China Export Strategy

China's Export Strategy: What Can We Learn From It? Arvind Panagariya As much as by luck as by design, China stumbled onto an export and foreign investment strategy that has proved remarkably successful, helping the economy move quickly to a market-based system. experience serve as a model for other countries? But can the Chinese After three decades of inward-oriented trade and foreign investment policies, in 1979, China switched course and launched an â€Å"open-door† policy. During the 15 years that have elapsed since then, the country has ersistently, albeit gradually, liberalized its trade and foreign investment regime. This has been accompanied by a spectacular growth in GDP and During 1980-90, GDP grew annually at an impressive rate of Over the same period, exports grew at an annual rate of 11 foreign trade. 9. 5 percent. percent–more than twice as fast as world trade–and imports 9. 8 percent. More recently, in 1992 and 1993, GDP has shown annual growth rat es exceeding 13 percent. The annual growth in exports and imports during these two years has been 13 percent and 27 percent, respectively. What are the key trade and foreign investment policies that have led to this dramatic growth in China's foreign trade and GDP? And what lessons can we derive from China's experience for other economies in transition? (see box)? In the following, we examine the nature of reforms and why they worked well or poorly in particular cases. Though this study focuses on external economic policies, it is important to remember that the promotion of non-state enterprises has closely complemented China's outward-oriented – 2 strategy. These enterprises, owned collectively by local authorities in urban areas, townships or villages, enjoy a high degree of autonomy in their operations. Consequently, they have been most successful in taking advantage of the outward-oriented strategy. Promoting an â€Å"export culture† On the external front, three factors combined to give rise to China's success: adoption of an aggressive pro-export strategy by central authorities, active participation of local authorities and the presence of Hong Kong and Taiwanese investors looking for a source of cheap labor. With he beginning of the open-door policy, the central authorities began sending clear signals in favor of an export-oriented trade regime. A variety of instruments were employed to promote what may be called an â€Å"export culture†: geographical targeting, sectoral targeting, a liberal foreign investment regime, and liberal provision of export financing. Geographical targeting. China set up the so-called Special Economic Zones (SEZs) and Open Cities within which economic activities– manufacturing, banking, exporting and importing, and foreign investment-took place in a more liberal environment than is available in the rest of the economy. These zones helped to serve as focal points for investment from both domestic and foreign sources and to allow China to develop links with the world market, brought in part, by Hong Kong and Taiwanese entrepreneurs. Originally there were only a handful of such zones, all in Guangdong and Fujian provinces. Over time, many features of SEZs were extended to other cities. Two features of SEZs distinguish them from the rest of the country. First, the SEZs enjoy considerable administrative autonomy in the – 3 areas of investment, pricing, taxation, housing, and labor and land management policies. require virtually no Most foreign investments can be approved locally and central clearance. Second, the SEZs offer many The economic incentives to investors not available in the inland provinces. corporate income tax, normally 33 percent for foreign funded enterprises and 55 percent for state owned enterprises, is 15 percent for all enterprises in the SEZs. All imported inputs used in exports or sold within the Zones are In addition, tax holidays free of import duty and other indirect taxes. available to foreign funded enterprises are more generous in the SEZs than those available under the national tax legislation. Depending on the amount of investment, nature of the technology, and duration of the project, tax holidays of up to five years are available. The SEZs and open cities exhibited spectacular economic performance. In 1979, the three SEZs in Guangdong were small fishing villages with virtually no industrial activity. transformed into modern cities. By the end of 1980s, they had been In 1990, the SEZs and open cities accounted for 52% of total realized investment and more than half of total exports. During 1985-90, industrial output in Guangdong and Fujian grew at annual rates of 16% and 14. % compared with 6. 9% in the rest of the economy. Sectoral targeting. Side by side with geographical targeting, China has also engaged in sectoral targeting for exports. Targeted sectors, chosen at a broad level, have included light industrial products, textiles, and machinery and electronic goods. The most important instruments of targeting were production networks for exports (PNEs) and higher excha nge retention rights to targeted sectors. – 4 The Seventh Five Year Plan (1986-90) provided for the creation of PNEs. The idea was to bring the leading factories within the targeted ector into a network and support them through subsidies for technological upgrading, guaranteed supplies of raw materials and power, preferential access to transportation, attractive purchase prices for their goods, and higher exchange-retention rights than other enterprises in the same industry. The aim of the networks was to expand both the quailty and quantity of exports of the participating factories. The first industry group to benefit from this scheme was machinery and electronic goods. PNEs have also been created in light industrial products and textiles, and farm and sideline products. Rights to foreign exchange generated by exports are shared between the central and provincial governments. For targeted sectors, the allocation of retention rights was more favorable to the province and the foreign trade corporations (FTCs), which procure and export more than 80 percent of China's exports. In the case of light industries, arts & craft, and knitwear, foreign exchange was divided in the ratio of 20:80 between the center and province. Similarly, in machinery and electronic goods, for within-quota exports, the split between the center and provinces was 35:65. Though the retention rights have been revised recently, the bias in favor of FTCs has been retained. From the available data, it is difficult to judge the impact of sectoral targeting primarily because it was broad based. textiles and light industrial products in total exports The share of did expand significantly after 1985. But the effect on machinery sector is less clear. – 5 Overall, one thing which is clear, however, is that the export share of labor intensive sector has gone up in the latter half of 1980s. export shares of heavy and light industries were 47. % In 1982, 37. 6%, and respectively, in 1982. 52. 9%. By 1989, these shares had changed to 31. 9% and Liberal foreign investment regime. China's striking export performance is related to the size of foreign direct investment flows into the country (see table). Foreign investors have been lured to the Chinese market for three reasons. First, both policies and procedures have been designed to facilitate foreign investm ent. A 25 percent foreign investment gives an enterprise the At status of a joint venture and qualifies it for various tax incentives. he same time, foreign equity investment can rise all the way up to 100 percent. Restrictions on the choice of sectors are minimal; any preferences, sectoral or otherwise, take the form of extra incentives. As a result, joint ventures have been established in sectors ranging from hightechnology to consumer goods, services, and raw materials. lower or upper limit on the amount of foreign investment. There is no In large open cities such as Shanghai, foreign investment projects up to $30 million can be approved by local authorities. The limit in smaller open cities is $10 This autonomy has illion while that in unopened cities is $3 million. greatly simplified the approval procedures. Second, employment, wage and pricing policies for joint ventures are flexible. contractual Joint ventures are free to employ any required personnel on a basis. Employees ar e subject to warnings, wage cuts and – 6 dismissal. Except for a few product categories for which prices are set by the state, joint ventures are free to set their prices both domestically and abroad. Products or services for which prices are fixed are of two types. In the first category, prices are completely fixed (e. . , products such as grain, oil, and fuel; and services such as electricity and rent). In the second category, prices are allowed to fluctuate within prespecified bands usually ranging from 10 to 30 percent (e. g. , steel, cement, timber, coal and other major capital goods). Finally, China has given extra incentives to joint ventures. As already discussed, these incentives are particularly generous in the SEZs and open cities. Since 1986, additional preferential treatment has been The available to export-oriented or technologically advanced projects. ncentives include: o Exemption from state subsidies paid to employees to cover the benefits provided by the gov ernment of China; o Priority in obtaining Bank of China loans; o Tax exemption on profits remitted abroad; o Longer tax holidays from corporate income tax; o Extra tax benefits on profits reinvested in export-oriented or technologically advanced projects; and o Further reduced land-use fees, priority in obtaining utilities, transport, and communication facilities. Duty exemptions. China has also instituted an elaborate system of Under these schemes, uty exemptions on imported inputs used in exports. the concessional share of imports was 35 percent in 1988 and rose to 50 – 7 percent in 1991. played an The schemes, introduced in 1984 or later, seem to have role in expanding China's exports. Total exports important associated with concessional import arrangements account for 64 percent of China's manufactured exports. These exports doubled between 1988 and 1991. The domestic value added of these exports is, of course, lower than of other exports. Export financing. Ready access t o export credits is believed to ontribute favorably to export performance. The Bank of China, which is the primary bank dealing in foreign exchange, provides trade credits. Credit, offered in domestic currency, is available for working capital as well as fixed investment for the production of exports and import substitutes. main beneficiaries of these credits are FTCs. of total trade credits in 1991. The They accounted for 85 percent The Bank of China also offers loans in terms of foreign exchange, primarily to enterprises in which foreigners have invested, for working capital and fixed investment. Though contributing favorably to exports, the liberal credit policy has led to a rapid expansion of outstanding loans. The total volume of outstanding trade loans at the end of 1991 was more than three time that at the end of 1985. In part, this expansion was due to the growth of exports. But perhaps it also reflects a rising ratio of export credit to total exports. According to one calculation, this ratio was 150 percent in 1988. The Hong Kong connection A key element in China's success in the world markets so-called â€Å"Hong Kong connection†. as been the In the mid-1980s, Hong Kong entrepreneurs began shifting manufacturing facilities to China, attracted by lower labor – 8 costs as wages rose rapidly at home. This link with Hong Kong has not only brought much needed capital to China but also supplied new technology, modern management practices and critical links to the world market. Today more than half of China's exports to the rest of the world are handled by Hong Kong. Of the $45 billion in cumulative foreign investment commitments to China through 1992, 70 percent came from Hong Kong. This investment went mainly to export-oriented joint ventures. A large proportion of Guangdong's export production is supervised under contract by firms in Hong Kong. Processing activity for exports in Guangdong is also carried out largely in collaboration with partners in Hong Kong who supply materials. Many items, particularly in the toy and clothing sectors, which were previously exported by Hong Kong are now exported by Guangdong. Local policies China's economic system is highly decentralized now and the implementation of policy is largely under the control of provinces. Hence, in the fast-growing provinces, provincial and local officials have been deeply involved in the development process in general and export promotion in particular. The role of local authorities in facilitating foreign investment has been described earlier. In addition, there are a number of ways in which local authorities promote exports. First, the center gives mandatory targets or export quotas for only a limited number of items or in limited volumes. But in some provinces, for Moreover, example Jiangsu, the export-quota-system is far more elaborate. aking advantage of their monopsony power, FTCs are able to buy goods from enterprises at prices well below the corresponding domestic prices. Though – 9 the economic desirability of â€Å"exports at any cost† has been questioned, the FTCs have certainly been able to operate profitably on account of the monopsony power. Second, operating within the center's guidelines, provincial authorities have been expanding Direct Export Rights (DERs) to enterprises. Because the criteria for obtaining such rights are stringent, the DERs have not expanded as rapidly as would have been desirable, however. ith DERs account for only 5% of China's exports. Third, within the State's guidelines, provincial and city governments decide the allocation of raw materials imported by using locally retained foreign exchange earnings among enterprises, collectives and TVEs and across different sectors. Provinces and cities also provide indirect export Enterprises subsidies through the provision of critical inputs such as electric power to export oriented enterprises. higher bonuses for Further incentives are provided in the form of and employees on the basis of export managers erformance. Within the guidelines laid down by the State, provinces can confer rights to trade directly upon enterprises and enterprise groups. Finally, local authorities establish joint ventures between FTCs and enterprises to promote exports. establ ished 160 of these ventures. establish another 200 such ventures. The central lesson Perhaps the most important lesson, also consistent with the experience of other East Asian countries such as Korea, Taiwan Province of China, During the Seventh Plan, Wuxi City alone In the Eighth Plan, the city intended to 10 Singapore and now Thailand, is that the key to high GDP growth rates is export orientation and eventual success in the world market. The success in export expansion, in turn, depends on the policy package, which conveys a message in no uncertain terms that, rather than shelter import competing industries, the country will give priority to export oriented activities. China benefitted greatly from the clarity of signals sent by its policy reforms. Once the reform process began, there was rarely any doubt Despite occasional policy reversals, provincial and about its direction. ity governments, which implemented policies and enterprises, both state and nonstate, were convinced tha t the country was headed towards an export oriented regime. geographical In terms of static efficiency, virtually all policies-preferential treatment of foreign investment in targeting, general and in export sectors in particular, and discriminatory exchange retention rights–were highly distortionary. Yet, they combined to give a loud and clear signal that the government was determined to change the economy's orientation away from import substitution to export promotion. – 11 – Box Can India benefit from China's experience? Operationally, the Chinese model is not very applicable to the economies of Eastern Europe or the former Soviet Union. These countries have largely rejected the planning model, which has remained an integral part of the Chinese development strategy. The countries in Eastern Europe The have already evolved far closer to the market model than China. countries emerging out of the former Soviet Union, on the other hand, are still struggling with the problem of macroeconomic stabilization. The country for which the Chinese experience is most relevant is India. Both are highly populous and, by developing-country standards, large economies. They began their development process approximately at the same time and stressed self-reliance. Both relied increasingly heavily on import substitution policies and ended up with a highly capital intensive production structure. China changed course in 1979 while India continued (with modest liberalization) on the old course. In 1991, in many ways, India stood where China stood in 1979. China's in 1979. Import and The trade-to-GDP ratio was the same as controls were rampant and the investment domestic currency was overvalued. Despite these similarities, even in India's case, lessons from China are limited. In addition to the obvious differences in political systems which lead to very different political-economy processes in the two countries, there are three reasons for this. has been highly interventionist. been in China and elsewhere in First, the Chinese approach This approach can be successful–as it has East Asia–provided the government can – 12 implement â€Å"right† interventions judiciously. India's experience during the Second, India's last four decades in this respect has not been encouraging. conomy has already evolved far closer to a market economy than that of China. have For instance, export targets and foreign exchange contracts, which helped create a pro-exports ethos in China are neither arguably desirable nor feasible in India. greater role in India than in China. Similarly, private sector plays a far Finally, India has already carried out For example, in the a rea of many reforms that China is still contemplating. exchange rate, China has a multiple exchange rate system and its exchange market is not organized along the lines of market economies. India has chieved virtual current account convertibility and its foreign exchange market is organized along modern lines. Of the lessons that have general relevance to India, the following points would seem to be the most pertinent. o First, creating a liberal and flexible economic environment along the lines of SEZs in China would stimulate greater foreign investment. The country can begin with a small number of cities–e. g. , Bombay, Bangalore, Cochin, and Madras–and, as in China, local governments may be given full authority to approve foreign investment up to a certain limit. Most important, rules of entry and exit in the zones can be made more flexible. Because these zones will be introduced in limited areas with a high growth potential, political consensus may be easier, even if this requires new legislation. Eventual success in the open zones may open the way for Currently, India does have export political consensus on a wider scale. processing zones. But the geographical area over which such zones operate – 13 is far too limited to allow for the full play of liberal policies and make them focal points of investment activity. Second, provision of infrastructure facilities through active In participation of local authorities in the reform process is critical. the fast growing provinces in China, local authorities–especially mayors of the cities–have been deeply involved in the process of development. They try to ensure that investors get speedy clearance with respect to land use, supply of electricity, water and other facilities. In India, so far, it seems that the enthusiasm for reforms has not filtered to state governments and the center may well have to take a lead in this regard, offering both carrot and stick. All incentives and reforms at the central level can be rendered ineffective if the state and local authorities, which must provide land, power, communications facilities, and environmental clearance, do not cooperate. There is an urgent need to study caefully how such bottlenecks can be removed. o Third, there is a need for a shift in the production structure towards more labor intensive industries. The share of capital goods imports in total imports is rather small in India when compared with China and other fast-growing countries in East Asia. This, combined with the fact that India's import-to-GDP ratio is small, suggests that India is far more deeply into the production of capital goods than China and other comparator countries. In late 1970s and early 1980s, China also suffered from this problem and adopted policies to change the structure of production in favor of labor intensive goods. An important part of this strategy was targeting of a few – 14 sectors, especially for exports. this route. For India, it is perhaps unwise to follow Given the country's generally neutral and rules-based approach to reforms, it is perhaps best to rely on the standard trade policy tools, particularly the structure of tariffs. Recent reduction in tariffs on capital goods should help move the economy towards more labor intensive goods. What is needed is resistance to policies that reverse the impact of this policy change. In particular, there is need for labor-market reforms. The country will not be able to take advantage of low wages of skilled and unskilled labor unless potential investors are sure that they can operate factories around the year without fears of recurrent labor disputes. This fear has been behind the highly capital intensive technologies chosen by investors in recent years. Fourth, duty exemptions for assembly type operations combined with rapid processing of imported inputs and materials by customs authorities made a significant contribution to China's export growth. In India, duty exemptions for exporters exist but an improvement in their administration and simplification of procedures leading to speedy processing by customs will help boost exports. Also, for small exporters who rely on duty drawbacks, delay in getting the drawback as well as in obtaining inputs from abroad are common. An improvement in this direction is also desirable. Fifth, it is important to note that China was welcoming of foreign investment for both domestic and foreign markets. Most of the incentives– tax holidays, lower fees on land use, flexibility in the employment of labor etc. ,–were available to all foreign investors. ventures, some extra incentives were provided. For export-oriented joint The lesson here is that – 15 fears of tariff-jumping type of foreign investment should not lead to erection of barriers. Instead, if the regime is to be tilted in favor of export-oriented foreign investments, it should be done through positive incentives. Imposition of barriers to foreign investment will only add noise to signals of openness that India has been sending. A final point concerns the importance of a â€Å"Hong Kong† connection. In India's case, there are no geographic neighbors that are as economically dynamic as Hong Kong or Taiwan, Province of China. But through cultural ties, the most India can do is to attract investments from Indians in Hong Kong and Non Resident Indians (NRIs) elsewhere in the world. While this is obviously worth doing, India has to rely on a more diversified base of foreign investors. It may be argued that to meet the East Asian challenge, investors in the United States and Europe will be increasingly looking for sources of cheap labor. With its vast pool of cheap unskilled to middleMoreover, level skilled labor, India clearly fulfills this requirement. India's economic and political institutions are also familiar to western investors. What is needed is more open policies, transparency, and infrastructure. If this can be accomplished, India may well become the primary export base for the United States and European Community in the 21st century. Arvind Panagariya an Indian national, was a Principal Economist in the Bank's Trade Policy Division and is a Professor of Economics at the University of Maryland. He earned his PhD from Princeton. – 16 Direct foreign investment into China (billion dollars) Commitment 1988 1989 1990 1991 1992 (first half) Cumulative, end 1991 5. 3 5. 6 6. 6 12. 0 14. 5 48. 9 Actual n. a. 3. 4 3. 5 4. 4 3. 4 20. 3 ——————————————————————- Sources: China Statistics Yearbook 1990, 1991, Ministry of Foreign Economic Relations and Trade, China.

An Introduction to Marxist Economic Theory

An Introduction to Marxist ECONOMIC THEORY Ernest Mandel 2 An IntroductIon to MArxIst EconoMIc ) was the most influential exponent of Marxist economic theory in the Western world during the second half of the 20th century, and is best known for his masterful two-volume work Marxist Economic Theory (1962) and his brilliant Late Capitalism (1972).In the former, he demonstrated that it was possible, on the basis of the contemporary data, to reconstitute the whole economic system of Karl Marx 100 years after the first publication of Marx’s Capital. In the latter work, Mandel provided an explanation of the causes of the 20-year â€Å"wave† of rapid growth of the world capitalist economy after World War II, which also demonstrated that it would soon be followed by an indeterminately â€Å"long wave† of much slower economic growth, and recurrent social and political crises in the developed capitalist countries.Late Capitalism also provided the first comprehensive analys is of the new features of global capitalism that emerged in the post-war period and that are still with us today — transnational corporations as the dominant form of capitalist business organisation, the enormous growth of the services sector, the crucial role of state expenditure in propping up an economic system marked by financial instability, long-term stagnation punctuated by speculative booms, mindless consumerism and accelerating environmental destruction.This pamphlet, which was first published in French in 1964, provides a concise exposition of the elementary princples of Marxist economic theory. In the first section, Mandel elucidates the basic categories of Marx’s economic doctrine from the emergence of the social surplus product to the labour theory of value. In the second section, he explains the basic laws of motion of capitalism and its inherent contradictions.In the final second, he applies these to some of the new features exhibited by the new stage of imperialist capitalism that emerged after the second world war, which at the time he termed â€Å"neo-capitalism†. In his more mature work Late Capitalism, Mandel abandoned this term in favour of the designation â€Å"late capitalism†, explaining in the introduction to 4 An IntroductIon to MArxIst EconoMIc thEory that work that the designation â€Å"neo-capitalism† could be falsely â€Å"interpreted to imply either a radical continuity or discontinuity with traditional capitalism†.Instead, Mandel stressed that the â€Å"era of late capitalism is not a new epoch of capitalist development [but] merely a further development of the imperialist, monopoly-capitalist epoch† with â€Å"the characteristics of the imperialist epoch enumerated by Lenin† at the beginning of the 20th century remaining â€Å"fully valid for late capitalism†.? I. thE thEory of VAluE And surplus VAluE In the last analysis, every step forward in the history of civili sation has been brought about by an increase in the productivity of labour.As long as a given group of men barely produced enough to keep itself alive, as long as there was no surplus over and above this necessary product, it was impossible for a division of labour to take place and for artisans, artists or scholars to make their appearance. Under these conditions, the technical prerequisites for such specialisation could not possibly be attained. socIAl surplus product As long as the productivity of labour remains at a level where one man can only produce enough for his own subsistence, social division does not take place and any social differentiation within society is impossible.Under these conditions, all men are producers and they are all on the same economic level. Every increase in the productivity of labour beyond this low point makes a small surplus possible, and once there is a surplus of products, once man’s two hands can produce more than is needed for his own sub sistence, then the conditions have been set for a struggle over how this surplus will be shared. From this point on, the total output of a social group no longer consists solely of labour necessary for the subsistence of the producers.Some of this labour output may now be used to release a section of society from having to work for its own subsistence. Whenever this situation arises, a section of society can become a ruling class, whose outstanding characteristic is its emancipation from the need of First presented at an educational weekend organised by the Paris Federation of the United Socialist Party in 1963 and subsequently published in Les Cahiers du Centre d’Etudes Socialistes, February 1964. 6 An IntroductIon to MArxIst EconoMIc thEory working for its own subsistence.Thereafter, the labour of the producers can be divided into two parts. A part of this labour continues to be used for the subsistence of the producers themselves and we call this part necessary labour; the other part is used to maintain the ruling class and we give it the name surplus labour. Let us illustrate this by the very clear example of plantation slavery, as it existed in certain regions and periods of the Roman Empire, or as we find it in the West Indies and the islands of Portuguese Africa starting with the 17th century, on the great plantations which were established there.In these tropical areas, even the slave’s food was generally not provided by the master; the slave had to produce this himself by working a tiny plot of ground on Sundays and the products from this labour constituted his store of food. On six days of the week the slave worked on the plantation and received in return none of the products of his labour. This is the labour which creates a social surplus product, surrendered by the slave as soon as it is produced and belonging solely to the slavemaster.The work week, which in this case is seven days, can be divided into two parts: the work of one day, Sunday, constitutes necessary labour, that labour which provides the products for the subsistence of the slave and his family; the work of the other six days is surplus labour and all of its products go to the master, are used for his sustenance and his enrichment as well. The great domains of the early Middle Ages furnish us with another illustration. The land of these domains was divided into three parts: the communal lands consisting of forest, meadows, swamps, etc. the land worked by the serf for his own and his family’s subsistence; and finally, the land worked by the serf in order to maintain the feudal lord. The work week during this period was usually six days, not seven. It was divided into two equal parts: the serf worked three days on the land from which the yield belonged to him; the other three days he worked on the feudal lord’s land, without remuneration, supplying free labour to the ruling class. The products of each of these two very different types o f labour can be defined in different terms.When the producer is performing necessary labour, he is producing a necessary product. When he is performing surplus labour, he is producing a social surplus product. Thus, social surplus product is that part of social production which is produced by the labouring class but appropriated by the ruling class, regardless of the form the social surplus product may assume, whether this be one of natural products, or commodities to be sold, or money. Surplus value is simply the monetary form of the social surplus product. The Theory of Value and Surplus Value When the ruling class appropriates the part of society’s production previously defined as â€Å"surplus product† exclusively in the monetary form, then we use the term â€Å"surplus value† instead of â€Å"surplus product†. As we shall see later on, however, the above only constitutes a preliminary approach to the definition of surplus value. How does social surpl us product come into existence? It arises as a consequence of a gratuitous appropriation, that is, an appropriation without compensation, by a ruling class of a part of the production of a producing class.When the slave worked six days a week on a plantation and the total product of his labour was taken by the master without any compensation to the slave, the origin of the social surplus product here is in the gratuitous labour, the uncompensated labour, supplied by the slave to the master. When the serf worked three days a week on the lord’s land, the origin of this income, of this social surplus product, is also to be found in the uncompensated labour, the gratuitous labour, furnished by the serf.We will see further on that the origin of capitalist surplus value, that is to say, the revenue of the bourgeois class in capitalist society, is exactly the same: it is uncompensated labour, gratuitous labour, which the proletarian, the wage worker, gives the capitalist without rec eiving any value in exchange. coMModItIEs, usE VAluE And ExchAngE VAluE We have now developed several basic definitions which will be used throughout this exposition. A number of others must be added at this point. Every product of human labour normally possesses utility; it must be able to satisfy a human need.We may therefore say that every product of human labour has a use value. The term â€Å"use value† will, however, be used in two different senses. We will speak of the use value of a commodity; we will also talk about use values, as when we refer, for example, to a society in which only use values are produced, that is to say, where products are created for direct consumption either by the producers themselves or by ruling classes which appropriate them. Together with this use value, a product of human labour can also have another value, an exchange value.It may be produced for exchange on the market place, for the purpose of being sold, rather than for direct consumpt ion by the producers or by wealthy classes. A mass of products which has been created for the purpose of being sold can no longer be considered as the production of simple use values; it is now a production of commodities. The commodity, therefore, is a product created to be exchanged on the market, as opposed to one which has been made for direct consumption. Every 8 An IntroductIon to MArxIst EconoMIc thEory commodity must have both a use value and an exchange value.It must have a use value or else nobody would buy it, since a purchaser would be concerned with its ultimate consumption, with satisfying some want of his by this purchase. A commodity without a use value to anyone would consequently be unsaleable, would constitute useless production, would have no exchange value precisely because it had no use value. On the other hand, every product which has use value does not necessarily have exchange value. It has an exchange value only to the extent that the society itself, in whi ch the commodity is produced, is founded on exchange, is a society where exchange is common practice.Are there societies where products do not have exchange value? The basis for exchange value, and a fortiori for trade and the market place, is constituted by a given degree of development of the division of labour. In order for products not to be directly consumed by their producers, it is essential that everybody should not be engaged in turning out the same thing. If a particular community has no division of labour, or only its most rudimentary form, then it is clear that no reason for exchange exists. Normally, a wheat farmer has nothing to exchange with another wheat farmer.But as soon as a division of labour exists, as soon as there is contact between social groups producing different use values, then exchange can come about, at first on an occasional basis, subsequently on a more permanent one. In this way, little by little, products which are made to be exchanged, commodities, make their appearance alongside those products which are simply made for the direct consumption of their producers. In capitalist society, commodity production, the production of exchange values, has reached its greatest development.It is the first society in human history where the major part of production consists of commodities. It is not true, however, that all production under capitalism is commodity production. Two classes of products still remain simple use value. The first group consists of all things produced by the peasantry for its own consumption, everything directly consumed on the farms where it is produced. Such production for self-consumption by the farmer exists even in advanced capitalist countries like the United States, although it constitutes only a small part of total agricultural production.In general, the more backward the agriculture of a country, the greater is the fraction of agricultural production going for self-consumption. This factor makes it extreme ly difficult to calculate the exact national income of such countries. The second group of products in capitalist society which are not commodities but remain simple use value consists of all things produced in the home. Despite the fact that considerable human labour goes into this type of household The Theory of Value and Surplus Value 9 production, it still remains a production of use values and not of commodities.Every time a soup is made or a button sewn on a garment, it constitutes production, but it is not production for the market. The appearance of commodity production and its subsequent regularisation and generalisation have radically transformed the way men labour and how they organise society. thE MArxIst thEory of AlIEnAtIon You have no doubt already heard about the Marxist theory of alienation. The emergence, regularisation and generalisation of commodity production are directly related to the expanding character of this phenomenon of alienation.We cannot dwell on this aspect of the question here but it is extremely important to call attention to it, since the history of trade covers far more than the capitalist era. It also includes small-scale commodity production, which we will discuss later. There is also a postcapitalist society based on commodities, a transitional society between capitalism and socialism, such as present-day Soviet society, for the latter still rests in very large measure on the foundations of exchange value production.Once we have grasped certain fundamental characteristics of a society based on commodities, we can readily see why it is impossible to surmount certain phenomena of alienation in the transitional period between capitalism and socialism, as in Soviet society, for example. Obviously this phenomenon of alienation does not exist — at least in the same form — in a society where commodity production is unknown and where the life of the individual and his social activity are united in the most elementa ry way. Man works, but generally not by himself; most often he is part of a collective group having a more or less organic structure.His labour is a direct transformation of material things. All of this means that labour activity, the act of production, the act of consumption, and the relations between the individual and his society are ruled by a condition of equilibrium which has relative stability and permanence. We should not, of course, embellish the picture of primitive society, which was subject to pressures and periodic catastrophes because of its extreme poverty. Its equilibrium was constantly endangered by scarcity, hunger, natural disasters, etc.But in the periods between catastrophes, especially after agriculture had attained a certain degree of development and when climatic conditions were favourable, this kind of society endowed all human activities with a large degree of unity, harmony and stability. Such disastrous consequences of the division of labour as the elimin ation of all aesthetic activity, artistic inspiration and creative activity from the act 10 An IntroductIon to MArxIst EconoMIc thEory of production and the substitution of purely mechanical and repetitive tasks were nonexistent in primitive society.On the contrary, most of the arts, music, sculpture, painting, the dance, were originally linked to production, to labour. The desire to give an attractive and appealing form to products which were to be used either by the individual, his family, or larger kinship groups, found a normal, harmonious and organic expression within the framework of the day’s work. Labour was not looked upon as an obligation imposed from without, first of all because it was far less intense, far less exhausting than under capitalism today. It conformed more closely to the rhythms of the human organism as well as to the rhythms of nature.The number of working days per year rarely exceeded 150 to 200, whereas under capitalism the figure is dangerously cl ose to 300 and sometimes even greater. Furthermore, there was a unity between the producer, his product and its consumption, since he generally produced for his own use or for those close to him, so that his work possessed a directly functional aspect. Modern alienation originates basically in the cleavage between the producer and his product, resulting both from the division of labour and commodity production.In other words, it is the consequence of working for the market, for unknown consumers, instead of for consumption by the producer himself. The other side of the picture is that a society which only produces use values, that is, goods which will be consumed directly by their producers, has always in the past been an impoverished society. Not only was it subject to the hazards of nature but it also had to set very narrow limits to man’s wants, since these had to conform exactly to its degree of poverty and limited variety of products.Not all human wants are innate to man . There is a constant interaction between production and wants, between the development of the productive forces and the rise of new wants. Only in a society where labour productivity will be developed to its highest point, where an infinite variety of products will be available, will it be possible for man to experience a continuous expansion of his wants, a development of his own unlimited potential, an integrated development of his humanity. thE lAw of VAluEOne of the consequences of the appearance and progressive generalisation of commodity production is that labour itself begins to take on regular and measurable characteristics; in other words, it ceases to be an activity tied to the rhythms of nature and according with man’s own physiological rhythms. Up to the 19th century and possibly even into the 20th, the peasants in various regions of Western Europe did not work in a regulated way, that is to The Theory of Value and Surplus Value 11 say, they did not work with the same intensity every month of the year.There were periods in the work year when they worked very hard and other periods, particularly during the winter, when all activity virtually came to a halt. It was in the most backward agricultural areas of most of the capitalist countries that capitalist society, in the course of its development, found a most attractive source of reserve manpower, for here was a labour force available for four to six months a year at much lower wages, in view of the fact that a part of its subsistence was provided by its agricultural activity.When we look at the more highly developed and prosperous farms, those bordering the big cities, for example, and which are basically on the road to becoming industrialised, we see that work is much more regular and the amount of expended labour much greater, being distributed in a regular way throughout the year, with dead seasons progressively eliminated. This holds true not only for our times but even as early as the Middle Ages, at least from the 12th century on.The closer we get to the cities, that is to say, to the marketplace, the more the peasant’s labour becomes labour for the market, that is to say, commodity production, and the more regulated and more or less stable his labour becomes, just as if he were working inside an industrial enterprise. Expressed another way, the more generalised commodity production becomes, the greater the regulation of labour and the more society becomes organised on the basis of an accounting system founded on labour.When we examine the already fairly advanced division of labour within a commune at the beginning of commercial and craft development in the Middle Ages, or the collectives in such civilisations as the Byzantine, Arab, Hindu, Chinese and Japanese, certain common factors emerge. We are struck by the fact that a very advanced integration of agriculture and various craft techniques exists and that regularity of labour is true for the countrysi de as well as the city, so that an accounting system in terms of labour, in labour-hours, has become the force governing all the activity and even the very structure of the collectives.In the chapter on the law of value in my Marxist Economic Theory, I give a whole series of examples of this accounting system in work-hours. There are Indian villages where a certain caste holds a monopoly of the blacksmith craft but continues to work the land at the same time in order to feed itself. The rule which has been established is this: when a blacksmith is engaged to make a tool or weapon for a farm, the client supplies the raw materials and also works the blacksmith’s land during the whole period that the latter is engaged in making the implement.Here is a very transparent way of stating that exchange is governed by an equivalence in work-hours. In the Japanese villages of the Middle Ages, an accounting system in work- 12 An IntroductIon to MArxIst EconoMIc thEory hours, in the liter al sense of the term, existed inside the village community. The village accountant kept a kind of great book in which he entered the number of hours of work done by villagers on each others’ fields, since agriculture was still mainly based on cooperative labour, with harvesting, farm construction and stock breeding being done in common.The number of work-hours furnished by the members of one household to the members of another was very carefully tallied. At the end of the year, the exchanges had to balance, that is, the members of household B were required to have given household A exactly the same number of work-hours which members of household A had given household B during the year. The Japanese even refined things to the point — almost 1000 years ago! where they took into account that children provided a smaller quantity of labour than adults, so that an hour of child labour was â€Å"worth† only a half-hour of adult labour. A whole system of accounting was set up along these lines. There is another example which gives us a direct insight into this accounting system based on labour-time: the conversion of feudal rent from one form to another. In feudal society, the agricultural surplus product could take three different forms: rent in the form of labour (the corvee), rent in kind, and money rent.When a change is made from the corvee to rent in kind, obviously a process of conversion takes place. Instead of giving the lord three days of labour per week, the peasant now gives him a certain quantity of wheat, livestock, etc. , on a seasonal basis. A second conversion takes place in the changeover from rent in kind to money rent. These two conversions must be based on a fairly rigorous accounting in work-hours if one of the two parties does not care to suffer a loss in the process.For example, if at the time the first conversion was effected, the peasant gave the lord a quantity of wheat which required only 75 workdays of labour, whereas p reviously he had given the lord 150 workdays of labour in the same year, then this conversion of labour-rent into rent in kind would result in the sudden impoverishment of the lord and a rapid enrichment of the serfs. The landlords — you can depend on them! — were careful to see to it when the conversion was made that the different forms of rent were closely equivalent. Of course the conversion could eventually turn out to be bad one for one of the participating classes, for example, against the landlords, if a sharp rise in agricultural prices occurred after rent was converted from rent in kind to money rent, but such a result would be historical in character and not directly attributable to the conversion per se. The origin of this economy based on an accounting in labour-time is also clearly apparent in the division of labour within the village as it existed The Theory of Value and Surplus Value 13 between agriculture and the crafts. For a long time the division rem ained quite rudimentary.A section of the peasantry continued to produce part of its own clothing for a protracted historical period, which in Western Europe extended almost a thousand years; that is, from the beginning of the medieval cities right up to the 19th century. The technique of making clothing was certainly no mystery to the cultivator of the soil. As soon as a regular system of exchange between the farmer and textile craftsman was established, standard equivalents were likewise established — for example, an ell of cloth [a measure varying from 27 to 48 inches] would be exchanged for 10 pounds of butter, not for 100 pounds.Obviously the peasants knew, on the basis of their own experience, the approximate labour-time needed to produce a given quantity of cloth. Had there not been a more or less exact equivalence between the time needed to produce the cloth and the time needed to produce the butter for which it was exchanged, there would have been an immediate shift i n the division of labour.If cloth production were more lucrative than butter production, the butter producers would switch to producing cloth. Since society here was only at the threshold of an extreme division of labour, that is to say, it was still at a point where the boundaries between different techniques were not clearly marked, the passage from one economic activity to another was still possible, particularly when striking material gains were possible by means of such a change.In the cities of the Middle Ages as well, a very skilfully calculated equilibrium existed between the various crafts and was written into the charters which specified almost to the minute the amount of labour-time necessary for the production of different articles. It is inconceivable that under such conditions a shoemaker or blacksmith might get the same amount of money for a product which took half the labour-time which a weaver or other artisan might require in order to get the same amount of money f or his products.Here again we clearly see the mechanism of an accounting system in workhours, a society functioning on the basis of an economy of labour-time, which is generally characteristic of the whole phase which we call small-scale commodity production. This is the phase intervening between a purely natural economy, in which only use values are produced, and capitalist society, in which commodity production expands without limit. dEtErMInAtIon of thE ExchAngE VAluE of coMModItIEsOnce we have determined that the production and exchange of commodities becomes regular and generalised in a society based on an economy of labourtime, on an accounting system in work-hours, we can readily understand why 14 An IntroductIon to MArxIst EconoMIc thEory the exchange of commodities, in its origins and inherent nature, rests on this fundamental basis of an accounting system in work-hours and consequently follows this general rule: the exchange value of a commodity is determined by the quanti ty of labour necessary to produce it.The quantity of labour is measured by the length of time it takes to produce the commodity. This general definition of the labour theory of value is the basis of both classical bourgeois political economy from the 17th century to the beginning of the 19th century, from William Petty to Ricardo; and Marxist economic theory, which took over the theory of labour value and perfected it. However, the general definition must be qualified in several respects.In the first place, not all men are endowed with the same capacity for work, with the same strength or the same degree of skill at their trade. If the exchange value of commodities depended only on the quantity of labour expended individually, that is, on the quantity of labour expended by each individual in the production of a commodity, we would arrive at this absurdity: the lazier or more incompetent the producer, and the larger the number of hours he would spend in making a pair of shoes, the gr eater would be the value of the shoes!This is obviously impossible since exchange value is not a moral reward for mere willingness to work but an objective bond set up between independent producers in order to equalise the various crafts in a society based both on a division of labour and an economy of labour-time. In such a society wasted labour receives no compensation; on the contrary, it is automatically penalised. Whoever puts more time into producing a pair of shoes than the average necessary hours — an average determined by the average productivity of labour and recorded in the Guild Charters, for example! such a person has wasted human labour, worked to no avail for a certain number of hours. He will receive nothing in exchange for these wasted hours. Expressed another way, the exchange value of a commodity is not determined by the quantity of labour expended by each individual producer engaged in the production of this commodity but by the quantity of labour socially necessary to produce it. The expression â€Å"socially necessary† means: the quantity of labour necessary under the average conditions of labour productivity existing in a given country at a given time.The above qualification has very important applications when we examine the functioning of capitalist society more closely. Another clarifying statement must be added here. Just what do we mean by a â€Å"quantity of labour†? Workers differ in their qualifications. Is there complete equality between one person’s hour of work and everybody else’s, regardless of such differences in skills? Once again the question is not a moral one but has The Theory of Value and Surplus Value 15 o do with the internal logic of a society based on an equality between skills, an equality in the marketplace, and where any disruption of this equality would immediately destroy the social equilibrium. What would happen, for example, if an hour’s work by an unskilled laboure r was worth as much as an hour’s work by a skilled craftsman, who had spent four to six years as an apprentice in acquiring his skill? Obviously, no one would want to become skilled. The hours of work spent in learning a craft would be wasted hours since the craftsman would not be compensated for them after becoming qualified.In an economy founded on an accounting system of work-hours, the young will desire to become skilled only if the time lost during their training period is subsequently paid for. Our definition of the exchange value of a commodity must therefore be completed as follows: â€Å"An hour of labour by a skilled worker must be considered as complex labour, as compound labour, as a multiple of an hour of unskilled labour; the coefficient of multiplication obviously cannot be an arbitrary one but must be based on the cost of acquiring a given skill. It should be pointed out, in passing, that there was always a certain fuzziness in the prevailing explanation of c ompound labour in the Soviet Union under Stalin which has persisted to this very day. It is claimed that compensation for work should be based on the quantity and quality of the work, but the concept of quality is no longer understood in the Marxist sense of the term, that is to say, as a quality measurable quantitatively by means of a specific coefficient of multiplication. On the contrary, the idea of quality is used in the ourgeois ideological sense, according to which the quality of labour is supposed to be determined by its social usefulness, and this is used to justify the incomes of marshals, ballerinas and industrial managers, which are ten times higher than the incomes of unskilled labourers. Such a theory belongs in the domain of apologetics despite its widespread use to justify the enormous differences in income which existed under Stalin and continue to exist in the Soviet Union today, although to a lesser extent.The exchange value of a commodity, then, is determined by the quantity of labour socially necessary for its production, with skilled labour being taken as a multiple of simple labour and the coefficient of multiplication being a reasonably measurable quantity. This is the kernel of the Marxist theory of value and the basis for all Marxist economic theory in general.Similarly, the theory of social surplus product and surplus labour, which we discussed at the beginning of this work, constitutes the basis for all Marxist sociology and is the bridge connecting Marx’s sociological and historical analysis, his theory of classes and the development of society 16 An IntroductIon to MArxIst EconoMIc thEory generally, to Marxist economic theory, and more precisely, to the Marxist analysis of all commodity-producing societies of a precapitalist, capitalist and postcapitalist character. hAt Is socIAlly nEcEssAry lAbour? A short while back I stated that the particular definition of the quantity of socially necessary labour for producing a commod ity had a very special and extremely important application in the analysis of capitalist society. I think it will be more useful to deal with this point now although logically it might belong to a later section of this presentation. The totality of all commodities produced in a country at a given time has been produced to satisfy the wants of the sum total of the members of this society.Any article which did not satisfy somebody’s needs, which had no use value for anyone, would be a priori unsaleable, would have no exchange value, would not constitute a commodity but simply a product of caprice or the idle jest of some producer. From another angle, the sum total of buying power which exists in this given society at a given moment and which is not to be hoarded but spent in the market, must be used to buy the sum total of commodities produced, if there is to be economic equilibrium.This equilibrium therefore implies that the sum total of social production, of the available pro ductive forces in this society, of its available work-hours, has been distributed among the various sectors of industry in the same proportions as consumers distribute their buying power in satisfying their various wants. When the distribution of productive forces no longer corresponds to this division in wants, the economic equilibrium is destroyed and both overproduction and underproduction appear side by side.Let us give a rather commonplace example: toward the end of the 19th and beginning of the 20th century, a city like Paris had a coach-building industry, which together with associated harness trades employed thousands or even tens of thousands of workers. In the same period the automobile industry was emerging and although still quite small it already numbered some scores of manufacturers employing several thousands of workers. Now what is the process taking place during this period? On the one hand, the number of carriages begins to decline and on the other, the number of a utomobiles begins to increase.The production of carriages and carriage equipment therefore shows a trend toward exceeding social needs, as these are reflected in the manner in which the inhabitants of Paris are dividing their buying power; on the other side of the picture, the production of automobiles is below social needs, for from the time the industry was launched until the advent The Theory of Value and Surplus Value 17 of mass production, a climate of scarcity existed in this industry. The supply of automobiles on the market was never equal to the demand. How do we express these phenomena in terms of the labour theory of value?We can say that in the carriage industry more labour is expended than is socially necessary, that a part of the labour expended by the sum total of companies in the carriage industry is socially wasted labour, which no longer finds an equivalent on the marketplace and is consequently producing unsaleable goods. In capitalist society, when goods are unsal eable it means that an investment of human labour has been made in a specific industrial branch which turns out to be socially unnecessary labour, that is to say, it is labour which finds no equivalent in buying power in the marketplace.Labour which is not socially necessary is wasted labour; it is labour which produces no value. We can see from this that the concept of socially necessary labour embraces a whole series of phenomena. For the products of the carriage industry, supply exceeds demand, prices fall and goods remain unsaleable. The reverse is true in the automobile industry where demand exceeds supply, causing prices to rise and under-production to exist. To be satisfied with these commonplaces about supply and demand, however, means stopping at the psychological and individual aspects of the problem.On the other hand, if we probe into the deeper social and collective side of the problem, we begin to understand what lies below the surface in a society organised on the basi s of an economy of labour-time. The meaning of supply exceeding demand is that capitalist production, which is anarchistic, unplanned and unorganised, has anarchistically invested or expended more labour hours in an industrial branch than are socially necessary, so that a whole segment of labour-hours turns out to be pure loss, so much wasted human labour which remains unrequited by society.Conversely, an industrial sector where demand continues to be greater than supply can be considered as an underdeveloped sector in terms of social needs; it is therefore a sector expending fewer hours of labour than are socially necessary and it receives a bonus from society in order to stimulate an increase in production and achieve an equilibrium with social needs. This is one aspect of the problem of socially necessary labour in the capitalist system. The other aspect of the problem is more directly related to changes in the productivity of labour.It is the same thing but makes an abstraction of social needs, of the â€Å"use value† aspect of production. In capitalist society the productivity of labour is constantly changing. Generally speaking, there are always three types of enterprises (or industrial sectors): those which are technologically right at the social average; those which 18 An IntroductIon to MArxIst EconoMIc thEory are backward, obsolete, on the downgrade, below the social average; and those which are technologically advanced and above average in productivity.What do we mean when we say a sector or an enterprise is technologically backward and has a productivity of labour which is below the average? Such a branch or enterprise is analogous to our previously mentioned lazy shoemaker, that is, it is one which takes five hours to produce a specific quantity of goods in a period when the average social productivity demands that it be done in three hours. The two extra hours of expended labour are a total loss, a waste of social labour.A portion of the t otal amount of labour available to society having thus been wasted by an enterprise, it will receive nothing from society to compensate it. Concretely it means that the selling prices in this industry or enterprise, which is operating below average productivity, approach its production costs or even fall below them, that is to say, the enterprise is operating at a very low rate of profit or even at a loss. On the other hand, an enterprise or industrial sector with an above average level of productivity (like the shoemaker who can produce two pairs of shoes n three hours when the social average is one pair per three hours) economises in its expenditure of social labour and therefore makes a surplus profit, that is to say, the difference between its costs and selling prices will be greater than the average profit. The pursuit of this surplus profit is, of course, the driving force behind the entire capitalist economy. Every capitalist enterprise is forced by competition to try to get greater profits, for this is the only way it can constantly improve its technology and labour productivity.Consequently all firms are forced to take this same direction, and this of course implies that what at one time was an aboveaverage productivity winds up as the new average productivity, whereupon the surplus profit disappears. All the strategy of capitalist industry stems from this desire on the part of every enterprise to achieve a rate of productivity superior to the national average and thereby make a surplus profit, and this in turn provokes a movement which causes the surplus profit to disappear, by virtue of the trend for the average rate of labour productivity to rise continuously.This is the mechanism in the tendency for profit rates to become equalised. thE orIgIn And nAturE of surplus VAluE And now, what is surplus value? When we consider it from the viewpoint of the Marxist theory of value, the answer is readily found. Surplus value is simply the monetary form of th e social surplus product, that is to say, it is the monetary form of that part of the worker’s production which he surrenders to the owner of the means of production without receiving anything in return. The Theory of Value and Surplus Value 19 How is this surrender accomplished in practice within capitalist society?It takes place through the process of exchange, like all important operations in capitalist society, which are always relations of exchange. The capitalist buys the labour-power of the worker, and in exchange for this wage, he appropriates the entire production of that worker, all the newly produced value which has been incorporated into the value of this production. We can therefore say from here on that surplus value is the difference between the value produced by the worker and the value of his own labourpower. What is the value of labour-power?In capitalist society, labour-power is a commodity, and like the value of any other commodity, its value is the quanti ty of labour socially necessary to produce and reproduce it, that is to say, the living costs of the worker in the wide meaning of the term. The concept of a minimum living wage or of an average wage is not a physiologically rigid one but incorporates wants which change with advances in the productivity of labour. These wants tend to increase parallel with the progress in technique and they are consequently not comparable with any degree of accuracy for different periods.The minimum living wage of 1830 cannot be compared quantitatively with that of 1960, as the theoreticians of the French Communist party have learned to their sorrow. There is no valid way of comparing the price of a motorcycle in 1960 with the price of a certain number of kilograms of meat in 1830 in order to come up with a conclusion that the first â€Å"is worth† less than the second. Having made this reservation, we can now repeat that the living cost of labour-power constitutes its value and that surplus value is the difference between this living cost and the value created by this labour-power.The value produced by labour-power can be measured in a simple way by the length of time it is used. If a worker works 10 hours, he produces a value of 10 hours of work. If the worker’s living costs, that is to say, the equivalent of his wage, is also 10 hours of work, then no surplus value would result. This is only a special case of the more general rule: when the sum total of labour product is equal to the product required to feed and maintain the producer, there is no social surplus product.But in the capitalist system, the degree of labour productivity is such that the living costs of the worker are always less than the quantity of newly created value. This means that a worker who labours for 10 hours does not need the equivalent of 10 hours of labour in order to support himself in accordance with the average needs of the times. His equivalent wage is always only a fraction of his day’s labour; everything beyond this fraction is surplus value, free labour supplied by the worker and appropriated by the capitalist without an equivalent offset.If this difference did not exist, of course, then no employer would hire 20 An IntroductIon to MArxIst EconoMIc thEory any worker, since such a purchase of labour-power would bring no profit to the buyer. thE VAlIdIty of thE lAbour thEory of VAluE To conclude, we present three traditional proofs of the labour theory of value. The first of these is the analytical proof, which proceeds by breaking down the price of a commodity into its constituent elements and demonstrating that if the process is extended far enough, only labour will be found.The price of every commodity can be reduced to a certain number of components: the amortisation of machinery and buildings, which we call the renewal of fixed capital; the price of raw materials and accessory products; wages; and finally, everything which is surplus value, such as profit, rent, taxes, etc. So far as the last two components are concerned, wages and surplus value, it has already been shown that they are labour pure and simple. With regard to raw materials, most of their price is largely reducible to labour; for example, more than 60% of the mining cost of coal consists of wages.If we start by breaking down the average manufacturing cost of commodities into 40% for wages, 20% surplus value, 30% for raw materials and 10% in fixed capital; and if we assume that 60% of the cost of raw materials can be reduced to labour, then we already have 78% of the total cost reduced to labour. The rest of the cost of raw materials breaks down into the cost of other raw materials — reducible in turn to 60% labour — plus the cost of amortising machinery. The price of machinery consists to a large degree of labour (for example, 40%) and raw materials (for example, 40% also).The share of labour in the average cost of all commodities thus passes suc cessively to 83%, 87%, 89. 5%, etc. It is obvious that the further this breakdown is carried, the more the entire cost tends to be reduced to labour, and to labour alone. The second proof is the logical proof, and is the one presented in the beginning of Marx’s Capital. It has perplexed quite a few readers, for it is certainly not the simplest pedagogical approach to the question. Marx poses the question in the following way. The number of commodities is very great.They are interchangeable, which means that they must have a common quality, because everything which is interchangeable is comparable and everything which is comparable must have at least one quality in common. Things which have no quality in common are, by definition, not comparable with each other. Let us inspect each of these commodities. What qualities do they possess? The Theory of Value and Surplus Value 21 First of all, they have an infinite set of natural qualities: weight, length, density, colour, size, mo lecular nature; in short, all their natural physical, chemical and other qualities.Is there any one of the physical qualities which can be the basis for comparing them as commodities, for serving as the common measure of their exchange value? Could it be weight? Obviously not, since a pound of butter does not have the same value as a pound of gold. Is it volume or length? Examples will immediately show that it is none of these. In short, all those things which make up the natural quality of a commodity, everything which is a physical or chemical quality of this commodity, certainly determines its use value, its relative usefulness, but not its exchange value.Exchange value must consequently be abstracted from everything that consists of a natural physical quality in the commodity. A common quality must be found in all of these commodities which is not physical. Marx’s conclusion is that the only common quality in these commodities which is not physical is their quality of bei ng the products of human labour, of abstract human labour. Human labour can be thought of in two different ways. It can be considered as specific concrete labour, such as the labour of the baker, butcher, shoemaker, weaver, blacksmith, etc.But so long as it is thought of as specific concrete work, it is being viewed in its aspect of labour which produces only use values. Under these conditions we are concerning ourselves only with the physical qualities of commodities and these are precisely the qualities which are not comparable. The only thing which commodities have in common from the viewpoint of exchanging them is that they are all produced by abstract human labour, that is to say, by producers who are related to each other on a basis of equivalence as a result of the fact that they are all producing goods for exchange.The common quality of commodities, consequently, resides in the fact that they are the products of abstract human labour and it is this which supplies the measure of their exchange value, of their exchangeability. It is, consequently, the quality of socially necessary labour in the production of commodities which determines their exchange value. Let us immediately add that Marx’s reasoning here is both abstract and difficult and is at least subject to questioning, a point which many opponents of Marxism have seized upon and sought to use, without any marked success, however.Is the fact that all commodities are produced by abstract human labour really the only quality which they have in common, apart from their natural qualities? There are not a few writers who thought they had discovered others. In general, 22 An IntroductIon to MArxIst EconoMIc thEory however, these have always been reducible either to physical qualities or to the fact that they are products of abstract labour. A third and final proof of the correctness of the labour theory of value is the proof by reduction to the absurd. It is, moreover, the most elegant and most à ¢â‚¬Å"modern† of the proofs.Imagine for a moment a society in which living human labour has completely disappeared, that is to say, a society in which all production has been 100% automated. Of course, so long as we remain in the current intermediate stage, in which some labour is already completely automated, that is to say, a stage in which plants employing no workers exist alongside others in which human labour is still utilised, there is no special theoretical problem, since it is merely a question of the transfer of surplus value from one enterprise to another.It is an illustration of the law of equalisation of the profit rate, which will be explored later on. But let us imagine that this development has been pushed to its extreme and human labour has been completely eliminated from all forms of production and services. Can value continue to exist under these conditions? Can there be a society where nobody has an income but commodities continue to have a value and to be s old? Obviously such a situation would be absurd. A huge mass of products would be produced without this production creating any income, since no human being would be involved in this production.But someone would want to â€Å"sell† these products for which there were no longer any buyers! It is obvious that the distribution of products in such a society would no longer be effected in the form of a sale of commodities and as a matter of fact selling would become all the more absurd because of the abundance produced by general automation. Expressed another way, a society in which human labour would be totally eliminated from production, in the most general sense of the term, with services included, would be a society in which exchange value had also been eliminated.This proves the validity of the theory, for at the moment human labour disappears from production, value, too, disappears with it. II. cApItAl And cApItAlIsM cApItAl In prEcApItAlIst socIEty Between primitive society founded on a natural economy in which production is limited to use values destined for self-consumption by their producers, and capitalist society, there stretches a long period in human history, embracing essentially all human civilisations, which came to a halt before reaching the frontiers of capitalism.Marxism defines them as societies in which small-scale commodity production prevailed. A society of this kind is already familiar with the production of commodities, of goods designed for exchange on the market and not for direct consumption by the producers, but such commodity production has not yet become generalised, as is the case in capitalist society. In a society founded on small-scale commodity production, two kinds of economic operations are carried out.The peasants and artisans who bring their products to market wish to sell goods whose use value they themselves cannot use in order to obtain money, means of exchange, for the acquisition of other goods, whose use value i s either necessary to them or deemed more important than the use value of the goods they own. The peasant brings wheat to the marketplace which he sells for money; with this money he buys, let us say, cloth. The artisan brings his cloth to the market, which he sells for money; with this money he buys, let us say, wheat.What we have here, then, is the operation: selling in order to buy . C ommodity—Money—Commodity, C —M—C w hich has this essential character: the value of the two extremes in this formula is, by definition, exactly the same. But within small-scale commodity production there appears, alongside the artisan and small peasant, another personage, who executes a different kind of economic operation. Instead of selling in order to buy, he buys in order to sell. This type of person goes to market without any commodities; he is an owner of money.Money cannot be sold; but it can be used to buy, and that is what he does: buys in order to sell, in order to resell: M—C—M’. There is a fundamental difference between the two types of operation. The 24 An IntroductIon to MArxIst EconoMIc thEory second operation makes no sense if upon its completion we are confronted by exactly the same value as we had at the beginning. No one buys a commodity in order to sell it for exactly the same price he paid for it. The operation â€Å"buy in order to sell† makes sense only if the sale brings a supplementary value, a surplus value.That is why we state here, by way of definition. M’ is greater than M and is made up of M+m; m being the surplus value, the amount of increase in the value of M. We now define capital as a value which is increased by a surplus value, whether this occurs in the course of commodity circulation, as in the example just given, or in production, as is the case in the capitalist system. Capital, therefore, is every value which is augmented by a surplus value; it therefore exists not only in ca pitalist society but in any society founded on small-scale commodity production as well.For this reason it is necessary to distinguish very clearly between the life of capital and that of the capitalist mode of production, of capitalist society. Capital is far older than the capitalist mode of production. The former probably goes back some 3000 years, whereas the latter is barely 200 years old. What form does capital take in precapitalist society? It is basically usury capital and merchant or commercial capital. The passage from precapitalist society into capitalist society is characterised by the penetration of capital into the sphere of production.The capitalist mode of production is the first mode of production, the first form of social organisation, in which capital is not limited to the sole role of an intermediary and exploiter of non-capitalist forms of production, of small-scale commodity production. In the capitalist mode of production, capital takes over the means of produ ction and penetrates directly into production itself. orIgIns of thE cApItAlIst ModE of productIon What are the origins of the capitalist mode of production?What are the origins of capitalist society as it has developed over the past 200 years? They lie first of all in the separation of the producers from their means of production. Subsequently, it is the establishment of these means of production as a monopoly in the hands of a single social class, the bourgeoisie. And finally, it is the appearance of another social class which has been separated from its means of production and therefore has no other resources for its subsistence than the sale of its labour-power to the class which has monopolised the means of production.Let us consider each of these origins of the capitalist mode of production, which are at the same time the fundamental characteristics of the capitalist Capital and Capitalism 25 system as well. First characteristic: separation of the producer from his means of pr oduction. This is the fundamental condition for existence of the capitalist system but it is also the one which is generally the most poorly understood. Let us use an example which may seem paradoxical since it is taken from the early Middle Ages, which was characterised by serfdom.We know that the mass of peasant-producers were serfs bound to the soil. But when we say that the serf was bound to the soil, we imply that the soil was also â€Å"bound† to the serf, that is, he belonged to a social class which always had a base for supplying its needs, enough land to work so that the individual serf could meet the needs of a household even though he worked with the most primitive implements. We are not viewing people condemned to death by starvation if they do not sell their labour-power.In such a society, there is no economic compulsion to hire out one’s arms, to sell one’s labour-power to a capitalist. We can express this another way by stating that the capitalist system cannot develop in a society of this kind. This general truth also has a modern application in the way colonialists introduced capitalism into the African countries during the 19th and early 20th centuries. Let us look at the livin

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Exploring Presidental elections and Presidental Power between President Ronald Reagan and President Barack Obama - Research Paper Example During his reign, his administration concluded an important treaty with Soviet Union in order to restrict the intermediate range for nuclear weapons conducted in a proxy war with Nicaragua through the services it offered on the contras. Thus, it invaded the grenade ostensibly to prevent the Soviet Island from becoming an outpost of the Soviet. In 1984, Reagan was re-elected by a huge margin back to the white house. This paper will analyze the presidential powers of Reagan during his reign as the president of the US. Reagan’s taking office that was ushered shortly in his popular acceptance for supply of the side economics both with bellicosity abroad and at home. He was given a political honeymoon after an unsuccessful assassination attempts in 1981. The democrats in the north and the south supported President Reagan’s domestic policy (Cannon 33-35). He therefore instituted a program that focused on phasing out taxes and increasing expenditures on defense of the governme nt. Furthermore, education and welfare budgets were cut, and unanimously accepted, by the congress (Lawson 38). This was a deregulation program of business and a measure of tightening control of information concerned about the government. During his reign, Reagan’s staff contemplated on legislation of the British secret acts until they realized that loyalty was paramount for the detection of the lies. In the foreign policy, other countries were alarmed due to the frank nature of the triumphant of the American rhetoric and determination of the administration in imposing the leadership in America and its priorities. He used his position as the president to pressure for the catapulted movement of the NATO in to order increase expenditures on military. For instance, Reagan affronted even Margaret a staunch supporter to sell grains to USSR to raise money to boost the military. This was like pleasing the agribusiness sector aimed at supporting the US subsidiaries companies that bas ed in Europe. He also managed to prevent Western Europe from importing natural gas, which Russia demanded. The fears of the nuclear weapons receded when Reagan agreed to limit his expenditure on arms talks with Russia and reduced on the tone of the bellicose rhetoric. This progress passed in a summit held in Geneva with Russian president Gorbachev. Reagan’s domestic policies of the US recessed the economy, which meant that his re-election was uncertain. In 1984 November, he got a huge margin of the votes than 1980 election. He exercised peace abroad and gained fame locally. His policy of not ruling but reigning made him famous and extended his congressional action. Furthermore, Reagan presided over for the breakup of USSR claiming victory in the cold war. He was rhetoric a symbolic conservative thinker whose legacy became a strong boom to the economy. He recaptured the national confidence and decayed the spirit of the community that resulted from community inequalities. Most symbolically, he tripled the national debt for US (Owen 235). During his reign for two terms, Reagan sought through all means to reduce domestic programs of the US federal government (Cannon 123). During his first years in office, he adopted the theory of the supply side to stimulate the production and the control of the high inflation by cutting the tax and reducing federal spending. 1982, was the year of major recession