There are at least three distinctive elements. Marxist economics locates the study of capitalism in the broad flow of history. It understands capitalism as one form of organizing social production, and it sees capitalism as a class-divided society, just like feudalism and slave-based societies. Therefore, the first distinctive characteristic of Marxist economics is that it tries to understand how the class-divided society of capitalism gives rise to and is based on exploitation.

Second, Marxist economics looks at capitalism as a contradictory system. This comes from Marx’s work, where Marx highlights the positive aspects of capitalism in comparison to previous modes of production. These positive aspects create enormous wealth that can, if distributed properly, address the needs of the majority of the population — but that is not happening due to the way the relationships of capitalism are organized. There is that contradictory aspect: capitalism increases the productivity of labor and makes possible enormous wealth creation; but then, because it is motivated by generating profit and not satisfying need, it does not end up satisfying the social needs of the system.

The third distinctive element, which sets it apart from all other economic traditions, is the focus on crisis. Marx’s analysis of capitalism always highlighted that capitalism is a crisis-prone system. Even though there are periods when it seems to be doing ok, if we look underneath the surface, a crisis tendency matures, which will almost inevitably explode into a crisis. So if you look at the history of capitalism, every three or four decades it is caught in a deep crisis.

In Marx’s writing, you’ll never find something like a final demise of capitalism. There is a rich discussion of various tendencies that lead capitalism to a crisis, but how the crisis is resolved and what emerges from that is not predicted. The resolution can only emerge as the result of social action by large groups of people.

Between 1857–58, when he seriously started writing Capital, and 1865, when he had more or less completed some first drafts, we see Marx going through several different ways of organizing and presenting the work.

What finally emerged comes from two important ideas that Marx had. First, he realized, after his almost decade-long study of the capitalist system, that the focus of his work would be on capital. By “capital” he meant a system where sums of money come to the market, purchase commodities, produce some commodities with the purchased commodities — one of the important commodities being labor power — and then at the end sell those commodities that have been produced for more money. It is a system that is organized around the need to generate more money by investing money.

This process of what Marx calls “value begetting more value” or “value in motion” is what he understood by the word “capital.” Marx’s understanding was that capitalism is a representation of this dynamic, of this logic, of this need. Therefore, the central concept that he wanted to study in his book would be capital.

The second thing followed from his understanding that, if he wanted to present to his readers an analysis of the logic of capital, then it must not follow the historical trajectory by which capitalism emerged, but it must follow the logic of the concepts that are necessary to understand the social structure and dynamics of capitalism as it existed during Marx’s time. That’s why he did not present a historical narrative but instead presented a conceptual structure.

Moreover, the conceptual structure that he presented was organized into what Marx called “different levels of abstraction.” Just like any other science, social science also abstracts from various peripheral aspects of a phenomenon and tries to hone down and to come to the basic thing that comprises a system’s logic. That is what Marx wanted to do at the first level of abstraction, which he called “capital in general.”

There he wanted to understand the pure interaction between the two elements that comprise capital — on the one hand, capital or money, on the other hand labor — and how the interaction of the two gives rise to various tendencies that we see in capitalism.

Volumes I and II of Capital are organized at this high level of abstraction. What Marx abstracts from here are two things. The first is the fact of competition, which is the fact that in capitalism there is not one bloc of capital, but individual capitalists who compete among each other. The second is that in capitalism there is the phenomenon of credit, whereby banks can make credit available to capitalists, who can make credit available to households.

Then in volume III of Capital, he brings these things that he had abstracted from back into the analysis. So by the time we have reached the end of volume III, we have understood the logic of capital at a very abstract level, but then also have understood how it operates when it is brought down to lower levels of abstraction where competition between capitalists and the phenomenon of credit also play important roles.

The question of value is central to economic thinking, and it has been for a very long time. It starts with a simple phenomenon. If we observe the world of commodities where things are bought and sold, we realize that in the market, one commodity exchanges in a particular ratio for another commodity. For instance, let’s say the price of a table is forty dollars and the price of a shirt is twenty dollars. That effectively means that two shirts can be exchanged for a table.

This form of exchange of one commodity for another has been in existence for a very long time, and economic theorists have asked what underlies this phenomenon of exchange. Value is an answer to this question: What can account for the phenomenon of exchange? In the history of economic thinking, we see two broad approaches. One is the subjective approach — this is the approach of neoclassical economics. Then there is an older tradition going back to the writings of Adam Smith, David Ricardo, and Karl Marx, which provides a very different answer to this question.

The answer that is given by the classical economists Ricardo, Smith, and Marx is that what can explain the phenomenon of exchange and what can thereby account for the value of commodities is the amount of labor that has gone into producing commodities. That is that tradition’s answer, which emerged as the labor theory of value.

On the other hand, the neoclassical tradition, which started gaining prominence from about the 1870s, answers the same question by looking at what it calls “utility.” The answer it provides is that commodities exchange with one another in particular ratios because different commodities provide different levels of utility to the people who want to purchase them.

Now utility or usefulness was recognized by the classical thinkers as one aspect of a commodity. But they also realized that there is another aspect of the commodity, which is the fact that commodities can be exchanged for one another. When they see that what can account for the fact of exchange is not utility or usefulness, they want to give an objective theory of value. Therefore, they look at the process of production and at the relative amounts of labor that have gone into producing different commodities. Their answer is that the relative amount of labor that has gone into producing commodities can account for exchange, both its qualitative features and its quantitative features.

That’s why their answer is different from the answer of the neoclassical economists who rely on utility or usefulness, which is, after all, a subjective feature. Because how much usefulness or utility I derive from a particular commodity’s consumption depends on me. It depends on my surroundings, on my state of being, whether I’m happy, whether it’s raining. The same ice cream that I consume will give me different amounts of utility depending on whether it’s a very hot day or a cold day. So utility is really a subjective phenomenon, and therefore the theory of value that derives from utility is a subjective theory of value.

On the other hand, the theory of value that derives from the amount of labor that has gone into producing a commodity is an objective theory of value because production is an objective fact. Labor going into production and the amount of labor going into producing different commodities is an objective fact. How we measure that value is a different question, and it may be that in some cases measuring precisely the amount of labor that has gone into producing a commodity is difficult. But nonetheless, it’s an objective theory of value.

The labor theory of value, which asserts that commodities have value because and to the extent they have absorbed some productive labor of society, was something that Marx took from the classical economists. But he then brought in more nuances. He asked, “Can we say something more about the labor that has gone into producing commodities and that can thereby give rise to value?” There he brought in the concept of abstract labor, and he said that abstract labor rather than concrete labor gives rise to the value of a commodity.

He also brought in the concept of socially necessary labor. Marx says that at any given point in time, given the technology of production and the intensity of work, the amount of labor needed to produce one unit of any commodity will be more or less fixed. That is what he calls the “socially necessary labor” required to produce the commodity. So he says, when we think about value, we have to think about the social context, the given technology and intensity of work, which will then define how much labor is needed.

Finally, Marx was aware that we cannot compare an hour of a skilled worker’s labor with an hour of an unskilled worker’s labor. He therefore pointed out that there must be a conceptual way to make sure that we convert units of complex labor into units of simple labor. So once we have worked out these three concepts of socially necessary labor, abstract labor, and the reduction of complex to simple labor, we have a very solid foundation coming from the writings of Marx for a labor theory of value.

There are two ways in which the concept of surplus value is significant for Marx. The first is that Marx located his economic analysis in the broader understanding of history, what he calls the “materialist conception of history” or “historical materialism.” In the materialist conception of history, capitalism is understood as one form of class-divided society. Now, in class-divided society, there is the appropriation of labor effort of one class by another. That was the central way in which the phenomenon of exploitation was understood by Marx.

Marx wanted to clearly understand and explain to his readers how the phenomenon of exploitation operates in a class-divided society. Marx was juxtaposing the understanding of exploitation in feudalism, which was very easy to understand because it was transparent, to the much more complex way in which the same phenomenon operates in capitalism.

In feudalism, to give a very simple analysis, the law enforced that the serf would work for four days a week on the lord’s land and for three days the serf would work on his or her own land. So four-sevenths of the serf’s time was immediately appropriated by the lord. The fact of exploitation whereby the lord appropriated the fruits of labor of the serf was transparent.

Marx claimed that the same phenomenon was happening in capitalism. But what was obscuring this was the fact that it was all mediated through the market process and the fact of exchange. In capitalism, the working class sells its ability to work to a capitalist for a wage. Marx wanted to show that when the capitalist used the labor power that he or she had purchased, and produced a commodity and then sold it in the market, in that process the capitalist was able to appropriate more value than the capitalist paid to the worker in the form of the wage.

This difference, which was essentially what emerged as the profit of the whole capitalist class, is what Marx understood as surplus value. This was probably the most important aspect of the concept of surplus value, because by demonstrating in a rigorous way that a market-based exchange system can also give rise to the emergence and appropriation of surplus value of one class by another — appropriation of surplus value by the capitalist class from the working class — Marx demonstrated in a rigorous way that capitalism was also based on exploitation of one class by another, just like previous class-based societies were.

The second point was that Marx understood that the generation, realization, and distribution of surplus value was the primary dynamic of the capitalist system looked at from a macro perspective. Capitalism is about making profits, and the source of profit is surplus value. That is why what the capitalist class does with the surplus value that it realizes as profit has a direct implication for how the system evolves over time. Marx also argued that crisis tendencies that emerge in the capitalist system are related to either the generation of surplus value or the realization of surplus value.

The concept of surplus value played both roles. One, it emphasized that capitalism was a class-divided society and therefore it rested on the exploitation of workers by the capitalists in the sense that part of the working classes’ value creation was taken away by the capitalist class without giving anything in return. Two, the dynamics of the system, including its crisis tendencies, emerge from these two domains, one where surplus value is generated and another where it is realized through the sale of commodities.

An abstract way to understand a capitalist society is to start with a capitalist or the capitalist class entering the market with sums of money and using those sums of money to purchase two kinds of commodities: labor power — the ability to work — and all other nonlabor inputs that are used in production. Then we travel with the capitalist into the factory, where the capitalist brings these two elements together, and once they are brought together, the commodity is produced, and the capitalist returns to the market once again — now not as a buyer but as the seller, because he has the finished commodities with him. Then he sells them.

In the process, the capitalist ends up with more money than he started with, and this extra amount of money is the monetary expression of surplus value. That is the part of the unpaid labor time of the workers who actually produce the commodities. Once we understand this, then Marx asks the question: What does the capitalist do with this extra amount of money that he has managed to extract from the working class, the unpaid labor time of the working class?

Marx’s answer is that most of the surplus value that has been realized is plowed back into the production process to generate more surplus value. And at the end of another cycle, it will again be reinvested so as to generate more surplus value. The reinvestment of surplus value into the production process with the aim of generating more surplus value is what Marx calls the “accumulation of capital.”

The process of accumulation of capital gives rise to a seeming puzzle. Let’s say the capitalists invest all their profits back into production. In this case, what will happen is the scale of production will rise and the demand for labor power will rise. If this keeps happening over many quarters and years, the demand for labor will ultimately outstrip the supply of labor power. Once that happens, the real wage that is earned by the working class will start going up. And if that keeps going up, it will ultimately start eating into the profits. If this is not checked, then this will lead, in the extreme case, to profits becoming zero.

This leads to a puzzle because the capitalist system is geared toward generating profits. If the internal dynamic of the system is leading us to a situation where profits will become zero, then this shows up in a deeply contradictory dynamic hidden within capitalism. So Marx asks: Is there a mechanism available to capitalism to make sure that the demand for labor power does not rise to the extent that it starts eating into profits and, at the extreme, pushing down profits to zero? And Marx’s answer is yes. The mechanism that he talks about is what he calls the “reserve army of labor” or the “relative surplus population.”

The reserve army of labor is the fraction of the working class that is not currently employed by capitalist firms but that is potentially available to be employed when necessary. Marx says that we can understand the reserve army of labor as being composed of three parts. One, which he calls the “floating” reserve army of labor, is the part of the working class that moves between employment and unemployment. Sometimes they’re employed, and then when there is a recession or a firm closes down, they are laid off and they are unemployed.

There is a second big element of the reserve army of labor, which Marx calls the “latent” reserve army. This is the fragment of the working class that has not yet been tapped into by the capitalist system but that is potentially available. Here he has two important demographic segments in mind. The first is peasant producers who own small plots of land and who are able to generate enough income so as to not need to come all the way to the market to sell their ability to work. The second is domestic labor, largely women, who for a long period of time were outside the labor force. This segment can be drawn on by capital if needed.

The third segment is the “stagnant” reserve army of labor. This is the part of the working class that has really fallen out of the system: workers who have either lost their skills or have, for various reasons, stopped looking for work. All of these together comprise the reserve army of labor.

And in chapter twenty-five of volume I of Capital, Marx demonstrates that fluctuations in the reserve army of labor are the primary mechanism that keeps the real wage movement in check and makes sure that real wages do not rise to an extent that will completely wipe out profit. This was a very important and revolutionary concept because it highlighted that the fact of unemployment is built into the capitalist system.

While it is possible for capitalism to solve the problem of unemployment for short periods of time, over long stretches of time, unemployment as a feature of capitalism is going to be there. Because if that mechanism is not available, then capitalism will be in jeopardy because there will be no way of ensuring that wages do not rise to the extent that profits fall to zero.

In volume I of Capital, Marx’s question is to understand how surplus value is generated and what the capitalist class does with that surplus value. So one part is to explain how surplus value is generated. Another part is the accumulation of capital, which is what happens when that surplus value is reinvested.

In doing this analysis, Marx had abstracted from an important issue: surplus value can only be realized and become part of the capitalists’ pool of money when the commodities that have been produced with the labor are sold in the market at an adequate price. In volume II, he comes back to the question: How is it that the capitalist system is able to produce a lot of commodities and then to make sure that all those commodities are purchased at the prices that are necessary to realize all the value? Marx provides an answer to this at two levels.

At the aggregate level, the main thing he wants to point out is that, when we look at the bundle of commodities that have been produced in a capitalist country in a period of time, let’s say a year, we will realize that all those commodities will be purchased either by the capitalist class or by the working class (roughly speaking, if we abstract from the state and from international trade for the moment). So the capitalist class will purchase from each other parts of what they have produced as inputs that they will use in their production process.

So part of that total bundle of commodities, the capitalists will directly purchase from one another. The other part, which will be purchased by the working class, is also ultimately driven by the purchases of the capitalist class. Why? Because the capitalist class decides how much labor to employ. When labor is employed, workers get wage income. With those wage incomes, the workers go out and purchase commodities for their consumption needs. So it is the decision of capitalists of how much to invest, of how much commodities they want to produce, which ultimately will determine whether all the commodities that have been produced will be bought.

In the aggregate, the capitalist economy will be able to purchase everything that it produces at the right price to generate and to realize all the surplus value, if the capitalist class is willing to make an adequate amount of investment. Therefore, from Marx’s perspective, it was crucial to develop a solid theory of capitalist investment. Marx did not complete that project in volume II, and I think Marxist scholars need to work on this.

The second perspective from which Marx tried to attack that same question was to understand what happens when we think of the economy as being divided into what he called “departments.” Let’s say there are two departments: one department produces machines, another department produces consumption goods. Once we think about it a little, it is obvious that the aggregate capitalist economy, divided into these two departments, will be able to produce and sell everything it produces only if there is a proportionality between how many machines are produced and how many consumer goods are produced.

You cannot produce too much of either, because otherwise there will be a glut. The reason is that a lot of the machines that are being produced will be purchased by the capitalists who are currently engaged in producing consumption goods. And a lot of the consumption goods that are being produced will be purchased not only by the workers in the consumption goods factories, but by workers in the machine goods factories.

There is an interdependence between the two sectors. That is why Marx emphasized, through what are known as the reproduction schemes, that if the capitalist system is to reproduce itself smoothly over time and get caught neither in a problem of too much demand or too little demand, it must produce consumption goods and producer goods in some proportionality. We can actually be more precise and work out the algebra and show that there is a specific ratio in which these two departments must produce for the system to smoothly reproduce itself over time.

From that, we go directly to the question of growth. For Marx, capitalism is a system that is geared toward generating and realizing surplus value. That surplus value that has been realized is plowed back into the system, which increases the scale of the production process, and so growth is understood by Marx as the size of the flow of value through the capitalist economy over time.

Over time, year after year, the size of value increases. It increases for two reasons. First, more surplus value is extracted from the workers because the working-class population, which is employed by capital, increases. It becomes more productive. Second, because of technological change, commodities are sold more quickly. The speed with which value traverses the whole process and comes back in monetary form to the hands of the capitalists to be reinvested once again increases over time. As more surplus value is extracted and as it is realized in a speedy fashion, the system grows over time.

Marx understood capitalist growth as a deeply contradictory process, which had the possibility of being interrupted at various points. The interruption of this generation, circulation, and realization of surplus value is what Marx calls “the period of crisis.” A crisis can happen if a lot of surplus value has been produced and for some reason the commodities are not able to be sold, so all that surplus value that was produced is not being realized. If that happens, then in the next period capitalists will reduce their investment, a lot of workers will lose their jobs, and the demand for goods and services produced will fall further. The economy will then move into a crisis.

Another way a crisis can emerge is if there is conflict in the workplace, whereby the capitalist system is not able to generate enough surplus value, and that might then present itself or manifest itself as a fall in the rate of profit that is realized on investment.

His argument moves in two steps. In the first step, he is looking at what he calls functioning capitalists: capitalists who are either directly involved in the production of commodities, or capitalists who are involved in ensuring that those commodities are sold. The first group of capitalists is what Marx calls “industrial” capital, and the second group of capitalists is what he calls “commercial” capital.

Industrial capital directly organizes the production of commodities and then hands it over to commercial capital, which then makes sure the commodities are sold to the final consumers. Let’s say you have General Motors making cars and then you have a group of shops that sell those cars. The first would be industrial capital, the second would be commercial capital.

Marx is very clear that surplus value can only be generated in production. All of the surplus value that is distributed and redistributed is generated in the capitalist production of commodities. That is the first place to start understanding how the surplus value will then gradually flow through society and end up as the income stream of different fragments of the nonworking class.

Within the group of industrial capitalists, different types of producers have different capital intensities. Some production requires a lot of labor per machine, and some other commodities require the opposite. So there is a process by which the total surplus value that has been generated in the production of commodities is, in the first instance, redistributed between the different fragments of industrial capital.

Why is that necessary? It is necessary to make sure that every capitalist in the long run makes the same average rate of profit. Because if there is a segment of production that generates higher than the average rates of profit, then a lot of capitalists will come into that sector and the production and supply of that commodity will rise. Therefore its price will fall and the rate of profit will fall.

We can visualize this process working itself out over a long period to ensure that every capitalist who is engaged in the production of commodities — no matter which line of production he or she is involved in, whether producing cars or computers or shirts — gets the same rate of profit. The fact that production of cars might require many more machines per worker than production of shirts means that there is a first-round redistribution of surplus value among the industrial capitalists themselves. That’s the first step.

Then the commodities that have been produced are handed over to the firms that organize the sale of the commodities. Those firms do not produce anything; they just make sure that the commodities that have been produced are sold. This category of capital is what Marx calls commercial capital. So the second part of the argument is that what happens between industrial capital and commercial capital is a distribution of surplus value. If total surplus value generated was equal to $100, there is some process by which that $100 is distributed between the producer who actually organized the production and the firms that sell the commodities.

Surplus value was generated; part of it is realized by the capitalists who generated it, part of it is handed over to the commercial capital, because the commercial capital will ensure that the commodity is actually sold. Without the commodity being sold, the surplus value cannot be realized. That is why commercial capital is able to extract part of the surplus value.

The process does not end there, because all these firms need two things. First, they need to borrow money to finance their investments, because oftentimes they do not have all the money they need to expand their production, to introduce a new machine, or to expand the network of shops.

So capitalists end up borrowing from another group of nonworkers who specialize in lending money to the functioning capitalists, and this group is what Marx calls “money capital.” Now a process of bargaining happens between functioning capitalists and money capitalists. Part of the surplus value that has been realized as profit of the producing capitalists or the commercial capitalists has to be handed over to the money capitalists as interest income. That is necessary because functioning capitalists need to borrow money from the money capitalists.

The final cut comes from a group of nonworking people who have ownership of natural resources like land. Land is required for capitalist production — think of agriculture — but also think of mines, real estate, tourism, all of which require natural resources or access to natural resources. Owners of natural resources are able to bargain for a part of the surplus value from the functioning capitalists, who will use that natural resource for producing some commodity and selling it at a profit. The part of income that is taken by the owners of natural resources such as land is what Marx calls “ground rent,” or what we can just call “rent.”

So at the end of volume III, we have covered all the important segments of the nonworking class — the ruling class — and have understood how the income streams ultimately come from the unpaid labor of workers. The first cut goes to the industrial capitalist, the second to the commercial capitalist, the third to the money capitalist, the final to owners of natural resources. The first two groups get profit, the money capitalist gets interest, and the owners of natural resources get rent.

That is how Marx concludes the analysis: by showing how surplus value was generated in volume I, how it was realized in volume II, and then how it was distributed and ends up as the income stream of different fragments of the nonworking class in volume III of Capital.

Marx always has the class structure in view when he’s theorizing capitalism, and he makes the following two points. First, there is the all-important contradictory relationship between capital and labor, but there is also the contradictory relationship between the individual capitalists or groups of capitalists within the capitalist class. The interaction between them is what we can understand as the process of competition.

Capitalists individually and as a group are interested in generating and realizing more and more surplus value. Since capitalism is not a planned system, each individual capitalist is not always trying to coordinate his or her action with other capitalists. In fact, the opposite is mostly the case. Individual capitalists within one industry, or different capitalists between industries, are always trying to outdo one another to generate more profit for themselves. The process of fierce, unrelenting, continuous competition is a fact of life under capitalism. Marx spends a lot of time describing and analyzing this phenomenon.

In the competition between two capitalists, the capitalist who is able to reduce the cost of production will be able to win the competitive struggle. Why? Because the individual capitalist who produces the same commodity for a lower cost will, on selling at the going market price, be able to generate more surplus value and more profit. And by reinvesting that surplus value or profit into the production process, he will be able to increase the size of his capital base and to improve the techniques of production used.

So the capitalist who is able to reduce the cost of production is going to win the competitive struggle. Therefore, built into the logic of capitalism is a need for capitalists to continuously search for newer methods of production that can reduce the cost of production. Once we realize this, we also need to realize that one of the most important elements of cost for the capitalist producer is the wage cost, because labor is one of the most important elements of production.

The competitive struggle leads directly to the search for new techniques of production, which can reduce the amount of labor used to produce every unit of output. That is the secret to a tendency that we have observed for long periods of time, which is the emergence of laborsaving technical change whereby capitalist systems continuously improve on the methods of production by saving labor and increasing nonlabor inputs in place of labor.

The process of competition, which is inherent to capitalism, thereby leads to this particular feature of technical change. What is striking is that empirical evidence for long periods of time, and even today, has completely validated Marx’s understanding of the necessity of technical change and the pronounced tendency for labor-saving technical change coming into play over and over. This feature of Marx’s analysis is absolutely relevant to understanding the history of capitalist technology and also to understanding the current period of capitalism.