Within the framework of capitalist mythology, wealth and poverty are explained by psychology or individual personality traits. Rich people are rich by virtue of industriousness, hard work and conscientious saving. Poor people are poor because of laziness or other physical or personal defects.
According to this mythology, the only way to address social and economic problems is to appeal to those who have on behalf of those who don’t. Fair trade should replace “free trade,” and thus abolish exploitation. Reactionary central bankers like Alan Greenspan should be removed in favor of a progressive monetary policy that could eliminate unemployment and lead to permanent prosperity.
Marxism, by contrast, views the root of the economic disparities within the structure of capitalism itself. Surplus value is the key to understanding why society is divided into a handful of super-rich and millions of poor and working people.
Commodities and labor power
All human societies have been marked by a division of labor. In early societies, some people hunted while others collected food and supplies. Over time, however, the division of labor became more complex, and trade and markets developed.
As the market developed, the movements of prices and profits increasingly regulated the division of labor. Fewer products were produced for immediate consumption and more products were produced for sale on the market—they became commodities. Eventually, human beings even began to sell their labor time; labor power itself became a commodity to be bought and sold on the market. The capitalist mode of production had arrived.
Capitalist economists and thinkers of the 17th and 18th centuries like William Petty, Benjamin Franklin, and Adam Smith tried to explain the basis on which commodities could be exchanged. They saw that the capitalist economy was really a complex set of relations in which the products of human labor are exchanged.
In the classical theory, each commodity has a natural price that reflects the average amount of labor time that was needed to produce it. The more human labor that is needed on average to produce a given commodity, the higher its natural price will be. Every commodity has both a use value, which means it meets a human need or want, and an exchange value, which is determined by the amount of labor socially necessary to produce it.
At the beginning of the 19th century, English economist David Ricardo, a brilliant and extremely logical thinker, tried to tie it all together into a completely consistent theory of capitalist economy—which Ricardo envisioned as the only possible form of economy. He thus brought classical capitalist economic theory to its highest point.
Labor power as a commodity
German revolutionary Karl Marx used Ricardo as the starting point of his own economic theory of capitalism. Marx realized that workers do not sell their labor, but rather their labor power—their ability to work.
In one sense, labor power is a commodity like all other commodities. It has a use value and an exchange value. Labor power’s exchange value is determined by what it takes to produce it. For example, workers need food, clothes, and shelter. Workers also need enough commodities to raise the next generation.
Purchasing labor power means paying an employee wages. These wages are based on labor power’s exchange value—the minimum socially necessary to live and reproduce.
Labor power and surplus value
But labor power is also a commodity unlike all other commodities. Labor power is the only commodity that once used actually creates exchange value. In other words, the value that a laborer produces in a day exceeds what it takes to keep that laborer alive. For part of the day, the workers produce the value that covers the cost of their own existence. In essence, what the workers produce the rest of the day is unpaid labor.
Marxists call this extra value that the worker produces during the course of a day’s work “surplus value.” Under capitalism, the owners of capital—the ones who buy the workers’ labor power—own the fruits of that labor. This is how the capitalists make profits—when the commodity produced by the workers is sold in the marketplace, its price is far above the amount the capitalist had to spend in wages to produce it. The capitalist takes the difference. The capitalist owns the surplus value.
To the employer, labor power has a very clear use value: it earns the capitalist a profit. This is the basic inequality built into the capitalist system. As long as one small class of owners controls the surplus value created by the working class, there will always be rich and poor, wealth and poverty.
Unlike the classical capitalist economists who only touched on the subject of surplus value, Marx understood that surplus value was the basis of capitalist profit.
Based on a full understanding of the labor theory of value, surplus value, and the nature of capitalism, it becomes clear that reforms or appeals to the capitalist class are inadequate. Exploitation and thievery are built into capitalist relations. In the drive for increasing profits, wages are held as low as possible.
Socialists aim to abolish the right of the tiny capitalist class to own in private the surplus value that is created by the millions of workers in society. Instead of serving private gain, the productivity of humanity and society’s surplus would benefit the vast majority of society—those who produce it.