Modern capitalism is characterized by an immense expansion of wealth. Its entire history is marked by growth. The US economy, when healthy, grows by about 4 percent per year. The Chinese economy, until recently, was growing by as much as 10 percent per year. And the world economy as a whole has expanded by roughly 3 percent annually since 1980, according to data from the World Bank. In fact, if any country’s output stops expanding, it goes into recession. If economies throughout the world contract all at once — as we’re seeing today — the result may well be a global depression.

How do capitalists generate this expanding surplus? Karl Marx, though he was writing 150 years ago, made an indispensable contribution to uncovering the internal laws of capitalism beneath the façade of equity. A useful starting point is to look at what Marx calls the “the general formula of capital,” which he summarized with a simple formula: M-C-M’.

Capitalists start with money (M), which they use to invest in the production of commodities (C), and then they sell those commodities on the market to get back more money than they started with, (M’).

In a pre-capitalist bartered exchange, commodities of roughly equal value could change hands, using money as an intermediary to facilitate the process. But the circuit of capital instead turns money into the driver of the process.

Capitalists don’t exchange goods for the sake of qualitative enrichment. Steve Jobs didn’t one day decide he had more iPhones and MacBooks than he reasonably needed and therefore might as well trade them for something he didn’t have. (What didn’t Steve Jobs have?) A capitalist invests for the sole purpose of accruing further wealth.

To exchange like-for-like items and wind up with the same amount of money that they started with would be, to use Marx’s words, “absurd and empty.” The sole purpose of exchange among capitalists is the accumulation of extra value, or surplus value, which forms the basis of capitalist profit.

As Marx explained:

The simple circulation of commodities [basic bartered exchange] — selling in order to buy — is a means to a final goal which lies outside circulation, namely the appropriation of use-values [goods for use], the satisfaction of needs. As against this, the circulation of money as capital is an end in itself, for the valorization of value takes place only within this constantly renewed movement. The movement of capital is therefore limitless.

In pre-capitalist societies, the satisfaction of even the most extravagant of needs could only go so far in compelling an expansion of the production of goods. But under capitalism, the goal of acquiring more money through its circulation is an inexhaustible endeavor, which has the potential to provoke continual growth.

Unlike systems of mercantilism which preceded it, modern capitalism doesn’t depend on a process of “buying cheap and selling dear,” and the thievery that this entailed. Surplus value is produced when capitalists are buying goods for their true value and selling them for their true value. Capitalists may certainly defraud other players along the way — pay less for inputs or charge more for the final product. But surplus is produced without that duplicity occurring, even when the system is at its most “honest” and “lawful.”

Rather than being cunning in the market, the key to surplus value is a production process that creates more wealth than it begins with. Contrary to mainstream explanations, capitalist surplus is not generated within the realm of exchange at all. It is created, argued Marx, within “the hidden abode of production on whose threshold there hangs the notice ‘No admittance except on business.’ Here we shall see, not only how capital produces, but how capital is itself produced. The secret of profit-making must at last be laid bare.”

Wherein lies the secret? Let’s look more closely at the circuit of capital. The merchant bought commodities that had already been produced and then sold them for a higher price. However, the capitalist invests not in finished products, but rather purchases two different types of commodities: 1) means of production (MP), and 2) labor-power (L). The “means of production” are the tools and materials that are necessary to make goods (e.g. factories, office buildings, land, machinery, software, IT infrastructure, etc.). And “labor-power” is our ability to labor.

The capitalist employs both “inputs” in a production process (P) that creates a new set of commodities, worth more than the combined value of the original inputs. The circuit of capital can thus be expanded to a more precise formula: M-C (MP+L) . . . P . . . C’-M’.

The “secret” hidden within this production process lies in a special commodity of “labor-power” — the ability to work. The ability to work has become a commodity under capitalism, which the capitalist buys in exchange for a wage. At first look, this seems self-evident. We wake up, go to work, come home with a wage (or at least the promise of one to be paid at the end of the pay period). We are selling our ability to work — our labor-power. And since selling our old Beanie Baby collection will only get us so far, by and large, for most of us, if we are “lucky” enough to be considered employable, our labor-power is the only commodity we really have to sell.

But what makes this commodity special, and to whom?

Labor-power is bought by the capitalists for a wage. But the value of this wage and the value that labor, once employed, then produces for the bosses, are two very different things. The worker is paid one thing, but then will normally create much more value during her shift than she is paid.

The key to this arrangement for the boss is an agreement in which your labor is put under his control for a set amount of time, and you are paid for this time, not for the fruits of your labor. Just as a baker parts with the bread she has made once she sells it, so too does the worker part with her labor-power once she has sold it. As soon as she punches the clock, the conditions of her labor and the products of her labor are no longer hers, but the boss’s. Marx thus continued:

[L]abor, belongs just as little to its seller [the worker], as the use-value of oil after it has been sold belongs to the dealer who has sold it. The owner of the money has paid the value of a day’s labor-power; he therefore has the use of it for a day, a day’s labor belongs to him. On the one hand the daily sustenance of labor-power [paid out in a wage] costs only half a day’s labor, while on the other hand the very same labor-power can remain effective, can work, during a whole day, and consequently the value which its use during one day creates is double what he pays for that use; this circumstance is a piece of good luck for the buyer, but by no means an injustice towards the seller.

In other words, the boss can get away with paying you for just half (or some other fraction) of the day for the “daily sustenance of labor-power” while reaping the full day of your labor. On top of it, he can proclaim it a fair day’s wage.

The secret to this claim is in the determination of value of labor-power.

Labor-Power

Marx explained: “The value of labor-power is determined by the value of the means of subsistence habitually required by the average worker.” That is to say, labor-power’s “value,” in the form of a wage, is determined by the amount of labor-time required to keep the worker alive, to daily reproduce her capacity and readiness to go to work every day, and to keep her children alive, so that they may one day replace her in the workforce.

The value of food, rent, clothing, training, and education, along with other necessities deemed essential by society, therefore make up the value of labor-power. If, for example, social norms attach an average of $120 to the cost of minimal daily needs, that would loosely translate into the value of labor-power, or its daily wage.

Of course, $120 per day is a simplified and arbitrary cost of labor-power, for the purpose of distilling the basic mechanism of this special commodity. In reality, the cost of the subsistence and reproduction of workers is both socially and historically determined. It reflects the changing cost of producing food or acquiring skills; as well as differences — based, for instance, on the balance of class forces — in what is deemed a socially acceptable requirement for subsistence.

For both of these reasons, the cost of labor differs, too, between countries or regions with disparate levels of productivity and histories of class struggle. This is why US-based companies chase cheaper wages to other countries like China or Mexico, or to the closer distance of the “right-to-work” states within the US.

The cost of labor also reflects the injustice of oppression. As of 2019, women in the United States were still paid 79 cents to a man’s dollar. (Or in the case of the country’s most talented and famous soccer team, the United States women’s national soccer team earns 38 cents to their male counter- parts, despite generating greater revenue.) Black men are paid 70 cents and black women 61 cents in comparison to their white counterparts. Latina women earn 53 cents to a white man’s dollar. Increased education does little to change this ratio for women or people of color.

Blacks, Latinos, and women at all education levels earn less than white men. Women of color occupy the bottom of the totem pole. American capitalism relies upon women and people of color to populate permanent, low-wage sectors of the labor force.

The disparities in racial and gender wage gaps point to the fact that “socially determined” is not only dependent on public perception of what is acceptable, but is also based on historic and systemic institutions of oppression. People of color, on average, have less inherited familial wealth to draw from, and therefore disproportionately suffer from the accumulation of considerable amounts of debt in order to go to college or earn an advanced degree. Combined with the reality of severely underfunded, under-resourced, segregated public schools, this ensures that they never enter a level playing field. Then come long-documented discriminatory practices, which ensure that they are the last to get hired and the first to be fired, contributing to higher rates of unemployment and a more desperate workforce, forced to accept lower wages for equal work.

Inequality has long been built into the core fabric of the American business model. Pitting black workers against white workers against immigrant workers has been a particularly potent, tried-and-true tactic of employers to drive down all wages. But the cursory sketch laid out here does not even begin to discuss the very many oppressions — of immigrants, of people with disabilities, of gay people, of transgender people, of Native peoples, of elders, and more — that play an integral role in upholding the profitability of US capitalism.

In fact, any place where bosses can hold down the wages of one section of the workforce not only ensures a cheaper labor pool among the oppressed demographic, but also, in the words of abolitionist Frederick Douglass, divides both in order to conquer each, so that everyone’s wages are pushed down.

The value of labor will also vary among industries and skills. One reason is the cost of education and training required for different jobs, and another is the expectation of how stable of a workforce bosses are looking to buy. Fast food workers, home health aides, farm workers, and other low-wage workers are consistently paid wages far short of the cost of living (and there- fore their true value).

The capitalists bank on getting away with it because they expect, in fact depend on, a high turnover rate and unemployment rate, which will ensure that those positions will fill easily. Bosses see low-wage workers as quickly replaceable commodities, bought and employed as easily as one would buy other cheap “inputs.”

The bosses also get a big discount when they purchase labor-power. A good deal of unpaid work contributes heavily toward its reproduction: for instance, childbirth, childcare, food preparation, laundry, and household cleaning, to name a few.

As Marxist feminist Tithi Bhattacharya explained, “The working class doesn’t only work in its workplace. A woman worker also sleeps in her home, her children play in the public park and go to the local school, and sometimes she asks her retired mother to help out with the cooking. In other words, the major functions of reproducing the working class take place outside the workplace.” The free labor, performed largely by women within the home, is not accounted for within labor-power’s exchange-value. Within the realm of social reproduction, workers’ ability to live and work are reproduced and regenerated at very little cost to the system.

Surplus Labor

Yet even if we limit ourselves more narrowly to the paid labor that goes into producing your subsistence, if all things were fair and just, you would give over to your boss only the amount of time that it takes to reproduce the value of your labor-power.

Say it takes four hours to produce $120 worth of goods, the equivalent of your daily wage, you could go home after four hours. But if your boss allowed that, his inputs and outputs would be equal. It would just be M-C-M. What would be the point? Why not just keep the money he started with?

But all things are not fair and just. The capitalist pays you for the cost of your labor-power, not for the value of the goods you produce. Thus your paycheck is worth the value of your labor-power. But your labor-power is set to work to produce commodities of greater value.

Let’s say you work for Starbucks and they pay you $120 for an eight-hour shift. But you can probably make $120 worth of fancy coffee in an hour, or probably in a half hour at a busy store.

Even once you subtract the cost of materials and use of the equipment, Starbucks doesn’t pay you anywhere near the value you’ve created (hundreds of dollars a day). They buy your labor-power from you, not the actual fruits of your labor. And you make that value back for them in an hour. The rest of your shift, you’re basically working for free!

This extra labor they extract from us is called “surplus labor.”

While necessary labor is that part of the day required to reproduce the cost of labor-power, the surplus labor is the free labor that the capitalist benefits from during the rest of your workday. Thus, if after you finish making $120 worth of coffee, instead of throwing down your apron and going home, you finish out your eight-hour shift, one hour will be necessary labor, and seven hours are surplus labor! (This seven to one ratio is overly simplified because it doesn’t yet factor in the machinery and equipment we mentioned above, something I take up elsewhere in my book.)

Marx wrote:

I call the portion of the working day during which this reproduction takes place necessary labor-time, and the labor expended during that time necessary labor; necessary for the worker, because independent of the particular social form of his labor; necessary for capital and the capitalist world, because the continued existence of the worker is the basis of that world.

During the second period of the labor process, that in which his labor is no longer necessary labor, the worker does indeed expend labor-power, he does work, but his labor is no longer necessary labor, and he creates no value for himself. He creates surplus value which, for the capitalist, has all the charms of something created out of nothing.

In this way, through the “charm of something created out of nothing,” capitalism disguises a process of exploitation, of appropriating surplus labor from the working class, as a “fair day’s wage for a fair day’s work.” Appropriating surpluses was a visible and obvious norm of previous class societies. In examining capitalist society however, we have to go beneath the surface appearance of a “fair day’s work” to uncover the inner essence of exploitation.