PLSC 118: The Moral Foundations of Politics

Lecture 10

 - Marx's Theory of Capitalism


Today, Professor Shapiro continues his discussion of Enlightenment theory of Karl Marx, focusing on the foundations of his theory of capitalism. The central question is, how is wealth created under capitalism at the micro level? For Marx, Adam Smith’s invisible hand is not entirely benevolent. His labor theory of value stipulates that living human labor-power is the only way to create new value, and therefore capitalists who shift toward capital-intensive production cannot actually create new value. Marx also assumes wages are at the level of subsistence, and that capitalists turn a profit by exploiting the surplus labor time of workers. Professor Shapiro also explores some corollary concepts to Marx’s mode of production: the class-for-itself/class-in-itself distinction, socially necessary labor time and surplus labor time, and the extent to which workers are other-referential.

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PLSC 118 - Lecture 10 - Marx's Theory of Capitalism

Chapter 1. Introduction: Class Agenda and Marx’s Characterization of Freedom [00:00:00]

Professor Ian Shapiro: 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,

The 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.

Chapter 2. Marx’s Theory of Science [00:07:12]

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.

Chapter 3. The Labor Theory of Value; Exploitation and Injustice [00:16:37]

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?

Professor Ian Shapiro: 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?

Chapter 4. The Labor Theory of Surplus Value [00:22:37]

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?

Professor Ian Shapiro: 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.

Chapter 5. Relative & Absolute Surplus Value & Rate of Exploitation [00:35:37]

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.

[end of transcript]

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