Political Economy¶

I will present, in condensed form, the content of Paul Singer’s book “Curso de Introdução a Economia Política” in order to discuss several key issues.

Theory of Value¶

We must begin with the fact that there is a fundamental divide in economics between two opposing approaches. This division is so profound that these approaches do not even share a common language. The discussion presented here is based on the approach that adopts the labor theory of value. To understand this theory, we must first examine the problem of value. One of the defining features of economics is the possibility of quantification; that is, most economic laws can be expressed mathematically and verified empirically. This possibility of quantification stems precisely from the theory of value.

Value is a fundamental concept in economics because it provides an essential unit of measurement for virtually all economic phenomena. Consequently, the nature of this unit constitutes one of the cornerstones of the entire scientific framework. There are two fundamentally different ways of defining value: the utility theory of value and the various labor theories of value. This is not the appropriate place to compare these two perspectives in detail. For the present, it is sufficient to recognize this distinction and to note that, unless explicitly stated otherwise, all subsequent discussion will adopt the Marxist labor theory of value.

According to this theory, value arises from the social relations of production established among individuals. In this framework, value is the product of the social relations created through economic activity. More precisely, it is measured by the amount of productive labor time expended by individuals in the course of economic production.

The labor theory of value begins from the premise that economic activity is essentially collective. In other words, it is not concerned with purely individual activities. For example, if a household appliance breaks and its owner repairs it personally, this is a private activity and, from the standpoint of this theory, it does not constitute an economic activity. The situation is different if the owner hires an electrician to perform the repair as a paid service. This also illustrates that, under capitalism, the social relations relevant to the labor theory of value are those mediated by money.

According to this theory, the value of a commodity can be measured by the average socially necessary labor time invested in its production. Thus, the labor theory of value holds that value is intrinsically social and objective; that is, it can be measured objectively. Although we will not explore this debate in depth, it is important to keep in mind the social character of value. The value of a given commodity is not determined by the amount of time an individual producer spends making it, but rather by the average amount of time that society as a whole requires to produce that type of commodity. If a particular firm takes twice as long as the social average to produce a commodity, its product does not thereby acquire twice the value. Conversely, if another firm is able to produce the same commodity in half the socially average time, it will be able to produce a larger quantity of commodities within the same period. Since each commodity has the same value regardless of which firm produced it, the more productive firm generates more value overall simply because it produces a greater total number of commodities.

Another aspect that we will not discuss in detail at this point is the evident fact that commodities must satisfy human needs in order to possess any value at all. Although the existence of such needs is not sufficient to determine the magnitude of value, it is nevertheless a necessary condition for a commodity to have value. According to the labor theory of value, the value of the social product is measured by the average socially necessary labor time required to produce a given quantity of commodities. However, the social product is subject to a limit. For a given population, there is a certain quantity of commodities that society requires, and this quantity depends on factors such as culture, demographic composition, purchasing power, and other social characteristics. Any commodities produced beyond this limit are unnecessary, and the labor expended in their production is therefore not socially necessary. Consequently, such labor creates no value.

Naturally, this raises the question of the relationship between price and value. A common objection is that the quantity of a commodity that is considered “necessary” itself depends on its price. The response typically found in the labor theory of value literature is that commodities do not enter the market without prices. During the production process, firms do not plan to sell their products below the minimum price required to cover production costs and secure a profit margin. Before the final market price is reached, there is a complex sequence of transformations connecting the value of a commodity to its price. Thus, within the Marxist framework, price and value are distinct concepts. We therefore have two separate systems: one concerned with prices (the price system) and another concerned with values (the value system). It is beyond the scope of this discussion to examine this relationship in detail. For our purposes, it is sufficient to recognize that there exists an indirect relationship linking value and price. As a general rule, our discussion will focus primarily on value.

Naturally, prices fluctuate (in the long run, according to the labor theory of value, around values). Nevertheless, the existence of a relationship—albeit a transformed one—between price and value, together with the existence of an objective concept of value itself, are features that make the labor theory of value particularly appealing and well suited to the purposes of our research. As a contrasting example, one may consider the utility theory of value, which treats value as an inherently subjective concept.

A few additional remarks should be made before concluding this section.

First, the labor theory of value is historical by definition. It is grounded in the idea that the value of the social product is explained by the social division of labor. Consequently, value can exist only insofar as such a social division of labor exists. In a pre-capitalist society, where a large share of individuals work primarily for themselves and their activities are predominantly non-economic, we should not expect the labor theory of value to apply.

A second point concerns the fact that proponents of the labor theory of value generally acknowledge the practical applicability of the utility theory of value in explaining immediate market phenomena, particularly the determination of actual market prices.

Finally, the labor theory of value begins from the sphere of production. It holds that value is not created in the market; rather, it is created through labor and is subsequently realized through circulation.

Income Distribution¶

We may begin the discussion by recalling that the problem of income distribution is one of the oldest and most classical topics in Political Economy. David Ricardo regarded it as the true object of political economy. In general terms, distribution theories attempt to explain how the social product is divided among the fundamental classes of society. This is equivalent to investigating how the social product is distributed across different forms of income. Classically, these incomes are divided into wages, profit, land rent, and interest.

Let us begin by defining what is to be distributed, that is, by clarifying the meaning of the social product. To do so, we must first distinguish between productive and unproductive labor. The former refers to labor that is paid, more specifically labor paid out of capital (namely variable capital, which is precisely the portion of capital that is transformed into wages). This is the type of labor responsible for producing value and must necessarily generate a product greater than its own remuneration, which, for proponents of this theory, is a social rather than a technical determination.

However, there are other types of labor that are exchanged for income but are not productive in this sense. This distinction can be clarified with an example. Consider a cook: if she works in a private household, she receives part of that household’s income, merely transforming her labor into monetary income. This is different from the case in which she performs the same activity in a restaurant. In this second scenario, she performs productive labor, because the value she creates for the capitalist who employs her exceeds her wage; there is now a product that is transformed into profit. It is only in this second case that she contributes to the social product.

A further example may help reinforce this distinction. If a physician runs a private practice without employees, their labor is unproductive. Once again, we have only the conversion of labor into income. However, if the physician works for a hospital, they become a wage earner and are included among productive workers. In this case, their remuneration, in terms of socially necessary labor time, will necessarily be lower than the number of hours of socially necessary labor they expend in providing the service. This is because the hospital, as a capitalist enterprise, must necessarily obtain a profit margin, which is generated through this difference. It is precisely this difference that constitutes the social surplus.

For this economic approach, what matters is precisely the division of the social product between the necessary product and the surplus, that is, how the total social product is divided between the portion required for the maintenance of the workers’ physical and mental productive capacity and the other portion that constitutes the social surplus. This division is carried out primarily through class struggle. In other words, the determination of the worker’s wage level is not an intrinsically economic or technical issue, and therefore the determination of the necessary product itself is not purely technical either. This level depends largely on the bargaining power of the working class; for instance, whether workers are organized in trade unions or not. In short, wages are not determined solely by economic factors; they are strongly dependent on the balance of forces within certain limits.

Naturally, the possibility of reducing labor compensation has limits. At the extreme lower bound, there are physiological limits, since below a certain level the quantity and quality of labor power decline as workers are no longer able to survive. There are also political limits, which depend on historical circumstances and may lead, for example, to strikes and popular mobilizations of varying intensity. There is also, of course, an upper limit, since the necessary product itself is bounded by the social product; that is, workers can never receive more than the point at which the social surplus becomes zero, although this limit is never actually reached. Before this point is reached, a restriction of capital accumulation occurs, leading the economy into crisis. Under such conditions, wages will likely return to a “convenient” level, since crises increase unemployment and reduce the bargaining power of wage laborers.

Another element to be discussed concerns the incremental rate of profit of the capitalist. According to this theory, the rate of profit is the outcome of competitive struggle among capitals. Sectors yielding lower profits are gradually abandoned by capital; that is, there is a reduction in the inflow of new capital. By contrast, sectors with higher profits attract capital inflows, since they are preferred by capitalists. After some time, this increases the productive capacity of these sectors, leading to a higher supply of commodities. This, in turn, generates a tendency toward lower prices, which ultimately also leads to a reduction in the rate of profit in that sector. This movement of capital thus produces a tendency toward equalization of the incremental rate of profit. This tendency is, however, challenged by the technological dynamism of the system, which allows for a continuous development of the productive forces.

Another important point is that this theory assumes a certain degree of rationality. It is assumed that capitalists know what they are doing, such that the capitalist class as a whole tends to act rationally. Nevertheless, a certain number of them always make mistakes and disappear, while new capitalists emerge to replace those who are eliminated.

Economic Surplus¶

The economic surplus is, in general terms, the portion of production that is not absorbed by the necessary costs of production. In the framework adopted here, it coincides with what is called the total surplus value produced in the economy over a given period of time. If we denote the social product as $P$, constant capital as $c$, variable capital as $v$, and total surplus value as $mv$, we then have

Constant capital refers to the productive elements expended in obtaining the social product, namely raw materials, auxiliary materials, machinery, and installations, among others. While machinery and installations constitute what is called fixed capital—elements that are gradually worn out during the production process—raw materials belong to circulating capital, which is fully consumed in production. Circulating capital and fixed capital are both subsets of constant capital. Furthermore, constant capital is determined by the production technique employed.

Variable capital, in turn, is, as previously discussed, the total amount of wages paid for productive labor. This, as also noted earlier, is determined primarily by class struggle, that is, by the conflict between workers’ capacity to defend their standard of living and employers’ capacity to minimize the remuneration paid to workers.

In other words, the economic surplus, which appears in capitalist economies as surplus value, is given by

Once again, as in the discussion of the theory of value, we are dealing with a quantity that is objectively determined. In this case, the economic surplus results from a configuration that is simultaneously social and technical, namely the productive structure of society. Surplus value, of course, has two possible uses: a productive use or an unproductive use. In the first case, it is a potential surplus that, when used productively by society, increases $P$ as well, for instance by increasing $c$. In the second case, if it is not used productively, it does not lead to such an increase.

We are, however, interested in how the size of the surplus is determined over time. There are two ways of increasing the surplus: through the production of absolute surplus value and through the production of relative surplus value. The first case, as the name suggests, arises from the fact that if we increase the amount of human labor expended over a given period without increasing wages, this results in an increase in surplus value. Recall that the value of the product is measured in socially necessary labor hours; thus, all terms in our equation are expressed in this unit, which is the fundamental unit of the labor theory of value.

Let us consider a practical example. For simplicity, we assume workers whose efficiency is such that their working hours correspond exactly to socially necessary labor time in their respective tasks; that is, these workers require the average time of society to produce a given commodity. If a worker works 8 hours per day for 250 days per year, this amounts to 2000 hours of labor. Then 1000 workers will produce 2 million hours of socially necessary labor. Suppose that, of this total, 1.2 million hours are converted into wages paid for labor power, while 800,000 hours constitute surplus. If it becomes possible to make a worker work 2200 hours per year without increasing wages—that is, keeping variable capital $v$ constant—then surplus value will increase from 800,000 hours to 1 million hours, since the entire additional labor time is transformed into surplus value.

This increment corresponds to absolute surplus value, which was the main form of surplus expansion in the early stages of industrialization. However, after this initial phase, industry began to rely increasingly on the increase of relative surplus value.

Keeping the same example, let us maintain the requirement of 1.2 million socially necessary labor hours to reproduce the labor power of 1000 workers. This quantity corresponds to the goods required for these workers to eat, dress, raise their children, and so on. In other words, it corresponds to a bundle of commodities that allows them to live and maintain a given standard of living. This minimum standard of living required by workers, considered as the minimum cost for the reproduction of their social life, is historically determined and varies across time and place.

If productivity increases, it becomes possible to produce the same consumption goods in fewer hours of labor, and this is both the aim and the result of technological development.

Now suppose that, due to technological progress, it becomes possible to reduce variable capital from 1.2 million to 1 million labor hours, since more goods are produced in each hour of labor. Thus, without reducing the workers’ standard of living (but also without increasing it), the amount of variable capital required to maintain the same standard of living for the same number of workers decreases, and consequently the social surplus increases. With this increase, the economic surplus also becomes equal to 1 million hours, as in the previous case, but now this corresponds to relative surplus value.

It is important to emphasize that we are referring to value in terms of socially necessary labor hours, not necessarily nominal wages. An example of the emergence of relative surplus value at the individual level occurs when a capitalist introduces a technological innovation and succeeds in increasing productivity. In this way, they are temporarily able to produce commodities in less time than the socially necessary labor time, until competitors adopt the same technology and the socially necessary labor time is reduced to a new level. During this interval, this capitalist is able to maximize profits.

In summary, in the case of absolute surplus value, the total volume of socially necessary labor performed by workers increases. In the case of relative surplus value, what changes is the distribution of labor between $v$ and $mv$; even though the total volume of labor remains constant, $v$ decreases, which translates into an increase in $mv$, hence the term “relative.”

Historically, it was the generation of relative surplus value that became the primary way in which capitalism expanded the surplus. To measure the proportion in which labor is divided between variable capital and surplus value (which together constitute so-called living labor, as opposed to constant capital), the rate of exploitation is defined as

In the previous example, we had

This means that for each hour of socially necessary labor in which the worker works “for themselves”—that is, which returns to them in the form of wages—they work an additional 40 minutes (0.67 hours) that is appropriated by the capitalist. In the case of relative surplus value, we obtain

which implies that now, for each hour the worker works “for themselves,” they also work an additional full hour for the capitalist.

An interesting point to note is that it has been observed that surplus value as a proportion of total output has remained approximately constant in the long run, although it fluctuates. This does not imply that the absolute surplus is constant; on the contrary, the surplus tends to grow over time. However, constant capital also tends to grow, since expanding production requires increasingly large amounts of machinery and infrastructure. A second observation that has been made is that there is a tendency toward monopolization within capitalism.

Accumulation and Concentration of Capital¶

Capital accumulation is the process by which part of the economic surplus is converted into new capital, thereby expanding productive capacity. One portion of the social product takes the physical form of workers’ means of subsistence, while another portion takes the form of machinery, raw materials, buildings, and other infrastructure that is added to the existing stock of resources. In this way, it becomes possible to increase the level of production in the subsequent period. Our interest lies in understanding how this process of capital accumulation unfolds.

Let us begin by assuming a competitive capitalism, that is, a situation in which, within a given sector, no single participant—neither producer nor buyer—has the ability to unilaterally determine prices. Although some authors argue that the competitive character of capitalism tends to give way to monopoly, others maintain that as oligopolies emerge, the opposite occurs: competition is intensified. We shall nevertheless consider capitalism in a competitive phase in order to analyze the accumulation process. In this case, the incentive to accumulate arises from competition itself: capitalists must reinvest surplus value into accumulation because the capitalist system compels them to do so; those who do not grow and expand their firms tend to disappear.

The limit of accumulation is reached when the pool of unemployed workers is fully absorbed into the economy, that is, under conditions of full employment. As accumulation accelerates, an increasing number of jobs may be created. However, once full employment is reached, workers’ bargaining power increases significantly. From the moment the necessary product rises due to wage increases, surplus value is consequently reduced, and thus the social surplus is also reduced. As a final consequence, accumulation tends to come to a halt.

However, as the economy approaches full employment, technological innovations that replace labor with machinery become highly profitable. In this case, accumulation shifts away from merely extending productive capacity and increasingly takes the form of deepening productive capacity, that is, changing technology in order to increase labor productivity. The consequence of this shift is an increase in the unemployment rate. This phenomenon is known as technological unemployment. In this way, a reserve army of unemployed workers is reconstituted. The transition from a phase of “extensive” accumulation to one of “intensive” accumulation is marked by crisis.

However, to what extent can capitalists invest and expand productive capacity? Productive capacity increases whenever investment takes place. But investment is only realized insofar as the commodities produced by the new capacity are actually sold. If they are not sold, surplus value is not realized and therefore cannot be accumulated. Hence, there is a requirement of demand for accumulation to occur; that is, in order to expand productive capacity, there must be someone who purchases the additional output that will be produced.

This demand is necessarily external to a simplified system consisting only of workers and capitalists. While workers must receive less than they produce and therefore cannot purchase the entire output, capitalists are precisely those who seek to accumulate rather than consume it. This demand may therefore come from outside the capitalist system or from within it; in the latter case, it arises fundamentally through the role of the State. The State—especially in contemporary capitalism, both in developing and developed countries—has the capacity to directly and indirectly influence the level of accumulation. Any theory that ignores the State is analyzing a system that is not relevant to the present reality of capitalism.

Closely related to accumulation is another central and fundamental tendency of capital: the concentration of capital. The mere existence of an individual capitalist firm already implies a concentration of the means of production under the command of a single owner or a group of owners. A capitalist enterprise with even a small army of workers under its command already entails a concentration of productive resources.

Capital accumulation tends to accelerate continuously as the economy grows, since the very meaning of progress is the increase of human productivity. However, this increase in labor productivity is achieved primarily by making a larger volume of productive resources available to the worker; it is only with the aid of such machinery that workers are able to produce more and more. This phenomenon is called capital concentration.

Competition among capitalists forces them to adopt the most advanced available technique, namely the one capable of delivering the highest productivity, which is typically also the most capital-intensive. Individual capitals therefore tend to grow through accumulation, that is, through the transformation of surplus into new capital that enables them not only to produce more, but to produce more with less labor. In this way, capital concentration is a result of capital accumulation itself. This process clearly has a limit, which is the accumulation of the entire society: individual capitals can only grow insofar as total social capital grows. In conclusion, concentration is, by definition, the growth of individual capitals through accumulation.

There is still another process, known as centralization, that deserves attention. This process concerns the domination of some capitalists over others. Since labor productivity depends on the volume of capital made available to workers, larger capitals are in a position to displace and absorb smaller ones. The process of centralization acts as a force of attraction exerted by large capitals over smaller ones. Smaller capitals are left with either the option of merging with one another in order to resist the pressure of large capitals—thereby themselves becoming large capitals—or being broken up and absorbed by larger firms.

In summary, there are two tendencies that must be highlighted: concentration, which is nothing more than the growth of the average firm as a result of the search for higher productivity through capital accumulation, that is, through the transformation of part of profits into new capital; and centralization, which follows directly from competitive struggle and the advantages enjoyed by larger firms.

The former is limited by the accumulation of the wealth of society as a whole, while the only limit to the latter is the concentration of all means of production in the hands of a single owner. Once again, the intrinsic tendency of capitalism toward monopoly becomes evident.

Money¶

Before concluding the discussion of this book, one final topic must be addressed. While economic production necessarily increases over time, the same is not necessarily true of the quantity of money.

Capitalism requires the existence of a commodity that can function as the universal equivalent of all others. This follows from the fact that, within capitalism, each of its components—namely the private ownership of the means of production—has the autonomy to operate in a relatively uncoordinated manner. In this sense, exchange (or the market, understood as the place where exchanges occur) has the function of overcoming the fragmentation of the capitalist economy. The market thus plays the role of coordinating productive activity after production has taken place, and it does so through a system of rewards and punishments. Those who produce goods that are scarce relative to demand are rewarded with a larger share of surplus value, while those who produce in excess lose part or all of the surplus value they expected to obtain.

All of this market function is carried out through the process of commodity circulation and exchange. However, for this exchange process to operate efficiently, it is necessary that there exist a commodity capable of serving as a universal equivalent to all others. This commodity then comes to serve exclusively as the equivalent of other commodities and loses its other possible uses. In history, virtually every commodity has at some point served as money for some society, but in most capitalist economies the chosen universal equivalent has been precious metal, specifically gold and silver. In this way, the existence of money becomes a central element in any capitalist economy; it performs the function of signaling to different producers the economic viability of their previous productive activity.

We must therefore address the question of how much money is required to circulate in the economy. Since a single monetary unit can be used in more than one transaction, the quantity of money needed in the economy does not have to equal the total sum of transactions over a given period. Instead, it can be expressed as that total divided by the average number of times each monetary unit is used. This average number is called $V$ (the velocity of circulation of money).

Let us consider an example. Suppose that the total volume of transactions during one year is 100 units. If each monetary unit is used, on average, in 10 transactions per year, then the amount of money required will be only 100 divided by 10. Thus, at any given moment, the quantity of money required ($Q$) depends on the total volume of transactions in the economy and on the average velocity of circulation of the monetary unit.

In a scenario in which gold functions as money, when there is a shortage of it, the price of all commodities measured in this currency tends to fall. Consequently, the same quantity of commodities—or more precisely, the same amount of value in commodities—can circulate with a smaller quantity of money. More precisely, in the case of gold and other commodity-money systems, inflation and deflation do not depend solely on the quantity of money in circulation, but also on changes in its own value, measured in the same way as other commodities: by the socially necessary labor time required for its production. For the moment, however, this suffices, since the situation changes when we consider paper money.

This is especially true from the moment the state, within a national economy, is able to impose acceptance of its tokens, thereby creating inconvertible currency. The state’s monopoly over issuance allows it to control the quantity of money in circulation independently of the value of any commodity-money such as gold. In the current phase of capitalism, the situation is more complex, since although the state retains the monopoly of issuance, it does not have full control over the quantity of money, as banks can also create money. However, this complexity lies outside the scope of this introduction, so we shall focus on the earlier phase of capitalism.

In this case, when the government issues additional money, the effect is similar to an increase in gold production under a commodity-money system. The predetermined quantity is some $Q$; when the government introduces an increase in the money supply without any change in the production of commodities, the result is a reduction in the value of money relative to other commodities, and the economy adjusts through a rise in the general price level. This creates a kind of vicious circle: as the nominal value of all transactions increases due to rising prices, the socially necessary quantity of money increases again in a subsequent step.