I’ve worked in machine shops for most of my life so it’s natural that I would think of a machine shop as a simple model for understanding the inner workings of a capitalist economy. This model also lends itself well to an exposition of the role of technology in transforming our relations of production, and gives the lie to many common ideological misperceptions.

In this series of posts we’ll take a look at an imaginary workplace and use it to illustrate various economic principles. We’ll look at both classical economics (Smith, Ricardo, and especially Marx) and modern neo-classical or neo-liberal theories. Our goal will be to see which theories better model real-world experiences. It may surprise some that I included Marx in a list of classical economists but that is how Marx would have considered himself. He saw himself as taking the economics of Smith, Ricardo and others through to their logical conclusions.

Imagine an aspiring capitalist. We’ll call him Mr. C.

Mr. C has some money he would like to put to good, productive use. It doesn’t matter to us how he got this money — whether he inherited it, saved it, won the lottery, or borrowed it. What matters is that he wants this pile of money to grow larger. (Actually, if he borrowed it from investors he has a legal obligation to make it grow and must behave in such a way as to maximize profits.) We’ll just assume this is his intention either way. He wants to see the healthy growth of his capital. He decides to open a machine shop.

He buys, or more likely, rents a suitable building. He buys machine tools — lathes, milling machines, grinders and the like — and cutting tools, inspection tools, computer systems, office equipment, in short, all the stuff  he needs to set up shop. Marx refered to this aspect of his investment as fixed, or constant capital investment. He may fill his building with everything he needs but its all just going to sit there and rust until he invests some of his capital in hiring employees to put these means of production to use. Marx refered to this aspect of his investment as variable capital. This term variable carries a lot of meaning, and we’ll get to this shortly.

For now, we see that he invests some of his money as fixed capital (the stuff) and some as variable capital (the workers). Obviously he wants the employees to use those instruments of production to make things that he can sell for more than it costs him to make them. He wants the company to make a profit.

Now, where does this profit come from? It cannot come from the fixed aspect of his investment. Remember, it is inanimate. It just sits there and depreciates. As it is utilized it depreciates even more rapidly due to wear and tear and normal life-expectancy. It does not create any new value, it just costs. In fact, if Mr. C is to stay in business, he is going to have to charge enough for his product to make up for this loss. He will need to charge enough to repair and/or replace this equipment as needed.

As an aside, we should mention that there is a way for Mr. C to seemingly create value out of stuff  itself. If he bought cutting tools, for example, wholesale and sold them retail he could turn a profit. He would then be a merchant instead of an industrialist. Properly speaking it is possible for mercantilism to function without capitalist relations of production (as in the case of the self-employed owner with no employees) but this distinction is outside the bounds of our present consideration. For now we note that even this line of work requires human labor to operate, though we do not think of the individual as self-exploiting.

But at any rate, this is not Mr C’s situation. Mr. C’s fixed capital investment only passes to the finished product that amount of its own value expended in the manufacture of that product. Yes, he could try to charge more than the replacement cost of his equipment, but a competitor could easily undercut him on this point. This is not a good business model; this is no way to make a sustainable profit.

The added value, and thus the profit, comes from the variable capital aspect of his investment. And this is the meaning behind the terms fixed, or constant, and variable capital. Constant capital (the stuff) passes only its own fixed value to the finished product. Variable capital, on the other hand, passes a variable amount of value to the finished product. It always passes on more value than itself, but how much more varies.

How hard are Mr. C’s employees working? How skilled are they at using the tools Mr. C has provided? How well organized are they? Two machine shops may be in direct competition with identical equipment. Which shop will prevail can be predicted by the answers to these questions.

All of the value added, all of the profit generated, arises from the labor of Mr C’s employees. This is known as “the labor theory of value,” It is considered an obsolete economic concept. It is still helpful in explaining basic concepts, and is an important foundation for exploring the “relations of production”. If it was good enough for Adam Smith it’s good enough for our present purpose. As stated earlier, we will compare the more modern “marginal utility theory” later, and see which model rings true to real-life experience.

Now, we must acknowledge something here. How well Mr. C is able to organize his workers is going to affect his profit margin. How well he manages their labors, how well engineered their manufacturing processes are, how much quality assurance is built into the processes, all these factors contribute enormously to productivity and efficiency. Even factors as subtle as employee morale should not be overlooked. These factors, and others like them, do not arise from the labor of the shop floor employees themselves, yet they play a crucial role in determining how high the contribution of value will be. Do these issues contradict our previous analysis that all value arises from the variable component of capital investment? Not at all. All these factors themselves are the product of human labor. The fact that the machinist may be an hourly employee while the engineer, the supervisor, the HR administrator and the quality engineer may be salaried should not confuse the issue. All are human laborers, all are variable capital inputs, even though, as employees, their class interests are distinct. [More on class interests later.]

But, you may ask, what about those machines? If Mr. C buys a certain machine, and his competitor, Mr X., buys a much more advanced machine, all other things being equal, doesn’t this advanced machine give Mr X. a competitive advantage? It sure does.

How then can we still assert that all surplus value arises from variable capital? Doesn’t this prove that a competitive edge, an increased profit margin, can arise from a fixed capital investment? It can, but we must bear two things in mind. First, remember that investment is going to lie there and rust unless some employee is hired to operate it. The potential is not drawn out until variable capital is applied. So we see that each and every factor that the capitalist can possibly muster to increase productivity and profits must, in the final analysis, pass though the labor process to be effectual. Second, consider that today’s capital investments are generally purchased with the profits made from yesterday’s labor processes.  Thus, they can be considered captured or frozen labor. This may seem like an obtuse point now, but we will explore this subject further in a future post and see that this concept has enormous social implications. For now, back to Mr. C.

We are not trying to say that that our capitalist, Mr. C, is not entitled to the fruits of his own creativity, ingenuity, hard work, and moxie. He certainly is. We are, however, trying to expose something of the nature of capitalist relations.

The hidden nature of capitalist relations is an essential element of capitalism. It is the key to understanding the transition to a post-capitalist society. Our capitalist, Mr C., because he has money, is able to buy the labor of other people. Because it is only the labor of people which produces value, he is thus able to buy, and own, all the value they produce. His own labor contributes to this, of course, but he capitalizes on all the labor of others. No one else in his organization enjoys this privilege. No one outside the capitalist class enjoys this privilege.

In fact, everyone else in his organization, everyone outside his class, is forced to sell their labor (pieces of their lives, essentially) for the going rate, and relinquish all claims to the true value of their abilities. The true value belongs to the capitalist; he must pay only the market value of labor and the difference is his to pocket. This is the difference between the value of labor and the value of labor-power. The value of labor power is the going market price for that job position; the value of labor is what that labor is capable of generating under the given conditions of production.

Our capitalist, Mr. C, understands all of this, of course, and he sets about to hire 100 of the best employees he can find.

In Part 2 we’ll examine how Mr. C is able to further exploit his advantaged position in these relations of production.