Introduction to Marxist Economics

International Bolshevik Tendency Study Class

19 October 2020

The expression “Marxist economics” is something of a misnomer. Karl Marx’s critique of the “political economic” theory of his day revealed the fundamentally social character of “the economy”: production, exchange, prices, wages, etc. Marxist economics is not some radical cousin to the sort of mainstream economics you study in university. It is not primarily concerned with price formation, nor does it care about making predictions to help you invest your capital in the most profitable enterprises. It doesn’t yield advice about which monetary policy is the best to encourage growth. Marxist economics has a different subject matter and purpose.

Marx’s analysis of the capitalist mode of production — i.e., “Marxist economics” — is a scientific exploration of the foundations and historical limits of capitalism, and of how the social relations of production are expressed in what we conventionally perceive as economic phenomena.

With that definition in mind, I’m going to provide a simple overview of Marxist economics. The main sections of my talk are: Production, Value, Alienation, Exchange, Crises in Theory, Crises in History and Socialism.


Let’s begin with production, which is the practical transformation of nature by human beings to create useful things for other people. We can call the sum of our creations the labor product, since nothing can be created without the expenditure of human labor — even a robot must first be built and programmed. Our abilities to transform nature into useful things Marx called the forces of production.

We are social creatures. We live and work together, and even an independent producer is enmeshed in social relations. Marx spoke of the social relations of production, i.e., the way we relate to each other via the way we are connected to the process of production. The social relations of production can also include spheres of human activity which grow out of the production process, but which attain a relative independence from it, e.g., the state, the family. They also usually find expression in a system of property and other ideological forms that reflect and reinforce the relations of production.

The social relations and forces of production (ie, why and how we produce) shape the labor product (ie, what and how much we produce). Altogether, they interact to form what Marx called the mode of production. There are different modes of production, which evolve historically according to their own specific “laws of motion” and the human actions shaped by those laws of motion.

Within a mode of production, the social relations at first encourage the development of the productive forces but later stunt their growth. This contradiction, or structural tension, between the forces and relations of production shapes the way the basic social classes of the mode of production come into conflict with each other.

Why are there different social classes? Why do social relations of production have a class-divided character? Let’s return to the labor product. We can divide it into two parts.

There is the necessary labor product, by which we mean the sum of useful things and services that are needed merely to reproduce the population. In other words, the amount of food, clothing, shelter but also health care, childcare, etc. that is required simply to ensure that people survive. The size and the character of the necessary labor product will vary from society to society, but there is a floor, a bottom level below which production cannot dip before large numbers of people start dying.

Beyond the necessary labor product, however, we may have a surplus labor product, i.e., useful things and services that are not necessary for the basic survival of those who produce. Our species has been around for about 200,000 years. The evidence suggests that we have lived and produced together the entire time and that, for most of that time, there was no substantial or enduring surplus labor product. We were hunters and gatherers whose mode of production yielded little beyond what we needed to survive. We often didn’t survive.

That began to change following the end of the last Ice Age around 12,000 years ago, when humans in what we today call the Middle East began planting and harvesting crops and raising animals for food. The agricultural revolution made possible a sustained and sizable surplus labor product.

The existence of a surplus labor product allows for a social division between the majority, who produce, and a small minority, who are exempted from work and who therefore live off the labor of those who do work. In other words, the surplus labor product is the material condition for the existence of a privileged ruling class and a class-divided mode of production.

Every class-divided mode of production has a surplus labor product that is appropriated by the ruling class. We have no problem recognizing this phenomenon in modes of production from the distant past, e.g., ancient slave society in Greece or Rome, feudalism in medieval Europe. Many bourgeois economists would readily admit to all that. But try saying that the same applies to the capitalist mode of production, and you will encounter indignation and a dozen convoluted reasons why things are different. But, of course, things are basically the same.

The real difference is that the surplus labor product under capitalism takes the social form of surplus value. Now that requires some explanation, because it was not the dominant form in previous class societies, and in fact this is the source of the illusion that capital or technology or risk-taking or some other thing is the source of capitalist profit.


Marx began his analysis of the capitalist mode of production with the commodity because the commodity is the basic social form assumed by the product of labor in our society. Like all things produced by people, it is supposed to be useful, so we can say it has use-value or utility.

But the commodity is bought and sold in the market, and it therefore also has exchange-value (ie, the amount of money it can command). In his analysis, Marx reveals that standing behind exchange-value and finding expression in it is the commodity’s value.

Bourgeois economists believe that the value of a commodity, which they simply conflate with its price or exchange-value, is based on its use-value — or rather, the subjective estimation of its utility relative to the wants and the money at the disposal of the purchaser. One of the problems with this argument is that utility, as an abstract trait, has no objective, quantifiable existence. Utility is inherently concrete and applies to specific types of commodity. It refers to the quality, not a quantity, of a commodity — it is in fact why people would exchange one commodity for a different one.

For value to find expression in the exchange value of different commodities, it would have to be both quantifiable (since commodities exchange with one another — and with the universal equivalent, money — in definite quantities) and an objectively real “abstraction” (a generalized or undifferentiated reality that exists outside of the subjectivity of individuals).

Marx observes that commodities are the products of labor. Labor is concrete, i.e., it assumes particular forms associated with the production of specific use-values. But labor, through its participation in market-mediated social relations, is simultaneously abstract — or rather it is abstracted or reduced to generalized human productive activity. Moreover, abstract labor is quantifiable — typically, it is quantified in hours, or more generally labor time.

For Marx, abstract labor is the social substance of a commodity’s value. As a material thing, a commodity is both a use-value and a material crystallization of the structure of human relations based on the mode of production. Its value is determined by the socially recognized (or socially necessary) abstract labor time required for its production.

The value of a commodity does not directly translate into its market price. The prices of commodities are determined at a different level by various factors, including the familiar supply and demand. But prices do oscillate around their social anchor in labor value, and at the macro level total prices should equal total value. This is the law of value.

You have probably experienced a kind of intuitive apprehension of the law of value when you have encountered some product that is, in your view, “overpriced.” Overpriced in relation to what? Bourgeois economics would say “in relation to your estimation of its usefulness for you,” but that is subjective and ultimately circular reasoning that cannot account for why that might be true for everyone. In reality, you are probably picking up on the fact that it took less average, socially necessary labor time to produce that commodity compared with commodities at a similar price.

Wherever there is trade, there are commodities possessing labor value. The law of value therefore exists, to some extent, in any society in which there is commodity exchange. What is different about capitalism is that the labor product primarily takes the form of commodities — it is not something that occurs on the margins of society. Capitalism is a market society. The law of value is the dominant regulator of the capitalist economy.

For this to be so, for the law of value to be the capitalist law of value, it is not enough that the labor product take the form of commodities. Another major transformation in the mode of production must occur: labor power itself must become a commodity bought and sold for wages on the market. In this way the reproduction of the working class depends entirely on market interactions (as well as unpaid domestic labor, especially of women, that is not valued because it occurs outside of market relations).

How exactly does labor create surplus value. As a commodity, labor power has a value, and that value is determined, as it is for any other commodity, by the amount of socially necessary labor time required for its “production” — in this case, the food, shelter, education and so on that a worker (along with his/her dependents) requires to be able to work. Labor power is, however, a unique commodity. Set in motion, it is laboring activity, and it is the living component of the production process that creates more value than it itself is worth. The surplus product, in the form of surplus value, goes to the capitalists as profit, interest and rent (they share the surplus through different processes). Because labor power is, at the macro level at least, paid for at its true value, there is no “shortchanging” according to the law of value — and so the appropriation of surplus value appears not only to be fair but to be related to economic factors beyond labor. This is an illusion generated by the system itself: capitalists in fact live off the exploitation of the working class, just as all previous ruling classes appropriated (albeit in more obvious ways) the surplus labor of the direct producers.


Marx believed that the conscious transformation of nature by human beings was a basic element of what it means to be human. The species being of humanity, i.e., the human practice of “objectifying” our labor in elements of nature as we produce together, is an eternal element of the human condition.

Alienation is a product of the way society organizes production. It is not a permanent feature of production or the human condition. What is alienation? What is alienated, estranged or separated from what or from whom? And what does this have to do with value and surplus value?

For Marx, alienation has three dimensions:

  1. The product of labor, i.e., objectified labor, has become “external to the worker.” Marx means by this that the product of labor belongs to someone other than the worker, i.e., that it has become “alienated” or separated from the person who made it.
  2. Just as the product of labor has become alien to the worker, so too has the laboring activity itself become “external,” i.e., controlled by someone else for the benefit of someone else. Labor has become “forced” or “coerced” labor, and it is a means to an end (ie, survival in the context of hostile natural and social conditions) rather than the expression of what it means to be human. In this sense, the worker has become estranged from his/her “species being.” Marx notes that, having become alienated from the human essence of conscious, creative activity, workers paradoxically seek comforting “human” experience in those activities we have in common with other animals, e.g., eating, sex.
  3. The foundation of the first two forms of alienation is the estrangement of people from each other. Alienated human beings (exploited workers) are also alienated from each other, as they are forced to compete in the labor market. The division of society into antagonistic classes is also a form of alienation. Other forms of oppression (alienation of human beings from each other) grow out of this situation.

The overall picture that Marx draws is of a society in which the vast majority of the population (the producing class) is subject to the power of blind “economic” forces (primarily the law of value) and the authority of the capitalist class; in which workers have no say over the conditions of work and, by extension, those aspects of life that depend on work; and in which workers, perhaps without being able to put their finger on the source of the problem, experience dehumanization. The paradox is that capitalism, the most materially productive society in history, has taken alienation to new heights just at the moment it has brought us within view of a future without alienation.

Surplus value is the most obvious expression of alienated labor — the surplus labor product, expressed in value, has been appropriated by the owners of the means of production. Capitalist profit is the money expression of the exploitation of the working class, a process rooted in the self-alienating activity of the direct producers under conditions in which they are compelled to sell their labor power.

Marx’s argument has other implications. All value under capitalism participates in the structure of abstract labor, which is alienated labor. The “world of commodities” that materially expresses the social relations of capitalism is an edifice of objectified, alienated labor. The working class is surrounded by a world which is of its own making, but which is neither under its control nor for its benefit. We are connected to each other through things that we buy in the market, and money invades virtually every aspect of our lives. It brings us together but simultaneously comes between us.


It is in the sphere of production that value is created. But surplus value in the form of money profit, like the money price paid for commodity values, is realized in the sphere of exchange, aka “the market.” While the sphere of exchange grows out of the sphere of production and is organically connected to it in reciprocal ways, the two are distinct and generate distinct ideological forms of consciousness.

Production is the site of exploitation and alienation. It is in this realm of social life that class conflict is most clearly posed: capitalists exercise their class power over workers through their ownership and control of the means of production, and workers resist their oppression, with varying degrees of class consciousness, by challenging the claim of capitalists over the means of production, e.g., through strikes, factory occupations and even daily micro-resistance like loafing, protecting co-workers, taking extended breaks, etc.

Exchange is a realm of “equivalents” — different commodities, whose values are reducible to different quantities of abstract labor time through the law of value, are equivalent to one another despite their differing use-values. The sphere of exchange is where the principles of freedom and equality find expression. Marx did not deny that capitalism promotes these principles; to deny it would mean being unable to provide a materialist explanation for their historical emergence. To the contrary, Marx understood how the law of value generates a tendency toward equality and liberation from “non-economic” impositions of inequality.

The dominant ideological precepts of capitalism are drawn from market relations. Capitalism, which is a market society, tends to generate the view of itself as only a market society, i.e., to “forget” that it is a mode of production. Capitalists really believe that their profits are generated in the realm of exchange, “fair and square,” through their brilliant investments and their own hard work. If they are in the business of producing commodities, they also have some awareness of the role of their workers, but that awareness is largely negative, i.e., they tend to view their workers as the unreliable, annoying part of the process. What they don’t understand, what they really can’t understand, is that the working class — “living labor” — is the sole basis of their profits because their profits are nothing other than surplus labor.

The conscious goal of capitalists is not the exploitation of the working class per se but the pursuit of profit. Especially given the fact that surplus value is shared throughout the economy (including with capital that has no direct connection with production), the capitalist class does not see itself as an exploiting class. It is a class of risk-takers, innovators, “job creators” or some other flattering heroic thing. Their feudal forebears thought themselves ordained by god, so perhaps that’s progress.

The bourgeoisie is, however, a divided class. Capitalists compete with each other in every sector, and capital — as money — can move from one sector to another in search of a higher rate of return. The competition of capitals, in the context of the inherent hostility of capital to labor, sets a path for capitalism that is crisis-ridden, generating recessions and depressions.

Crises in Theory

Crises are both cyclical (ie, grow out of boom-bust cycles over the medium term) and secular (ie, reflect a decline of the system over the long term). There is another, still more general, level on which we can say the system is in crisis: the historical. To start to make sense of crises, we need to explore a handful of concepts from Marx.

Let’s return to the commodity, whose value can be broken down into three components, c + v + s,

Value is created in production but shared out to unproductive capital in advertising, transportation, the state and finance through various mechanisms. All of the value in capitalist society can be conceptualized as belonging to one of the three categories.

Marx thought of constant capital as “dead” (or past) labor, and variable capital as “living” labor. The value that constant capital contributes to the commodity is fixed (hence “constant”), but living labor — which effects the transfer of the value of constant capital to the commodity — creates new value both by replacing the value of labor power and by generating surplus value (from which the capitalists draw either to consume or to reinvest in expanded production). Living labor is the lifeblood of the system.

Yet competition among capitalists, coupled with the antagonisms between capitalists and workers, leads capitalists to maximize profits by driving down production costs through labor-saving and labor-displacing technology, e.g., automation, computers, more efficient techniques, etc. In other words, capitalism tends to reduce the role of living labor in the production process.

On its own, this would be a good thing, since this development of the productive forces lays the basis for less work shared out among the same number of people. Given the alienated social conditions of the capitalist mode of production, however, it means crisis, unemployment, and greater exploitation.

In fact, for Marx, exploitation of labor can be measured: the rate of surplus value (s/v) is also known as the rate of exploitation, since it reflects how much surplus value is produced relative to variable capital (the wages of productive workers).

The labor-displacing bias of capitalism creates another, more profound problem — one that reflects the increasingly irrational character of the relations of production. Investment in technology and the rising “technical composition of capital” yields a changing proportion in the value breakdown of the commodity, as “c” assumes ever-greater weight. There is a tendency for what Marx called the organic composition of capital, c/(v+s) to rise. We can think of the OCC as the domination of “dead” labor in machinery, etc. over “living” labor.

It is important to point out that a high OCC has different consequences for individual firms than it does for the economy as a whole. Capitalists do not directly appropriate the surplus value created by their own workers. A transformation process occurs in the sphere of production such that those companies within industries (and those industries in the economy) enjoying a higher organic composition will capture more of the available surplus. That is, of course, the ultimate material incentive for companies to invest in labor-saving technology.

The problem arises at the macro level. Other things being equal, a rising OCC creates a falling tendency for the rate of profit, s/(c+v), i.e., the amount of surplus value relative to the capital advanced. While a rising rate of surplus value can raise profits, the overall direction in which the system moves is toward a falling rate of profit. That is a big problem because the rate of profit is what drives capitalist investment.

If the rate of profit falls, capitalists will tend to restrict investment in productive activity — they will either invest in non-productive activity (which increases the amount of non-productive capital sharing the surplus value created in productive activity), or they sit on their capital and wait for better times. The dip in investment has a knock-on effect leading to layoffs and business failures (including because workers cannot afford to buy as many goods and services). The subsequent destruction of constant capital value (though not necessarily the technical apparatus in which it is expressed) lowers the OCC, setting the groundwork for a rise in the rate of profit and renewed investment. Generally speaking, this is the process underpinning the familiar cycle of boom and bust that even bourgeois economists recognize.

Cyclical crises are typically what we call recessions, though they can precipitate more severe contractions (ie, depressions) depending on how they relate to long-term trends in the rate of profit and organic composition of capital. Cycles exist with both long-term periods of expansion and decline.

The system really avoids shutting down on itself by seeking to implement what Marx called “countervailing” tendencies, e.g., investing capital overseas, increasing the productivity of labor without introducing new machines (eg, lengthening the working day), de-valuing constant capital (eg, through “fire sale” liquidation and bankruptcies during economic contractions). There are limits to these remedies and the general historical trend is toward a declining rate of profit and worsening crises, leading the system to become sluggish, with capital increasingly diverted into non-productive (including completely fictitious) activities.

Crises in History

The capitalist mode of production has been in a state of historic decline since the last quarter of the 19th century. That does not mean that the system has been in acute crisis the entire time. To the contrary, there have been periods of intense growth and expansion of the productive forces. But that growth has come at enormous costs created by the irrationality of the capitalist system. Setting aside the obvious issue of the impact on the natural environment, the growth that capitalism has been able to achieve has been made possible by massive destruction.

Let’s go back to the distinction between recessions (which is what we have come to call those mid-range, cyclical contractions) and depressions (which are more severe, rare and longer-lasting contractions). Bourgeois economists typically label as “recessions” those contractions in GDP which last at least two quarters but which are resolved within a few years at most; depressions (which used to be the generic term for contractions before the Great Depression of the 1930s) are those that last more than three years and/or involve a contraction of 10 percent of GDP or more. In his book, The Long Depression, Marxist economist Michael Roberts does an excellent job explaining the history of depressions using value theory. Roberts argues that the distinction made by bourgeois economists misses the importance of how long it takes to recover from the contraction — it takes a decade or more to recover from depressions, but not recessions.

With that in mind, Roberts identifies three depressions in global capitalist history: 1873—97; 1929—39; and 2008—? Within each of these depressions there were ups and downs (ie, periods of expansion and recession), but the overall level of growth was below the level of growth in the period preceding the depression. In between depressions, growth is more robust. As Roberts details, the movements in the rate of surplus value, the organic composition of capital and the rate of profit, as articulated by Marx, are remarkably powerful tools for making sense of the real history of capitalist crises, which may be triggered by a range of factors, e.g., financial panics, commodity bubbles, natural disasters and, we could add, public health crises.

Many of us are familiar with the Great Depression of the 1930s. Liberals point to the impact of the Keynesian or semi-Keynesian policies of FDR and other Western governments in pulling the economy out of depression, but the reality is that the Great Depression was ended by the mobilization of industry for World War II. Moreover, the basis for the post-WWII boom was the massive capital destruction during the war. Essentially, nearly the entire industrial apparatus of Western Europe was physically destroyed, substantially reducing the organic composition of capital.

In the late 1940s, the United States was home to 50 percent of the world’s industrial production. The following three decades were shaped by the dominance of US imperialism, which adopted a policy of allowing its competitors in Germany and Japan to recover and grow — largely due to geo-political calculations in the context of the Cold War with the Soviet Union.

The post-WWII boom ended in the early 1970s. The economic recovery following the Great Depression and WWII was linked to a recovery in the profit rate, though the latter actually began a secular decline in the 1950s. It was the fall in the rate of profit over the next decade or decade and a half that set the stage for the malaise of the 1970s. In the second edition of his fantastic book Invisible Leviathan, Murray Smith looks at theoretical and empirical contributions from Marxist economists (including himself) concerning the US economy from the 1950s to today. Smith shows how a rising OCC prompted a dramatic decline in the rate of profit between 1950 and the 1980s.

The rate of profit climbed from the 1990s until 2007, i.e., just before the “Great Recession” that began in 2008. As Smith points out, the climb in the rate of profit (calculated using official measures) during that quarter century was based not only on a rise in the rate of surplus value (this was a period of neoliberal attacks on the working class) but also to a large extent on fictitious profits — capital fled more and more into Wall Street and financial transactions of increasing complexity and detachment from the “real economy.”

The contraction that began in 2008 thus started out on a relatively low level in real terms, with a bloated financial sector, massive public and private debt (ie, claims on future value) and the fictious profits that are tied to that debt. In that case, it was the puncturing of the housing bubble in the US, which undergirded a house of cards in fictious capital (derivatives, credit default swaps) that was the trigger to the economic collapse.

Smith notes “that the crisis of global capitalism that erupted in 2007—08 is due to the persistent profitability problems of productive capital, and that these problems are at the root of the ‘financialisation’ phenomenon and debt crises that are now destabilizing the world system.” He adds: “the global capitalist slump is unlikely to be overcome without far more savage attacks on labour by capital than those that characterized the pre-2008 neoliberal era.”


We are today in the midst of a massive global contraction. Even before the coronavirus crisis, we were likely headed for a downturn within the framework of the broader slump. That downturn is now a reality: tens of millions of people are out of work who were gainfully employed just two months ago. The response of governments to the crisis, especially pronounced in the US, has been to bail out the corporations and provide little support for workers. Capitalist states are strengthening the financial sector as they rack up debt, setting the stage for an even more savage wave of attacks on the working class, notwithstanding the current (and largely empty) rhetoric of taking care of people. We are facing, not the prospect of a new “New Deal” (“Green” or otherwise), but mass unemployment and austerity.

What does all this mean? What does it do to help us understand and fight capitalism? What does it do to shape the fight for socialism?

Marxist “economics” helps us understand the contradictions of capitalism, its foundation in exploitation and its generation of crises. But the system will not simply collapse on its own. Capitalism will always find a way out of crisis, even as those crises become more severe. It will find a way out by ratcheting up exploitation of workers, by using the state to transfer wealth from the working class to the capitalist class (including the parasitical layers of financial capital, insurance, etc.), and by pushing for trade wars and eventually shooting wars.

But Marxism also helps us understand how to get rid of capitalism. The key is the international working class. Marxists seek to use our understanding of capitalism to help build a revolutionary party that can win support in the working class, educating it in its historic mission of replacing the capitalist mode of production with socialism.