 In the last two segments we understood concepts of commodity and through the analysis of value we came to the notion of money. Money is essential to understand capitalism and that is why Marx first looked at the commodity and then looked at value from there developed the notion of money. Now we are ready to dive into an analysis of capitalism. The key concept which captures the essential feature of capitalism is capital. Capital is nothing but surplus value, surplus value which is accumulated to generate more surplus value is capital. So, to understand capital we have to understand the notion of surplus value that is what we are going to do now. To understand the notion of surplus value let us think of the two typical ways in which commodities are exchanged in a capitalist system. So, the two types of exchange or the two types of circulation are the following. Here C stands for commodity, C prime stands for a different commodity and M stands for money. So, there are these two different forms of circulation that we observe in any capitalist society. Let us look at each of them in some detail. What is happening here? In this form of circulation a commodity owner comes to the market with commodity C, sells it for a sum of money M and then uses that sum of money to purchase any commodity C prime. What might be the aim of this kind of circulation? Well the aim of this kind of circulation can only be qualitative. So, for instance a farmer who has grown rice needs to have some furniture for his home. So, what does he do? He takes part of the rice that he has gone, goes to the market, sells it for a sum of money and uses it to buy a table or a chair or other items of furniture. So, once he has purchased the furniture this kind of exchange finishes because the aim of this kind of circulation was qualitative. The aim was to convert this commodity C to another commodity C prime. So, this form of circulation begins with a commodity and ends with a commodity. Once that commodity has been got the process ends. Of course, the farmer might return to the market in a later period to exchange rice for other items of food or other things. That might very well be the case, but the exchange that we were looking at nonetheless has ended. It might start again, but that will be a fresh exchange. Now, let us look at the second form of circulation that we also observe in capitalist societies. Here, what happens? A particular economic agent comes to the market with a sum of money, uses it to purchase a commodity, sells it for another sum of money. So, here the beginning and end point of the process of circulation is sums of money. Therefore, this form of circulation is very different from this. In this form of circulation, the aim of the process was to convert one commodity into another. This circulation, the aim of the process cannot be qualitative because the beginning and the end point of the process are both sums of money. Qualitatively, they are different. Therefore, the only way this kind of circulation can make sense is if the amount of money at the end is larger than the amount of money at the beginning. And that difference is what we call surplus value. So, this is the Greek letter delta. Delta M is the difference between the sum of money at the end and the sum of money at the beginning. This difference is or can be the only motive of entering into a process of circulation like this. So, whereas, this circulation had a qualitative aim, this circulation can only have a quantitative aim. Notice another important difference. For this process of circulation, once the commodity C prime has been got, the process ends. Now, this process of circulation starts with sums of money and ends with sums of money. And therefore, the end point is also the beginning of another circulation process because this form of circulation begins with sums of money. And therefore, in a very important sense, this form of circulation is endless because it creates its own beginning once it ends. Very different from this. This is what we can call an abstract representation of capital. Therefore, we can go with Marx and note that capital is self-valorizing value. What do I mean by this? There are couple of things written here. Capital is self-valorizing value. The word valorizing means increasing. So, capital is a process whereby value increases itself. So, it increases itself some process and the process is driven by the logic of the process built into itself. And therefore, it is self-valorizing value. Now, remember also our discussion from the previous segment tells us that money, commodity and money, each of them are forms of value. A commodity has value. Money is a way to represent value in other commodities and therefore, M which represents money in this case is also a form of value. So, if we look at this process of exchange in an abstract way, what is going on is value which initially is in the form of money transforms itself into a commodity form of value and then transforms itself back into the money form of value. And that is why capital is understood as value going through this process of circulation whereby it transforms itself from money to commodity and back to money. But most importantly, the amount of money at the end is more than the amount of money you begin with and that difference is known as surplus value. Since each of these are forms of value, the amount of value at the end if it is bigger than the amount of value at the beginning we have an excess and that excess is known as surplus value. So, if this is an abstract representation of capital, what capital is doing is it is generating surplus value through the movement that starts with sums of money, converts itself into commodities and converts itself back into a money form, but the amount of money at the end is larger than the amount of money at the beginning. This is what is captured by saying that capital is self valorizing value. So, any sum of value which can be abstractly represented as moving through these forms through this process whereby it can increase itself in value that is self valorize itself is capital. But the beginning of capital always is sums of money and that is why we had to understand the concept of value before we could have understood the concept of capital. This is what Marx also refers to at as the general formula of capital. It is also referred to as the circuit of capital. So, this is the circuit of capital meaning it is an abstract representation of what we mean by the concept of capital. Once we realize that the key motivating feature of the circuit of capital is an increment in value, we would like to now understand what is the source of that increment. Meaning what is the source of surplus value? As we begin to understand and address that question we must get one issue aside. You might think that surplus value is generated because one commodity owner cheats another commodity owner. Meaning one commodity owner pays less than the true value of the commodity and thereby some excess is generated. Now Marx is clear that we cannot use this form of unequal exchange meaning whereby one commodity owner purchases a commodity at less than its value to be an adequate explanation for the origin of surplus value. Why is that so? Well think of many commodity owners. If one commodity owner purchases a commodity at less than its value then one commodity owner gains another commodity owner loses. The gain of one is exactly equal to the loss of the other and therefore if we aggregate or sum across all commodity owners then the gain of one will be cancelled by the loss of the other and therefore unequal exchange cannot be an adequate way to explain how the capitalist system is able to generate surplus value at the aggregate level. That is why Marx posed himself the question of trying to explain the origin of surplus value when every commodity is sold at its true value. So we want to explain the origin of surplus value when there is an exchange of equivalence. So every commodity sells and is bought at its true value. If that is the case how do we then explain the origin of surplus value? That is the question we want to try to investigate. Let us go back to the circuit of capital as our beginning. So our question is to explain how the amount of money at the end is bigger than the amount of money at the beginning. To understand how that happens we will take a two step argument. In the first step of the argument we will expand the formula the circuit of capital as follows. Instead of writing MCM prime we will write it as MCC prime M prime. What does that mean? It means that if we want to explain the origin of surplus value at the aggregate level then we must pay attention to the fact that the commodity that is bought and the commodity that is sold is different. So if that is the case then what is going on? The commodity owner the capitalist comes to the market with the sum of money, purchases a commodity, the purchase is of equivalent is a exchange of equivalent. So the amount of money is exactly equal to the value of the commodity C because that is the terms of the problem. We cannot assume unequal exchange. There can only be equal exchange. So in this the amount of value at this point and the amount of value at this point is the same. Now let us look at this exchange. What is going on here is another a different commodity, a different commodity than this is sold here. Again the amount of value here and the amount of value here is the same. That is what it means to say there is equivalent exchange. But if there are two different commodities it is still possible even if there is equivalent exchange the amount of value here to be bigger than the amount of value here. How? That is possible if the value of the commodity C prime is bigger than the value of the commodity C. So in on the terms that we want to explain the emergence of surplus value here we need to make sure that we expand the circuit of capital in this way. Instead of the capitalist buying and selling the same commodity it is essential that the capitalist buys one commodity and sells some other commodity. Because that allows for the possibility that every act of exchange is an exchange of equivalence yet surplus value emerges in the circuit of capital. Because the value of the commodity C prime is bigger than the value of commodity C. So if that is the case then our investigation boils down to trying to explain how the value of commodity C prime is bigger than the value of the commodity C. Now let us try to address that question. So we are trying to explain how in this representation of the circuit of capital the value of C prime how is it possible for that to be bigger than the value of C. Now to explain that we need to understand what the value of C is what the value of C prime is. Now when the capitalist comes to the market with the sum of money he purchases a bundle of commodities that whole bundle of commodities we have represented as C. But the commodities that he purchases are of two different types one is what we call means of production. So the capitalist buys two types of commodities one is all the non-labour inputs into the production process. The raw materials, the electricity, the power, the oil, the machinery all the non-labour inputs to production is what we can call the means of production. That is one type of commodity he buys the other type of commodity he buys is labour power. What is labour power? Labour power is the capacity to do work to do any useful work. When the capitalist hires a worker what is going on is the capitalist is purchasing the labour power of the worker for a definite period of time. Say 8 hour usually today the work day is 8 hours long. So in the labour market what goes on is the worker sells his or her ability to work for 8 hours for a price which is the wage. So therefore if we look at the transaction in an abstract manner what the capitalist is purchasing with the sum of money are two very different things the means of production and the labour power. So what is the value of C? The value of C comes from the value of the means of production and the value of labour power because C represents these two different commodities. Now what is C? Well C is the finished output that is then sold in the market for a sum of money and what we are saying is that in the circuit of capital surplus value can emerge when the value of the finished commodity is bigger than the value of the commodity bundle that has been bought by the capitalist to produce that commodity. Now what is the value of the finished commodities? The finished commodities value comes from two sources. One source of the value of the finished commodity is the value of the inputs that get transferred to the commodity, the finished commodity. For instance, let us think of C prime as a car. So let us say this is an abstract representation of General Motors. General Motors comes to the market with the sum of money, purchases means of production. So all the raw materials, the machinery, the building everything and then also purchases labour power. Using those it manufactures cars and then sells it on the market. What we want to explain is why the value of the car is bigger than the value of the inputs that General Motors had bought. So now therefore we want to understand from where or what is the source of the value of the car. So what I am saying is that the value of the car has two different sources. One source of the value of the car is the value of the means of production that has been transferred. So the value of the rubber, the steel, everything that goes into making the car has been transferred into the car. So that is one source. The other source is the value that is added by the labour that has worked on the raw materials to produce the car. So now we have understood an important point. The value of the finished commodity C prime can be bigger than the value of the input bundle that goes into its production only for one reason. Why? Because the value of the means of production which appears on this side of the equation and which appears on this side of the equation are the same. Because the value of the car that comes from the value of the means of production which have been used up is something that figures on both side of the equation. So therefore the only way the value of the finished commodity can be bigger than the value of the inputs is if the value added by labour is bigger than the value of labour power. So let me write it here. The only way that surplus value can be generated is if the value added by labour power is bigger than the value of labour power. So notice there are two different things on two sides of this equation. On this side we have value of labour power. So value of labour power is the value of the commodity that is purchased by the capitalist in the market. On this side we have a different thing which is the value added by labour power. And the only way surplus value can be generated is if the value added by labour power is bigger than the value of labour power. Now let's try to probe this question a little more. So what is labour power? Labour power is a commodity that is bought and sold on the market. Labour power is the capacity to do useful work. That is what is bought and sold on the market. Like every other commodity labour power has two aspects. It has use value and it has exchange value. What is the use value of labour? Labour power. The use value of labour power is, since labour power is the ability to do work, the use value of labour power is when the worker actually does the work. So therefore what happens in the capitalist labour market is that the capitalist purchases the commodity labour power. Like every other commodity he purchases it at its price. The price of labour power is known as the wage. Let's say the wage is 5 dollar per hour of labour power. Now we have seen earlier that any quantity of money can be converted into equivalent quantities of social labour time. So 5 dollars if it is divided by the monetary expression of labour time can convert the wage into social labour time equivalent. So if we take the wage and divide it by the melt we get a social labour time equivalence of the price of labour power. So in our specific example that will be 5 divided by 10 which is half. So what does that mean? It means that the social labour time equivalence of one hour of labour power which the worker sells is half hours of social labour time. Now let's look at the other aspect, use value. Use value of labour power is when the worker does the actual work of using the raw materials working with the machine to make the car. So use value of labour power leads to the emergence of labour. One hour or one unit of labour power gives rise to one unit of value that is one hour of social labour time. Now if you compare these two we can understand where surplus value is coming from. What the worker sells in the labour market is the ability to do work. The capitalist purchases that commodity at its true value which is the wage. The wage when it is divided by the melt converts the price of labour power into units of social labour time. The only way that surplus value can emerge is if the price of labour power when it is converted to social labour time comes out as a quantity which is less than one. Why? Because one hour of labour power which is used by the work capitalist and used in the production process produces one unit of value which is one hour of social labour time. So what the capitalist gets from the worker is one unit of social labour time. What the capitalist pays to the worker is something which is less than one unit of social labour time. The discrepancy between the two is precisely what emerges as surplus value. Marx uses a metaphor to highlight this aspect and let us use that. Let us think of the total labour time available to a capitalist society as one big working day. So the width of the box gives us the total working day. Let us call that one working day which is the total amount of labour time that is available to a capitalist society. Now the total labour time in a capitalist society gets broken up into two parts. One part is what the workers get, another part is what the capitalist take. But we can look at this division of the total working day between these two parts from very different perspectives. If we take the perspective of value added then this total working day creates one unit of value and it gets broken up into two parts. One part is the wages, another part is the surplus value. So the total working day creates the total value added. What the worker gets returned in the form of wages is only one part of the total value added that it has created. The difference between the total value added and what the worker gets back in terms of its wage is precisely surplus value. And therefore if we look at the total value added created by workers in society we can divide it up into two parts. One which they get back in terms of wages the equivalence of in terms of what they get back. And another part which they do not get back which is appropriated by capitalist in the form of surplus value. We can also look at this total working day in terms of the amount of amount of time that is devoted to the working day. If we do that we would be able to see that it is broken up into two parts. One part is what the worker gets back in terms of sorry this is the paid. So wages represent the paid labour time and the surplus value represents the unpaid labour time. And we can also look at the total working day in terms of the needs of social reproduction. Meaning all the tasks that are necessary to reproduce society day after day. If we look at the total working day in terms of what is necessary to reproduce society we can break it up into two parts. First part is what Marx calls necessary labour and the second part is what Marx calls surplus labour. So this is a nice way to summarize our discussion of the emergence of surplus value. The total working day can be thought of as the total amount of time that workers put in to produce all the commodities. The value of labour power is only a fraction of one and therefore you can think of the value of labour power as breaking up the big box into these two parts. One part is what you can think of either as necessary labour that is the amount of labour that is necessary to reproduce the conditions of existence of the workers or you can think of it as the paid labour time or you can think of it as the wages. All these are equivalent ways of thinking of this part. Whatever remains after that is the surplus labour which is what is appropriated by the capitalist class as surplus value. So if we now go back to the example we were working with in this particular example the monetary expression of labour time was 10 dollar per hour. The wage was 5 dollar per hour and therefore the value of labour power was the wage divided by the monetary expression of labour time which was 5 divided by 10 which was half. So therefore if we translate this into the box what we are saying is that the box is of length 1 which is the total amount of time that workers put into the work. What they get back in terms of the wages is only half of the total time that they put. So the wages represent the paid labour time that workers get back and half of the total labour time that they put is appropriated by workers by the capitalist as the unpaid labour time of workers is appropriated as surplus value. And with this discussion of surplus value we would also like to introduce some terminology and then define 3 important ratios that will be useful for our later discussion. So let us go back to the circuit of capital that will always be our starting point. So we have labour power means of production. So the capitalist starts with the sum of money goes to the market buys a bundle of commodities. There are 2 types of commodities the capitalist purchases labour power and means of production then they are brought together in the production process. Once the production process is finished the output emerges. Once the output emerges the capitalist returns to the market and sells it for a sum of money M prime. So this is the complete representation of the circuit of capital. It is an abstract way to see what is going on when we think of a capitalist enterprise or of the total capitalist economy. We have understood that the source of surplus value that is the amount of money that is there which is in excess of what was there in the beginning. That surplus value emerges in the process of production because the value added by labour power is bigger than the value of labour power. Now let me introduce 2 concepts. One is the notion of constant capital. Now we know that the amount of money that the capitalist brings to the market is used to purchase 2 different types of commodities. Means of production and labour power. The part the amount of money that is used to purchase means of production is known as constant capital. The amount of money that is used to purchase labour power is known as variable capital. What is the reason for using these terms? Well the reason is the following. The value that is represented by the means of production is transferred to the product without any increment. Think of the car, the value that comes from the steel, the rubber and all the other components that have been used for the production process. The value of the components can at most transfer its total value to the car. It cannot increase itself in that transfer. That is why the amount of money that is used to purchase means of production transfers its value to the commodity without any increment. That is why Marx calls this part of the money constant capital and contrasts it to the variable capital. Because the variable capital is the amount of money which is used to purchase labour power. But in the process of production labour power adds more value than its own value. That is it adds more value to the product than what the capitalist had to pay to purchase it. That is why it is a variable quantity as contrasted to this quantity which is constant. So therefore this is known as variable capital and this is known as constant capital. Now with those two definitions we can define three important ratios. The first ratio is the ratio that divvish the ratio of surplus value to variable capital. So before I define that ratio let me just write the following notation here. Constant capital is denoted with the letter C, variable capital is denoted with the letter V and surplus value is denoted with the letter S. Our discussion of the value transfer process has also told us that the value of the commodity is the sum of constant capital, variable capital and surplus value. Why? Well the value of the finished commodity C prime comes from two sources. First is the value that is transferred to it from the means of production which is used up. That is precisely what is constant capital. The other source of value comes from the value that is added by labour power. Now we know that the value that is added by labour power itself can be broken up into two parts. One part for which the worker gets its equivalence in terms of wages which is precisely variable capital and another part for which it does not get back anything in return but which is appropriated by the capitalist which is precisely surplus value. Therefore the value of any commodity can be broken up into these three components. Constant capital, variable capital and surplus value. With these three components in place we can now define these three ratios. S by V is known as the rate of surplus value. It is the ratio of the surplus value generated to the variable capital. What does this show? Well it shows how much surplus value the capitalist is able to extract for the amount of money it uses to purchase labour power. So, if we look at the whole capitalist system then this ratio is also an index of the rate of exploitation because surplus value is something which the workers are adding to the product without getting getting anything back in exchange in equivalence. This is what they get back for their labour power and this is the excess of the value of the labour power that they add to the commodity and therefore this ratio is an index of the rate of exploitation. The second ratio is the ratio of C and V that is constant capital and variable capital. What does this suggest or what does this measure? This is known as the organic composition of capital. This measures the technology or the capital intensity of the production process. Why? Because C represents the value of means of production that is all the non-labour inputs into production. V represents the amount of money used to purchase labour power so that is the labour input. The ratio of the two gives us the capital intensity of production meaning how much non-labour inputs are used per unit of labour power and the third ratio is the rate of profit. The rate of profit is the ratio of the surplus value and the total amount of capital that is invested in production. The total amount of capital that is invested in production is the amount that is used to purchase labour power sorry the amount that is used to purchase the non-labour inputs to production means of production that is constant capital and the amount that is used to purchase labour power which is this which is the variable capital. The ratio of surplus value that is extracted to the total cost of production is known as the rate of profit. A capitalist enterprise is interested in maintaining a high or increasing rate of profit and therefore, this ratio is one of the most important ratios that gives us an idea of how well a capitalist enterprise or a whole capitalist economy is doing. If we divide if we take this ratio and divide both the numerator and the denominator with the variable capital then what we will get on the denominator we will have S divided by V in the denominator we will have C divided by V plus 1. So, therefore, the rate of profit is a ratio of the rate of exploitation and 1 plus the organic composition of capital. So, the most important variable which gives us an idea of how well a capitalist economy is doing can be seen to result from the interaction of two features. One how much workers are exploited which is captured by the rate of exploitation and what is the technology that is being used how intensive the technology the capital intensive the technology is. The two together tell us how much surplus value can be extracted for each unit of capital that is laid out in production. We will return to this ratio later to make some important points. So, let me summarize our discussion of capital and surplus value. Capital is self valorizing value value which has the property of not only preserving itself quantitatively, but adding to itself quantitatively. It is represented abstractly by the circuit of capital. So, capital always starts with sums of money that is value in the monetary form and it moves through the circuit of capital converting itself first to a commodity then into productive capital then back into a commodity and then back into a monetary form. In its movement through the circuit it not only preserves itself it goes through different forms also increments itself in value that is capital. We understood that the source of that increment in value the surplus value comes from the process of production. In the process of production we have the use of a unique commodity labor power which adds more value than it costs to purchase. And that discrepancy that difference between the two emerges as the surplus value that is realized by the sale of the finished commodity. With that discussion we also defined constant capital which is the amount of money used to purchase means of production, variable capital which is the amount of money used to purchase labor power and surplus value which is the excess of value that is added to the commodity in excess of what is returned to the worker in the form of wages. We also saw that the value of a commodity is the sum of these three components and using those we could define these three ratios. With that we have finished our discussion of surplus value and capital. Next time we are going to take up the discussion of how capitalist relations of production have an impact on the organization of production and on the inputs to production.