10. Marx’s Theory of Capitalism

10. Marx’s Theory of Capitalism


Prof: So one way you can
think about comparisons between Marxism and the utilitarian
tradition is that both have a micro story and a macro story.
So when you think about the
utilitarian tradition we have the micro story of the Pareto
principle and how each individual transaction will go,
and then we have a macro story that if you allow people to
transact freely you get the most efficient utilitarian result
over time. And so you get the
rights-utility synthesis, at least in the aspiration.
Another way of putting that is
what Adam Smith famously referred to as an invisible hand
theory; that while no individual
participant is interested in generating an efficient
aggregate outcome, indeed, each individual
participant is just trying to get on as high an indifference
curve as possible. The byproduct of their
collective individually selfish actions is that beneficent
overall result, and so that’s the invisible
hand of the market that Smith talks about in The Wealth of
Nations. Marx, too, has a micro story,
a macro story, and an invisible hand theory,
and that’s what we’re going to spend today’s lecture and next
Monday’s lecture talking about. Today, principally,
we’re going to focus on his micro story,
his story of how wealth gets created at the micro level under
capitalism, and then we will link it on
Monday to his macro story, and he too, you will see,
has an invisible hand theory. That is to say the particular
players at the micro level confront incentives to behave in
certain ways, and the byproduct of their
actions is a macro result which nobody understands or intends.
The difference is we’ll see
that for Marx the invisible hand isn’t entirely benevolent.
It’s benevolent for a while,
but then it start to become malevolent over time because of
the way that the dynamics of capitalism play themselves out.
So that’s the sort of where
we’re headed in the medium-term in the next couple of lectures.
I want, though,
before heading into the micro story to make a couple of
conceptual points. Remember that when we look at
Enlightenment thinkers we’re concerned first and foremost
with the fact that they are all motivated by the idea of
individual freedom as the highest good,
and basing politics on scientific principles rather
than appeals to custom, or natural law,
or religion, or tradition,
or anything else. And I just want to highlight
what Marx’s assumptions about those two things are.
I’ve actually mentioned these
in one way or another in last Monday’s lecture,
but just to emphasize, first of all,
the idea of freedom in Marx is captured beautifully in this
very famous passage that he wrote,
actually a relatively young Marx, his critique of the
Hegelians and their followers Feuerbach in a work called
The German Ideology. He has this very vivid
description of what he means by unfreedom, the antithesis of his
ideal. He says, [T]he division of
labour (which we talked about last time) offers us the first
example of how, as long as man remains in
natural society, that is, as long as a cleavage
exists between the particular and the common interest,
as long, therefore, as activity is not voluntarily,
but naturally, divided, man’s own deed becomes
an alien power opposed to him, which enslaves him instead of
being controlled by him. For as soon as the division of
labour comes into being, each man has a particular,
exclusive sphere of activity, which is forced upon him and
from which he cannot escape. He is a hunter,
a fisherman, a herdsman, or a critical
critic, and must remain so if he does not want to lose his means
of livelihood; while in communist society
(this is his utopian ideal), where nobody has one exclusive
sphere of activity but each can become accomplished in any
branch he wishes, society regulates the general
production and thus makes it possible for me to do one thing
today and another tomorrow (this is maybe the most famous line in
all of Marx), to hunt in the morning,
fish in the afternoon, rear cattle in the evening,
criticise after dinner, just as I have a mind,
without ever becoming hunter, fisherman, herdsman or critic.
So this is a utopian Marx,
this idea that as soon as you have a division of labor we’re
no longer free. We’re enslaved to our
particular place in the division of labor.
Remember what I read to you
from Adam Smith’s description of the pin factory?
Somebody spends their whole
life stretching that wire for the pin.
Somebody spends their whole
life putting the heads on the pin.
That’s the sense in which Marx
wants to say we’re alienated from our true selves once the
division of labor sets in, and we can only return to being
fully rounded human beings at one with ourselves when the
division of labor ultimately is abolished,
and a precondition for that is the super abundance of wealth
that capitalism is historically destined to create.
And how we will finally get
there is the story Marx believed of how his macro theory would
play out over time. And we will only reach a
communist society where people can be genuinely free once the
need for a division of labor has been obviated by the existence
of a super abundance of wealth. So all of that’s coming,
but this is just to underscore that his basic ideal is freedom
and not equality, and his argument is going to
be, as I said to you last time, that the condition for the free
development of each is the free development of all.
Second, just to come back to
his and underscore his theory of science, Marx is an objectivist.
He believes that there are
forces operating in history, which he calls the materialist
conception of history, which shape the way history
unfolds. History has a direction.
It’s moving through a variety
of phases, each of which has internal
contradictions, and the way they play
themselves out is going to determine what happens.
So the tension in a feudal
society between the peasants and the lords is going to determine
the way in which conflict in that society occurs.
Then you’ll get the emergence
of a bourgeoisie class and they will create capitalism,
but that will bring forth a working class who will get into
conflicts with them, and as those conflicts play out
you’ll eventually get communism and socialism.
It’s a reductionist theory.
As I said to you before,
think of Bill Clinton’s line, “It’s the economy,
stupid.” Most of what happens,
if not all of what happens, that’s of any importance in
politics is determined by economic interests.
Whether people understand this
or not, or agree with it or not is beside the point.
And that brings us to a third
element of this Marxian science that I just want to underscore,
which will be relevant for today’s lecture,
is that Marx makes a distinction between a
class-in-itself and a class-for-itself.
I want to spend a couple of
minutes on, first, his definition of class,
and then this “in-itself/ for-itself”
distinction. A lot of people say that Marx
is anti-individual. He’s not individualist because
he thinks about things in terms of classes and class conflict.
That is a very superficial
reading of Marx. As a very eminent scholar
called Jon Elster has pointed out in many books that he’s
written on the subject, actually Marx is an
individualist because if you look at how he defines classes
he defines them by reference to the way in which individuals
relate to the means of production.
So what is it that makes you
working class as opposed to a member of the capitalist class?
What makes you working class is
if you have to sell your labor-power to somebody else in
order to live. So if you want to know whether
somebody is working class you say,
“Does he have to sell his labor-power to somebody else in
order to live or not?” If the answer’s yes,
he’s working class. If the answer’s no,
he’s not working class. So you might say,
“Hmm, well, I have to come here and work
everyday to get paid my salary. I have to sell my labor to the
university in that sense, but I’m not working class.
Somebody else might tell me I’m
working class, but they can speak for
themselves. I drive a nice car.
I live in the suburbs.
I’m not working class.”
Marx’s answer is to appeal to
this distinction between a class-in-itself and a
class-for-itself. The answer is,
“Shapiro, you’re just deluded.
You might think you’re not
working class, but that’s because you don’t
understand your objective position in the division of
labor. You are working class whether
you understand it or not. And that a class I’m a working
class in the class-in-itself sense.
I’m not working class in the
class-for-itself if I don’t believe that I’m working class.
So the “in-itself”
represents the objective definition of class,
the “for-itself” is the subjective;
whether people actually believe they’re working class and
perceive themselves to be working class.
But what matters for the
movement of history is the “in-itself.”
What’s ultimately going to
drive everything is the objective logic of class
conflict, not the subjective logic of
what people think is their position in the social division
of labor. So it’s important to keep those
two things separate. Now, Marx, as I’ve I already
said, was a utopian thinker,
and he does ultimately want to say,
for reasons that I’ll get into later today and in more depth on
Monday, he does ultimately want to say
that what differentiates a communist revolution from all
previous revolutions is that these two things will become
synonymous; that for the first time in
history the working class-for-itself will come to
see itself as the working class-in-itself.
We will understand our
objective position in the division of labor and
self-consciously create the new order,
whereas in all previous modes of production,
people don’t really understand their position in the objective
scheme of things and so they create orders as invisible
hands, to go back to Adam Smith’s term.
They create orders as
byproducts of their intended activities, not as products of
their intentional design. And so that’s that distinction
between “in-itself” and “for-itself.”
Now, you might listen to all of
this and you could say, “Well, it’s a kind of
quaint nineteenth-century idea, but it doesn’t have much to do
with the way people live in the world today.”
After all, as we have all
noticed with great intensity in the past year and a half of the
financial crisis, many people who work for wages
also have money in the stock market.
Well, but then they’re
capitalists, aren’t they, because stock is capital?
So I have my retirement money
in my TIAA-CREF, as college professors get it,
in the stock market, so I’m an owner of capital as
well as a worker. And this sort of binary
distinction between the working class and the capitalist class
is just too simple-minded. What do you think Marx would
say to that? Anybody?
Any takers?
I’m not really working class
because I’ve got money, and I have stocks invested in
all kinds of things, mutual funds,
so I’m not really working class.
Anyone think what Marx might
say to that? It’s not easy.
I think that what he would say
is this. He would say,
“Well, the definition of working class is that you have
to work for somebody else in order to live.
Not that you choose to work for
somebody else in order to live. So if I have enough money in my
TIAA-CREF invested in the stock market that I can quit tomorrow
and do just fine, then I’m not working class.
So it’s this element of
compulsion that makes you working class.
So it’s not important from
Marx’s point of view that some of us might own stocks,
but if we really owned enough stock that we were not in this
position of having to work for somebody else in order to live
we wouldn’t be working class, and so people could move in and
out of the working class. Indeed, I know people on the
Yale faculty who two years ago were about to retire and live
off their accumulated TIAA-CREF, and then it went up in smoke
when the wheels came off the economy,
and now they’re not retiring. So what Marx would say is,
“Well, the managed to get out of the
working class in theory, in principle,
but then they fell back down into the working class.
So it’s this element of
compulsion. They’re not retiring because
they don’t have enough, and therefore they have to work
for somebody else in order to live.
So that’s the distinction
between a class-in-itself and a class-for-itself that drives his
theory. Okay, so what is the theory?

We’re back to Locke.
Those of you who read chapter
five of The Second Treatise carefully,
when we looked at Locke and his theory of property saw how for
Locke the workmanship ideal plays out in the economic realm
with the proposition that most of the value of a product comes
from work. Very crude in Locke;
at one point he says, “Ninety percent of it
comes from work. The rest is natural
resources.” At another point he says,
“Ninety-nine percent of it comes from work.
The rest is natural
resources.” But Locke doesn’t really have
any mechanism by which labor supposedly creates value.
And in the seventeenth and
eighteenth century there were really three theories floating
around. There were, as I think I
mentioned to you on Monday, there were in Europe,
particularly France, the physiocrats who said value
comes from the land, but there were English
theorists who looked at them and said,
“No. That can’t be right because
look how rich Holland is and they don’t have a lot of
land,” and so they thought value came from trade.
But then the third group,
starting in the seventeenth century with Hobbes,
Sir William Petty, Locke and others said,
“No, value comes from work. The source of value is
work,” and that’s what Marx picks up on in trying to develop
a theory of value. And his theory is more refined
than Locke’s, more refined than Smith’s,
and more refined than Ricardo’s.
It starts with this idea of
socially necessary labor time, or SNLT, and he defines SNLT as
the labor time required to produce any use-value.
Anyone remind us what is a
use-value? Monday’s lecture,
what’s a… Yes?
Yes?
Student: Is it useful?
Prof: Right.
So anything with utility is a
use-value, right? So it’s the amount of labor
time required to produce any use value under the conditions of
production normal for a given society and with the average
degree of skill and intensity of the labor prevalent in the
society. So let’s suppose Leonid and I
are making typewriters. One of the big sort of
conundrums of labor theories of value have been,
well, what if Leonid is a perfectionist and he spends
twice as long making his typewriter as I spend making my
typewriter, but most of the perfectionism
is actually in his own head because at the end of the day
they’re the same? Marx would say–he would not
say Leonid’s typewriter was worth twice Shapiro’s typewriter
because he put twice as much labor into it.
No, because half of his labor
would be socially unnecessary. So it’s socially necessary
labor time. Or if a new labor saving device
was created so that the keys could be made much more quickly
than our laborious doing it with file,
and I use the new machine, the labor saving device,
and Leonid doesn’t, so my typewriters get produced
more quickly. His typewriter is not going to
sell for more than my typewriter because, again,
he’s using socially unnecessary labor.
So that’s the notion of
“the average degree of skill and intensity of labor
prevalent in the society at the time.”
So that’s what’s going to
determine the value of commodities,
the long-term–remember we talked about the natural value,
the long-term equilibrium price of a commodity,
is going to be determined by the amount of labor power that
is socially necessary to produce it.
And this idea of “socially
necessary” includes everybody working at
the same or an average intensity,
and it includes using available technologies because if some use
them, and others don’t,
those who don’t are going to be deploying unnecessary labor time
and that’s not going to be reflected in the value of the
product because in a competitive market the most cheaply priced
commodity is going to beat the others out.
Important to remember,
Marx works with a model of a perfectly competitive economy,
right, in which equivalents exchange for equivalents.
No cheating;
I mentioned that on Monday. His model is a perfectly
competitive economy, at least at the beginning.
He’s got a view about how
economies evolve over time to become uncompetitive,
and we’ll get to that. But initially,
and in his analytic story, in a competitive economy the
most cheaply produced products are going to drive out the less
cheaply produced, and so it’s socially necessary
labor time, not actual.
It doesn’t matter how much
blood, sweat and tears Leonid actually uses.
What counts is how much he
needs to use, okay?
So that–you could say,
“Okay, but that’s not the beginning of
the whole story,” and to get into that we have to
go a step further with Marx and look not just at the labor
theory of value, but the labor theory of surplus
value. This is where the rubber meets
the road for Marx. What he wants to say is,
“Living human labor-power is the only source of fresh
value, of exchange value.” So this is the workmanship
ideal on crack, okay?
Living human labor-power is the
only source of fresh value. So when Locke said,
“Work is ninety percent, or maybe it’s ninety-nine
percent of the value of commodities and the rest comes
from the common,” Marx is going to say,
“It’s a hundred percent. All exchange value comes from
work.” And what he’s thinking of here
is two things. One is he wants to say,
“If you look at all the commodities that are produced in
a market economy the one thing they all have in common is that
they’re products of human work.”
It’s the single common
denominator, right?
The capacity to work is a
commodity like any other so that,
we’ll get into this in more detail in a minute,
but when you think about what it is that people are paid,
what is it that a worker is paid, it’s determined like the
value of any other commodity. So when we say,
“What is the value of a book?”
It’s determined by the amount
of labor power necessary to produce that book.
And when we say,
“What is the value of a steel worker?”
It’s determined by the amount
of labor power necessary to produce that steel worker.
The worker is a commodity in
just the same sense as the book is a commodity.
So wages are determined by the
cost of producing the worker, and the reason a physicist gets
paid more than a manual laborer then is simple.
It costs more to produce the
physicist than it costs to produce the manual laborer.
All the training,
and education, and so on,
that goes into the physicist costs more than the training and
education that goes into producing a manual laborer.
So wages are not explained by
the value of what the worker produces.
This is one of the things
people often get wrong. Values are explained by the
cost of producing the worker. I’ll say that again.
It’s important.
Wages are explained not by the
value of what the worker produces, but rather by the cost
of producing the worker. So what do you think of that?
What would somebody say?
Somebody who thought this
was–what would Marx say about, “Why is a Michelangelo
painting worth so much, or why does a professional
baseball player get tens of millions,
maybe hundreds of millions of dollars if this is true?”
Anyone think of what Marx would
say?
Anyone want to guess?
Yeah?
Student: Would he say
it’s because like how much time they had to practice,
and how much money and time they put into learning their
skills? Prof: That would be part
of it, but still there are only so many hours in a day.
How do you get up to a hundred
million dollar salary? I mean, you’re on the right
track. What else goes into the
creation of a major league baseball player?
Why don’t they have very good
major league baseball players in Britain?
Because they don’t have minor
leagues, they don’t have farm teams,
there’s this huge cost associated with getting the one
brilliant best of all time player,
so that’s what he would have to say.
Or if you think about the value
of a Michelangelo painting it’s not just the training of
Michelangelo. It’s all those failed painters
that all those pubs wasted all that money investing in,
right? That all goes in,
in some indirect sense, into the wage differential.
So that’s sort of what–of
course it is a stretch, and one thing that Marx did not
think about was what we call in economics today,
winner-take-all markets. Anyone know what a
winner-take-all market is? What’s a winner take all market?

What is the phrase suggesting?
What do you think a winner take
all market could be?
Think about the wage
differential between the major leagues and minor leagues
baseball. It’s huge, right?
That’s a winner-take-all market.
The way you can think about it
is, before the advent of the gramophone record,
being a really pretty good opera singer could–you’d do
pretty well. Every major city would have an
opera with a pretty good opera singer who’d make a good living.
Once you have the gramophone
record then everybody can buy Pavarotti, right?
So then whether or not the
difference between Pavarotti, and the next best,
and the third best opera singer becomes much more important.
So that’s the idea of a
winner-take-all market, and Marx had nothing to say
about them. So he would have to reach for
this rather contorted logic of saying,
“It just costs much more to produce the best baseball
player in the world because you have to run everything that goes
into that production; not only his own practicing and
training, but everything that goes with it.”
So that’s the first point.
Labor power is a commodity and
its exchange value or its price is determined what it costs to
produce it. But then this is the magic.
This is the workmanship ideal
on crack. This is the idea.
He wants to say that living
human labor power is a unique commodity in that its
consumption as a use-value leads to the creation of fresh
exchange value. What does this mean?
It means that suppose I have
some money and I spend a thousand dollars on a wonderful
meal, good wine?
At the end of that meal it’s
gone, right? I pay the check and it’s gone.
I’ve consumed it.
Whereas, if I had spent that
thousand dollars hiring one of you to paint one wall in my home
when it’s done my home’s worth something more because it has a
freshly painted wall. That’s what he means, okay?
So that living human
labor-power differs from other commodities in that its
consumption as a use-value leads to the creation of fresh
exchange value, right?
You eat the meal,
it’s gone, but you consume the labor-power of the person
painting your house, or the person working in your
factory and it’s not gone, right?
I mean, the labor-power’s gone
in the sense that it’s been expended.
Those calories have been spent,
but you have something of greater value.
You have a house that’s worth
more than it was before you hired that person to paint it,
and that’s what makes labor-power unique,
right? He wants to say it is the only
source of fresh value, okay?
So a couple of just terms here
to get straight. His archaic language–you
probably read–he makes a distinction between what he
calls constant capital and variable capital.
All you need to think about
there is capital is what the capitalist spends in the
productive process. Variable capital is wages,
and constant capital is everything else.
Sometimes he uses these
symbols: C means all capital, big C means all capital;
little c means everything the capitalist spends on things
other than wages; and V is spent on wages.
And why he might call it
variable? So the idea is that wages are
always driven toward subsistence.
This is an empirical assumption.
Marx makes a few empirical
assumptions. Of all the empirical
assumptions he makes this is the one that actually is the most
accurate. He wants to say there are
always some unemployed in capitalist economies,
and because there are always some unemployed in capitalist
economies, wages will be driven towards
subsistence. Because if you have,
say, a union that organizes and drives up wages the employer
will then go and hire nonunion workers and say,
“Well, will you work for me at something lower than the
union wage?” and the answer will be yes,
because the unemployed worker won’t have a choice,
okay? So wages will be driven towards
subsistence. Now that puts on the table
another question. Well, what is subsistence?
What is subsistence?
And Marx does say, “Well,
it has a social and historical element,”
so that is to say in a society like ours a definition of
subsistence might include having enough money to buy a car in
order to drive to work, whereas obviously that was not
true in nineteenth-century Britain,
so what counts as subsistence changes.
And we will see there are other
features of Marx’s theory of capitalism which show that
there’s actually an impetus for what counts as subsistence to go
up, but at any given time the
accepted level of subsistence, and the wages will be driven
toward that because of the existence of what he
flamboyantly describes as the reserve army of the unemployed,
right? That’s what keeps wages at
subsistence or close to it in a competitive economy.
Okay, let’s do a little micro
transaction. Suppose there’s a working day,
okay? And suppose the accepted
working day is ten hours long. Marx says, “Well think
about what the worker is doing.”
The worker is producing cotton,
let’s say; it doesn’t really matter what.
And for some portion of that
working day the cotton that he’s producing, when eventually sold,
is going to cover the cost of his wages.
So the worker produces cotton
all day long, and the capitalist eventually
sells the cotton, right, and gets something for
it, and then he’s got to pay his worker his wage.
And we’re just going to say for
the purposes of this example that the work that’s done in the
first four hours is going to cover the wage bill,
and the rest is what Marx called surplus.
So that’s the difference
between necessary and surplus labor time.
And Marx has the idea of a rate
of exploitation, which is the ratio of necessary
to surplus labor time. You could even make a little
index, and so you’d say it’s one point five.
Okay, so this is the value
that’s produced that covers the wage bill.
This is the rest.
Of course this isn’t all
profit, right? Why isn’t it profit?
Why isn’t all that profit,
somebody?
Think about it.
You’re a capitalist.
Yeah?
Student: Because some money
goes to the actual, I guess, building where they’re
working or even material needed to create the product.
Professor Ian Shapiro:
Exactly. The capitalist has to buy raw
material, has to do advertising,
has to have a system of managers,
research and development, all of that has to be paid out
of this. So profit is some subset of
this, but it’s not all of this, okay.
Okay, so we’re in the cotton
business, and it’s a competitive business, and so another cotton
manufacturer says, “You know what?
I think these workers are
slacking. I’m going to say from now on to
my workers, ‘You work eleven hours.'”
Wages are already at subsistence by assumption,
right? So the workers might say,
“No we’re not,” and they can say,
“Goodbye, I’ll somebody unemployed to do
it then,” okay?
So if you do that we now have
an eleven-hour working day. The rate of exploitation goes
up, right, because now there are seven hours of surplus labor
rather than six hours of surplus labor.
Now you might say, “Well,
the worker’s going to get worn out sooner and die sooner,”
but let’s just suspend disbelief about that,
and say, in fact, so this capitalist is going to
do better than this capitalist; so this capitalist is going to
be able to sell his or product more cheaply,
and therefore this capitalist is going to be in trouble.
People think in Marxism,
capitalists are afraid of the working class.
No.
On Marx’s theory who is a
capitalist afraid of? Who is the capitalist looking
over his should at? Student: The other capitalist.
Professor Ian Shapiro:
Yeah, the capitalist down the street.
He couldn’t care less
about–he’s not worried about the workers.
He’s worried about the
capitalist who can come into his industry and produce more
effectively, okay? So if you can make these
workers work an extra hour, you’re going to do it.
And then everybody else is
going to have to do it, right, or they’re going to go
out of business. And this is why Marx wants to
say, this is what he calls an increasing absolute surplus
value. This is why Marx says,
“Under primitive capitalism,
in the early stages of capitalism, the battles are
going to be over things like the length of the working day.
If any of you’ve done
nineteenth-century British history you will know that one
of the big battles– this starts with the chartists
in the early nineteenth century and goes on.
What are they pushing for?
The Ten Hours Bill,
they want the Ten Hours Bill. They want Parliament to come in
and say, “Working day’s ten hours,” to limit this.
So to the extent that the
workers can organize politically and put pressure to get a Ten
Hours Bill then you limit this. But in any case,
Marx wants to say, “There are only so many
hours in a day and people do have to sleep after all.”
So you’re not going to get much
out of this. The real secret to capitalism’s
dynamism is not the move from A to B.
It’s the move from A to C.”
Notice here we’re back at a Ten
Hours Day, but now, by assumption,
I’m saying the capitalist is going to cover his wage bill for
that worker in three hours rather than four.
How is he going to do that?
Yeah? Student: Reduce wages.
Professor Ian Shapiro:
Pardon? Student: Reduce wages.
Professor Ian Shapiro:
But you can’t reduce wages because wages are already at
subsistence. So you’re going to have to,
by assumption, you have to pay the same wages,
so how are you going to do it? Student: Technology.
Professor Ian Shapiro:
Technology, exactly. The name of the game is
technology. Somebody’s going to go and buy
a spinning jenny and put it in his factory,
and then the workers will work way more productively,
and as a result of that, the capitalist will cover his
wage bill more quickly. And of course,
the minute one capitalist put the spinning jenny in everybody
has to put the spinning jenny in,
right, or else they’re going to go out of business.
Because the capitalist that’s
covering his wage bill in three hours of that worker’s work,
rather than four, is going to be able to sell the
cotton more cheaply in the market and therefore outcompete
the capitalist who is still using the old system.
And so the way capitalism works
is that there’s constant pressure for technological
innovation, because this is not a very
effective way of increasing productivity,
right? In the early stages you’ll see
that, but there will be political
limits, Ten Hours Bill,
they’ll be natural limits, human capacity,
so then all the pressure is on dynamic innovation.
Okay, now this is where it gets
interesting, because what he wants to say
is, “But we know that only living human labor power
produces surplus value,” so as you become more and more
capital intensive, the capitalist is spending more
and more on constant capital and less and less on variable
capital. To put it in modern jargon,
production’s becoming more capital intensive.
You’re spending more and more
of your investment on something that does not produce new value.
So another way you can think
about this, and remember I said to you last
time, all the classical political
economists thought they had to explain the declining tendency
and the rate of profit. What Marx wants to say is,
if this is the status quo, okay, and one capitalist in the
cotton industry puts in the spinning jenny and this becomes
the status quo, this capitalist will have
higher profits than this capitalist, right?
But once they’ve all put in the
spinning jenny, the rate of profit in the
cotton industry will be lower than it was up here,”
okay? So there’s a short-run/long-run
conflict of interest for capitalists because in the
short-run at the margin I will innovate and my profits will go
up, but then everybody will copy me
and the rate of profit in the cotton industry will fall over
time. Now, there are some dubious
assumptions, which I’m going to come back to
on Monday, but I first want to just draw
your attention to some of the normative aspects of this.
What Marx calls the rate of
exploitation, as I said, is the ratio of
surplus to necessary labor time, but now look down the right
hand side here. He’s got all this jargon but
you can unpack it here. S over V is the rate of
exploitation. All these things are basically
equivalent ratio. But look down here,
and now think about this. Suppose I was a capitalist and
you were a worker working for me, okay?
And suppose I said,
“Times are tough in the cotton industry.
You’ve got a choice.
We can go to here or we can go
to here. We can pick B or we can pick C,
but A is no longer an option. A means I’m moving to Mexico,
can’t do A anymore. So take your pick B or C.”
How many are going to pick B?
Hands up.
How many are going to pick C?
Everybody.
But then it seems like this is
very counter intuitive, doesn’t it?
Because you all went for
something that, according to Marx,
has a higher rate of exploitation,
two point three-three as opposed to one point seven-five.

How can that be?
How can that make any sense?
Okay, I’m going to go two
minutes over here to leave you with this to think about,
and then we’ll pick up with it on Monday.
This is the intuition.
If you think about how people
think about how well off they are the Pareto system says,
“Am I on a higher or lower indifference curve than I was on
before?” It’s a bit like when Ronald
Reagan was running for reelection in 1984,
his slogan was, “Are you better off than
you were four years ago,” right?
You look at your situation and
you say, “What was my situation?
Is it better? Is it worse?”
a self-referential comparison.
Marx says, “No,
that’s not the relevant comparison.
The relevant comparison is
other referential.” You decide how well off you are
not just by reference to what you get compared to with what
you got before, but by reference to what others
are getting. So that in this kind of
situation if you say, “Which is worse for the
worker?” they may well say that a
situation in which they have more is worse than a situation
in which they have less if the capitalist has even more.
So Marx wants to say,
“We’re inherently other-referential.
What’s going to make us more or
less happy is not just what we have, but what we have in
relation to others.” So now, and it turns out on
this matter he was half-right. He was half-right,
we see, from a hundred years of studies of sociology.
What people find acceptable and
desirable is connected to what others have,
but usually it’s connected, and this is where he was
half-wrong, it’s usually connected to what
people who are similarly situated to themselves have.
So workers in the steel
industry will compare themselves to workers in the auto industry,
but workers in the auto industry will not compare
themselves to what executives in the auto industry get.
So people are
other-referential, but in a more horizontal sense.
And this is true up and down
the occupational scale. So if you have been a Yale
administrator one thing you will learn is it will matter much
more to a professor if he or she learns he’s being paid two
thousand dollars less than the professor down the corridor,
than if he or she learns he or she is being paid two hundred
thousand dollars less than the attorney who lives next door to
them. People compare themselves to
others, but they compare themselves to similarly-situated
others. Why that is,
is an immensely complicated and interesting subject,
but it means that Marx was right to think we’re basically
other-referential. We don’t just ask the question
“Has my utility gone up or down?”
We do compare ourselves to
others, but he was mistaken in thinking that workers would
compare themselves to capitalists rather than to other
workers in deciding whether or not they were well off,
and that would feed into his assumptions about the conditions
under which workers would be likely to become militant.
Okay, we’ll start with that
issue on Monday.

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