

• Goods being exchanged.
• Money being used for the exchange.

This is true no matter how the goods are produced:

• In primitive communities.
• Using slave labor.
• By independent peasants or craftspeople.
• Through capitalist factories.

It also doesn’t matter if all goods are for sale, or only the extra goods a producer doesn’t need for themselves. As long as goods need to be sold, trading capital plays a role.

How Trade Affects Production

The amount of goods entering trade depends on the production system. Under fully developed capitalism, where almost everything is made as a commodity for sale, the volume of trade is highest.

However, regardless of the production system, trade pushes producers to make more than they need for personal use. They do this to trade the surplus for money or other desirable items.

So, wherever trade exists, it gradually makes production focus more on exchange value (what goods can be sold for) rather than just use value (how useful goods are to the producer).

The Merchant’s Goal: Turning Money into More Money

No matter the society, a merchant’s wealth is typically held as money. Their money always acts as capital – its purpose is to make more money (profit or surplus value).

The merchant’s main aim, whether in ancient times or under capitalism, is to use money to make more money. The steps of buying goods (Money -> Commodity, or M-C) and selling goods (Commodity -> More Money, or C-M’) are just phases in this process of turning M into M’.

This M-C-M’ cycle is the defining movement of commercial capital. It’s different from trade directly between producers (Commodity -> Money -> Commodity, or C-M-C), where the final goal is to exchange one useful item for another.

Early Trade and Wealth

In less developed economies, producers usually have little money. Wealth in the form of money tends to concentrate in the hands of merchants. Money owned by merchants becomes a specific form of trading capital.

Trade: The Early Face of Capital

In all societies before capitalism, trade seemed like the main activity of capital. This was especially true when production mostly focused on providing basic needs for the producers themselves. Back then, commercial capital was essentially the only kind of capital.

Under modern capitalism, however, capital takes control of the production process itself. Commercial capital then becomes just one specialized function of capital, existing alongside others like industrial capital.

Why Trade Came Before Industrial Capitalism

It makes sense that commercial capital existed long before capital took over production. For the capitalist system to arise, commercial capital needed to exist first and reach a certain level of development. This was necessary for two main reasons:

1. Concentration of Money: Trade helped gather large amounts of money needed for investment.
2. Wholesale Distribution: Capitalism requires selling goods in bulk, not just to individual consumers. This needs merchants who act as intermediaries for many buyers.

Furthermore, the growth of commercial capital always pushes production more towards creating goods for exchange (commodities).

But Trade Alone Isn’t Enough

However, the development of trade by itself cannot cause or fully explain the shift from one economic system (like feudalism) to another (like capitalism).

Trading Capital Within Capitalism

Under the capitalist system:

• Commercial capital loses its old independence.
• It becomes just one specific way to invest capital.
• Its profit rate is reduced to the general average profit rate.
• It mostly functions as an agent or tool for productive capital.

The social conditions created by the early rise of trade are no longer the deciding factors. In fact, places where commercial capital still dominates often have older, less developed economic structures. This can be seen even within the same country: purely trading towns often resemble past eras more closely than modern factory towns do.

Independent Trade vs. Economic Progress

The independent development and dominance of commercial capital usually means that capital has not yet taken full control of production. Therefore, the independent power of commercial capital is inversely related to the overall economic development of a society – the stronger independent trade is, the weaker overall economic development tends to be.

Example: The Carrying Trade

This is clear in the history of the carrying trade (shipping goods for others). Cities like Venice, Genoa, and Holland became powerful this way.

• Their main profits came not from selling their own products.
• Instead, they acted as middlemen, exchanging goods between less developed societies.
• They essentially exploited both producing countries.

This was commercial capital in its purest form – separate from the production processes it connected. This monopoly on shipping, however, declined as the economies of the nations they exploited grew stronger.

Exploitation by Commercial Capital

A clear example of how commercial capital operates when it dominates production is colonization. The methods of the old Dutch East India Company also show this – it was often a system of plunder.

The Source of Commercial Profit

At first glance, it seems impossible for merchants to profit if goods are sold at their true value. The common idea of trade is “buy cheap and sell dear,” not exchange things of equal value.

Initially, the exchange of goods might seem random. But as trade becomes regular, involving goods specifically produced for exchange, things change. The randomness might remain for the individual producer or consumer, but not for the merchant. The merchant acts as the intermediary, compares prices, and keeps the difference.

Early trading nations in ancient times often relied on this carrying trade. They acted as middlemen for less “civilized” producing peoples.

Trade’s Impact on Society

In the early stages of capitalist society (like Western Europe in the Middle Ages), trade dominated industry. In modern societies, the opposite is true.

Trade always affects the communities involved.

• It makes production increasingly dependent on exchange value.
• People rely more on selling goods to live, rather than directly using what they produce.
• It helps dissolve old social structures.
• It increases the circulation of money.
• It captures not just the surplus production but gradually takes over entire branches of production.

However, the power of this dissolving influence depends heavily on the nature of the original production system.

Trade as Plunder

As long as commercial capital acts as a middleman between less developed communities, profit often seems like (and indeed comes from) cheating and fraud. When commercial capital is dominant, it often creates a system of plunder. This pattern is seen throughout history, tied to extortion, piracy, slavery, and colonial oppression (e.g., Carthage, Rome, Venice, Portugal, Netherlands).

Trade Pushes Towards Exchange Value

The growth of trade and commercial capital always pushes production towards creating exchange value. It expands the range and variety of production, makes economies more global, and develops money into world money.

Trade tends to break down existing production systems that were focused mainly on use value. But how thoroughly it breaks them down depends on the strength and structure of the old system.

What Replaces the Old System?

Crucially, the result of this breakdown – the new system that emerges – depends more on the old system itself than on trade.

• Ancient World: Trade often led to slavery aimed at producing surplus value.
• Modern World: Trade led to the capitalist system of production.

These different outcomes show that factors other than just the growth of commercial capital were involved.

Cities, Industry, and Trade

When city-based industry separated from agriculture, its products naturally became commodities needing trade. So, trade relies on city growth, and cities rely on trade.

However, the extent of industrial development alongside trade depends on other factors.

• Rome: Had highly developed commerce late in the Republic, but less industrial progress.
• Greek Cities (Corinth, etc.): Had highly developed industry along with trade.
• Nomadic Peoples: Sometimes showed a strong trading spirit and developed commercial capital despite not having significant urban development.

The Great Transformations (16th-17th Centuries)

There’s no doubt that the huge changes in trade during the 16th and 17th centuries, driven by geographic discoveries, greatly sped up the development of commercial capital. These changes were critical in moving from the feudal system to the capitalist system. Key factors included:

• Sudden expansion of the world market.
• More diverse goods being traded.
• Competition among European nations for Asian and American goods/treasures.
• The colonial system.

All these helped break the limits feudalism placed on production.

However: The modern way of production first developed only where the necessary conditions had already been created during the Middle Ages (compare Holland and Portugal, for example).

So, while the trade expansion of the 16th-17th centuries was crucial for ending the old system and boosting the new capitalist one, this happened on the foundation of capitalism that was already starting to form.

Modern Capitalism: Industry Drives Trade

Once capitalism is established, the world market itself becomes its foundation. The system inherently needs to constantly increase production, which in turn drives continuous expansion of the world market.

In this situation:

• Industry constantly revolutionizes trade, not the other way around.
• Dominance in trade is now linked to dominance in modern industry (compare England and Holland – Holland declined as a trading power as England’s industrial capital grew stronger).

Resistance to Trade’s Influence

The internal strength of older, pre-capitalist national production systems can resist trade’s dissolving influence. This is seen in England’s relations with India and China.

• Basis of Old System: Small-scale farming combined with home-based industry (plus village communities based on collective land ownership in India).
• England in India: Used both political power (as rulers) and economic power (as landowners) to destroy these small economic units. English trade impacted production mainly by using cheaper goods to kill off local spinning and weaving, breaking apart the village communities. Even so, this was a slow process.
• England in China: Without direct political control, England had less success. The efficiency of combining farming and manufacturing locally provided strong resistance to imported industrial goods, whose prices were higher due to transport and other circulation costs.

Two Paths from Feudalism to Capitalism

The transition away from the feudal economic system happens in two main ways:

1. The Producer Becomes a Merchant/Capitalist: The person actually making the goods takes on the role of trader and capitalist. This is the truly revolutionary path.
2. The Merchant Takes Control of Production: The trader starts directly managing the production process.
   • Historically, this path serves as a transition (like 17th-century English clothiers buying wool for weavers and then buying the finished cloth back).
   • However, this method doesn’t revolutionize the old way of production by itself. It actually tends to preserve the old methods because the merchant relies on them.
   • Examples include French silk and English stocking/lace industries up to the mid-19th century. The “manufacturer” was often just a merchant directing home-based workers who continued working traditionally.
   • This system blocks the full development of the proper capitalist mode of production and eventually disappears as factory systems advance.

How Merchant Control Affected Workers

When merchants took control of production but kept the old ways of making things (like small workshops or home-based work), it often made conditions worse for the workers.

• They became simple wage-earners, often under worse conditions than factory workers.
• The merchant took the extra value (profit) created by their labor, using the outdated production system to do so.

Example: London Furniture Makers (Around 1865)

A similar situation existed in parts of the London furniture industry back then.

• The industry was split into specialized branches: some workshops made only chairs, others only tables, etc.
• These were often small operations, run by a master craftsman with a few helpers, using traditional handicraft methods.
• However, they produced too much to sell directly to individual customers. Their main buyers were the owners of large furniture shops.
• Every Saturday, the workshop master would go to the shop owner to sell his products. They would haggle over the price, much like someone negotiating a loan at a pawn shop.
• These small masters had to sell their goods weekly just to buy more raw materials and pay their workers for the next week.
• In reality, these masters were just middlemen between the shop owner and their own workers.
• The shop owner was the real capitalist, taking the largest share of the profit (the surplus value).

This setup is much like the historical period when industries were moving from handicraft or rural work towards early factories (the “manufacture” stage).

The Move to Modern Industry

Eventually, even these small workshops started to change as technology improved.

• If a workshop used machines that could be adapted from hand power to steam power, the transition to modern industry could happen.
• For example, around 1865, steam power began replacing hand power in the English stocking (hosiery) industry, even in smaller settings.

Three Ways the Transition Happened

So, the shift from older systems towards capitalism involving trade occurred in three main ways:

1. Merchant Becomes Producer: The merchant directly sets up industrial production. This often happened with luxury goods, where merchants imported materials and skilled workers (like silk production moving from Constantinople to Italy in the 15th century).
2. Merchant Controls Producers: The merchant uses small masters as intermediaries or buys directly from independent producers. The merchant leaves the producers nominally independent and doesn’t initially change how they make things.
3. Producer Becomes Merchant: The industrial producer starts acting like a merchant, producing goods wholesale specifically for the wider trade market.

Shifting Roles Over Time

• In the Middle Ages: Merchants mostly just moved goods around that were made by guild members or peasants.
• Later: Merchants became industrial figures by employing handicraft workers or small rural producers.
• Conversely: Producers started acting like traders. For example, a cloth weaver might stop working for a single merchant who supplied the wool. Instead, the weaver would buy their own wool or yarn and sell the finished cloth to any merchant, producing for the general market. The producer became their own trader.

Trade’s Initial Role

Originally, trade was essential for transforming older ways of making things (guilds, rural home industry, feudal farming) into capitalist businesses.

• Trade created a market for the products.
• Trade supplied new raw materials and tools.
• Trade opened up entirely new branches of production based on market demand from the start.

Industry Starts Driving the Market

However, once manufacturing and especially modern industry developed, they began to create their own markets.

• Factories conquer markets by producing large quantities of goods.
• Trade then becomes the servant of industrial production.
• Industry needs constantly expanding markets to sell its increasing output.
• Mass production pushes for continuous market growth. This growth isn’t limited by existing trade (demand) but by the amount of capital available and how efficiently labor can produce.

The Capitalist’s Global View

The modern productive capitalist always looks at the world market. They must constantly compare their production costs with market prices, not just locally but globally.

Shift in Power

• In earlier times: Merchants mostly handled this comparison of costs and prices across markets. This gave trading (commercial) capital dominance over industrial capital.
• In modern times: Industrial capital takes the lead. The producer, focused on efficient mass production for a global market, now holds the primary position, and trade serves industry’s needs.

CHAPTER ELEVEN

Interest and Business Profit

Money’s Job: Making More Money

Under capitalism, money (or anything with value, like goods) can be used as capital. The goal of using money as capital is to turn its initial value into a larger value – to make it grow.

How does it do this? By enabling the capitalist (the business owner) to get a certain amount of unpaid labor from workers. The capitalist takes this unpaid labor, which is the source of profit. So, capital gains a new use value: the ability to make profit.

Because capital has this unique ability to generate profit, it becomes a special kind of commodity itself – one that can be lent and borrowed.

What is Interest?

Imagine someone has £5. Let’s say the average annual profit rate is 20%. If they use this £5 as capital in a business, they could potentially turn it into £6 by the end of the year (£5 principal + £1 profit).

Now, suppose this person lends the £5 to someone else for a year. The borrower uses it as capital and actually makes that £1 profit. By lending the money, the owner gave the borrower the means to produce that profit.

If the borrower pays the lender, say, 5 shillings (£0.25) at the end of the year, this payment is for using the £5. It’s a payment for the money’s ability to function as capital and make profit.

This payment – this share of the profit given to the owner of the capital – is called interest. Interest is simply a specific name for a part of the profit generated by capital.

The owner of the £5 has the power to claim a part of the profit (the interest) simply because they own the capital. If they hadn’t lent it, the borrower couldn’t have made the profit with that specific £5.

What Does a Lender Sell?

When someone lends money (acting as a money capitalist), what are they actually selling to the borrower (the industrial capitalist or business owner)?

In a normal sale, the seller gives the buyer the use value of the commodity – the useful quality of the item. The underlying value just changes form (from goods to money for the seller).

So, what is the use value that the money lender sells? It’s the capital’s unique ability to produce profit (surplus value) while keeping the original value intact.

For most commodities, using them consumes their substance and value. But capital is special: using its ability to make profit not only preserves its value but actually increases it.

What Does the Borrower Pay?

The industrial capitalist pays for borrowing this profit-making ability. The price they pay is interest, which is simply a portion of the profit they expect to make with the borrowed capital.

How is the Interest Rate Decided?

The “price” of borrowing capital – the rate of interest – is determined by supply and demand. It depends on competition between lenders and borrowers, just like the market prices of regular goods.

But Interest Rates are Different

There’s a key difference, though:

• Regular Goods: When supply meets demand, the market price usually equals the price of production (the cost to make the item plus the average profit). This price seems regulated by the basic laws of production, not just competition. Competition mainly explains why market prices go above or below this production price temporarily. Over time, average market prices equal production prices.
• Interest: With interest, competition doesn’t just cause deviations from a basic rule. Competition is the rule. There’s no underlying “natural” rate of interest that supply and demand fluctuate around.

No “Natural” Rate of Interest

Why isn’t there a natural limit or level for the interest rate?

• Interest is just a part of the total profit.
• How the two claimants (lender and borrower) split this profit is, in itself, arbitrary. It’s like how business partners decide to split their company’s profits – there’s no single “natural” way to do it.
• Because there’s no fundamental law dictating the split, the balance between lenders and borrowers could result in an interest rate of 3%, 4%, 5%, or something else. Supply and demand decide the level.

Limits on the Interest Rate

Since interest is paid out of profit:

• Maximum Limit: The highest possible interest rate is the total profit itself. If interest equals total profit, the active business owner (borrower) gets zero profit from the enterprise. (We can refine this slightly: the maximum is the total profit minus whatever amount covers the owner’s management effort, the “wages of superintendence”). In rare cases, interest might temporarily exceed profit, but it can’t be sustainably paid then.
• Minimum Limit: There’s no fixed minimum. Interest rates can fall very low. However, forces usually emerge to push rates back up if they fall too far.

Why Interest Rates Seem More Stable and Definite Than Profit Rates

Even though the interest rate is determined by competition, it often appears more uniform and concrete than the general rate of profit.

• Average Interest Rate: In any country, the average interest rate seems like a stable number over long periods. This is because it reflects the general rate of profit, which also changes only slowly over long periods (even as profits in specific industries fluctuate constantly, they tend to cancel each other out in the average).
• Market Interest Rate: The day-to-day market interest rate does fluctuate. But at any given moment, it’s seen as a fixed number that applies generally across the money market. Stock exchange reports list interest rates as precisely as weather reports list temperatures. This isn’t the rate for one specific loan, but for the total pool of loanable capital.
• General Profit Rate: The general rate of profit, however, isn’t a directly observable fact. It’s a tendency – an average result of capital constantly moving between industries with high and low profits. Discovering this average requires analysis; it’s not quoted daily.

Why the Difference in Appearance?

1. Uniformity: The market interest rate, while changing, applies uniformly to similar types of loans at any moment.
2. Visibility: It’s publicly quoted and known.
3. The Money Market: Lenders and borrowers face each other directly in the money market. Capital appears here in its simplest form: money. The specific industries where the money will be used don’t matter at this stage. It looks like a straightforward competition for a single commodity (loanable money).
4. Concentration: Modern banking concentrates loanable capital. Supply (from bankers representing many lenders) and demand (from businesses) confront each other as large, organized forces.

These factors make the interest rate seem like a clear, definite number, while the general profit rate seems like a vaguer background average.

The Big Split: Interest vs. Business Profit

How does this simple quantitative division of profit (total profit split into interest and the rest) turn into what seems like a qualitative difference? Why do even capitalists using their own money start thinking of their profit in two parts: interest and business profit?

(Note: Not all quantitative splits become qualitative. When business partners divide profits according to shares, it remains just a quantitative split.)

How the Split Seems “Natural”

Consider a business owner working with borrowed capital:

1. They make a gross profit.
2. Out of this, they must pay interest to the lender. The interest amount is typically fixed beforehand by the general interest rate.
3. The amount leftover is their own share – the undertaker’s profit (or profit of enterprise/net profit).

Because the interest amount is fixed and predetermined, the remaining profit seems directly linked to how successfully the business owner manages the enterprise.

Interest = Reward for Owning Capital

This makes interest appear as the natural “fruit” of owning capital itself, whether the capital is actively “working” in a business or not. The lender receives interest simply for owning and providing the capital.

Business Profit = Reward for Managing Capital

In contrast, the undertaker’s profit appears to come from the owner’s activity – their work in managing production and sales. It looks like the reward for using capital, for being an active manager, as opposed to the passive ownership of the lender.

The Idea of “Management Wages”

This leads the active capitalist to see the two parts of profit as coming from different sources:

• Interest: From capital ownership.
• Undertaker’s Profit: From their own management activities.

They begin to view their undertaker’s profit not as something derived from the exploitation of labor, but as “wages” earned for their own work – the wages of superintendence.

Historical Context Reinforces the Split

Interest and lending existed long before modern industrial capitalism. This long history makes interest seem inherent to money or capital itself, independent of the capitalist production process. The fact that money earns interest even when not used productively reinforces this idea.

The Illusion of Capital Splitting Itself

This thinking leads to the idea that every sum of capital automatically splits its profit generation:

• One part is interest, due to capital simply existing as property.
• The other part is undertaker’s profit, due to capital functioning under active management.

Even a capitalist using their own funds mentally performs this split. They see the interest portion as the return on their ownership, and the undertaker’s profit as the return on their management efforts. Capital itself seems divided into:

• Ownership capital (Property): Generates interest while outside the production process.
• Functioning capital (Activity): Generates undertaker’s profit within the production process.

The Flaw in Universal Lending

From the individual capitalist’s perspective, this makes sense. They can choose to lend their capital for interest instead of running a business.

However, applying this to the whole economy is wrong. It’s absurd to think all capital could just be lent out for interest. Someone must borrow it and use it to employ labor and produce goods or services. If too many people tried only to lend, the interest rate would plummet, forcing many back into active business.

But the individual perspective prevails. The active capitalist sees interest as the baseline return of capital itself, and their additional profit (undertaker’s profit) as the result of their own “labor” as managers. This reinforces the view that interest comes purely from ownership, while undertaker’s profit comes from production activity.

Is Business Profit Just Management Pay?

The idea that the business owner’s profit (undertaker’s profit) is really just payment for their management work seems supported by a couple of things:

1. It seems like the profit results from the owner’s work, not just their ownership, setting it apart from passive interest income.
2. Part of the total profit can be paid out as a salary to a hired manager. This makes it easy to think that if the owner manages the business themselves, their profit is also just their salary for doing that job.

Two Sides of Management Work

However, the work of managing and supervising people has two different aspects, especially when many people work together:

1. Coordination Work (Productive): Whenever people cooperate on a task, someone needs to coordinate their efforts and guide the overall activity, like an orchestra conductor leads musicians. This kind of coordination is necessary and productive work in any shared labor.
2. Control Work (Due to Conflict): In economic systems built on conflict between the workers and the owners of the means of production (like tools, land, factories), management takes on another role: controlling the workers. The stronger this conflict (or antagonism), the more supervision and control are needed. Think of governments in repressive states: they perform necessary common tasks but also spend effort controlling the population due to the conflict between rulers and ruled.

Historical Views on Management

Ancient writers who observed slavery described these two sides of management clearly.

• Aristotle noted that any form of rule, political or economic, requires the rulers to do the work of governing. In economics, owners needed to know how to manage labor effectively.
• Aristotle also remarked that management wasn’t considered a high-status job, so wealthy masters gladly handed off these duties to overseers or managers.

Using Management to Justify Exploitation

Often, the fact that owners perform management duties has been used to justify their exploitation of others’ labor (taking the value of their unpaid work). And just as often, taking this unpaid labor has been presented as the fair payment or “wage” for the owner’s management work.

A stark example comes from a defender of slavery in the U.S., lawyer O’Connor, in 1859. He argued:

• Nature made Black people strong enough for labor but denied them the will or ability to manage themselves.
• Nature therefore gave them a master to force them to work and govern them.
• Forcing the slave to work was justified as fair compensation for the master’s “labor and talent” in managing the slave, making the slave “useful to himself and to society.”

Applying the Logic to Wage Workers

The same basic argument gets applied to workers paid wages: If you assume the relationship between ruler (owner/manager) and ruled (worker) is permanent and necessary for production, then it seems natural that the worker must produce enough value not only to cover their own wage but also to cover the “wages of superintendence” – the owner’s “compensation” for managing them.

But Management Can Be Separated from Ownership

However, the management work that comes specifically from the control aspect (the owner dominating the worker) is not automatically tied to the productive coordination needed in any group work.

The capitalist system itself shows that management can be separated from ownership of capital:

• Historically, hired managers existed (like the Greek epitropos or the French régisseur) who earned wages, not profits.
• An orchestra conductor doesn’t need to own the instruments. Managing the orchestra is separate from dealing with the musicians’ pay.
• Cooperative factories, owned and run by workers, prove that a capitalist owner is not essential as a manager for production to happen.
• Often after economic crises, former factory owners end up working for low wages as managers in the very factories they used to own, now managing for the new owners (sometimes their creditors).

What Cooperative Factories Show

Looking at the financial records of worker cooperative factories in England reveals something important:

• After paying the manager’s salary (which is treated just like workers’ wages, part of the costs), the remaining profit was often higher than the average profit in privately owned factories.
• This happened even though co-ops sometimes paid higher interest on loans than private firms.
• The higher profit often came from being more careful and economical with materials and resources.
• Crucially: This clearly shows that the total profit (which includes both interest and undertaker’s profit) is completely separate from any salary paid for management. Because the total profit was higher than average here, the undertaker’s profit part was also higher than usual.

Other Examples: Joint Stock Banks

Some capitalist businesses, like joint-stock banks (owned by shareholders), also illustrate this. They deduct both the manager’s salary and the interest they owe to depositors from their gross profit. Yet, they often still have a very large undertaker’s profit left over.

Why the Confusion Arose

So why did people start confusing undertaker’s profit with management wages?

1. It initially came from the obvious difference between passive interest income (from just owning capital) and the profit kept by the active business owner.
2. The confusion grew because profit itself was often described not as surplus value (unpaid labor) but as the capitalist’s own “wages” for the work they supposedly performed.
3. Ironically, Socialists then challenged capitalism to live up to this claim: if profit is just management wages, then it should be paid like wages. This was uncomfortable for capitalists because management wages, like all wages, tend to fall due to competition and easier access to education.

The Excuse Vanishes

With the rise of worker cooperatives (eliminating the capitalist owner-manager) and joint-stock companies (separating ownership from professional management), the last justification for confusing the owner’s profit with management wages disappeared.

A New Problem: Boards of Directors

In joint-stock companies, however, a new form of potential misuse related to management pay emerged.

• Alongside (and above) the actual, working manager, companies appoint boards of directors.
• For many directors, “management” and “supervision” become just excuses to collect fees and enrich themselves at the expense of the company’s shareholders.
• An example was Timothy Abraham Curtis, whose bankruptcy records showed he earned £800-£900 annually just from “directorship” fees because companies wanted the prestige of having a Director of the Bank of England on their board.
• Directors often received fees (e.g., a guinea per meeting) where the payment was inversely proportional to the actual supervision they provided.

CHAPTER TWELVE

Credit and Banks

The Costs of Handling Money

Capitalists are constantly paying out money and receiving money. These basic tasks – making payments, receiving payments, keeping track in account books – are necessary work, but they don’t create any new value. They are part of the costs of circulation.

Besides these tasks, businesses always need to keep some capital available as cash – a reserve fund or treasure for making purchases and payments. This money is waiting to be used. Storing this treasure safely also requires effort and cost.

Banks Specialize in Handling Money

These technical tasks involved in managing money are made easier and cheaper because specialized agents – banks and money dealers – handle them for the entire business community. Through a division of labor, money handling becomes the specific job of these specialists. They concentrate these tasks and perform them on a large scale, much like merchants specialize in buying and selling goods.

Within banking itself, there is further division of labor. Different branches handle specific tasks like currency exchange, deposits, loans, etc. And within each branch, tasks like payments, accounting, and managing deposits are further specialized.

Where Did the Money Trade Start?

As we’ve seen, money first developed through trade between different communities. So, the trade in money itself (dealing with different types of coins or precious metals) initially grew out of international trade.

When countries have different currencies, merchants trading internationally need to exchange their home currency for the foreign currency, or vice versa. They might also exchange various coins for gold or silver bullion, which acts as world money. This currency exchange business is a key foundation of modern banking. Exchange activities led to the development of discount banks, where gold and silver act as universal bank money, distinct from everyday coins.

How Credit Develops

The exchange business is one reason credit systems developed. (We won’t go into all the details of credit instruments like credit money here, just the key points relevant to capitalism). We’re focusing on business (commercial) and bank credit, not government (public) credit.

Credit arises naturally from the way goods are produced and sold:

• Production Time: Some goods take longer to make than others.
• Seasonal Production: Some goods depend on specific seasons.
• Time to Market: Some goods are sold locally, others travel far.
• Timing Mismatches: Seller No. 1 might be ready to sell before Buyer No. 2 is ready to buy.
• Regular Transactions: When the same people trade repeatedly, payment terms often adjust to production conditions, leading to payment after delivery.
• Paying for Use Over Time: For things like renting a house, the buyer uses the item over a period but might pay later. The seller becomes a creditor, the buyer a debtor.

Credit Under Capitalism

As trade and capitalist production (which produces mainly for sale/circulation) develop, credit becomes more widespread and essential.

• Money often acts as a means of payment rather than immediate cash. Goods are sold against a written promise to pay later (a bill of exchange).
• These bills of exchange themselves can circulate as a form of payment (commercial money or trade money) until their payment date arrives.

The Network of Credit

Most credit transactions happen within the business world itself:

• Raw material producers supply manufacturers on credit.
• Manufacturers supply partly finished goods to other manufacturers on credit.
• Wholesalers supply retailers on credit, having received credit from manufacturers.
• Credit extends from person to person, creating a web of advances.
• Everyone borrows with one hand and lends with the other – sometimes money, but often goods or delayed payments.

This constant exchange of advances, linking businesses together, is the credit system. Its development lies in the growth and complexity of these mutual advances.

How Banks Fit In

Banks also develop out of the money trade, concentrating several key functions:

• Storing Reserves: Holding the reserve funds of businesses.
• Handling Payments: Making and receiving payments, settling accounts between businesses (clearing).
• International Payments: Facilitating trade across borders.
• Bullion Trade: Dealing in gold and silver.

Early deposit banks (like those in Venice) started as associations where merchants deposited money safely. They could then pay creditors using written orders (like early checks), with the bank simply adjusting the balances in their books. This made payments easier and safer.

Banks as Middlemen for Loans

Managing money that earns interest (money capital) becomes a specialized function of banks.

• Banks act as intermediaries between those who have money to lend and those who need to borrow it for business.
• Banking concentrates scattered loanable funds into large pools. Instead of many individual lenders, banks represent the collective lending power.
• Banks also concentrate borrowers, borrowing from the public (depositors) to lend to the business world.
• Banks generally profit by charging borrowers a higher interest rate than they pay to depositors.

Where Banks Get Their Money

Banks gather loanable capital from several sources:

1. Business Reserves: Acting as cashiers for businesses, banks hold their temporary reserve funds. This concentrates the reserves, reducing the total amount needed, and allows idle funds to be lent out.
2. Deposits from Lenders: Wealthy individuals (money capitalists) deposit their funds with banks, letting the banks handle the lending.
3. Savings and Idle Money: When banks pay interest on deposits, they attract savings from all classes of society and any money temporarily not in use. Small sums are pooled into significant financial power.
4. Temporary Income Deposits: Money received as income but not immediately spent is often deposited in banks.

What Banks Do With the Money

Banks lend this concentrated capital in various ways:

• Discounting Bills of Exchange: Buying IOUs (bills of exchange) from businesses before they are due. The bank pays cash immediately, minus an amount representing the interest for the remaining time. This is a core banking activity.
• Advances and Loans: Making direct loans based on personal creditworthiness, or loans secured by collateral like stocks, bonds, certificates showing ownership of goods, etc.

Banks Deal with Existing Value

It’s important to remember:

• The money banks handle is mostly the circulating capital of merchants and producers.
• Bank operations are largely the financial operations of these businesses, with banks acting as intermediaries.
• Bank profit is a deduction from the total surplus value (profit) generated in the economy, because banks primarily deal with value that has already been created (even if it exists only as a debt claim).

(Some money-handling tasks still need to be done by businesses themselves).

Summary: Key Effects of Credit

Based on our study, credit has the following major impacts:

I. Helps Equalize Profit Rates: By making it easier to move capital between industries, credit helps ensure that profit rates across different sectors tend towards an average level.

II. Reduces the Costs of Circulation:

1. Saves the Need for Money:
   • A) Reduces the number of transactions requiring cash.
   • B) Speeds up money circulation through banking techniques and by accelerating business turnover via credit.
   • C) Allows cheaper paper money to substitute for gold.
2. Speeds up Production Cycles: Shortens the time between different phases of production and circulation. (However, by allowing buying and selling to be separated over longer periods, credit also provides a basis for financial speculation).
3. Reduces Reserve Funds: Less capital needs to be held idle as cash reserves, both for individual businesses and the economy as a whole.

III. Enables Joint Stock Companies (Corporations):

1. Larger Scale Production: Allows for huge projects and businesses far larger than any single individual could fund.
2. “Social Capital”: Capital takes on a social form, owned collectively by many shareholders, as opposed to private ownership. This is seen as the suppression of private capital within the limits of capitalism itself.
3. Separation of Ownership and Management:
   • The active capitalist becomes a hired director or manager, administering other people’s capital.
   • The owners of capital become passive money capitalists, receiving profits mainly as dividends.
   • Even if dividends include both interest and business profit, the return to the owner looks like interest – payment for ownership, not active management (manager salaries are treated as wages).
   • Ownership is now completely separated from the function of managing capital in the actual production process.
4. A Stepping Stone: This separation, resulting from advanced capitalism, is considered a crucial step towards:
   • Transforming capital back into the property of the producers, but as collective social property, not individual private property.
   • Transforming management functions, previously tied to private ownership, into social functions.
5. Viability Based on Interest: Since profit for owners now takes the form of interest/dividends, these companies can potentially survive as long as they generate enough income to pay this return, even without large “undertaker’s profits.”

(Engels’ Note on Later Developments): Since Marx wrote this, new industrial forms emerged, taking joint-stock companies further. Free competition began to end as industry leaders formed trusts and cartels to regulate production, sometimes even internationally. When these broke down due to conflicting interests, entire industries in some sectors were consolidated into single giant corporations under one management. Here, monopoly replaced competition, making future takeover by society (the nation) even easier.

An Internal Contradiction: This development (especially joint-stock companies) represents the partial abolition of the capitalist way of producing within the capitalist system itself. It appears as a transition towards a new form of production.

IV. Empowers Individual Capitalists via Leverage: Beyond corporations, credit gives individual capitalists (or those acting like them) control over large amounts of other people’s capital and labor, far beyond their own wealth. A person’s real or perceived capital becomes a basis for obtaining credit. This is especially true in wholesale trade, where speculators often risk social property, not just their own. This makes the old idea that capital comes just from personal saving completely outdated – these capitalists rely on others saving for them.

Cooperative Factories: A Positive Alternative

Worker-owned cooperative factories represent the first positive break from the old system, from within it.

• They naturally show flaws inherited from the current system.
• But in them, the conflict between capital and labor is overcome (at least initially), as the workers become their own collective capitalists.
• Co-ops demonstrate how a new way of production can naturally emerge from the old one when productive forces develop sufficiently.

Comparing Transitions

Both capitalist joint-stock companies and worker cooperatives are seen as transitional steps away from the purely private capitalist system towards a more social one.

• In joint-stock companies, the owner-worker conflict is suppressed “negatively” by separating ownership from function.
• In cooperatives, the conflict is suppressed “positively” by uniting ownership and function in the hands of the workers.

What is Bank Capital Made Of?

Bank capital typically consists of:

1. Cash: Gold or banknotes.
2. Securities: Documents representing value. These include:
   • Commercial Paper: Bills of exchange, short-term debts from trade that mature soon. Discounting these is core banking business.
   • Public/Investment Securities: Government bonds (Treasury notes), stocks, bonds, mortgages – interest-bearing assets different from short-term trade bills.

This capital comes from the banker’s own investment and customer deposits. Banks that issue their own banknotes have those notes as another component.

Making Everything Look Like Capital (Capitalization)

Because capital earns interest, people start to view any regular income as if it were interest generated by a principal sum of capital. This happens whether the income actually comes from capital investment or not.

Any sum of value that isn’t spent as income starts to look like capital – a principal amount defined by the interest it could earn.

Example:

• Assume the average interest rate is 5% per year.
• A sum of £500 (£25) would earn £25 (500 shillings) in interest annually if invested.
• Therefore, any fixed annual income of £25 gets treated as if it were the interest payment from a £500 capital sum. This assigns a “capital value” to the income stream.

It seems like having 25 shillings of income means you have real capital, but this is often just an illusion.

The only exception is if the thing generating the income can actually be transferred or sold. This could be a right to ownership, a debt claim someone owes you, or a real means of production, like a piece of land.

Let’s look at two examples: government debt and workers’ wages.

Government Debt: An Example of Fictitious Capital

1. The Loan: The government borrows money from people or institutions.
2. The Spending: The government spends this money, perhaps on roads, war, or services. The actual money is now gone; it has been consumed.
3. The Creditor’s Position: What does the person who lent the money (the creditor) actually have?
   • An IOU from the government (like a bond), saying the government owes them, say, £5.
   • A claim on the government’s yearly income (taxes) for interest payments, maybe 5 shillings a year (5% interest).
   • The ability to sell this IOU (bond) to someone else.
4. The Illusion: In this situation, the “capital” that supposedly earns the interest doesn’t really exist anymore. The original money lent to the government is gone. It was never meant to be invested productively like capital in a business. The bond is just a claim on future tax revenue. This is purely fictitious capital – it looks like capital, but it’s just a debt claim.

Labor Power Treated as Capital

Now let’s consider labor power – a person’s ability to work.

Sometimes, wages are thought of as the “interest” earned on the “capital” of a person’s labor power.

• The Calculation: For example, if a worker earns £50 in wages per year, and the current interest rate is 5%, some might calculate the “capital value” of their labor power as £1,000. (Because £1,000 invested at 5% would yield £50 per year).
• The Absurdity: This way of thinking is completely wrong and reaches peak absurdity for two main reasons:
  1. Work is Required: A worker must actively work to get their wages (“interest”). Interest on actual capital usually comes without the owner having to work for it directly.
  2. Cannot Be Sold: A worker cannot sell the “capital value” of their ability to work as a lump sum. You can’t sell your future capacity to work to someone else like you can sell a bond or a piece of land.

The Concept of Capitalization

This method of calculating a capital value based on income is called capitalization.

• How it Works: You take any regular income stream. Then, based on the average interest rate, you figure out how much capital you would need to invest at that rate to get the same income.
• The Effect: This way of thinking completely disconnects the income from the real process of how value is actually created. It makes it seem like capital just magically grows by itself, losing sight of production and labor.

Shares: Real Capital vs. Illusory Value

Sometimes, the paper claim (like a stock certificate or bond) does relate to real capital, unlike government debt.

• Real Capital: Shares in companies like railways, mines, or shipping lines represent real capital. This is the money actually invested in buildings, machinery, materials, and operations.
• No Double Existence: But this capital doesn’t exist twice – once as the real assets of the company and again as the total value of the shares. It only exists in its real form within the company.
• Shares as Claims: A share certificate is simply a document proving ownership. It gives the owner a right to a portion of the profits (surplus value) generated by the company’s real capital.

How Share Prices Move

These share certificates can be bought and sold, making them commodities. Their prices change in specific ways:

1. Based on Profit: If a company’s profits increase, the price of its shares tends to rise.
   • Example: If a share originally represented £5 of investment and the company’s profit rate goes from 5% to 10%, the share’s value might rise towards £10 (assuming a 5% general interest rate and other factors stay the same).
   • The opposite happens if profits decrease; the share price tends to fall.
2. Based on Interest Rates: Even if the company’s performance stays the same, the share price can change based on the overall interest rate in the economy.
   • The relationship is inverse: If the general interest rate rises, the share price falls. Why? Because investors can now get a better return elsewhere, making the share’s existing dividend less attractive.
   • Example: If a share guarantees a 5 shilling annual dividend, and the interest rate rises from 5% to 10%, that share now only represents the equivalent of 50 shillings of capital (since 50 shillings at 10% yields 5 shillings).
   • If the interest rate falls, the share price rises.
   • Example: If the interest rate falls to 2.5%, that same share paying 5 shillings now represents £10 of capital (since £10 at 2.5% yields 5 shillings).
3. Market Crises: In bad economic times (when the money market is tight), share prices often fall for two reasons at once:
   • Interest rates tend to rise.
   • Many people try to sell their shares at the same time, flooding the market.

All Securities are Claims on the Future

Ultimately, all these financial documents – shares, bonds, etc. – represent claims or ownership rights to future production and the value it generates.

Bank Capital: Mostly Fictitious

Much of the capital held by banks is also fictitious in this sense. It consists mainly of:

• Debt Claims: Money owed to the bank by borrowers (like loans and bills of exchange).
• Government Securities: Bonds representing past government borrowing (claims on future taxes).
• Shares: Ownership claims on companies (claims on future profits).

The Credit System Creates Illusions

As the credit system develops, it makes it seem like the total amount of capital has doubled or even tripled.

• Why the Illusion? The same underlying real capital (like a factory) can have multiple claims layered on top of it. The owner has a claim, the bank that lent money has a claim, and shareholders have claims. These different claims (IOUs, shares) exist in different hands and take different forms, circulating as if they were separate pools of capital.
• Result: A large part of the “available capital” in the economy is just an illusion, a phantasm. This even applies to bank “reserve funds,” which might seem solid but often consist of claims rather than readily available cash.

Banks, Credit, and the Social Nature of Capital

The banking system is the most complex and highly developed organizational product of capitalism.

• Influence: Institutions like the Bank of England have huge power over trade and industry, even though they don’t directly manage production themselves.
• Social Form: Banking creates the appearance of a society-wide system for bookkeeping and distributing the means of production. But it’s only the form, not the substance.
• Profit Distribution: We know that an individual capitalist’s profit doesn’t just come from their own workers. It comes from the total pool of surplus value created by all capital in society. Each capitalist gets a share proportional to their capital.
• Realizing Social Capital: The credit and banking system helps make this social character of capital real. It gathers all the temporarily idle capital in society and makes it available to businesses that can use it. The lender isn’t necessarily the owner or creator of the capital, and neither is the borrower who uses it.
• Suppressing Private Capital: In this way, the credit system seems to overcome the purely private nature of capital. It suggests – but only suggests – the possibility of moving beyond capital itself. Banks take the job of distributing capital away from individual private capitalists and turn it into a social function.

The Downside: Crises and Fraud

• Pushing Limits: Precisely because banks make capital allocation a social function, they also become the main tools for pushing capitalist production beyond its sustainable limits.
• Fueling Problems: They become powerful engines for causing economic crises and enabling large-scale fraud.

Credit’s Role in Potential Transition

Looking ahead, there’s no doubt that the credit system could be a powerful tool during a transition away from capitalist production towards a system based on social labor (like socialism).

• But Only One Part: However, credit can only be effective as part of a package deal, combined with other fundamental changes to how production itself is organized.
• Avoiding Misconceptions: The mistaken belief that credit and banks alone can magically socialize the economy comes from a complete misunderstanding of how capitalist production and its credit system actually function.

CHAPTER THIRTEEN

CRISES

(Note from the Editor)

Understanding Marx’s theory about economic crises is crucial for grasping his overall ideas. That’s why we must include it here.

However, simplifying this part is very difficult. Marx dedicated hundreds of pages in his work Capital to explaining crises. He showed in detail:

1. How capital (money, machines, materials) and labor need to be balanced across different industries for production and consumption to match smoothly.
2. How capitalism, driven by the constant need to grow (accumulate capital), inevitably disrupts this balance, leading to crises.

Marx argued that crises aren’t just accidents caused by bad decisions. Instead, they are unavoidable results of how capitalism normally works.

Trying to reproduce all of Marx’s calculations here would result in long, dry lists of numbers. Only someone with extreme dedication could follow all the details. Most people wouldn’t read it, which defeats the purpose of making Marx’s ideas accessible.

So, we’ll take a different approach:

• We will show a small part of Marx’s calculations to give you an idea of his method.
• We will then add our own explanation to make the essential points of this chapter clear and understandable.

(End of Editor’s Note)

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Understanding How Society Reproduces Its Wealth

Each year, society produces a vast amount of goods (the annual commodity product). Some of these goods replace the tools, machines, and materials used up in production (capital). Other goods are consumed by workers and capitalists.

We need to answer two key questions:

1. How does the value of the capital used up get replaced by the new products made each year?
2. How is this process connected to capitalists consuming surplus value and workers consuming their wages?

Starting Simple: The Assumption of Simple Reproduction

To understand this complex process, we’ll start with some simplifying assumptions:

1. Simple Reproduction: We’ll first imagine that the economy reproduces itself exactly as before, without growing or expanding. Production levels stay the same year after year. (This is called simple reproduction).
2. Value Exchange: We’ll assume goods are bought and sold at their actual values.
3. Stable Values: We’ll assume the value of machines, materials, and labor power doesn’t change.

Why make these assumptions?

• Deviations from Value: In reality, prices often differ from values. But overall, the total value exchanged in society remains the same. Price deviations mainly affect how the total value is shared among individual capitalists. Analyzing exchange based on value helps understand the underlying movement.
• Changes in Value: If the value of capital changes (e.g., machines become cheaper), this affects the amount of value being replaced, but not the basic rules of how replacement happens. By assuming stable values first, we can figure out the rules.

Focusing on Value and Physical Goods

The process we’re studying involves replacing both the value and the physical form (the actual goods) of the capital used up. It also involves people consuming goods. This means the process depends on:

• The values of different parts of the total product relative to each other.
• The physical characteristics of those parts (what they can be used for).

Why Study Simple Reproduction?

Of course, simple reproduction (no growth) doesn’t really happen in capitalism. Capitalism constantly pushes for growth (accumulation). Also, production conditions change from year to year.

However, even when the economy is growing (accumulating), the process of simple reproduction is still happening as a fundamental part. To understand growth, we first need to understand the baseline process of simply replacing what was used.

Dividing Society’s Production

We can divide society’s total production into two main categories:

• Department I: Means of Production. These are goods used to produce other goods. Examples include machines, tools, factories, raw materials, energy. They are used for “productive consumption.”
• Department II: Means of Consumption. These are goods used directly by people to live. Examples include food, clothing, housing, entertainment. They are used for “individual consumption.”

Capital Within Each Department

In both Department I and Department II, the capital involved can be broken down:

1. Variable Capital (v):
   • Value view: The total amount of wages paid to workers in that department.
   • Material view: The actual living labor power of the workers.
2. Constant Capital (c):
   • Value view: The value of all the means of production used up in that department.
   • Material view: This includes:
     • Fixed Capital: Long-lasting items like machines, tools, buildings.
     • Circulating Constant Capital: Materials used up quickly, like raw materials, energy, partly finished goods.

The Value of the Annual Product

The total value of the goods produced each year in each department can also be broken down:

• c (Constant Capital Value): The value transferred from the means of production used up during the year.
• v (Variable Capital Value): The value added by labor, which replaces the wages paid.
• s (Surplus Value): The remaining value added by labor, claimed by the capitalists.

So, just like any single commodity, the value of the annual product of each department is c + v + s.

Important Note on Constant Capital Value (c)

The ‘c’ in the annual product’s value represents the constant capital consumed during the year, not the total constant capital employed.

• Raw materials are usually consumed entirely, so their full value is transferred to the product.
• Fixed capital (machines, buildings) is only partially consumed each year (wear and tear). Only the value corresponding to this wear and tear is transferred to the year’s product.
• The rest of the fixed capital still exists and works. We don’t include the value of this still-existing fixed capital when calculating the value of the annual product.
• For now, we’ll also ignore the value transferred by wear and tear, unless the fixed capital is fully replaced within the year. We’ll deal with wear and tear later.

A Formula for Simple Reproduction

Let’s use a numerical example to study simple reproduction. We’ll assume:

• The rate of surplus value is 100% (meaning s = v).
• Figures represent millions of pounds or dollars.

Department I: Produces Means of Production (mp)

• Capital Used: 4000c + 1000v = 5000 total capital
• Annual Product: 4000c + 1000v + 1000s = 6000 (This product consists entirely of means of production)

Department II: Produces Means of Consumption (mc)

• Capital Used: 2000c + 500v = 2500 total capital
• Annual Product: 2000c + 500v + 500s = 3000 (This product consists entirely of means of consumption)

Total Annual Product

• Dept I Product: 4000c + 1000v + 1000s = 6000 (mp)
• Dept II Product: 2000c + 500v + 500s = 3000 (mc)
• Total Value = 9000 (Remember, this excludes the value of fixed capital that wasn’t used up).

Necessary Exchanges for Simple Reproduction (Ignoring Money First)

For the economy to reproduce itself simply (stay the same size), with all surplus value being consumed, certain exchanges must happen between the two departments:

1. Consumption within Department II: The workers in Dept II (paid 500v) and the capitalists in Dept II (receiving 500s) need to spend their income on means of consumption (mc). They buy goods produced by their own department. This uses up 1000 worth of Dept II’s product (500v + 500s). This part of the exchange happens within Dept II.
2. Consumption by Department I: The workers in Dept I (paid 1000v) and the capitalists in Dept I (receiving 1000s) also need to spend their income on means of consumption (mc). They must buy these from Dept II. This requires an exchange: Dept I gives 2000 worth of its means of production (mp) to Dept II. In return, Dept II gives 2000 worth of its means of consumption (mc) to Dept I. This uses up the remaining value (2000c) of Dept II’s product.
3. Replacement within Department I: Dept I produced 6000 worth of mp. After trading 2000 worth to Dept II, it has 4000 worth left (equal to its own 4000c). These remaining means of production are exchanged among the capitalists within Dept I to replace the constant capital they used up in producing mp.

The Key Exchange Between Departments

The crucial exchange happens between the two departments:

• Dept I has 2000 worth of product representing its wages (1000v) and surplus value (1000s). This product is in the form of means of production (mp).
• Dept II has 2000 worth of product representing its constant capital (2000c). This product is in the form of means of consumption (mc).

They must trade: I (1000v + 1000s) <==> II (2000c)

• Result for Dept II: It trades its consumption goods (mc) for the means of production (mp) it needs to start the next year’s production cycle. Its constant capital is physically replaced.
• Result for Dept I: Its workers receive the consumption goods (mc) they need for their wages (1000v). Its capitalists receive the consumption goods (mc) they want for their own spending (1000s).

The Role of Money

These exchanges don’t happen by simple barter; they require money. Money circulation makes understanding the process a bit harder, but it’s essential, especially because wages (variable capital) must always be paid in money.

Let’s trace the money flow, focusing first on Dept I’s wages:

1. Wages Paid: Capitalists in Dept I pay their workers £1000 in wages (1000v). This money initially comes from the capitalists.
2. Workers Buy mc: The workers take their £1000 and buy means of consumption (mc) from the capitalists in Dept II.
3. Dept II Buys mp: The capitalists in Dept II now have the £1000. They use it to buy means of production (mp) from the capitalists in Dept I.
4. Money Returns: The £1000 returns to the capitalists in Dept I. Now they have the money again to pay wages for the next cycle. Their variable capital has returned to its money form.

Now, what about the exchange involving the surplus value (1000s) of Dept I and the remaining constant capital (1000c) of Dept II?

• Another £1000 is needed to circulate these goods. Dept I capitalists need money to buy mc, and Dept II capitalists need money to buy mp.
• Where does this extra £1000 come from? It must come from money reserves held by capitalists (beyond the capital actively used in production).
  • Maybe Dept II capitalists advance £500 from their reserves to buy mp from Dept I.
  • Maybe Dept I capitalists advance £500 from their personal spending reserves to buy mc from Dept II.
• Tracing the £1000 (Example):
  • Dept II uses £500 reserve cash + £1000 from Dept I workers = £1500 to buy mp from Dept I.
  • Dept I capitalists now have this £1500. They use £500 of it to buy mc from Dept II. This returns £500 cash to Dept II capitalists (replacing their reserve).
  • Dept I capitalists also use their own £500 reserve cash to buy more mc from Dept II.
  • Dept II capitalists now have this £500. They use it to buy the remaining mp they need from Dept I.
• Outcome:
  • Dept II has now spent £1000 (from workers) + £500 (own reserve) + £500 (from Dept I capitalists) = £2000 to buy mp, fully replacing its constant capital physically. It also got its £500 reserve cash back.
  • Dept I capitalists received £1000 (from Dept II for mp bought with worker wages) + £500 (from Dept II for mp bought with reserve cash) + £500 (from Dept II for mp bought with Dept I’s reserve cash) = £2000. They spent £1000 on wages (which returned via Dept II buying mp) and £1000 on mc (£500 from reserves, £500 from sales to Dept II). Their variable capital is back in money form, and their surplus value is spent.
• General Point: The total value of goods exchanged might be £4000 (£2000 between departments, £1000 within II, £1000 within I for v+s), but the amount of money needed depends on how quickly it circulates. The key is that money advanced by capitalists for circulation eventually flows back to them.

The Circuit for Department I’s Variable Capital

Notice how the money paid as wages by Dept I capitalists returns to them:

• It goes from Dept I capitalists to Dept I workers.
• Then to Dept II capitalists (when workers buy mc).
• Then back to Dept I capitalists (when Dept II buys mp).
• It follows a circuit between the departments.

The Core Condition for Simple Reproduction

This analysis shows a fundamental requirement for simple reproduction to work smoothly:

• The value of the newly created product in Department I (representing variable capital + surplus value, v+s) must be equal in value to the constant capital used up in Department II (c).
• Formula: I (v + s) = II c

Exchanges Within Department II

Now let’s look closer at Department II (means of consumption):

• Its workers receive wages (500v). They use this money to buy consumption goods from their own department.
• This directly returns the wage money (£500) to the capitalists in Dept II who advanced it. It’s like they paid wages in coupons redeemable only for their own products.

Subdividing Department II: Necessities vs. Luxuries

Department II produces many different kinds of consumption goods. We can group them into two main types:

• A) Necessary Means of Consumption: Goods needed by workers (food, clothing, housing, etc.). These might also be consumed by capitalists. It includes anything workers habitually consume, even if not strictly a biological necessity (like tobacco).
• B) Luxury Means of Consumption: Goods consumed only by capitalists, bought with their surplus value. Workers do not buy these.

Money Circulation in Department II Subdivisions

• II A (Necessities): When capitalists producing necessary goods pay wages, that money comes directly back to them when their workers buy those necessities. The workers themselves provide the means of circulation (money).
• II B (Luxuries): Capitalists producing luxuries also pay wages. But their workers don’t buy these luxury goods. So, how does the wage money get back to the luxury producers? It requires an indirect exchange. This situation is similar to how Dept I capitalists get money for their surplus value (s) to buy consumption goods. It implies there must be a specific balance or proportion between the production of necessities and the production of luxuries for simple reproduction to work.

Summary Result

Assuming simple reproduction, we find this necessary condition:

1. The part of the annual product made in Department I (Means of Production) that represents newly created value (variable capital + surplus value, or v + s) must be equal in value to the constant capital (c) used up in Department II (Means of Consumption). Let’s look again at the first condition we found: The new value created in Department I (wages + surplus value, or I(v+s)) must equal the constant capital used up in Department II (IIc).

• What if I(v+s) is too small? If the value of new means of production (representing I(v+s)) is less than what Department II needs to replace its used-up constant capital (IIc), then Department II cannot buy enough tools, materials, etc. It won’t be able to produce the same amount of consumption goods next year. Production shrinks.
• What if I(v+s) is too large? If the value of new means of production (I(v+s)) is more than what Department II needs (IIc), then Department I has produced too many means of production. Some of its products will be left over, unsold and unused.

Now for the second condition, related to luxury goods:

2. The total wages paid to workers who produce luxury goods must be less than the total surplus value gained by the capitalists who produce necessary goods.