 In the previous sections, we understood the notion of a commodity and then the notion of money. Then we moved to the study of capital and then we looked at the effect that capitalist relations of production have on the organization of the production process. Now, in a sense we are going to move and ask a very different question. So, we have seen that capitalism which can be represented through the circuit of capital is primarily interested in generating surplus value. So, we have understood how this surplus value is generated. So, we have understood that capital can be represented abstractly as this process which generates surplus value. Now, we want to ask the question what does the capitalist system do with the surplus value that it has generated? Once it has generated the surplus value what does it do with it? There are two things that the capitalist system can do with the surplus value. Either it can consume it or it cannot consume it and invest it. If the capitalist system consumes all the surplus value it has generated then we have a scenario that Marx refers to as simple reproduction. Simple reproduction means all the surplus value is consumed and therefore the production process carries on in the same scale. The scale of production, the size of the production process, the size of the capital involved in the production process does not change. So, that is if all the surplus values consume. The capitalist system does not really consume all the surplus value. In fact, it only consumes a small part of the surplus value and rather invest the major part of surplus value back into the production process. When it invests the surplus value back into the production process and consumes a small fraction of it we have what Marx calls the accumulation of capital. In fact, there are two sub cases to consider. If the investment takes place with the key parameters of the production process remaining unchanged and by the parameters here I mean two parameters the rate of surplus value and the organic composition of capital. If these two parameters of the production process does not change then what we have is what Marx calls the expanded reproduction of capital. On the other hand if we have the more general case where along with reinvestment of surplus value we also have a change in the key parameters of the process then we have accumulation of capital. Now no matter which of them we are considering accumulation of capital or expanded reproduction whenever there is reinvestment of the surplus value it increases the scale of capital. It increases the scale of the production process. The size of capital involved in the production process increases because the surplus value that was generated is reinvested back here. So, the amount of capital at the in the beginning of the next cycle of production is bigger than what it was in the previous cycle and that is why the amount of capital value involved in production increases. The size of the capital value can increase in the production process through two methods one of which Marx calls the concentration of capital and the other is what Marx calls the centralization of capital. What is the difference between the two? Concentration of capital refers to the case of an increase in the size of the capital by the reinvestment of surplus value generated in the firm itself. So, when a firm when a capitalist enterprise reinvest the surplus value it has generated and thereby increases the scale of its production the size of the capital we have concentration of capital. Centralization of capital is different it refers to the fact when different existing capitals are brought together through the process of what we today call mergers and acquisitions. So, if instead of the reinvestment of surplus value what is going on is a hundred small firms are brought together under the ownership of one capitalist through a merger process we have concentration centralization of capital. Marx points out that as the capitalist system develops the key way in which the scale of production increases is through centralization. Even though concentration goes on because capitalist enterprises do reinvest their surplus value the key way in which the scale of production increases is through mergers and acquisitions. Those are some of the key features or key concepts that relate to the accumulation of capital. But now we are going to ask an interesting and puzzling question and that will allow us to understand another important concept that Marx brings to the fore which is the concept of the reserve army of labor. So, the puzzle is the following when there is accumulation of capital when there is reinvestment of surplus value that leads to an increase in the demand for labor power because when capitalist enterprises make investments part of it go to purchasing means of production part of it go to purchasing labor power. And therefore with the increase in the reinvestment and the increase in the scale of production the demand for labor power increases. Now if demand for labor power increases the price of labor power will increase everything else remaining constant. And therefore when the price of labor power increases the amount of surplus value that will be remaining with the capitalist will fall meaning the rate of surplus value will fall and it might even be the case that the rate of surplus value falls all the way to zero. If the rate of surplus value were to fall all the way to zero then the source of income of the capitalist class with completely dry up in a word capitalism would end. The puzzle therefore is that capitalism constantly reinvest large part of the surplus value increases the scale of production, but with the increase in the scale of production the demand for labor power increases. If there were no mechanism available to counteract that the increase in the demand for labor power would lead to an increase in the price of labor power which would ultimately eat into surplus value and reduce profits. So the question is what is the mechanism available to capitalism to make sure that the price of labor power does not increase too much and by too much I mean it does not increase to the extent that it removes all surplus value from the system. This was an important question which had been addressed by previous scholars, previous classical economists. The answer to this question that was provided by Ricardo drew on the theory of population that had been propounded by TR Malthus. So the answer that Ricardo gave was the following, when the demand for labor increases the price of labor power increases what that means is that workers now have larger incomes. The ability of workers therefore to increase their family size increases and therefore with the rise in incomes the population of workers increase. As the population of workers increase there is an excess, there is an entrance into the labor market of more people and that puts a downward pressure on wages and brings it back to where it was earlier. So it was the theory of population given by Malthus which was used by Ricardo to explain why the capitalist system does not have a tendency for the wage rate to increase the value of labor power to increase and to eat into the surplus value which is the source of the profit of all capitalists. Marx was very critical of the theory of population that Malthus had propounded and therefore he wanted to propose an alternative mechanism. The mechanism that Marx proposed to answer that same question relied on the notion of the relative surplus population or the reserve army of labor. So what was Marx's argument? Marx's argument was the following. With the accumulation of capital there is an increase in the demand for labor for labor power increases. The demand for labor power when it increases it reduces the rate of surplus value because a higher amount of the value added is returned to the working class in terms of the wages. Once the rate of surplus value falls there is an incentive for capitalist to start searching for new methods of production which save on labor. So therefore instead of using the population theory what Marx proposes is an inherent tendency, an intrinsic tendency in capitalism to introduce technology which saves on labor, what is today called labor saving technical change to deal with the decline in the rate of surplus value. So labor saving technical change, the technological changes which reduce the amount of labor used in the production process is the response of the capitalist system to the increase in the price of labor. This has two effects. It reduces the demand for labor. Why? Well it is labor saving technical change. So therefore the amount of labor required to produce whatever is being produced is going to be lower after the technological change has been introduced. So the demand for labor power falls. What about the supply? The supply of labor power increases. Why? Because when labor saving technical change is introduced some of the workers who are currently working lose their jobs. Instead those work, those jobs, those tasks are now done by machines. So on the one hand the demand for labor power falls and the supply of labor power increases. The result is that the pressure on wages go down and therefore the price of labor falls. So the wage rate falls and therefore the rate of surplus value is restored. So this is the mechanism through which the capitalist system is able to deal with wage pressures when there is an increase in the demand for labor that comes from the accumulation of capital. So what Marx is proposing here is to think of the labor market as being divided into two parts. The total labor market is divided into two parts. One part is what Marx calls the active army of labor. So these are all the workers who are currently employed. But in addition to the active army of labor there is always a relative surplus population which is what Marx calls the reserve army of labor. The reserve army of labor are all the workers who are currently not employed but are potentially available to capital to be drawn on if the need arises. We can think of the flow of labor power through the labor market as follows. Every period new workers enter the labor market. So that's the flow A. Some of them find jobs so they become part of the active labor market. Some of them do not find jobs therefore they become part of the reserve army of labor. There is of course a movement between these two boxes. Some of the workers who are currently employed might lose their jobs. So therefore there is some movement from the active army of labor into the reserve army of labor. The opposite movement also happens. So some of the workers who are currently not working might find work. And then some of the workers who are currently employed would finally retire and move out of the labor market. And some of the workers who are currently in the reserve army might get discouraged or become old and move out of the labor market. So the reserve army is the relative surplus population that is essential to stabilizing the movement of wages in the capitalist system. So instead of a theory of population it is a theory of the generation and reproduction of the reserve army of labor which was essential for Marx to answering that question and addressing that puzzle. The reserve army of labor it in turn can be thought of as three different components. So it has what we can call the floating reserve army. The floating reserve army are all the workers who lost their jobs who were at one point in the active army of labor who had been employed but who lost their jobs because of labor saving technical change or because some businesses went under when there was a general recession or depression. That part of the reserve army of labor is what Marx calls the floating reserve army. The second component of the reserve army is what Marx calls the latent reserve army. The latent reserve army is all the workers who are potentially available to be drawn on by capital but who are not right now part of the labor force. There are two important components of the latent reserve army. One household labor. In most of the capitalist world household work is done mostly by women. Lot of those women do not enter the labor force but they are potentially available to be drawn on when the need for excess labor arises. In fact, in the post war period in the US and Europe lot of labor who lot of women who had earlier been not in the labor market were drawn into the labor market. So, that is the one component of the latent reserve army. The other component is peasants. Peasants in third world who might not be in the labor market selling their labor power but might be working on small plots of land. They can be drawn on by capital if the need be. So, that's the latent reserve army. The final and third part of the reserve army is the stagnant reserve army. The stagnant reserve army are those workers who at some point might have worked but for long periods have not been working either because they are discouraged or because their skills have become obsolete or for other reasons they are not able to be part of the labor market. In any case, in the capitalist system there is always available a large reserve army of labor, a large relative surplus population that is surplus to the need of capital which bears the cost of stabilizing the system. It is the replenishment of the reserve army of labor which is the key mechanism that moderates wage pressures and therefore the capitalist system requires to constantly reproduce this relative surplus population if it has to continue the production of surplus value. So, let me summarize. In this segment we looked at the issue of accumulation of capital that is the question what happens to the surplus value that has been generated. We saw that a large part of the surplus value is reinvested in production. The reinvestment of surplus value in production increases the scale of production increases the capital value in production that process is known in most general terms as the accumulation of capital. We saw that the scale of production and the size of capital can increase either through the concentration of capital or the centralization of capital. And lastly we looked at an interesting and puzzling question, what is the mechanism available to capitalism to make sure that when there is an increase in the demand for labor power with the accumulation of capital, the price of labor power does not increase to the extent that completely wipes out surplus value. And we saw that the key idea that Marx brought forth to answer this question is the reserve army of labor. The existence and the reproduction through time of a relative surplus population which stabilizes wage movements. With that we have now completed the main argument outlined by Marx in the first 25 chapters of capital. In the last segment of this module we are going to ask a historical question, how did the capitalist system emerge? Meaning what were the historical conditions of origin of the capitalist system? And we will see that the Marx brings forth the concept of primary accumulation or original accumulation of capital to answer that question.