Dominic Alexander explains the Marxist theory of where value comes from and why it’s central to understanding how capitalism functions

We live in a global society suffering from colossal extremes of wealth and poverty. Throughout the world, millionaires and billionaires maintain that they deserve their riches because their business activities create the wealth. When such claims come from hedge-fund managers shorting stocks on the market, they ring hollow to most people. On the other hand, the idea that manufacturers and ‘productive’ businesses create something of worth has greater traction.

Yet, it is not true: the only creators of surplus in the economy are those who do the work, and this sector represents the great mass of ordinary people who actually make society function. It is labour that is the source of all surplus value. That is to say, all the profit that is appropriated by the capitalist class, and its servants in the managing structures of economy and society, comes from the labour of working people.

Back at the origins of modern economic theory, political economists were all very concerned with the problem of ‘value’; its origins and how it came to be distributed in the way it was. Their conclusions started to trouble bourgeois society, as they began to reveal the real working of capitalism, and the profession soon turned away altogether from questions of value. As a result, even many left-wing economists today continue to reject the concept of value.

It was, however, a pro-capitalist economist, David Ricardo (1772-1823), who, drawing upon his predecessors, created the first ‘labour theory of value’. Marx took from Ricardo, making some crucial revisions of the theory, and using it to create his uncompromising critique of the capitalist system. This is why so few modern economists dare to touch this whole question: the answers lead in the wrong direction for them.

The standard assumption is that ‘supply and demand’ determine price, but as Marx pointed out, when those two factors are balanced, then they explain nothing. The mainstream fallback position is to say that the price of a product is derived from a combination of the value of raw materials, capital investment and labour. The conclusion is then that workers receive a fair recompense for their work based on the exchange-value of labour ‘in the marketplace’.

Marx showed why this eclectic approach also explained nothing, and how the exploitation of workers is, in fact, hidden by a focus on the workings of supply and demand in the ‘free market’. Neither the input of raw materials nor capital into a product can explain the origin of surplus value, from which capitalist profit is derived. Both represent ‘dead labour’. The former is from the work that has been done to turn natural resources into exchangeable commodities, and the latter being an accumulation of surplus derived from labour that is stored as capital. Neither can produce a surplus above the value of their own inputs.

Only human labour can produce such a surplus. That is to say that unlike all the other inputs into a commodity, only human labour power can produce more value than it requires, on average in society, to maintain the supply of productive workers. All that the capitalist can put into a commodity is the fixed value of the capital and commodities that have already been produced. Labour power is ‘variable’, in Marx’s terms, because more value can be forced out of a worker than she needs to be paid, according to the price of labour power in the market. This ‘surplus value’ is appropriated by the capitalist, who, if successful in selling commodities on the market, realises the surplus as profit.

This is why capitalism is always an exploitative system, even when it appears on the surface that workers are receiving a ‘fair’ wage according to the market price of labour. Some capitalists can receive more than their share of the total surplus value in the economy through market competition, or access to political power, for example, but at the level of society as a whole, these variations all cancel out. So, however the total social surplus gets distributed among particular capitalists, it is all derived ultimately from paying workers less than the total value of what they have produced through their labour.

Capital is no more than accumulated surplus value derived from the difference between the workforce’s capacity for labour, and the social cost of maintaining that workforce. The claims that it is the owners of capital who themselves produce social wealth are wholly baseless. Their demands that spending on social goods, from housing to health care, must be limited so as not to place too great a burden on ‘wealth creators’ are therefore entirely bogus. The argument represents a reversal of the truth. It is profit that seeks to crowd out the share of the social surplus that goes to the reproduction of human life. It is only the elimination of capitalist profit-making that can enable society to prosper.

 Now part of a published collection of socialist explainers.