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VALUE THEORY AND BUSINESS CYCLES
ond, labor being used less would be able to buy back less, hence
demand would drop off. (To this extent Marx departed from
an embodied labor theory to that of demand and supply. In
fact, embodied value theorists unwittingly pass over to a demand
and supply analysis with more or less frequency.)
THE BUSINESS CYCLE AND SURPLUS VALUE
Clearly for Marx, the secular trend was downward. But in
addition to a secular trend, he sought also to establish the fact
of a constantly recurring business cycle. The theory of the
cycle or of crises was based wholly upon his Surplus Value
analysis. Surplus Value holds so important a place in the general
theory of Marx that it is necessarv to study it with care.
In dealing with exchange or the metamorphosis of commodities, he first treated C-M-C [Commodity for Money for Commodity]. Such an exchange he considered no different in principle from that of barter since the object of exchange was to
transfer a commoditv of little or no utility to its possessor for
a different commodity of high utility, and money entered as a
convenient medium to effect the transaction. This double transaction indicated no exploitation, for the assumption was that in
each transaction there was an exchange of equivalent values, or
quantities of embodied labor, so the final commodity had
neither more nor less value than the original commodity, but
had a higher utility for the recipient. Thus the metamorphosis
C-M-C represented an exchange of equivalent values and no
exploitation. Marx admitted the possibility of variation in value,
but such would be accidental and negligible and not inherent in
the process.
But the metamorphosis M-C-M' was fundamentallv different. And it was in explaining this formula that Marx treated
thoroughly the nature and source of surplus value. In this case
the individual starts with money and ends with money. The only
possible motive, then, for making the two exchanges was to end
with more money than at the beginning. And the extent to which
the second M or M' exceeds the first, is the measure of surplus value.
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However, surplus value was not created or gained in
the circulation of commodities but in production. The first M
represented the money paid to labor for wages. In return for
the wages received labor created commodities C which belonged
to the employer, the value being determined by the amount of
labor-time or social labor-power incorporated. Then Marx, in
the inimitable Marxian style, proceeded to show that, whereas
there was an exchange of equivalents as between commodities,
vet with the concentration of capital and tools into the hands
of capitalists and the rise of the proletariat, divorced from tools
and compelled to seek employment of the capitalist, there arose
a transaction between employer and laborer, a transaction in
volving the exchange of labor-power for subsistence, in which
case there was no guarantee whatsoever that there would be an
exchange of equivalents, but rather a predetermined certainty
that labor would invest more social labor-power than would be
returned as wages
Marx then turned directly to an analysis of the determination of wages. "We must now examine more closely this peculiar commodity, labor-power. Like all others, it has its value.
How is that value determined?"
Value of Labor-Power Determined by Cost of Subsistence
and Perpetuation
"The value of labor-power is determined as in the case of every
other commodity by the labor-time necessary for the production, and
also for the reproduction of this special article. So far as it has value,
it represents no more than a definite quantity of the average labor
of society incorporated in it. Labor-power exists only as a capacity, or
power of the living individual. Its production, consequently, presup-
poses his existence. Given the individual, the production of labor-
power consists in his reproduction of himself or his maintenance. For
his maintenance he required a given quantity of the means of subsistence. Therefore the labor-time requisite for the production of
labor-power reduces itself to that necessarv for the production of those
means of subsistence; in other words the value of labor-power is the
value of the means of subsistence necessary for the maintenance of the
laborer. .. . His means of subsistence must therefore be sufficient
to maintain him in his normal state as a laboring individual.
48:
His natural wants such as food, clothing, fuel and housing vary according
to the climatic, and other physical conditions of his country. On the
other hand the number and extent of his so-called necessary wants, as
also the modes of satisfying them, are themselves the product of his-
torical development, and depend therefore to a great extent on the
degree of civilization of a country, more particularly on the condi-
tion under which, and consequently on the habits and degree of com
fort in which, the class of free laborers has been formed. In contra-
distinction therefore to the case of other commodities, there enters
into the determination of the value of labor-power a historical and
moral element. Nevertheless in a given country at a given period the
average quantity of the means of subsistence necessary for the laborer
is practically known. .
into the value of a definite quantity of the means of subsistence. It
therefore varies with the value of the means or with the quantity of
labor requisite for their production." 6
The value of labor-power resolves itself
Thus we are led to see that Marx held that the wages of labor
were determined, not by the amount of social labor-power which
they invested in commodities for their employers, but by the cost
of maintenance which tended to hover around the subsistence
level, though it might be modified upwards slightly by the pre-
vailing standard of living. It was by showing that labor actually
did embodv more labor-power in the commoditv which it cre-
ated for emplovers than was embodied in the monev which it
received as wages that employers found themselves the pos-
sessors of commodities more valuable than their cost. This rep-
resented surplus value created bv labor, for 'which it received no
equivalent.
Returning to a final analysis of the formula M-C-M' the employer possessed a certain quantity of money, which represented
so much embodied or crystallized social labor-power. With this
he employed workmen who, in exchange, created for him the C
of the equation or so many commodities in which was embodied
a quantity of social labor-power, which, as we have already observed, might hold little or no relation to the value of money
which he gave for its production and tended on the average to be far in excess.
6 Marx, Capital, Vol. I, pp. 189-91
49:
This C of the equation was then sold on the
market at its full value in exchange for a quantity of money of
exactly equivalent value, i.e., embodying the same amount of
crvstallized social labor-power. By the extent to which the
quantity and value of the second M exceeded that of the first, by
so much had surplus value been created by labor. It also represented the exact extent to which labor had been exploited.
As has been said, the wages of labor were determined, by
the cost of subsistence, or of production and reproduction. The
employer therefore paid him a sufficient money wage to guaran-
tee that subsistence. But upon payment of that wage, the capital
ist laid claim to the full productive capacity of the worker. To
illustrate mathematicallv, if labor in six hours embodied value
in commodities equivalent to that contained in the specie re-
ceived as wages, but the employer withheld the specie until an
additional six hours of labor-power had been embodied, then it
is clear that labor has created six hours of surplus value for the
employer for which no equivalent was paid. This represented
accurately the degree of exploitation of labor, and Marx called
it "surplus value."7
But exploitation has its limits and cannot go on indefinitely
without producing serious maladjustments in the commodity
field. All commodities produced must be exchanged (or vir-
tually all in modern capitalistic economy) and the only effective
demand is the supply of another commodity, the value of which
is proportionate to the labor-power embodied. But the greatest
group of buyers, or consumers is comprised of the laboring class
which has been "robbed" of part of its purchasing power, hence
it cannot buy back the product of its labor. Commodities seek a
market but can find none, or if they do, they must seek it at a
market price much below the actual or market value. Then both
entrepreneurs and labor lose, the former becomes bankrupt and
the latter unemploved because factories close down and the world
experiences a crisis. Indeed it comes at the time when the supply
of commodities is the greatest. While the occasion for the crisis
7 Marx, Capital, Vol. I, pp. 197-215
was bankruptcy of entrepreneurs, the basic cause was in the ex-
ploitation of labor through employers' extortion of surplus value.
If the cause of crises was to be found in underpavment of
workers, with consequent lack of market for goods, a glut of the
market and bankruptcy of employers, how was recovery to come
about? The crisis was caused by too much goods, not only con-
sumption goods, but also capital goods; in other words the
powers of production had outrun the power of effective demand
or consumption, and a bottomed market resulted.
But all above the dire poverty line kept on consuming fairly
normally even in time of depression. Ultimately the glut was
worked off, because factories were closed down and production
had ceased. Also, many bankrupt firms were unable to start
again, machinery rusted away, factories were abandoned, etc. In
other words the function of depression was to scrap enough
capital goods so that the powers of production no longer ex-
ceeded those of consumption, ie.) consumption goods became
scarce, market price came back to market value, which always
contained a margin of profit, hence industries started up with a
vim and the cycle started on its first phase again, but only to
run the gamut of the previous cycle
Thus about the downward secular trend, there ran constantly
this cyclical curve of prosperity, glut, bankruptcy, crisis, and
depression; all based in the last analysis on "surplus value ex-
ploitation.'"
Thus far, we have attempted to show how Marx explained
the secular trend of the price level on the basis of embodied
value, and the cyclical movement of market prices on the basis
of surplus value. Standing alone each explanation seems logical
and complete. The difficulty arises when we attempt to reconcile
the two. If the value of commodities was determined bv the
amount of labor embodied, how could goods sell at times far
below this value, as at the time of crisis, and at other times far
above their value as in the period of prosperity?
Marx noted the apparent contradiction and promised a recon-
ciliation at a later time.
51:
This was eagerly looked for in the second
volume of "Das Kapital" but strangely, it was conspicuous by its
absence. However, before his death the attempt had been made
and Engels found it among his manuscripts, and published it in
Volume III.8
Stripped of its verbiage, numerous definitions and involved
formulae, Marx held that two sets of forces were operating in
the determination of value and market price. The fundamental
and primary force, was embodied social labor-power. This de-
termined the value of all commodities. (Value here is used in ex-
actly the same way in which Ricardo used "Natural Value.") The
natural value of commodities was determined by the quantitv of
labor embodied, and market price would never depart from this
unless influenced by some disturbing factor. The disturbing factor
was found in "Demand and Supply" which constituted a secondary
force. But demand and supply had no effect so long as they were in
equilibrium. Furthermore, demand would always equal supply
if labor were not exploited. If it could buy back the full volume
of its product the market would never become glutted and
therefore market price would be held constantly at the natural
value. But due to the exploitation of labor, the compulsory pro-
duction of surplus value, supply exceeded demand and when de-
mand and supply were not in equilibrium, they did have an effect
upon prices and compelled market price to depart from the curve
of Natural Value.
In the words of Marx:
"If demand and supply balance, then they cease to have any effect,
and for this very reason commodities are sold at their market values.
If two forces exert themselves equally in opposite directions, they
balance one another, they have no influence at all on the outside,
and any phenomena taking place at the same time must be explained
by other causes than the influence of these forces. If demand and sup
ply balance one another, they cease to explain anything, they do not
affect market values and therefore leave us .. . in the dark. . . .
It is evident that the essential fundamental laws of production can-
not be explained by the interaction of supply and demand. . . . For
these laws cannot be observed in their pure state until the effects of
8 See Marx, Capital, Vol. III, Ch. X
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