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"When I give food to the poor, they call me a saint. When I ask why the poor have no food, they call me a communist".
(Dom Helder Camera -former archbishop of Olinda, Recife, Brasil)(1984)
Basic Knowledge on Economics.- by Róbinson Rojas Sandford
Notes: 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17
Session 2

            The History of Economic Thought [I]. Classical economics:
            the economic thought of Smith, Ricardo -problems of value,
            production and distribution, and economic growth. Karl
            Marx and the role of surplus value in the capitalist
            system of production.
            Discussion of the central principles of classical economics.
            Value theory and the long-term prospects for the capitalist
            economy in the classical and marxist thought.
                    Free market, competition, Smith's theory of value,
                    the invisible hand, laissez faire, the labour
                    theory of value, Marx's concept of surplus value,
                    the rate of profits, capital accumulation,
                    business cycles, Marx's concept of crises.

Why, at the end of the Twentieth century is relevant to study classical
economics? Because, apart from the obvious reasons,
"not only capitalism today, but also communism, socialism and
also development of the Third World today are directly linked to
nineteenth-century industrial capitalism. There is no economic system
in being today which was not seriously affected by the first industrial
revolutions. China and Japan, Nigeria and India, Israel and Egypt, Russia
and Cuba, are today reverberating to the industrialization begun in
Manchester and Birmingham 200 years ago. There is no movement to reform
or displace capitalism today which does not have its origins in the
nineteenth century." (G. Dalton, "Economic Systems & Society.
Capitalism, Communism and the Third World", Penguin, 1974).
Classical economics covers roughly from 1800 to 1930, before the Great
Depression. Three writers are the founding fathers of the analysis of
the capitalist system:

Adam Smith, who published "Inquiry into the Nature and Causes of the
            Wealth of Nations" in 1776;
David Ricardo, who published "The Principles of Political Economy and
               Taxation" in 1817; and
Karl Marx, who published volume 1 of "Capital" in 1867.


"His main preoccupation was with economic growth, and the engine of
growth he found in the 'division of labour', which leads to increased
output, technical progress and even capital accumulation. Division of
labour implies the need to exchange and is limited by the extent of the
market. Exchange takes place because each man is prompted by self-
interest in his desire for the goods of others. The other element
promoting growth is capital accumulation, for which Smith makes
parsimony the basis. For growth to succeed the social, institutional and
legal framework must be correct and Smith argues for 'the obvious and
simple system of natural liberty', where each man, in promoting his own
interest, is led (through an harmony of interests) to promote those of
society, though he does not intend this. Smith is in fact relying upon
a system of free competition, which has its own powers of regulation and
which economists have recognized can lead to an optimal allocation of
resources. Smith has shown himself aware of this principle in his
description of an optimal investment pattern for a country. Though he
argued for laissez faire, Smith recognized the need for state
intervention, e.g. a tariff for infant industries and for the three
functions of the state -security, justice and certain public works...
Prices he argued were determined by costs of production...He offered a
compendium of theories to explain wages, including a subsistence theory...
Profits, Smith thought, would fall through time owing to competition and
the increasing difficulty of finding profitable outlets". ( D. W. Pearce
(ed.), "Macmillan Dictionary of Modern Economics", Third Edition,
Macmillan Reference Books, 1989)

Smith's theory of economic growth can be summarized as follows:

1) Division of labour              (the process starts here)
2) Increased productivity
3) Greater output
4) Higher wages
5) Increased per capita income
6) Higher levels of annual consumption
7) Greater wealth of a nation
8) Increased capital accumulation  (keeps the process going)
9) Further division of labour      (the process restarts)

Smith argued that division of labour had three advantages:

a) an increase in skill and dexterity of every worker;
b) the saving of time; and
c) the invention of machinery   (see BOX 1)

Labour, wages, profits and private property were very much component
parts of a whole for Adam Smith. I quote from pages 30, 52, 64 and 97-98
from Smith's "Wealth of Nations":

"Labour, therefore, is the real measure of the exchangeable value of
commodities...Wages, profit, and rent are three original sources of all
revenue as well as of all exchangeable value...In that original state
of things...the whole produce of labour belongs to the labourer. He has
neither landlord nor master to share with him...As soon as land becomes
private property, the landlord demands his or her share of the annual
produce, and as soon as capital accumulation occurs, the capitalist does
likewise...In reality high profits tend much more to raise the price of
work than high wages...Our merchants and master manufacturers complain
much of the bad effects of high wages in raising the price, and thereby
lessening the sale of their goods both at home and abroad. They say
nothing concerning the bad effects of high profits". (See BOX 2)

Smith's theory of growth was a static look at the capitalist system of
production because it didn't include fluctuations in the process of
growth. There wasn't room for 'crises' or 'cycles'. This weakness made
of Smith's point of view a very limited tool for analysis.


 Adam Smith and Karl Marx were political economists in the sense that
they analysed  economic issues only to argue social policy. Before
Ricardo, whose PRINCIPLES were published in 1817 there wasn't economics
in the modern sense of the word. Capitalist economics that is.

Ricardo argued that "the purely market forces of cost and demand
determine the rents tenants pay and the prices at which goods are
exchanged nationally and internationally". 

From the above Ricardo concluded theories of price mechanisms and
income shares by owners of land, owners of capital, and the rest
of the population -owners of labour power-, which made of rent,
interest, profits and wages the outcome of "natural laws", like
sunshine, rain, etc. Therefore, Ricardo's economics created the
ideological foundations for presenting the free-market system as
a religious belief: either you believe in it or not. Free-market
is the 'best allocator of resources', 'is just', and when the market
produce dramatic social damages like poverty and unemployment, is
the poor and the unemployed to blame, not the capitalist/free market
because, like any God, the "market is always right".

Nevertheless Ricardo was seriously worried about how wage earners,
the populace, didn't know how to cope with economic progress and
therefore endangering the newfound paradise of the free market. From
the way in which did put the problem is clear that pushing wages
down to subsistence level was the "efficient" thing to do. This was
Ricardo's argument (from "Principles"):

...the wage rate is determined by the proportion of fixed capital and
circulating capital to the population...As long as profits are positive,
the capital stock is increasing, and the increased demand for labour
will temporarily increase the average wage rate...but when wage rates
rise above SUBSISTENCE, the 'domestic delights' come into play, and
population increases. A larger population requires a greater food
supply, so that, barring imports, cultivation must be extended to
inferior lands. As this occurs, aggregate rents increase and profits
fall, until ultimately the stationary state is reached...

From Ricardo until today, economic theory became divorced from society
and remains to this day a markedly different subject from sociology,
anthropology, etc.

From Ricardo onwards, economists and politicians ensured that the new
capitalist class ruled societies utilising the religious notion of free
markets encapsulated in the concept of LAISSEZ FAIRE, and, like many
priests of many religions keeping a notorious lack of consistency
between preaching and doing.

"Economists played its role in showing that vigorous competition
produced an optimum allocation of resources: the right amount of each
good produced at lowest cost. And 'Say's Law' suggested that full
employment of resources would also result from the automatic play of
market forces. Any lapse from full employment would be self-correcting;
market wage and interest rates would fall, inducing entrepreneurs to
expand output in response to cheapened costs. LAISSEZ FAIRE, in
short, produced economic efficiency and full employment. Unhappily,
things did not work that way...Throughout the nineteenth century,
laissez faire as ideology rather than as practice was dominant in Britain
and America but not in France and Germany. In Britain, competitive
markets and governmental intervention grew together. Repeal of the Corn
Laws in 1846 meant free trade; factory legislation starting in 1819 meant
the beginning of controls over the labour market. In the century after
1932 the extension of the right to vote and the growth of democratic
political institutions meant that economic issues increasingly would
become matters of political concern: "As voting rights were extended,
the possibility of the 'Welfare State', resting on democratic pressure
without violence, came gradually into view".(G.D.H. Cole, "Socialist
Thought, the Forerunners 1789-1850", Macmillan, 1953)( G. Dalton,
"Economic Systems & Society. Capitalism, Communism and the Third
World", Penguin, 1974)


The most outstanding feature of Marx's work on capitalism is his
methodology. "Marx's system is a mixture of philosophical, sociological,
and economic analysis"..."Marx's approach to the study of the economy is
unconventional. Orthodox economic theory, particularly microeconomic
theory, attempts to understand the whole of the economy by an examination
of its parts: households, firms, prices and markets, for instance. Marx,
on the other hand, starts at the level of the total society and economy
and analyzes them by examining their influence on their components. Thus,
in orthodox methodology, the major causation runs from the parts to the
whole, whereas in the Marxian scheme the whole determines the parts. This
description of the different approaches of Marxian and orthodox economic
theory is an oversimplification, since both allow for an interaction
between the parts and the whole, but it does clarify a basic difference
in orientation" ( L. Colander, "History of Economic Theory", Houghton
Mifflin Company, 1989).

Marx's theory of capitalist economic growth is based upon his concept

Marx understood capitalist production as a process led by the owners
of machinery, land and raw materials (capitalists) who paid to the
workers only part of the value added to the raw materials when
transforming them in commodities. Marx, like modern economists, thought
that workers ADDED VALUE to raw materials when transforming them into
commodities, and that VALUE ADDED was shared by the worker and the
capitalist in the form of wages and gross profits.

Thus, the price of commodities was composed of COSTS plus VALUE CREATED
in the process of production.

The value created was then separated in two portions: wages and gross
profits. Marx called gross profits SURPLUS VALUE. He defined wages as
the amount of money necessary to allow the working  class to survive and
reproduce itself, thus making possible capitalist appropriation of more
surplus value.

From a moral point of view, Marx saw the act of separating value added
in two portions as an act of working class being expropriated of part
of the "wealth created with blood, sweat and tears". From a political
point of view, Marx saw this appropriation of surplus value as a legal
right that the capitalist imposed by force on the working class,
creating a two tier society with a wealthy minority, and a relatively
poorer majority.

From the surplus value, the capitalist will dedicate a portion to buy
more machinery and more raw materials, in order to accumulate more
surplus value, which will lead to accumulate more machinery and raw
material, etc. Thus, the dynamics of the capitalist system, for Marx,

This accumulation of surplus value could be carried out in two ways:
reducing wages as much as possible and employing as many workers as
possible, or, creating new technologies to increase productivity,
increase output per worker, that is.
(For a popular version of Marx's theory of capitalist economic growth
 see chapter I of "Manifest of the Communist Party", 1848)

The first system was unreliable on two accounts:
     1) if wages went too low, workers could starve and the system
        ran out of labourers; and
     2) employing as many workers as possible will reduce supply of and
        increase demand for workers pushing wages up.

The second system was far better, because creating new technologies
amounted to invent labour-saving technologies, which will decrease
demand for labour, and wages could remain low. And producing more with
less will reduce cost increasing surplus value.

By and large, Marx saw the dynamics of economic growth in a capitalist
system as follows:

The driving force is accumulation of capital, leading to maximization
of profits (surplus value), to relative oversupply of labour via
inventing new technology to faster accumulation of capital and faster
accumulation of surplus labour. This oversupply of labour will keep
wages relatively low, adding to the dynamics of accumulating more
surplus value. 

The above accumulation of ever increasing capital will maximize
political power for owners of capital.

But economic growth with capitalist relations of production had some
problems exactly because of the main feature of capitalist system:
individual ownership of capital.

Individual capitalist will try to maximise surplus value producing as
much as possible. Because of this, the market will reach a point were
overproduction will hit businesses and stock will accumulate. To reduce
losses, individual capitalists will produce less and shed workers,
until a crisis of underproduction will appear. Thus, the capitalist
system will advance in cycles, with ups and downs, depending on
stages of underproduction or overproduction.

In the first case, when there is not enough production, demand is
larger than supply, and, therefore:
                        a) sales increase,
                        b) profits increase,
                        c) investments increase,
                        d) employment increase,
                        e) production increase,
until a point where there is TOO MUCH production, and businesses
do not sell all the stock they have. This is the second case. Now
supply is larger demand, and, therefore:
                        a) sales decrease,
                        b) profits decrease, and even losses occur,
                        c) investments decrease, and even stop in
                           some cases,
                        d) employment decrease (unemployment is high)
                        e) production decrease,
                        f) less profitable business disappear
until reaching a situation in which production is TOO LITTLE, and
therefore demand becomes larger than supply...the whole cycle starts
all over again.

Marx stated that this ups and downs (he called them crises) are actually
crises are the most efficient manifestation of the market system because

How is that? Marx assumes that in every crises only the less efficient
capitals are destroyed (lower prices bankrupt them), and the most
efficient survive. Therefore, the crisis improves the overall quality
of capital. Economic growth and efficiency, in the capitalist system
is achieved through the chaotic behaviour of the market, the destruction
of capital, and high rates of unemployment which ensure relative low
level of wages.

Marx was the first economist dedicating a large portion of his research
to the study of business cycles, and the first economist, also, to
state that business cycles were the 'driving force of the system',
which, in turn, was unleashed by the aim of maximizing profits/surplus

(For Marx's exposition of the above see BOX 4)(In the text Marx calls
'centralization' the process by which monopolies/oligopolies are
created in the market system, and 'concentration' the process by which
individual ownership of means of production spreads throughout society
with the triumph of the capitalist system over non-capitalist systems.
In modern language, 'concentration' indicates the process of
'centralization' in Marx's text.)

His main findings were that, because crises allow the survival of only
the most efficient capital, then, the long-term tendencies of capitalist 
economic growth were as follows:

                1) tendency to concentrate capital in fewer hands, in
                   such a way that a few monopolies will dominate the
                   national and international economy;
                2) tendency to increase the portion of machinery and raw
                   materials against the portion of human labour per
                   unit of output;
                3) tendency to the creation of a large contingent of
                   unemployed people alongside fast advance of 
                   technological processes which will make more and
                   more workers redundant to the system;
                4) tendency to more violent fluctuations in the market,
                   leading to dramatic business cycles. He wrote:
                   "The total movement of this disorder is its order".
                   (In "Wage, labour and capital");
                5) tendency to wider polarization in society among those
                   extremely wealthy and the overwhelming majority living
                   on depressed salaries;
                6) tendency to a fall in the rate of profits, which will
                   force capitalists to create new technologies even
                   faster, to make capital even more mobile (to cover
                   the world economy), and this will accelerate the
                   tendency to higher unemployment and wider
                   polarization in society between wealthy and poor
In today's economic jargon, the following equivalents are true:

               Marx's                      Modern economics'
               concept of:                 concept of:

              Value created                Value added
              Surplus value                gross profits
              Variable capital             wages
              Constant capital             capital
              crises                       business cycles
              colonization                 globalization
              expropriation/exploitation   fair wages


...a dynamic view of competition which had emerged in the late XVIII and
early XIX centuries, referred to as the 'classical' approach had as its
most important exponents  Adam Smith, David Ricardo and Karl Marx. For
these economists, the focus for analysing  the competitive process was
the tendency for new capital to enter a sector in which high profits are
being made, thereby tending to equalize returns between sectors. this context, the essential aspect of competition is not the number
of participants in the market-place...but the BEHAVIOUR of new entrants
and existing participants as they actively pursue above normal profits in
a given sector...New divisions of labour were innovations leading to
reap above normal profits, the building of new machinery with the same
purpose were inventions leading to the same outcome.
...Innovation is in fact a very common competitive strategy. There is a
difference between INNOVATION and INVENTION:

Invention is a technical concept, and involves the discovery of new
scientific principles and technologies;

Innovation, on the other hand, is an economic concept, and means the
introduction of new products and process to the economy, whether or not
these innovations involve the creation of new technologies.
END OF BOX 1____________________________________BACK_____________


Smith, Adam, "The Wealth of Nations", Edwin Cannan (ed.),
              New York: Modern Library, 1937 [1776]
Smith, Adam, "The Theory of Moral Sentiments", Indianapolis,
              Ind.: Liberty Classics, 1976 [1759]
about the "invisible hand":
"Every individual necessarily labours to render the annual revenue
of the society as great as he can. He generally, indeed, neither
intends to promote the public interest, nor knows how much he is
promoting it. By preferring the support of domestic to that of 
foreign industry, he intends only his own security; and by
directing that industry in such a manner as its produce may be of
the greatest value, he intends only his own gain, and he is in this,
as in many other cases, led by an invisible hand to promote an end
which was no part of his intention. Nor is it always the worse for
the society that it was no part of it. By pursuing his own interest
he frequently promotes that of the society more effectively than when
he really intends to promote it. I have never known much good done
by those who affected to trade for the public good. It is an affectation,
indeed, not very common among merchants, and very few words need be
employed in dissuading them from it". ("Wealth of Nations", p. 423)
for Smith civil society is to a major extent a consequence of private
property and the accumulation of wealth...:
"It is in the age of shepherds, in the second period of society, that
the inequality of fortune first begins to take place, and introduces 
among men a degree of authority and subordination which could not 
possibly exist before. It thereby introduces some degree of that civil
government which is indispensably necessary for its own preservation...
Civil government, so far as it is instituted for the security of 
property, is in reality instituted for the defense of the rich against
the poor, or of those who have some property against those who have none
at all". ("Wealth of Nations", p. 674)
Smith's theory of value:
"The word value...has two different meanings, and sometimes expresses
the utility of some particular object, and sometimes the power of 
purchasing other goods which the possession of that object conveys.
The one may be called "value in use"; the other, "value in exchange".
The things which have the greatest value in use have frequently little
or no value in exchange; and on the contrary, those which have the
greatest value in exchange have frequently little or no value in use.
Nothing is more useful than water: but it will purchase scarce 
anything; scarce anything can be had in exchange for it. A diamond, on
the contrary, has scarce any value in use, but a very great quantity of
other goods may frequently be had in exchange for it". ("Wealth of
Nations", p. 28)
Labour as a measure of value:
"The value of any the person who possesses it, and who
means not to use or consume it himself, but to exchange it for other
commodities, is equal to the quantity of labour which it enables him
to purchase or command. Labour, therefore, is the real measure of the
exchangeable value of all commodities". ("Wealth of Nations", p. 30)
Problems, practical and theoretical, in a labour theory of value:
"It is often difficult to ascertain the proportion between two
different quantities of labour. The time spent in two different sorts
of work will not always alone determine this proportion. The different
degrees of hardship endured, and of ingenuity exercised, must likewise
be taken into account. There may be more labour in an hour's hard work
than in two hours easy business; or in an hour's application to a trade
which it cost ten years labour to learn, than in a month's industry at
an ordinary and obvious employment. But it is not easy to find any 
accurate measure either of hardship or ingenuity. In exchanging indeed
the different productions of different sorts of labour for one another,
some allowance is commonly made for both. It is adjusted, however, not
by any accurate measure, but by the higgling and bargaining of the 
market, according to that sort of rough equality which, though not exact,
is sufficient for carrying on the business of common life". ("Wealth
of Nations", p. 31)
difference between real and nominal prices:
"Labour, like commodities, may be said to have a real an nominal price.
Its real price may be said to consist in the quantity of the necessaries
and conveniences of life which are given for it; its nominal price, in
the quantity of money. The labourer is rich or poor, or ill or well
rewarded, in proportion to the real, not the nominal price of his
labour".("Wealth of Nations", p.33)
The three component parts of market value:
"Wages, profit, and rent are the three original sources of all revenue
as well as of all exchangeable value. All other revenue (interest
income, taxes, etc.) is ultimately derived from some one or other of
these. ("Wealth of Nations", p52)
Smith's notion of "opportunity cost":
"Though in common language what is called the prime cost of any 
commodity does not comprehend the profit of the person who is to sell
it again, yet if he sells it at a price which does not allow him the
ordinary rate of profit in his neighborhood, he is evidently a loser
by the trade; since by employing his stock in some other way he might
have made that profit".("Wealth of Nations", p. 55)
about the interaction of supply and demand:
"The market price of every particular commodity is regulated by the 
proportion between the quantity which is actually brought to market,
and the demand of those who are willing to pay the natural price of
the commodity, or the whole value of the rent, labour, and profit,
which must be paid in order to bring it thither. Such people may be
called the effectual demanders, and their demand the effectual
demand; since it may be sufficient to effectuate the bringing of the
commodity to market. It is different from the absolute demand. A very
poor man may be said in some sense to have a demand for a coach and
six; he might like to have it; but his demand is not an effectual
demand, as the commodity can never be brought to market in order to
satisfy it". ("Wealth of Nations", p. 56)
the case of inefficient supply:
"When the quantity of any commodity which is brought to market falls
short of the effectual demand, all those who are willing to pay  the
whole value of the rent, wages, and profit which must be paid in order
to bring it thither, cannot be supplied with the quantity they want.
Rather than want it altogether, some of them will be willing to give 
more. A competition will immediately begin among them, and the market
price will rise more or less above the natural price, according as
either the greatness of the deficiency or the wealth and wanton luxury
of the competitors, happen to animate more or less the eagerness of
the competition. Among competitors of equal wealth and luxury the same
deficiency will generally occasion more or less eager competition,
according as the acquisition of the commodity happens to be of more or
less importance to them. Hence the exorbitant price of the necessaries
of life during the blockade of a town or in a famine". (Wealth
of Nations", p. 56).
the case of inefficient demand:
"When the quantity brought to market exceeds the effectual demand, it
cannot be all sold to those who are willing to pay the whole value of
the rent, wages, and profit, which must be paid in order to bring it
thither. Some part must be sold to those who are willing to pay less,
and the low price which they give for it must reduce the price of the
whole. The market price will sink more or less below the natural price,
according as the greatness of the excess increases more or less the
competition of the sellers, or according as it happens to be more or
less important to them to get immediately rid of the commodity. The
same excess in the importation of perishable, will occasion a much
greater competition in that of durable commodities..."( "Wealth
of Nations", p. 57)
and equilibrium price:
"When the quantity brought to market is just sufficient to supply the
effectual demand and no more, the market price naturally comes to be
either exactly, or as nearly as can be judged of, the same with the
natural price. The whole quantity on hand can be disposed of for this 
price, and cannot be disposed of for more. The competition of the
different dealers obliges them to accept of this price, but does not
oblige them to accept of less". ("Wealth of Nations", p.57)
price fluctuations:
"...though the market price of every particular commodity is in this
manner continually gravitating, if one may say so, towards the natural
price, yet sometimes particular accidents, sometimes natural causes, 
and sometimes particular regulations of police, may, in many commodities
keep up the market price, for a long time together, a good deal above 
the natural price".( "Wealth of Nations", p. 59)
about monopoly privileges
"A monopoly granted either to an individual or to a trading company
has the same effect as a secret in trade or manufacturers. The 
monopolists, by keeping the market constantly under-stocked, by never
fully supplying the effectual demand, sell their commodities much above
the natural price, and raise their emoluments, whether they consist in
wages or profits, greatly above the natural rate". "Wealth of
Nations", p. 61)
According to Smith, product prices cannot be in long-run equilibrium
unless factor prices are also in long-run equilibrium:
"Some of the component parts of its price must be paid below their
natural rate. If it is rent, the interest of the landlords will 
immediately prompt them to withdraw a part of their land; and if it
is wages or profit, the interest of the labourers in the one case, and
of their employers in the other, will prompt them to withdraw a part
of their labour or stock from their employment. The quantity brought to
market will soon be no more than sufficient to supply the effectual
demand. All the different parts of its price will rise to their natural
rate, and the whole price to its natural price". ("Wealth of Nations",
p. 57)
about wages, profits and contradictions among them:
"It seldom happens that the person who tills the ground has wherewithal
to maintain himself till he reaps the harvest. His maintenance is
generally advanced to him from the stock of a master, the farmer who
employs him, and who would have no interest to employ him, unless he
was to share in the produce of his labour, or unless his stock was to
be replaced to him with a profit". ("Wealth of Nations", p.65)
"What are the common wages of labour depends every where upon the
contract usually made between those two parties, whose interests are
by no means the same. The workmen desire to get as much, the masters
to give as little as possible. The former are disposed to combine
in order to raise, the latter in order to lower the wages of labour".
("Wealth of Nations", p.66)
Smith's theory of growth is almost entirely based upon the effects on
productivity of ever increasing division of labour. In a summary,
Smith's theory of growth follows this sequence:
Division of Labour leads to Increased Productivity, the latter
creates Greater Output, which will mean Higher Wages, or Increased
Per Capita Income, leading to Higher Levels of Annual Consumption,
which results in Greater Wealth of a Nation making possible
Increased Capital Accumulation, which will conduce to a New
Division of Labour (completing a full circle in a sequence of ever
increasing circles).
In a famous passage, Smith describes the gains from specialization:
"A workman not educated to... the trade of the pin-maker...nor
acquainted with the use of the machinery employed in it...could scarce,
perhaps with his utmost industry, make one pin in a day, and certainly
could not make twenty. But in the way in which this business is now
carried on, not only the whole work is a peculiar trade, but it is
divided in a number of branches, of which the greater part are likewise
peculiar trades. One man draws out the wire, another straights it,
a third cuts it, a fourth points it, a fifth grinds it at the top for
receiving the head; to make the head requires two or three distinct
operations; to put it on, is a peculiar business, to whiten the pins is
another; it is even a trade by itself to put them into the paper; and
the important business of making a pin is, in this manner, divided
into about eighteen distinct operations, which, in some manufactories,
are all performed by distinct hands, though in others the same man will
sometimes perform two or three of them. I have seen a small manufactory
of this kind where ten men only were employed, and where...each person...
[averaged] four thousand eight hundred pins in a day. But if they all
wrought separately and independently, and without any of them having
been educated to this peculiar business, they certainly could not each
of them make twenty, perhaps not one pin in a day" ("Wealth of Nations"
p. 5)
Smith concluded that there are three advantages of division of labour,
each leading to greater economic wealth:
1) an increase in skill and dexterity of every worker
2) the saving of time
3) the invention of machinery

MARX ON "Expansion of Production and Expansion of the Market"[R.R.]

This question may perhaps be answered by pointing to the constantly
expanding production, which expands each year for two reasons:
   first, because the capital invested in production is constantly
          growing; and
secondly, because it is constantly used more productively.

In the course of reproduction and accumulation there is a constant
aggregation of small improvements which eventually alter the whole
level of production. There is a piling up of improvements, an
accumulating development of productive powers.

If anyone likes to reply that the constantly expanding production
requires a constantly expanding market, and that production expands more
rapidly than the market, this is only putting in another way the
phenomenon that has to be explained -in its real form, instead of an
abstract form.

The market expands more slowly than production; or in the cycle through
which capital passes in its reproduction -a cycle in which there is no
merely reproduction, but reproduction on an extended scale; it describes
not a circle, but a spiral- a moment comes when the market manifests
itself as too narrow for production. This is at the close of the cycle.

This however merely means that the market is overfilled. Overproduction
is manifest. Had the extension of the market kept pace with the
extension of production, there would be no glut of the market, no

However, the mere admission that the market must expand along with
production is also from another aspect one more admission of the
possibility of overproduction, since the market is limited externally
in the geographical sense, the internal market is limited as compared
with a market that is both internal and external, the latter again as
compared with the world market -which however at each moment of time is
in turn limited, [even though] in itself capable of extension.

Consequently the admission that the market must expand if overproduction
is not to occur, is also an admission that overproduction can occur. For
since market and production are two independent factors, it is therefore
possible that the expansion of one may not correspond with the expansion
of the other, that the limits of the market may not be extended rapidly
enough for production, or that new markets -new extensions of the
market- may be rapidly overtaken by production, so that the expanded
market now appears just as much a barrier as the narrower one did

[Ricardo and Smith criticized by Marx. R.R.]

Ricardo is therefore consistent in denying the necessity for AN
EXPANSION OF THE MARKET to correspond with an expansion of production
and growth of capital: all capital available in a country can also be
advantageously employed in that country. He therefore polemizes against
Adam Smith, who on the one hand put forward HIS (Ricardo's) view, and
with his usual rational instinct also contradicted it. Adam Smith too
does not recognize the phenomenon of overproduction, crises resulting
from overproduction. What he sees are mere credit and money crises,
which come to the surface of their own accord, along with the credit and
banking system. In fact he sees in the accumulation of capital an
unqualified increase in the total wealth and well-being of the nation.
On the other hand he conceives the development of the internal market
into the foreign, colonial, and world market as in itself evidence of
what can be called a relative overproduction in the internal markets...

The word OVERPRODUCTION in itself leads to error. So long as the most
urgent needs of a great part of society are not satisfied, or ONLY its
most immediate needs, there can naturally be absolutely no talk of an
OVERPRODUCTION OF PRODUCTS -in the sense that the mass of products would
be excessive in relation to the need for them. What must be said is the
opposite: that in this sense, on the basis of capitalistic production,
there is constant UNDERPRODUCTION.

The limit of production is the CAPITALIST'S PROFIT, and not all the 
NEED OF THE PRODUCERS. But overproduction of PRODUCTS and overproduction
of COMMODITIES are two completely different things.

If Ricardo thinks that the form COMMODITY makes no difference to the product,
and further, that the CIRCULATION OF COMMODITIES is only formally different
from barter, that in this circulation exchange-value is only a form, without
significance, of the exchange of things, and that therefore money is a merely
formal means of circulation, this is in fact the outcome of his presupposition
that the bourgeois mode of production is the absolute mode of production, and
consequently is a mode of production without any precise specific character, that
what is specific in it is only formal.

It is therefore not possible for him to admit that the bourgeois mode of production
contains within itself a barrier to the free development of the productive forces,
a barrier which comes to the surface in crises, and incidentally in OVERPRODUCTION 
-the basic phenomenon in crises.

Ricardo saw, from the passages of Adam Smith which he quotes, approves and therefore
repeats, that the limitless 'desire' for all kinds of use-value is constantly satisfied,
on the basis of a state of things in which the mass of producers remains more or less
restricted to necessities, in which this very considerable mass of producers therefore
remains more or less excluded from the consumption of wealth -in so far as wealth oversteps
the circle of the necessary means of subsistence. Incidentally, this is also the case, and
to a still higher degree, in the ancient form of production based on slavery. But the
ancients never even thought of transforming the surplus product into capital. At least,
only to a small extent. The widespread occurrence among them of the amassing of treasure
in the narrow sense shows how much surplus product lay completely iddle. They converted
a great part of the surplus product into unproductive expenditure on works of art, religious
monuments and public works. Still less was their production directed to the unfettering and
development of the material forces of production -division of labour, machinery, use of
natural forces and science in private production. Broadly speaking they never got beyond
handicraft labour. The wealth they produced for private consumption was consequently relatively
small, and only seems large because it was amassed in the hands of a few people, who,
incidentally, did not know what to do with it.

If consequently there was no OVERPRODUCTION among the ancients, there was nevertheless
OVERCONSUMPTION on the part of the rich, which in the final periods of Rome and Greece
broke out into insane extravagance. The few trading peoples among them lived partly at
the expense of all these essentially poor nations.

It is the absolute development of the productive forces, and hence mass production, with
the mass of producers confined within the circle of the necessary means of subsistence on
the one hand, and on the other hand the barrier set by the capitalists' profit, which forms
the basis of modern overproduction. All the difficulties which Ricardo and others raise
against overproduction, etc., rest on the fact that they either look on bourgeois
production as a mode of production in which no distinction exists between purchase and
sale -direct barter- or they regard it as SOCIAL production, of such a kind that society
distributes its means of production and productive forces as if according to a plan, in
the degree and measure in which they are necessary for the satisfaction of its various
needs, so that to each sphere of production falls the quota of social capital required for
the satisfaction of the need to which it corresponds.

This fiction arises entirely from the inability to grasp the specific form of bourgeois
production, and this inability in turn from the obsession that bourgeois production is
production pure and simple -just like a man who believes in a particular religion and sees
in it religion pure and simple, with only FALSE religions outside it. On the contrary, it
would be much more pertinent to ask:

on the basis of capitalist production -in which everyone works for himself, and particular
labour must at the same time appear as its opposite, abstract general labour, and in this
form as social labour- how can the necessary balance and interdependence of the various
spheres of production, their dimensions and the proportions between them, be possible
except through the constant neutralization of a constant disharmony? This moreover is
admitted when adjustments through competition are spoken of; for these adjustments always
presuppose that there is something to be adjusted, and harmony therefore is always only a
result of the movement which neutralizes the existing disharmony. For this reason, too,
Ricardo admits the glut of the market for particular commodities; and then a general
simultaneous glut in the market is said to be IMPOSSIBLE.

Consequently the impossibility of overproduction for any particular sphere of production is
not denied. What is said to be [impossible] is the SIMULTANEITY of this phenomenon for all
spheres of production, and hence general overproduction. This last phrase is always to be
taken CUM GRANO SALIS, for in times of general overproduction the overproduction in some
spheres is always only the RESULT, the CONSEQUENCE, of overproduction in the leading articles
of commerce; [in these it is] always only RELATIVE overproduction, because overproduction exists
in other spheres.

Apologetics twist this precisely into its opposite. Overproduction in the leading
articles of commerce, in which alone active overproduction manifests itself -these are in
general articles which can only be produced in the mass and on a factory scale, also in
agriculture- [is supposed only to exist] because overproduction exists in the articles in
which relative or passive overproduction appears. According to this idea, overproduction
only exists because overproduction is not universal. The relativity of overproduction -the
actual overproduction in some spheres leads to it in others- is expressed in this way:
there is no universal overproduction, because if overproduction were universal, all
spheres of production would retain the same relation to one another; therefore universal
overproduction is equivalent to proportional production, which excludes overproduction.

And this is supposed to be an argument against overproduction. That is to say, on the
ground that universal overproduction in the absolute sense would not be overproduction,
but only a greater than usual development of productive power in all spheres of
production, it is said that actual overproduction, which is precisely not this
non-existent, self-abrogating overproduction, does not exist -although it only exists
because it is not this.

If this miserable sophistry is more closely examined, we get the following result.
Overproduction takes place, say, in iron, cotton goods, linen, silk,
cloth, etc. It cannot then be said, for example, that too little coal has been produced
and that therefore this overproduction has occurred; for the overproduction of iron, etc.,
involves an exactly similar overproduction of coal, just as an overproduction of woven
cloth involves that of yarn. (Overproduction of yarn as compared with cloth, iron as
against machinery, etc., would be possible. This would always be a relative overproduction
of constant capital.)

There can therefore be no question of the overproduction of articles
whose overproduction is implied because they enter as elements, raw materials, auxiliary
materials, or means of labour into the articles the positive overproduction of which is
precisely the fact to be explained (the 'particular commodity of which too much has been
produced, of which there may be such a glut in the market as not to repay the capital
expended on it'). The discussion concerns other articles which directly belong to other
spheres of production, and can neither be subsumed under the leading articles of commerce
which, according to the assumption, have been overproduced; nor do they belong to spheres
in which, because they form the intermediate product for the leading articles of commerce,
production must have advanced at least as much as in the final phases of the product-
although there is no reason why they themselves should not have gone still further ahead,
and thus have brought about an overproduction within the other overproduction.

For example, although sufficient coal must have been produced in order to keep going all the
industries into which coal enters as a necessary condition of production, and therefore
the overproduction of coal is implied in the overproduction of iron, yarn, etc. (the coal
having been produced only in proportion to the production of iron and yarn), it is ALSO
possible that more coal was produced than even the overproduction in iron, yarn, etc.,
required. This is not only possible but very probable. For the production of coal and yarn
and of those other spheres of production which produce only the conditions and earlier
phases of the product to be completed in another sphere, is not governed by the immediate
demand, by the immediate production or reproduction, but by the DEGREE, MEASURE,
PROPORTION in which these are expanding. And it is self-evident that in this calculation
the goal may be overshot. Nevertheless [overproduction is said to originate from the fact
that] there has not been enough produced, there has been underproduction, of other
articles, such as for example pianofortes, precious stones, and so forth. The absurdity of
this statement emerges all the more clearly when it is given an international setting, as
Say and others after him have done.

Thus, for example, England has not overproduced, but Italy has underproduced. If Italy,
firstly had had capital enough to replace the English capital that had been exported to
Italy in the form of commodities, and secondly had so invested this capital that it produced
the specific articles which English capital needed (partly to replace itself and partly to
replace the revenue flowing from it), there would have been no overproduction. That is, there
would no have existed the fact of actual -in relation to the ACTUAL production in Italy-
existing overproduction in England, but only the fact of IMAGINARY UNDERPRODUCTION IN ITALY 
-imaginary, because it presupposes a capital in Italy, and a development of the productive forces,
which did not exist there, and secondly because it makes the same utopian presupposition that
this non-existing capital in Italy had been applied exactly as required in order that the English
supplies and Italian demand, English and Italian production, should be complementary to each other.

This means in other words nothing [but]: no overproduction would occur if demand and
supply correspond to each other; if capital were distributed in such proportions in all
spheres of production that the production of one article involved the consumption of the
other and thus its own consumption. There would be no overproduction, if there were no
overproduction. But as capitalistic production is only able to let itself go without
restraint in certain spheres, in definite conditions, no capitalistic production at all
would be possible if it had to develop in all spheres SIMULTANEOUSLY and IN EQUAL DEGREE.
Because in these spheres absolute overproduction takes place, relative overproduction
takes place also in the spheres where there has not been overproduction. This explanation
of overproduction in one direction by underproduction in another means nothing [but]: if
production were proportionate, there would be no overproduction. Ditto, if demand and
supply corresponded to each other. Ditto, if all spheres comprised equal opportunities of
capitalistic production and its expansion -division of labour, machinery, export to
distant markets, production on a mass scale, etc. Or in still more abstract form: if all
countries which trade with one another possessed an equal capacity for production, and
indeed for different and complementary production. That is to say: overproduction takes
place, because all these pious wishes are not fulfilled. Or in even more abstract form:
there would be no overproduction at one point, if overproduction took place at all points
in equal degree. But capital is not large enough to overproduce in this universal way, and
consequently universal overproduction occurs.

Let us examine this fantasy still more closely. It is admitted that there can be overproduction
in each PARTICULAR BRANCH OF PRODUCTION. The one circumstance that might prevent overproduction
in ALL at the same time is, so it is alleged, that commodity exchanges against commodity; that is
to say, they take refuge in the conditions of barter which they assume. But this way of escape
is cut off by the very fact that trade in commodities is not barter, and therefore the seller of
a commodity is not necessarily at the same time the purchaser of another. This whole
subterfuge therefore rests on abstracting from MONEY, and abstracting from the fact that
what is in question is not the exchange of products but the circulation of commodities,
for which the separation of purchase and sale is essential.


The circulation of capital in itself comprises POSSIBILITIES of interruptions. For
example, in the reconversion of money into its conditions of production, the point is not
only to transform money back again into the same use-values (in kind), but it is essential
for the repetition of the process of reproduction that these use-values are to be had at
their old value (lower is naturally still better). The very significant part of these
elements of reproduction which consists of raw materials can however rise in price for two
reasons, FIRST if the instruments of production increase in quicker proportion than the
raw materials can be provided within a definite period of time. SECONDLY, as a result of
the variable character of harvests. That is why weather conditions, as Tooke rightly
observes, play such an important role in modern industry. That is also true of the means
of subsistence in relation to wages.

The reconversion from money into commodity can therefore come up against difficulties and
bring about possibilities of crisis, just as well as the conversion of commodity into money.
In so far as simple circulation is considered -not the circulation of capital- this difficulty
does not arise. There are besides a number of other factors, conditions, and possibilities
of crises which can only be considered when examining the concrete relations of the competition
of capitals and of credit.

The overproduction of commodities is denied, though the overproduction of capital
is admitted. But capital itself consists of commodities, or in so far as it consists of
money it must be reconverted into commodities of one kind or another in order to be able
to function as capital. What then does overproduction of capital mean? Overproduction of
quantities of value destined to produce surplus-value; or, if considered in their material
content, overproduction of commodities destined for reproduction -that is, reproduction on
too large a scale, which is the same thing as overproduction pure and simple. Defined more
exactly, this in turn means nothing but that too much has been produced for the purpose of
enrichment, or that too large a part of the product has been destined not for consumption
as revenue but for making more money, for accumulation; not to satisfy the personal
requirements of its possessor, but to secure for him abstract social riches, money and
more power over the labour of others -capital- or to increase the power in his hands. This
is what some say. Ricardo denies it.

How then do the others explain the overproduction of commodities? That production is not
sufficiently widely diversified, that certain articles of consumption have not been produced
in sufficiently great quantities. It is clear that this cannot refer to industrial consumption;
for the manufacturer who overproduces in linen thereby of necessity increases his demand for
yarn, machinery, labour, etc. Therefore the reference must be to personal consumption. Too much
linen has been produced, but perhaps too few oranges. Previously money was denied, for the purpose
of [denying] the separation between purchase and sale. Here capital is denied, in order to
transform the capitalists into people who carry out the simple operation


and for individual consumption, not as capitalists with the aim of getting richer, with the aim
of reconverting a part of the surplus-value into capital. But the statement that there is
TOO MUCH CAPITAL in fact means nothing but that too little is consumed and, in the given conditions,
can be consumed, as REVENUE (Sismondi). Why then does the producer of linen demand of the producer
of corn that he consume more linen, or the latter demand of the farmer that he consume more corn?
Why does the man who deals in linen not himself realize a larger part of his revenue, his
surplus-value, in linen, and the farmer in corn? Each of them individually will admit
that, apart from the limit to his requirements, what prevents him from doing this is his
need to capitalize it. But collectively they will not admit it. In this treatment we have
completely abstracted from crises that element which arises from the fact that commodities
are reproduced more cheaply than they have been produced. Hence depreciation of the
commodities on the market.

In the general crises on the world market, all the contradictions of bourgeois production
break through collectively; in particular crises (particular as to content and in extent)
they appear only in a scattered, isolated, and one-sided form. Overproduction is specifically
conditioned by the general law of the production of capital: production is in accordance with
the productive forces, that is with the possibility that the given quantity of capital has of
exploiting the maximum quantity of labour, without regard to the actual limits of the market,
the needs backed by the ability to pay. And this takes place through the constant expansion
of reproduction and accumulation, and therefore the constant reconversion of revenue into
capital; while on the other hand the mass of producers remain restricted to the average level
of needs, and on the basis of capitalist production must remain so restricted. (from K. Marx,
"Theories of Surplus Value", Chapter II, 4d, Progress Publishers, Moscow, 1966)
Marx on Monopoly, Capitalism, and Crises (from "Capital", vol. I)

Every individual capital is a larger or smaller concentration of means of production, with a
corresponding command over a larger or smaller labour army. Every accumulation becomes the
means of new accumulation.

With the increasing mass of wealth which functions as capital, accumulation increases the
concentration of that wealth in the hands of individual capitalists, and thereby widens the
basis of production on a large scale and of the specific methods of capitalist production.

The growth of social capital is affected by the growth of many individual capitals. All other
circumstances remaining the same, individual capitals, and with them the concentration of the
means of production, increase in such proportion as they form aliquot parts of the total social
capital. At the same time portions of the original capitals disengage themselves and function
as new independent capitals. Besides other causes, the division of property within capitalist
families plays a great part in this. With the accumulation of capital, therefore, the number of
capitalists grows to a greater or less extent. Two points characterize this kind of
concentration, which grows directly out of, or rather is identical with accumulation:

First, the increasing concentration of the social means of production in the hands of
individual capitalists is, other things remaining equal, limited by the degree of increase
of social wealth.

Second, the part of social capital domiciled in each particular sphere of production is
divided among many capitalists who face one another as independent commodity-producers
competing with each other.

Accumulation and the concentration accompanying it are therefore not only scattered over
many points, but the increase of each functioning capital is thwarted by the formation of
new and the subdivision of old capitals. Accumulation, therefore, presents itself on the one
hand as increasing concentration of the means of production and of the command over labour;
on the other, as repulsion of many individual capitals one from another. This splitting-up of
the total social capital into many individual capitals, or the repulsion of its fractions one
from another, is countered by their attraction. This last does not mean the simple
concentration of the means of production and the command over labour which is identical
with accumulation. It is concentration of capitals already formed, destruction of their
individual independent, expropriation of capitalist by capitalist, transformation of many
small into few large capitals.

This process differs from the former in that it only presupposes a change in the distribution
of capital already to hand and functioning; its field of action is therefore not limited by the
absolute growth of social wealth, by the absolute limits of accumulation. Capital grows in one
place to a huge mass in a single hand, because it has in another place been lost by many.

This is centralization proper, as distinct from accumulation and concentration. The laws of this
centralization of capitals, or of the attraction of capital by capital, cannot be developed here.
A brief hint at a few facts must suffice. The battle of competition is fought by cheapening of
commodities. The cheapness of commodities depend, CETERIS PARIBUS, on the productiveness of labour,
and this again on the scale of production. Therefore, the large capitals beat the smaller. It
will further be remembered that, with the development of the capitalist mode of
production, there is an increase in the minimum amount of individual capital necessary to
carry on a business under its normal conditions. The smaller capitals, therefore, crowd
into spheres of production which modern industry has only sporadically or incompletely got
hold of. Here competition rages in direct proportion to the number and in inverse
proportion to the magnitudes of the antagonizing capitals. It always end in the ruin of
many small capitalists, whose capitals partly pass into the hands of their conquerors,
partly vanish.


Apart from this, with capitalist production an altogether new force comes
into play -the credit system. In its beginnings, the credit system sneaks in as a modest
helper of accumulation and by invisible threads draws the money resources scattered all
over the surface of society into the hands of individual or associated capitalists. But
soon it becomes a new and formidable weapon in the competitive struggle, and finally it
transforms itself into an immense social mechanism for the centralization of capitals.

Competition and credit, the two most powerful levers of capitalism, develop in proportion
as capitalist production and accumulation do. At the same time the progress of
accumulation increases the matter subject to centralization, that is, the individual
capitals, while the expansion of capitalist production creates the social demand here, the
technical requirements there, for those gigantic industrial enterprises which depend for
their realization on a previous centralization of capitals. Nowadays, then, the mutual
attraction of individual capitals and the tendency to centralization are stronger than
ever before.

However, while the relative expansion and energy of the centralization
movement is determined to a certain degree by the superiority of the economic mechanism,
yet the progress of centralization is by no means dependent upon the positive growth of
the volume of social capital. This is the particular distinction between centralization
and concentration, the latter being but another expression for reproduction on an enlarged
scale. Centralization may take place by a mere change in the distribution of already
existing capitals, a simple change in the quantitative arrangement of the components of
social capital. Capital may in that case accumulate in one hand in large masses by
withdrawing it from many individuals hands. Centralization in a certain line of industry
would have reached its extreme limit if all the individual capitals invested in it were
amalgamated into one single capital. This limit would not be reached in any particular
society until the entire social capital were united either in the hands of one single
capitalist or in those of one single corporation. Centralization supplements the work of
accumulation, by enabling the industrial capitalists to expand the scale of their
operations. The economic result remains the same whether this consummation is brought
about by accumulation or centralization, whether centralization is accomplished by the
violent means of annexation by which some capitals become such overwhelming centres of
gravitation for others as to break their individual cohesion and attract the scattered
fragments, or whether the amalgamation of a number of capitals which already exist, or are
in process of formation, proceeds by the smoother road of forming stock companies. The
increased volume of industrial establishments everywhere forms the point of departure for
a more comprehensive organization of the cooperative labour of many, for a wider
development of their material powers, that is, for the progressive transformation of
isolated processes of production carried on in accustomed ways into socially combined and
scientifically managed processes of production. It is evident, however, that accumulation,
the gradual propagation of capital by a reproduction passing from a circular into a spiral
form, is a very slow process as compared with centralization, which needs but to alter the
quantitative grouping of the integral parts of social capital. The world would still be
without railroads if it had been obliged to wait until accumulation should have enabled a
few individual capitals to undertake the construction of a railroad. Centralization, on
the other hand, accomplished this by a turn of the hand through stock companies.

Centralization, by thus accelerating and intensifying the effects of accumulation, extends
and hastens at the same time the revolutions in the technical composition of capital which
increase its constant part at the expense of its variable part and thereby reduce the
relative demand for labour. The masses of capital amalgamated overnight by centralization
reproduce and augment themselves like the others, only faster, and thus become new and
powerful levers of social accumulation. Hence, if the progress of social accumulation is
mentioned nowadays, it comprises as a matter of course the effects of centralization. The
additional capitals formed in the course of normal accumulation (see Capital, chapter 24,
section I, R.R.) serve mainly as vehicles for the exploitation of new inventions and
discoveries, or of industrial improvements in general. However, the old capital likewise
arrives in due time at the moment when it must renew its head and limbs, when it casts off
its old skin and is likewise born again in its perfected industrial form, in which a
smaller quantity of labour suffices to set in motion a larger quantity of machinery and
raw materials.

The absolute decrease of the demand for labour necessarily following
therefrom will naturally be so much greater, the more these capitals going through the
process of rejuvenation have become accumulated in masses by means of the movement of
centralization. On the one hand, therefore, the additional capital formed in the course of
accumulation attracts fewer and fewer labourers in proportion to its magnitude. On the
other hand, the old capital periodically reproduced with change of composition, repels
more and more of the labourers formerly employed by it. (from Marx, "Capital",
Volume I, Chapter 25, section 2)
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