RE: RE: old ghosts

["Devine, James" <jdevine@xxxxxxx>]

In case anyone is interested, I've pasted a copy of my article from Bill
Dugger's book below. It's not exactly the same as the one that Bill
published.

Jim Devine jdevine@xxxxxxx &  http://bellarmine.lmu.edu/~jdevine

------------------------

Taxation without Representation:

A Reconstruction of Marx's Theory of Capitalist Exploitation*

by

James Devine

Professor
Economics Department
Loyola Marymount University
One LMU Drive
Los Angeles, CA 90045-2699 USA
phone: 310/338-2948; FAX: 338-1950
e-mail: jdevine@xxxxxxx

This chapter presents a robust reconstruction of Karl Marx's theory of
capitalist exploitation in a way that is coherent to modern readers. Neither
his "labor theory of value" nor dialectical jargon is employed, while
Marxology is largely avoided. The aim is to develop the general framework
for stating the necessary conditions for the existence and persistence of
the kind of capitalist exploitation described by Marx.

While John Roemer [1982] tries to fit Marxian conclusions onto a Procrustean
bed of mainstream theory, this chapter does not presume that vision to be
correct. Instead, it allows for the possibility that concepts and theories
developed using Marx's heuristics can be "rationally reconstructed" in terms
developed by another paradigm as long as points of disagreement are noted.

Any theory that uses the word "exploitation" necessarily has a normative
content, so that moral dimensions must be explored. But since this chapter's
goals are primarily positive, no conclusion about the word's normative
meaning is reached. However, I believe that Arjun Makhijani's [1992] phrase
"taxation without representation" summarizes the Marxian theory as a first
approximation: capitalist exploitation involves both macro-level capitalist
supremacy (the worker's proletarianization) and micro-level subjection of
labor by capital. Together, these are termed "institutional coercion" and
make exploitation akin to taxation. Allowing this taxation to persist is
workers' conscious submission.

As with all analogies, we cannot go too far. Capitalist exploitation is not
the same as taxation: the coercion that allows it to persist has a different
form than the armed force used by the state and can work in a decentralized
way. Further, unlike most forms of coercion, capitalist "taxation" can
encourage abundant growth of production.

--------------------

* An earlier draft of this paper was presented at the University of
California at Riverside on October 24, 1994 and at Loyola Marymount
University on November 16, 1994. A version of the appendix was presented at
the URPE sessions of the ASSA convention in January 1995. Thanks to Ed
Chilcote, Steve Cullenberg, Bill Dugger, Gabe Fuentes, John Harvey, James
Konow, Victor Lippitt, Michael Perelman, Bob Pollin, Lynda Rush, Howard
Sherman, Kamal Shoukry, Ajit Sinha, Robert Singleton, and others for their
useful comments. It also benefited from a long e-mail discussion with Gil
Skillman. Of course, all high crimes and misdemeanors are mine alone. A
mathematical model summarizing the theory is available.

-----------------------

This paper has seven parts, starting with (A) a quick survey of mainstream
views of exploitation. Then, some of Marx's (B) non-mainstream methodology
and (C) ethical dimensions are discussed. Next, (D) Roemer's effort is
criticized and (E) my vision of Marx's theory, based in part on that
critique, is introduced. Using Dymski and Elliott's [1989] terminology, this
theory centers on (F) primary exploitation, the creation of a
surplus-product. Finally, (G) the theory of secondary, merely
redistributive, exploitation is explained and (H) this chapter's conclusions
are summarized.

A. Mainstream Views.

"Exploitation" usually does not include simple theft, since the latter is
not a persistent economic relationship. Rather, exploitation involves some
"normal" aspect of the system, an institution. To Webster's Ninth New
Collegiate Dictionary (1991), exploitation is "an unjust or improper use of
another person for one's own profit." Mainstream economists see exploitation
as "improper" in liberal terms, i.e., serving individual or interest-group
goals against universal goals (the public interest).

There are three main perspectives here. First, neoclassical economists do
not follow the dictionary stress on selfishness since avarice drives
markets, the apotheosis of their vision. Exploitation is instead a kind of
market failure, a deviation from an ideal vision of capitalism (these days,
the Walrasian system). The most common neoclassical exploiter is a monopsony
[cf. Robinson, 1969] or a monopoly. Another exploiter is the agent who takes
advantage of the principal who hires her, under conditions of asymmetric
information [cf. Stiglitz, 1975]. A third exploiter is the free rider who
takes advantage of others in the production of public goods.

In the second view, exploitation coexists with "perfect" markets: given a
special position in society, an interest group can shift the distribution of
income in its direction, impoverishing the rest, even though their role
serves no reasonable purpose. While Henry George [1879] pointed to
landowners, John Maynard Keynes [1936] saw rentiers as fitting this picture.


Third, combining the neoclassical emphasis on market imperfections with the
second school's stress on the exploiters forming a segment of society that
gains income without contributing, Milton and Rose Friedman [1980] see the
government as exploitative. It is a monopoly run by a special interest
group, regularly interfering with markets.

B. Methodological Issues.

As we shall see, Marx's theory combines aspects of the mainstream visions,
mixed in a unique way. Before turning to the specifics, an overview of his
vision is needed, since it differs from that of most economists, in terms of
the surplus problematic, institutionalism, and political economy.

First, neoclassicals follow a scarcity problematic, seeing economics as
being about the allocation of scarce goods among competing ends. As Ajit
Sinha [1994] points out, Marx combined the scarcity approach with an
alternative, the surplus approach: aggregate output typically exceeds
aggregate costs of production, implying a surplus-product (for short,
"surplus"). (See also Obrinsky [1983].) Scarcity and choice play roles in
this view, but the emphasis is on the production and utilization of surplus
in a growth-oriented context.

Unlike many of this school such as the followers of Sraffa [1960], Marx's
surplus corresponds to surplus-labor done by workers to produce it. Within
those institutions described as capitalism, the surplus-labor shows up in
money form, as surplus-value (property income), which is divided among
industrial and commercial profits, interest, rent, much of taxes, and the
salaries of top managers of capitalist enterprises.

Neoclassicals see almost all income as "property income," thus seeing wage
income as the return on "human capital." But here we are referring only to
property that can be sold. Taxes are included as part of property income to
the extent that the state is an integral part of the property system; its
power is needed in order for such income to be received.

The reference to "institutions" points to Marx's second relevant deviation
from the mainstream, institutionalism. He rejects methodological
individualism, though individuals are very important: the societal process
cannot be reduced to nothing but atomistic agents' tastes and decisions
under the natural conditions they face. Many constraints are not natural but
artificial and benefit groups that fight to preserve them. Further,
institutions feed back to shape the nature of individual consciousness,
preferences, and actions. Though originally created by humans and
continually recreated by them, institutions take on a life of their own,
alienated from individual wills, and indeed shaping those wills.

Nowadays, capitalism is a central institution of this sort: it is not
natural but human-made and is defended mightily by those who benefit most
from exploitation that is its hallmark. Whereas the mainstream sees
exploitation as a disease from which capitalism can be cured (though perhaps
with difficulty) or as a natural part of the human condition, Marx saw
exploitation as being essential to that institution's operations and to be
abolished with it: "the production of surplus-value, or the extraction of
surplus-labor, is the specific end and aim, the sum and substance of
capitalist production . . ." [1867: 298]. The mainstream types of
exploitation are relatively secondary.

A third difference between Marx and most economists is that his method was
one of political economy, seeing the politics/economics distinction as
artificial. The distinction between the "state" and the "economy" (civil
society) arose only with capitalism. Though this distinction has become
fuzzy since the 19th century, with the rise of welfare state and fascism,
social scientists still employ the distinction, inventing departmental
boundaries which no longer correspond exactly to objective societal
divisions.

More fundamentally, Marx saw "politics" -- including conflictual relations
among people -- as not existing only in the state sphere, but also inside
other institutions, including the capitalist firm. In Bowles and Gintis'
terms [1986: ch. 4], economic sites involve political practice, just as the
political site (the state) includes economic activity.

Following from this, Marx's theory of exploitation goes beyond the normal
purview of economics: not only capitalism but other economic systems such as
feudalism and slavery are "exploitative." But our concern is exploitation
only under capitalism. Non-capitalist exploitation is assumed to have been
abolished.

C. Ethics.

Inevitably, Marx's use of the word "exploitation" has normative content. In
the broad Marxian tradition, there are several ethical perspectives that
should be noted. Three are associated with Marx himself, Makhijani, and
Roemer.

Marx has been accused of being relativist or even amoral -- even though his
moral commitment is obvious. This perplexity arises from his distinctive
approach. Writing in an era overloaded with often-hypocritical slogans of
liberty, fraternity, equality, and so forth, he never developed an ethical
system and tended to disdain moralistic incantations. As with the
neoclassical unease with conceptions of "fairness," he rejected the task of
discovering fundamental ethical principles. But unlike neoclassicals, he
never set up ideal models of the world (e.g., the Walrasian system) as a
standard of comparison for judging real-world phenomena; he left utopian
designs for others and described socialism and communism in the sketchiest
of terms [cf. Marx, 1891].

Instead, he used the dominant ethics, with a twist: as Cornell West argues,
Marx focused on "the discrepancy between the rhetoric of universal interests
[i.e., liberal ethics] and the reality of particular class interests within
the limits circumscribed by particular systems of production . . ." [1991:
92; emphasis suppressed]. This emphasis on the contradiction between theory
and practice produces a contrast between the dominant moral standards, e.g.,
"the very Eden of the innate rights of man . . . Freedom, Equality,
Property, and Bentham" [1867: 176], and Marx's subsequent description of the
class conflict within capitalist workplaces.

Similarly, we see his value = price assumption in volumes I and II of
Capital: value is used as a standard of "equal exchange," the trading of
equivalent for equivalent that liberals could accept. Marx saw such exchange
as prevailing under "simple commodity production" (in which all workers are
self-employed) when there are no monopolies or similar imperfections. Thus,
"exploitation" can be defined in terms of the non-exchange of equivalents or
"unequal exchange" (value =/ price).

As developed below, Marx's "primary" exploitation refers to a very special
kind of exchange. This is the "equal" purchase of labor-power (the workers'
ability to work) at its value, which hides a non-exchange relationship in
production. Capitalists receive the results of some of workers' actual labor
without payment, since they pay for only the workers' labor-power.

Since, as developed below, this exploitation is based on institutional
coercion (supremacy and subjection), it ends up being akin to "taxation
without representation" (to employ Makhijani's [1992] phrase), where the
mechanisms of taxation are largely hidden from view. As noted, the analogy
with taxation is not exact but is instead a heuristic for clarifying Marx's
theory. Since it is generally agreed that much or most coercion is bad, it
gives a second ethical perspective.

This perspective helps deal with an important issue of exploitation, that of
the use of the revenue earned by the exploiter for good purposes, such as on
the improvement of technology or other potentially good projects. However,
good use does not absolve the taxers from being subject to the strictures of
the consent of the governed. While most would agree that a benevolent despot
is superior to a malevolent one, that does not make the principle of popular
sovereignty irrelevant. After all, power corrupts: the technology and "good"
projects will be biased to serve the interests of the powerful, subjectively
benevolent or not.

A neoclassical might question the phrase "without representation": does not
the capitalist system represent consumers, who vote with their dollars? But
the actual result of the exploitation, surplus-value, is spent by only the
capitalists or their agents, so that it is only their "dollar votes" that
the taxers heed. Further, Marx argues that the system does not follow
consumption at all: rather, the driving force is the hunger for more
surplus-value that propels accumulation.

Going further beyond Marx, Roemer presents a third view, in terms of
alternatives available to the exploited: capitalism is called "exploitative"
because in theory there exists a situation where the workers would be better
off and capitalists worse off [1982: 194], say, a worker-controlled economy
or Roemer's own "market socialist" ideal [cf. Roemer, 1994, part IV]. This
exploitation persists because of the "dominance" of the workers by the
capitalists.

Stretching Roemer's usage a bit, exploitation persists because of collective
action problems: such an alternative to capitalism is not superior from the
point of view most workers as individuals or even as members of a large
minority, if they go alone. However, workers might form a united coalition
and break capitalist dominance, allowing a transition to a
collectively-preferable situation benefiting each individual worker. A
non-exploitative situation is thus seen as a collective good for workers
while it is a collective bad for the capitalists [cf. Devine 1989A, 1994B].

Given the three ethical visions, some might not see Dymski and Elliott's
"secondary exploitation," the redistribution of surplus-value, as
exploitation at all. But in criticizing the beneficiaries of this
redistribution, such as landowners and rentiers, Marx (unlike George or
Keynes) never appealed to the "public interest" or issues of fairness.
Besides, landowners and rentiers do not use force to get their incomes and
might be seen as advantageous to capitalism's operations compared to the
alternatives available to industrial capitalists. But to Marx, they are seen
as gaining from primary exploitation, so these groups might be seen as
recipients of stolen goods, where the industrial capitalists have done the
stealing. Secondary exploitation, like primary exploitation, is defined
relative to the exploited group, the direct producers.

Finally, despite these normative considerations, Marx's theory is mainly
positive in its aim. Marx's purpose in Capital was not only to rally the
workers against capitalism but to help us understand the "laws of motion of
modern society." His exploitation theory is central to that aim:
surplus-value is the basis for capitalist accumulation, which is not only
the increase in the stocks of means of production but also the extension of
capitalist social relations of exploitation on a wider scale [1867: ch. 24].
More generally, in volume III of Capital, he stressed the mode of
exploitation, i.e., the "specific . . . form in which unpaid surplus-labor
is pumped out of the direct producers," as revealing "the innermost secret,
the hidden basis of the entire social structure and . . . the corresponding
specific form of the state" [1894: 791-2]. Despite all of the qualifications
that Marx immediately piles on this assertion, his theory of exploitation is
central to his socioeconomic theory of history.

D. Roemer's Theory.

Before discussing that positive theory, recall that Roemer [1982] also
attempted a modern restatement. He elucidated Marxian ideas about
exploitation totally in terms of the hegemonic paradigm, applying Walrasian
theory, jettisoning the surplus problematic, institutionalism, and almost
all of Marx's political-economic vision. He concludes that we "should not
search for the cause of exploitation in the Marxian sense in the labor
process or at the point of production [as Marx did], but in the distribution
of property" [1994: 3].

This total emphasis on property ownership is true only if Roemer has
developed a coherent and robust theory of capitalist exploitation. It also
misses the point that both the labor process and the distribution of asset
ownership can be complementary parts of a coherent exploitation theory,
along with such factors as accumulation. But turn to both the contributions
and limitations of his models [see also Devine and Dymski, 1989; 1991;
1992].

1. The core of Roemer's vision of exploitation shares much with Marx. The
capitalist minority's ownership of society's scarce means of production
(capital goods) leads to their exploiting workers even though there exists
no overt use of force, monopoly, monopsony, or the like. Being "exploited"
can be defined either as working more hours than is needed to pay for one's
livelihood, as with Marx, or as that the workers' average product, the APL,
exceeds their real wage rate, RW.

But unlike for Marx, Roemer's workers are not forced by circumstances to
work for capitalists: they are "free to lose," voluntarily submitting
despite the existence of equally lucrative alternatives. His simplest model,
which captures the essence of his theory, is a version of W. Arthur Lewis's
[1958] model of the modern sector of an underdeveloped economy facing
unlimited supplies of labor coming from the backward "farm" sector. A
labor-demand curve intersects a horizontal labor-supply curve: the upper
area between the curves represents modern-sector profits, and for Roemer,
exploitation by the capitalists, which determines the profit rate obtained
by owning of the capital goods.

For Roemer, the different forms of property income (industrial profit,
land-rent, etc.) are scarcity rents, so that his theory is quite similar to
George's or Keynes's vision. For Marx, on the other hand, property income
arises originally with production of a surplus by wage labor subjected by
industrial capitalists, with the scarcity of capital goods only one
necessary part of their origin.

This difference does not prove Marx right and Roemer wrong. But because
Roemer's models do not capture the full extent of Marx's theory, they do not
present a robust theory of exploitation. Since the capital goods are
products of labor rather than gifts of nature, their scarcity is inherently
temporary. Endogenous market forces should drive their price to their
production cost, abolishing profits: the accumulation of capital goods
raises the demand for labor, eventually abolishing its abundance, so that
wages rise to annihilate profits. Since capitalists are getting "something
for nothing," they strive to get as much as possible until there is none
left. Collective action problems prevent them from voluntarily preventing
this over-accumulation that drives profit-rates to zero in equilibrium.

Accelerating the attainment of zero-profit equilibrium is the entrance of
workers into the capitalist class by saving. Further, under Roemer's
constant returns to scale assumption, any worker who goes into business for
herself would suffer no cost disadvantage vis-a-vis existing capitalists, no
matter how minuscule her business.

Even if we can avoid these problems, a new one arises since Roemer's models
are arbitrary with hardly any of their parameters justified in a theoretical
way. Most importantly, there is no explanation of the key question of why
the APL exceeds RW, i.e., why a surplus is produced. Production and
technology are unexplained in Roemer's theory. This is not surprising, since
Walrasian models in general lack production: the scarcity problematic deals
not with the actual creation of products but the distribution of a fixed
amount of products amongst individuals through markets. For Marx, on the
other hand, production is central [1867: chs. 7, 10, 13-15].

Relatedly, social relations of work are unexplained: we are never told about
how the capitalists get workers to work rather than "shirk"; the
Principle/Agent (P/A) problem is never addressed. The relations between
capitalists and workers are simply a matter of exchange (hiring). Crucially,
unlike for Marx, there is no unemployment to push workers to work: Roemer's
reserve army is all-volunteer, since workers can earn the same income by
going to the farm.

2. Skillman [1995] responded to the various critiques of Roemer, bringing
the debate to new territory in one way. To him, Roemer's "isomorphism"
theorem represents a major blow against Marx. He argues that it proves that
capitalist subjection (subsumption) of labor is unnecessary to exploitation.


In this theorem, Roemer [1982: ch. 3] compares two imaginary "islands": on
the labor market island (LMI), capitalists hire workers to work with capital
goods while on the credit market island (CMI), rentiers lend them to
workers. In both cases, workers are "exploited," in that APL > RW. Since the
labor market does not exist on the CMI, it is not necessary to exploitation.
Second, because unemployment is absent, it is also not required. Third,
since a rentier can lend and then collect interest (and exploit) without any
kind of supervision over workers' (debtors') activity, Skillman argues, no
supervision of labor is required.

The conclusion that the labor market, unemployment, and subjection are
unnecessary to exploitation is fallacious. Roemer assumes that capitalist
exploitation in production is akin to the LMI, and that lending and
receiving interest are akin to his model of the CMI. Then he shows that the
two islands are almost the same in their results, so that capitalist
exploitation in production is almost the same as lending. But the conclusion
applies only if the basic assumptions are true. Neither author presents a
sufficient argument to prove the validity of their assumption, i.e., the
similarity between the "islands" and the real world.

More important, however, is not the patent unreality of the CMI and LMI
models, but their similarity. Since the CMI's mathematical structure is so
similar to that of the LMI, one can easily interpret it as a model of hiring
labor. Alternatively, one might interpret the LMI as being a model of
capitalists lending to workers: after all, there is no unemployment and also
no explicit supervision of a labor-process. Roemer proves the "isomorphism"
between models that are substantially the same. It would be much more valid
and useful if Roemer had proved isomorphism between (1) an "island" with a
labor process that is under direct supervision of capitalists and their
underlings and subject to constant threat by the reserve army of unemployed
labor (Marx's case); and (2) an "island" where the workers are not
supervised, there is no involuntary unemployment, and workers can freely
choose to produce their subsistence by working on "the farm" (Roemer's
case). But neither Roemer nor Skillman attempts this task.

E. Marx's Positive Theory.

To Marx, as Dymski and Elliott argue, there is a clear distinction between
the industrial capitalist's exploitation and that by the rentier. The former
is "primary" exploitation, while the latter is merely "secondary"
(corresponding to Wolff and Resnick's [1987: 146-51] distinction between
"fundamental" and "subsumed" class processes). As suggested by the names, we
need to understand the former (in section F) before we can understand the
latter (in G). As usual with theory, reality is more fuzzy; however, an
understanding of the basic difference helps us with the ambiguous (mixed)
cases.

Marx described the issue of exploitation as one in which a representative
capitalist lays out money (M) to buy commodities (C) which are then used to
get more money (M'). The key issue is how and why M' > M, not only on the
micro but also on the macro level. Profits due to "buying low and selling
high," i.e., unequal exchange amongst capitalists (in which price =/ value)
are seen as mere redistributions (secondary exploitation) that cancel out on
the macro level and are so ignored [1867: ch. 5].

To understand what is at stake, examine the theory of profits in light of
neoclassical distribution theory. (Marx's exploitation theory is his profit
theory.) As Obrinsky [1983: chs. 4, 11] shows, this theory has largely
involved the unexplained or undertheorized assumption that profits are
positive. The existence of profits -- and of property income in general --
has usually been a non-problem. For many years, neoclassicals explained the
existence of property income, profits, or interest (concepts that were
almost always conflated) with an aggregate production function: the profit
(interest) rate equaled the marginal product of capital goods. That this was
an "explanation" indicates the low priority put on the problem: it is
equivalent to simply assuming that profits exist. This is especially true
since there is a clear distinction between the social role of owning capital
goods (which evokes a flow of property income) and the goods themselves
(which does not), so that the latter does not justify the former. This
theory fell apart when Sraffa [1960] demolished the aggregate production
function. Among neoclassicals, it has been replaced by Walrasian general
equilibrium theory (except in textbooks and the sloppy work on "total factor
productivity" and the "new growth theory").

Another response has been to develop a theory of profits on the micro level.
For the individual capitalist, "normal" profits are a given, and income
needed to justify staying in the industry (with super-normal, economic,
profits cancelling out on the macro level). Still needed is an theory of why
such profits exceed zero. One answer is to equate normal profits with the
interest that could be earned on alternative uses of a capitalist's assets,
since he could decide to leave "real" activity.

But this brings up the issue of why the interest rate (i) is positive. Here
a graph is drawn showing an individual's intertemporal choice, trading off
current consumption against next-period income. The budget line slopes down,
with slope = -(1 + i). The individual decides how much to consume, as shown
by this line's tangency with the highest indifference curve feasible. In
equilibrium, the budget line is also tangent to the intertemporal production
possibilities frontier below it. Often, the graph is assumed to apply
equally at the micro and macro levels -- or this issue is not addressed.

The reason for this digression into neoclassical economics is that Marx's
theory of primary exploitation was trying, in modern lingo, to explain why
the intertemporal p.p.f. for the economy as a whole has a slope so that i
can exceed zero. If this is true for the economy as a whole, then it can
also be so for an individual without that gain simply being at the expense
of others.

Marx went beyond explaining why i > 0, to help us understand all other types
of property income, including dividends, retained earnings, and the like.
The issue was the rate of profit (r, total property income divided by
invested capital), similar to what Keynesians might call the "average
efficiency of capital" or the rate of return. Then, if we can explain why r
> 0, we can also explain why i > 0.

Marx's surplus problematic explains how capitalist institutions create and
reproduce over time a steep p.p.f. that constrains choice, leaving the issue
of the actual choice made as secondary. In Marx's [1867: ch. 24, s. 3]
discussion of the abstinence theory, for example, the choice of how much
surplus-value to accumulate is subordinate to the actual existence of
surplus-value; abstinence alone does not explain why r > 0. He looked at the
societal mode of production in order to explain the creation of surplus by
workers, an issue that neoclassicals and Roemer never address.

On one level, the etiology of surplus might be extremely easy to understand,
but that simply brings up a a second issue, the form in which surplus
appears under capitalism. We can imagine that an independent producer
working hard now, taking advantage of possibilities given by nature,
producing surplus in the future. Whether or not surplus is produced is
problematic, depending on definitions, since "hard work" raises costs and
may mean a zero surplus. Even assuming a surplus, there is as yet no
exploitation or profit in the capitalist sense. Marx's exploitation excludes
such concepts as the self-employed producer "exploiting herself": as in
mainstream theory, exploitation is a regular association between people. To
understand it, we have to discover how someone can capture the proprietor's
surplus and also motivate her to continue to produce it (so that this is not
simply theft). If we can explain this, then the intertemporal p.p.f. will be
such that r > i > 0 for capitalists or money-lenders rather than simply for
the proprietor.

The "Austrian" school, among others, has a completely different answer: a
surplus arises and i > 0 (usually equated with r > 0) due to
"roundaboutness" as when wine improves with age, so that "waiting" or
"abstinence" is rewarded in the form of profit. Other mainstream authors
suggest that "risk-taking," "entrepreneurship," or "capital goods" are
produce profits. A full-scale critique of these theories is far beyond the
scope of this paper (but see Obrinsky [1983]). One example will suffice to
show that the mainstream factors explaining profit are necessary but not
sufficient at the macro level.

A professional poker-player uses equipment, takes risks, delays
gratification, engages in strategic behavior, tries new tricks and tactics
(innovates), owns tools (e.g. marked cards), cheats, and earns large
winnings and can even do so repeatedly. But no surplus results from such
behavior; the gambler's winnings are simply redistributions from others with
no new production occurring. Thus, the mainstream factors might be necessary
for an individual to receive profits but are far from sufficient for these
winnings not to be pure redistributions. We need to understand the societal
conditions which allow the risk-taker (etc.) to get a profit without being a
mere thief or bunko artist.

F. Primary Exploitation.

To explain the production of surplus which shows up as profit received by
non-workers, Marx's theory adds involuntary elements to Roemer's purely
voluntary exploitation. Since this coercion is part of the capitalist social
structure, it fits with institutionalism. But not all of the story involves
coercion: an individual can make a profit (secondary exploitation) without
participating directly in the production of surplus-value (primary
exploitation), just as a rentier can earn interest by holding treasury bonds
without personally joining in the government's forcible extraction of taxes.


Institutional coercion's role can be understood if we examine capital's
macro-supremacy and then its micro-subjection of labor. This reversal of
Marx's order of presentation clarifies matters because it fits with his
emphasis on the importance of the societal totality.

1. Supremacy. Marx emphasized "the so-called primitive accumulation" [1867:
chs. 27-33], the historical and violent creation of the "fundamental
conditions of capitalist production." Under these conditions, workers are
"free in a double sense" in that "neither they themselves form part . . . of
the means of production, as in the case of slaves, bondsmen, &c., nor do the
means of production belong to them, as in the case of peasant-proprietors"
[1867: 714]. This capitalist supremacy (workers' proletarianization) goes
beyond Roemer's "dominance" in that not only do workers lack control over
the capital goods, but their own income-producing assets are insufficient to
provide them with livelihood for any extended period. They are thus forced
by their social circumstance to work for the capitalist class, no matter how
unpleasant the job.

a) The two aspects of workers' freedom help produce the reserve army of
unemployed labor. First, freedom from bondage allows this army to exist:
there is no joblessness of the capitalist sort under slavery (for example)
since the slave owner strives to use his property as intensively as
possible. Second, workers lack access not only to the means of production
but also to the means of subsistence (consumption goods), which they can get
only by working for capitalists. Since they cannot go to the Roemerian
"farm" to work for their livelihoods, the only alternative is to be
unemployed (though this conclusion will be moderated in part (b)). Just as
George [1879: book 7 ch. 2] saw the exclusion of workers from the ownership
of land as putting them at a power disadvantage, it is central to Marx's
theory of unemployment and capitalist supremacy. He cites Wakefield's theory
that in land-rich colonies, it is necessary to forcibly keep workers from
the frontier if profit are to be garnered by hiring them [1867: ch. 33].

The reserve army's existence represents a form of structural coercion that
complements and reinforces the instrumental coercion (threats of firing,
etc.) practiced by capitalist managers discussed below. Given the existence
of the reserve army, "the laborer purchases the right to work for his own
livelihood only by paying for it in surplus-labor . . ." [Marx, 1867: 515].

The ability of workers to quit or to reject job offers (part of the first
kind of freedom) does not typically equate the marginal disutility of time
spent at the workplace to the wage rate, as for neoclassicals. (By a
Keynesian reckoning, the reserve army therefore involves involuntary
unemployment.) Instead, the marginal utility of work-time is equated to the
marginal disutility of becoming jobless, roughly the cost of job loss (COJL)
[cf. Weisskopf, Bowles, and Gordon, 1983]. Labor's mobility tends to
equalize wages and working conditions between sectors, subject to the usual
qualifications such as the effects of unemployment. However, absent the
frontier, this equalization does not abolish the capitalist supremacy that
allows exploitation.

b) There exist other ways in which workers can avoid working for the
capitalists besides going to the frontier, but these turn out to be quite
limited. Going into business for one's self is very difficult without
sufficient assets and the ability to diversify one's investments. Workers
lack that ability by definition [cf. Bowles and Edwards, 1993: 130]. It is
true that there is a constant flux of workers into the self-employed petty
bourgeoisie (and a trickle of these that become full-scale capitalists), but
there is also a constant reflux into the working class as enterprises fail.
Though some individuals move between class positions, the class structure
itself remains, with the vast majority where they started.

The difficulty of a worker going into business persists in part because of
the competition from capitalist firms, which can benefit more easily from
economies of scale and scope. At the same time, the reserve army keeps the
wages low, making it extremely difficult for workers to have enough income
to save enough to have the "down payment" for going into business. (Usually
saving for retirement or consumer durables such as houses is difficult
enough.) Since this blocks their ability to earn income for saving from
their own businesses, they can be stuck in a vicious circle.

Another place to get subsistence is from the state. But unemployment
insurance benefits and other welfare-state programs are paid for by
redistributions from employed workers, as serious analyses of the incidence
of payroll taxes indicate. The actual benefits are historically contingent,
based on struggles: politicians and social scientists work to make sure that
welfare-state programs do not undermine the "incentive to work" for
capitalists. In the absence of a strong counter-pressure from working
people, as in Western Europe after World War II, it is unlikely that these
programs will represent a viable alternative to selling labor-power to the
capitalists. For the U.S., Miller [1989] finds that government programs that
benefit workers were more than paid for by taxes on wages for 1952 to 1985
under three different sets of definitions [cf. Tonak, 1987].

One option is to live off one's family or community. Even though this may
encourage conflict within the group, extended families, communities, and
labor unions can and do provide (privatized) unemployment insurance. But
this does not change the redistributive nature of that insurance.

Criminal activity is another possible source of unemployed workers'
livelihood, but mostly represents a redistribution from other workers (whose
incomes are limited by the reserve army): as is often noted the main victims
of "street crime" are the poor. Its existence is also actively opposed by
the state and by non-criminals.

c) Open unemployment (as measured in the U.S.) is less important than the
more general phenomenon of the COJL. In many underdeveloped countries, there
is almost no open unemployment: almost all property-less people who can work
have jobs, no matter how pathetic. However, the large gap between wages in
the capitalist sector and the income earned from petty trading,
street-hustling, crime, and the like (and the non-existence of unemployment
insurance and the like) imposes a large COJL on workers in the capitalist
sector [cf. Schor, 1987: 175]. Even without open unemployment, as Joan
Robinson once noted, the only thing worse than being exploited by a
capitalist is not being exploited by one.

Before going further, a formal description helps us summarize:

COJL = C(U, Wgap) where C(0, 0) = 0 (1)

where C is a positive function of both the open unemployment rate (U) and
Wgap, the gap between the wage earned working for the capitalists and
alternatives such as street-hustling and the dole (the workers' fall-back
position). Now suppose that there exists a minimum COJL (Cmin) necessary to
produce an adequate profit rate (from a capitalist viewpoint). At this Cmin,
U and Wgap can substitute for each other in providing an adequate COJL. In
the "first world," the Wgap is minimal but U is positive, while in the
"third world," U is minimal and Wgap is large. Note the difference with
Roemer's models, in which it is possible for U and Wgap to both equal zero,
so that the COJL is zero.

Bowles and Edwards [1993: ch. 8] suggest two substitutes for the COJL in
ensuring that a surplus is produced: social democracy and fascism. To
simplify, these alternatives will be ignored until part (e) below.

d) We are far from concluding our argument in favor of Marx's theory. What
preserves the COJL over time? We do not want to leave the COJL unexplained
or simply assumed to equal or exceed Cmin. We want to avoid functionalism,
the view that a phenomenon exists simply because it helps the capitalist
class. If we can explain the COJL's persistence, we can also understand the
difficulties of workers going into business or providing privatized
unemployment insurance, since a high COJL makes these difficult. Our story
also gives us an understanding of the limits on welfare-state measures.

Recall that in Roemer's model, the abundance of workers relative to capital
goods is abolished automatically (and with it, profits and exploitation) if
capitalists follow market incentives, investing their profits in scarce
capital goods. Marx's solution is simple here, because his theory of
exploitation is so different. For Roemer, profits are quasi-rents. For Marx,
while the scarcity of these goods is not denied, the receipt of profits is
not simply based on this condition alone. Instead, profits are akin to a tax
that capitalists can impose because they control the economy's growth
process, including the pace and nature of investment and technical change.

Suppose that C < Cmin or that this situation is anticipated soon,
threatening a profit squeeze as workers are more able to push for high
wages, cut back on work intensity, or even go into business for themselves.
The capitalists' control over investment decisions means that they can and
will cut investment spending (and the economy's growth rate) when profits
are so threatened; this "capital strike" restores the profit-boosting
situation of high unemployment by depressing the economy [cf. Marx, 1867:
619f]. Richard Goodwin [1967] formalized this process, likening it to the
symbiotic and cyclical relationship between predators and prey. No
conspiracy is needed: profit squeezes hit all capitalists to varying
degrees, encouraging a certain unity of purpose without them having to
collude in any way.

The Marx-Goodwin theory presumes that capitalists cannot simply add a
mark-up to money wage costs (as in some Keynesian models). In Marx's time,
the gold standard prevented the passing-on of money wage costs. Today,
competition faced by individual capitalists and by nations on the world
market prevent complete passing-on, at least in the short run. But in a
modern economy with fiat and credit money, the short-term profit squeeze
could encourage accelerating inflation instead of recession [cf. Bowles and
Boyer, 1990]. Central banks' vehement opposition to inflation (reflecting
the power of property-owners) encourages recession, reproducing Marx's
classic scenario in a politicized form. Even without this opposition,
accelerating inflation eventually encourages recession that reestablishes a
COJL adequate to preserve profits.

This theory differs from that of Samuel Bowles and Herbert Gintis [1990A,B;
1993] and Devine and Dymski [1991], who stressed the origins of the COJL
from purely microeconomic behavior, in essence, the payment of efficiency
wages [cf. Akerlof and Yellen, eds., 1986]. While the idea that managers
manipulate wage payments in order to motivate workers by raising the COJL is
mostly reasonable and can cause unemployment by interaction with other
non-Walrasian elements of the economy [cf. Devine, 1993A], the emphasis
below is on the macroeconomically-created COJL. The role of other
imperfections is largely ignored.

This cycle theory also explains why the normal situation of positive
unemployment does not cause wages to fall to zero or enough to "clear" the
market for labor-power, abolishing involuntary unemployment (as in many
textbook stories) without bringing in any microeconomic explanation such as
sticky wages: when wages fall sufficiently relative to the APL, profits are
boosted and with them, accumulation and the demand for labor-power.
(Microeconomic theories of wage stickiness are not wrong or irrelevant; they
are just not necessary to the story.)

Threatened by high wages or low work effort, capitalists can also institute
labor-saving technological change [Marx, 1867: ch. 25, s. 2], while seeking
new labor-power supplies at home and abroad. Indeed, they are driven to seek
ways to replace labor-power by the battle of competition amongst capitalists
and the possibility that wages will rise in the future. Further, they may
use the state, as when capitalists push the state to change immigration laws
to import "guest workers" or braceros when labor-power is scarce.

Governments are sites for intraclass competition and inter-class conflict
and need not always serve the capitalist class interests. But a government
that attempts to lower the COJL has to face the limits created by the profit
squeeze/capital strike and capitalist control over technological change. If
a government promotes true full employment or institutes programs seen as
undermining profitability (even if they are not truly so), eventually
investment stagnates or capital flees to more profitable shores. This
induces recession or increased inflation, falling tax revenues, foreign
exchange problems, and/or long-term productivity-growth stagnation. These
undermine popular support for the government and push it out of office or to
change its policies [cf. Kalecki, 1972; Block, 1977; Lindblom, 1982].
Examples of such "automatic destabilization" include those against Allende
in Chile and Mitterand in France.

e) The receipt of profits is not guaranteed by capitalist control of
investment and technological change, since capitalists can get themselves
into serious crises (such as the Great Depression, in which the reserve army
became "too large," hurting the realization of profits [cf. Devine, 1994A]).
Further, workers can revolt or pressure the state in a way that lowers this
tax. But in "normal" (non-crisis) times, capitalists will receive positive
profits, because crises are typically not as severe as the Depression and
workers compete against each other. On the latter, the competition amongst
workers creates the collective action problem referred to in section C,
which is reinforced on a cultural and ideological level by the illusions
created by competition: workers often side with "their" employers in the
battle of competition, or with "their" nations in international competition,
in hopes of getting benefits. This divides and rules them as a class,
legitimating the system and preserving capital's supremacy over time.

Since it is based on the fact just highlighted, i.e., that the existence of
exploitation is partly based on workers' conscious submission, turn to the
possibility of the social-democratic contract that is one substitute for the
COJL: workers might accept exploitation in exchange for a relatively good
deal in terms of the distribution of benefits. Capitalists put up with this
situation because of the security that the contract provides.

The possibility of such a contract is based on interpretations of the
history of Sweden and some other countries; to some extent this kind of
contract has existed in the "primary labor markets" of the rest of the
capitalist world. In these cases, the type of consent based on the COJL and
divide-and-rule stressed above is replaced in part by a more democratic and
popular form of legitimation. "Taxation without representation" begins to
edge toward "taxation with representation," to stop being exploitation in a
normative sense. In the Swedish case, for example, workers had some control
over the way in which the surplus they had produced was utilized.

However, such a "social contract" is partial, conditional, and temporary. Itactual production of surplus, just as capital's supremacy is only part of
the story, necessary but not sufficient. For Marx, the "anarchy in the
social division of labor," i.e., the unplanned and relatively harmonious
co-operation of different industries and firms through the market (in the
absence of fascism or social-democratic planning), is complemented by
"despotism in that of the workshop" [1867: 356]. This subjection of labor by
capital (both formal and real) is what was earlier termed instrumental
coercion. It refers to the direct capitalist rule in production, as opposed
to voluntary exchange (the Walras/Roemer story): in this microeconomic
situation, the coercer can impose a significant cost on the coercee for not
complying with his wishes. The existence of a COJL > Cmin makes employers'
threats credible, unlike in a Walrasian model.

a) Capital's supremacy cannot be sufficient, since it does not explain the
existence of surplus: capitalists could use their macro-societal power to
induce a pure redistribution that reduces the standard of living and/or net
worth of workers. This would make capitalists akin to a kleptocratic elite
such as that led by Zaire's Mobutu or seen in the more extreme libertarian
statements about the U.S. government: the state extorts taxes from the
people in order to waste the revenues on luxury, war, and further tax
collection, steadily depressing peoples' standard of living and/or net
worth. This is similar to Marx's vision of precapitalist usury which

"impoverishes the mode of production, paralyzes the productive forces
instead of developing them, and at the same time perpetuates these miserable
conditions in which the social productivity of labor is not developed . . ."
[1894: 596].

This hurts the ability of the system to grow, so that it degenerates into a
stationary state. It thus differs qualitatively from the capitalist
exploitation that Marx explained, which was part of a dynamic and expanding
system, one that can produce new real assets rather than simply
redistributing them from others.

To rule out this purely redistributive and thus self-limiting exploitation
theory, to define and thus understand the production of surplus, some
standard of comparison is needed. Marx assumed that the workers are paid
enough to reproduce themselves as a class over time, i.e., according to the
culturally-based and historically-determined subsistence level. This notion
captures the fact that workers' needs are more than just a matter of
subjective wants but a matter of survival, not just physically but as human
beings in society. If paid at subsistence, they need not accumulate debt or
dip into savings in order to survive.

Marx stated the micro-etiology of exploitation as follows: surplus is
produced if the length of the working-day exceeds the value of labor power
(VLP), i.e., the socially necessary abstract work-time required to produce
the daily wage determined by the subsistence level. Payment at the VLP is a
key part of the equal exchange (price = value) assumption discussed in
section C: exploitation of workers is not defined as payment less than
competitive free-market prices for their labor-power, but rather as
occurring despite their being paid the value of their labor-power. This
complements the assumption that capitalists do not simply profit at each
others' expense, i.e., the focus on the macro creation of surplus rather
than mere redistribution of a given product.

As seems appropriate in our century use an hour rather than a day as the
unit for which workers are paid: the value of an hour of labor-power equals
the amount of socially-necessary abstract labor time needed to produce the
hourly real wage. So the VLP is the real wage (RW) for an hour of
labor-power divided by the average output produced by the labor done during
an hour of labor-power hired (output per hour hired, the APL).

To use modern language, avoid further reference to the VLP and allude to RW
and APL alone. Marx's issue can be restated as whether or not APL > RW. In
turn, the APL is explained by the following tautology:

APL = (output/labor done)(labor done/labor-power sold) = q e (2)

where q is the effectiveness of labor done and e is the intensity of labor
or the "degree of effort" [cf. Devine and Reich, 1981]. The ability of the
capitalists to extract a surplus and to exploit workers thus depends on
technology and management systems, plus the ability of capitalists to
depress wages.

Initially, changes in q (reflecting current technology and management
systems) will be largely ignored. Given this, the production of surplus
depends on capitalist managers' ability to evoke sufficient effort from
their workers. The issue of technical change will be addressed under point
(e), when "real subjection" is discussed.

Many have criticized Marx's assumption of the exogenously-given RW. Instead,
Andrew Friedman [1977: 267-9], Michael Lebowitz [1992: 119-20], and others
argue that the level of the RW is the product of an endogenous class
struggle. To assure generality, therefore, we should go beyond Marx to
consider the case in which wages are set by steadily changing social needs
and class struggle in the context set by the supply of and demand for
labor-power -- and can change in response to exploitation.

Marx's micro-theory of exploitation is not dependent on the given RW. In the
theory of the profit-squeeze/capital-strike cycle discussed above, wages are
the "dependent variable" [1867: 620] rather than the independent variable
that they were earlier in the book. The normal existence of unemployment
"confines the field of action of this law [of supply and demand for
labor-power] within the limits absolutely convenient to the activity of
exploitation and to the domination of capital" [1867: 639]. That is, the
cycle, labor-saving technical change, and the like insure that low-COJL
situations that squeeze profits are abolished.

b) Now assume RW constant, with its current value determined by what was
received in a previous period (roughly, their customary standard of living,
as in Bowles and Edwards [1993: ch. 4]). Given this, return to the issue of
how the capitalist or his hired managers can succeed in getting more out
than they put in to hire workers during this period. Marx's answer is
simple: workers are not paid for the actual labor they do but instead for
the cost of bringing themselves (their labor-power) to work; their actual
labor has no price on the market because it is not marketed. Further, they
labor more intensively than necessary to exceed the labor needed to produce
the RW, while the capitalists can capture the benefits of management systems
and technology that raises labor's effectiveness.

This theory is not contradicted by marginal productivity theory (assuming
that such theory is valid). A profit-maximizing capitalist equates the
marginal productivity of hiring labor-power to the RW, the price of
labor-power. But the wage is not determined by the MPL. Rather, as far as a
competitive capitalist is concerned, labor-power market conditions (the
COJL) determine the wage; then, the capitalist determines employment given
that wage. Even if the RW is constant, the COJL helps to determine the
degree of effort, the amount of actual labor done, and thus the marginal
productivity of an hour of labor-power hired.

c) Given the coercion allowed by the COJL, a central question is why it is
that workers get paid for providing labor-power rather than labor. Workers
sell their time on the market and it is that time (labor-power) which has a
price; once they have struck a deal, they are under the capitalist's
authority and their product is the latter's property. The social relations
within the workplace are distinctly non-market in character, involving much
more than individual exchanges.

Recent research fits with Marx's vision: as Williamson [1975], Herbert
Gintis [1976], and others explain, most jobs involve more than hiring an
individual to do a single and simple task. In the former's terms, complete
contingent futures contracts between employer and employee are impossible.
This fact's general acceptance has encouraged economists to increasingly
distinguish between "labor sold" and "services rendered" and to worry about
the P/A problem. With the workers as agents and the capitalist manager as
principal, the principal must discover how to get the agent to work hard in
the real world of asymmetric information.

Otherwise, embezzlers steal from their bosses while slackers and petty
bureaucrats gum up the works, making operations unprofitable. Without
dictatorial supervision, in the Marxian view, no profits will be received
since inadequate amounts of work will be done to do more than pay for the
wages.

Skillman [1994] argues that the P/A problem does not add anything
significant to exploitation theory; rather than explaining why profits are
positive, dictatorial supervision explains only why profits are higher than
with self-supervised workers organized through markets. But this argument
that subjection is merely epiphenomenal misses the limitations of the
neoclassical P/A literature. The usual P/A article starts with a totally
hypothetical "full information" Pareto-optimal economy and then introduces
asymmetric information. But Marx's standard for comparison in his
exploitation theory is not the Paretian ideal, but rather a non-exploitative
ideal of simple commodity production (posited by economists of his time).
Marx, like other economists of his period, would have considered the notion
of perfect information to be silly and irrelevant. More importantly, the
neoclassical view simply avoids the theoretical issue of the origins of
surplus (see section E). If anything, its existence in the full-information
model is implicitly assumed, with P/A problems leading to the imperfect
realization of these profits. Though on the technical level P/A models are
unobjectionable, if we want to explain positive profits we cannot start by
assuming what we are trying to explain.

Skillman's [1994: 34-9] effort follows exactly this pattern, except that he
explains profits' existence with Roemer's "full information" theory. But as
noted in section D, Roemer's theory simply assumes that APL > RW, while the
scarcity of capital goods is insufficient to explain the actual production
of surplus as opposed to mere redistribution of an already-produced surplus.
We need the more complete picture of institutional coercion to explain the
existence of profits.

Indeed, the P/A problem undermines Roemer's models. Both his Credit Market
and Labor Market Islands lack Marines to hit the beaches to enforce
contracts. Though the state is implicitly assumed to do the job, it lacks
the resources (including information) needed to enforce each and every
contract, even if it were possible to fully specify contracts ahead of time.
State enforcement is thus at most complementary to the efforts of the
contract-enforcers that capitalists hire or mechanisms that they use
(including the COJL) to ensure contract compliance. Without the subjection
of labor, contract compliance breaks down.

In sum, if we are trying to explain rather than presume the existence of a
surplus the P/A problem stops being an example of "inefficiency" defined
relative to an imagined ideal, but is rather defined as a conflict over the
amount of production, a variable: in the simplest story, workers (ceteris
paribus) want to produce only what is enough to cover their wages, while the
capitalist wants them to produce as much beyond their wages as is possible,
of course balancing the cost of evoking that effort.

d) We must now turn to an important practical concern that goes beyond the
P/A problem and limits the effectiveness of such individual solutions to the
problem as "bonding" (as happens with individual contractors) and the paying
of efficiency wages to individuals. Work occurs in groups, with the
individual worker being part of the "collective worker." This means that
there are so many interdependencies -- externalities within the workplace --
amongst the various workers and their work that it is extremely difficult if
not impossible to separate out the contributions of individual workers in
the "team."

Alchian and Demsetz [1972] see the capitalist as a supervisor, "monitoring"
the teams' inputs and outputs to avoid "shirking." The capitalist receives
the lion's share of the "residual" gained through such monitoring. However,
these authors do not note the fact that this residual accrues to the
capitalist not simply because of any supervision but also because of
ownership rights [cf. Mandel, 1977: 53-4]. With different ownership rights,
the residual might be received by (for example) a workers' co-operative, in
which workers supervise each other. Even given capitalist property rights,
Alchian and Demsetz miss the way in which the reserve army of labor (and the
COJL) allow the employer to threaten workers to get them to work to produce
a surplus.

The collective nature of work suggests that workers have group interests
(the production of collective goods, such as a leisurely pace of work) which
conflict with the goal the capitalist manager. This conception differs from
Williamson [1975] or Stiglitz [1975], for whom the capitalist/manager and
workers share a single collective good. But these authors' vision is not
totally wrong: while there exists a basic conflict of interests between
capitalists and workers, in many cases workers (fearing unemployment and
hoping for raises) and their employers ally against the employers'
competitors.

In view of the common conflict between profits and the workers' collective
good, however, the capitalist tries to encourage the free rider problem
amongst workers, in order to divide and rule his employees [Marglin, 1974;
Devine and Reich, 1981]. Friedman [1977] and Edwards [1979] emphasize the
need for organized management systems to control workers, usually
incorporating the divide-and-rule principle. In this vision, the capitalist
control of production is more than simply a matter of setting up an
incentive system and enforcing it; rather, it is a (micro) political
problem, involving potential and actual conflicts of interest. In this
management relationship, the submission that was necessary to the
perpetuation of supremacy is also needed to reproduce subjection over time.
A rebellious workforce willing to throw spanners in the works or to go on
wildcat strikes will not allow subjection or exploitation.

In response to all of this, the case of piece rates is often mentioned, as a
counter-example. But as noted in Mathewson [1931] and Devine and Reich
[1981], payment of piece wages are very limited in application and further,
do not prevent political problems. Besides the problem of actually isolating
an individual's contribution to the total product, one problem with
market-like piece-rates is that the quality of the pieces is impossible to
contract ahead of time. The other is that workers band together to prevent
the downward adjustment of piece-rates that so often happens when they work
harder. Unlike competitive farmers who face a somewhat similar situation,
workers find it relatively easy to do so because they often work together in
a single workplace and thus find it easier to communicate and co-operate
with each other, even if that co-operation is largely tacit while on the
job. Both of these considerations indicate that in addition to the
piece-rate, workers must submit to the power and authority of the employer.
Piece rates and capitalist management/control systems are complements rather
than substitutes.

e) As Marx realized, real wages may not be low enough (given technology and
thus the effectiveness of labor) to actually allow for exploitation to
occur. Given the absolute limits set by physical subsistence needs, it may
be impossible to reduce the RW. Increases in the intensity of labor may
simply induce a higher cost of reproducing labor-power, preventing the
creation of a surplus. With undeveloped forces of production, therefore, it
is quite possible that the degree of exploitation would be extremely low or
even zero [Marx, 1867: 511].

However, once capitalism takes hold of the production process -- what Marx
called the real subjection of labor by capital -- it promotes labor
productivity growth, helping to assure the reproduction of exploitation over
time. This real subjection is more stringent than mere supervision (formal
subjection): it involves the capitalist control over technology and its
introduction on the micro-level. Capitalists are no longer dealing with
workers who bring their own tools and knowledge to work (as with many
craft-workers in even in today's construction industry); instead, they are
replacing their own machinery with new and different capitalist-owned
machinery and are monopolizing the technical knowledge developed by hired
scientists and engineers.

Under real subjection, the capitalists can install the technology they want,
one which raises the effectiveness of labor (q) without directly causing
increases in real wages. Such labor-saving technological change also helps
create a reserve army of labor (technological unemployment) and the
economies of scale and scope that block workers' entrance into business.

Once established, the normal production of surplus can then be the basis for
a virtuous circle (from the capitalist viewpoint) of accumulation and the
creation of further profits, even in the face of rising wages. After the
initial stage, in which more overt force may be needed, the somewhat
automatic profit squeeze/capital strike cycle and labor-saving technical
change can make sure that wages do not rise too much to allow the production
of profits, since the real subjection of labor implies that the capitalist
controls investment and technology. Such control is not present if
production simply involves workers deploying their own tools.

At the same time, automation and similar techniques are used to lower the
skill content of the work process, taking control away from craft-workers
[cf. Braverman, 1974]. In the end, workers may be relatively skilled, but
both the machines and the knowledge are supplied by the capitalists or their
institutions (such as technical schools) so that workers have no special
advantage arising from their individual attributes. Unlike many craft
workers in the building trades, for whom the ownership of skills and tools
conveys certain advantages even in the absence of a union, under the real
subjection of labor by capital, workers must band together to resist capital
or to bargain collectively.

Despite the introduction of machinery and the deskilling of craft-based
labor, exploitation remains a political problem at the micro-level. Even
"semi-skilled" and "unskilled" workers can devise ways to block the
introduction of new machinery or to undermine its effectiveness if the
capitalist has not solved the political problem. This can be done either via
collective action (unions, wild-cat strikes, etc.) or if some subset of
workers can find a strategic location in the management structure (such as a
bottleneck in the assembly line) or even by sabotage. Submission is still
needed for exploitation to be reproduced over time.

f) Subjection is necessary but not sufficient; it is complementary to
capitalist supremacy. First, subjection depends on supremacy, the lack of
workers' options besides working for capitalists; the COJL gives subjection
its force. In turn, capital's supremacy involves capitalist control over
both investment and the introduction of new technology.

Completing the circle, these types of control require subjection. In an
imaginary economy totally organized by self-employed craft-workers using
their own tools and knowledge, capitalists would have no direct control over
real investment or technological change. If there were no COJL, the
craft-workers would face no disadvantage vis-a-vis contractors and bankers,
so the latter could not force their decisions concerning investment and
technology. With no direct control by capitalists over the workplace, there
would be no way to get the craft-workers to produce a surplus or to hand it
over to the capitalists.

G. Secondary Exploitation.

The six mainstream kinds of exploitation mentioned in section A fit with the
Marxian theory. As pure cases, they represent "secondary exploitation."
However, there exist important "impure" cases, which are (a) mixed with
and/or (b) contribute to primary exploitation. So, the simple case of "all
exploitation arises out of industrial production" needs to be modified. Even
so, primary exploitation sets the context in which secondary exploitation
occurs so that our discussion above helps us understand that below.

1. For monopsony and monopoly, market prices deviate from competitive prices
for long periods. Some capitalists have special positions that prevent the
entry of competitors, so that their profit rate exceeds the average for the
economy as a whole; they receive "super-profits." Others have work forces
with a limited ability to seek jobs elsewhere and are able to pay lower
wages for given working conditions than on average, allowing the capitalists
to "super-exploit," to participate in exploitation more than others.

In the latter case, if capital mobility is unblocked, the monopsonist will
not receive an above-average profit rate in notional equilibrium, as other
capitalists rush in to take advantage of below-average wages. But it is
possible that monopolistic and monopsonistic privilege are combined (as with
the company town), in which case the company will receive super-profits.

Unless the monopoly or monopsony is extremely important in the economy as a
whole (which seems unlikely given the magnitude of world capitalism), it
does not affect the over-all degree of exploitation. If this is unchanged,
the monopolist or monopsonist gains super-profits only from other
capitalists, who receive sub-normal profits.

If monopsony and monopoly are extremely important to the operations of the
economy, the capitalist economy has a significant admixture of feudalism or
some other form of overt servitude; alternatively, fascism exists. If these
phenomena are the normal way in which business is operated, then they would
raise the overall degree of exploitation, though (as mentioned in part
F.1.e) it may hurt long-term growth of labor productivity.

2. The P/A theory of exploitation has three levels. First, capitalist agents
such as the top managers of firms are able to capture part of societal
surplus-value in the form of exalted salaries, perks, stock options, and/or
embezzlements, reducing the incomes of stock-owners and creditors and
getting more than justified from these principals' perspective. Their
ability to do so depends on the primary exploitation of the direct
producers. Though they may use their power in a way that limits the size of
the surplus produced, that would undermine their income in the long run.

Second, from the point of view of these managers, the workforce are the
agents. The latter can refuse to produce a surplus-product. Further, if we
use the customary standard of living to define the RW and, given the APL,
the surplus-product, workers can capture part of the surplus-product by
pushing to earn more than their customary level. As discussed above, this
represents a central part of subjection, i.e., the constant political
problems that it involves.

Workers are sometimes seen as earning "employment rents," which some see as
exploitation of capitalists by workers. But this is looking at matters
backwards. Workers fear the COJL and thus produce a surplus. Then they may
be able to win back some of the surplus that they created. They are not the
exploiters.

Third, individual workers can gain at each others' expense. While this
"opportunism" [Williamson, 1975] can benefit individual workers in an
"exploitative" way, this competition among workers (if kept within bounds)
also divides and rules the work-force and encourages the production of
profit: the back-stabbers in "office politics" can help the managers and
owners by motivating workers to work hard to rise in the hierarchy rather
than fight to attain collective goals. To management, such behavior must be
kept within limits; doing so is part of the political problem that
capitalist exploiters must face.

3. The free rider problem is best explained in terms of a specific case, the
destruction of nature and the exploitation of future generations. It is part
of a Marxian theory of competition. In their efforts to survive the
competitive battle, capitalists actively seek to internalize external
benefits and externalize internal costs, often in innovative and highly
creative ways that demonstrate an ability to plan ahead and delay
gratification in the name of profit [cf. Hunt, 1980; Devine, 1993B].
Successful development of new ways to dump costs on others can give a
company a competitive advantage and temporary super-profits that can be
capitalized, allowing for further growth. Of course, on the macro-level,
this behavior can eventually lead to the destruction of the natural
conditions allowing capitalist exploitation to exist. But a competitive
capitalist cannot act on such knowledge. In other words, the free rider
problem is part and parcel of the way in which freely-competitive capitalism
works.

4. Just as for George, Marx saw the land-owning class as crucial. For both,
land-owners capture some surplus because they control scarce gifts from
nature. The major difference is that George, having a different theory of
profits, stressed a basic harmony between the urban classes. For Marx, on
the other hand, land-owners are able to grab a part of the aggregate
surplus-value, representing a redistribution from industrial capital, where
surplus-value is produced.

The landowner may also be an industrial capitalist (hiring farm workers to
harvest the crop, etc.) In this "impure" case, the landowner is contributing
to the aggregate surplus-value. Further, as noted, the extent to which
workers are landowners themselves (rather than being pure proletarians)
limits the degree to which they can be exploited by normal capitalist means.


5. Marx's attitude toward rentiers was similar to that of Keynes, without
sharing the latter's admiration of the entrepreneurs (industrial
capitalists). The rentiers gain a share of the societal surplus-value in the
form of interest from their control of loanable money-capital. But
industrial capitalists are the ones who induce the workers to produce the
surplus in the first place. For Marx, unlike for Roemer, the rentier's pure
money-lending does not create the basis for the receipt of property income.

However, there exist cases of impure money-lending, as when a loan-shark
forces a worker to work hard and long. But the loan-shark is not a rentier
but instead shares some characteristics of an industrial capitalist, i.e.,
the direct participation in the subjection of labor. As the P/A literature
on banking points out, much money-lending shares this characteristic (to
varying degrees): the loaners ration credit, snoop into prospective debtors'
personal lives, and impose conditions concerning collateral and the like
[cf. Mishkin, 1992: 171-8].

Given capitalist supremacy, i.e., the threat of the COJL and the absence of
alternatives, this type of behavior might induce an "I owe, I owe, so it's
off to work I go" response on the part of workers, complementing the
industrial capitalist's subjection, which (if common enough) raises the
aggregate degree of exploitation. Without supremacy, the dependence of
workers on industrial capitalists for their livelihood, however, the
money-lender's hold over workers would be nil. So again, the institutional
coercion of labor is central to the exploitation story.

Even many or most of the independent producers living on the edges of
capitalism (the petty bourgeoisie and home-workers) are subject to capital's
supremacy. In the extreme, they own neither the means of production
(including raw materials) nor the means of subsistence, or have very limited
access to these, and must gain access to them through the agency of the
capitalists. These workers may not even own the homes they work in and may
be borrowing money to finance consumption. They are also threatened by the
existence of the reserve army, as a merchant can "fire" home-workers and
hire replacements. They may also be competing in product markets with
wage-workers operating much more advanced equipment, i.e., with low-cost
commodities produced under conditions of the subjection of labor by capital.
Of course, some independent producers are not in this kind of bind: these
are not exploited and instead are on the edge of joining the capitalist
class.

6. The final theory of exploitation centers on the role of the state.
Contrary to the popular image of Marx as a super-statist, he was hostile to
the state, striving for its "withering away" [cf. Draper, 1977, 1978, 1986,
1990; Devine, 1994B]. In Marxian theory, the state is central to the
existence of both supremacy and subjection over labor, since it helps create
and preserve capitalist property rights. Under feudalism and other
precapitalist modes of exploitation, the use of armed force (a
characteristic role of the modern state) is inseparable from the "economic"
relations between the lord and the serf: the former simultaneously collects
rent and taxes, two incomes that cannot be separated. But under 19th century
capitalism there was a societal division of labor between those sectors
"monopolizing the legitimate use of force" [Weber, 1918] and those that
engage in purely economic activity. Taxes on capital may be seen as partly a
matter of redistribution of surplus-value to the state in return for
services rendered to the capitalist class.

The state can also use its force in order to raise the degree of
exploitation, as under fascism, or may emulate capitalists by directly
engaging in production, as with state capitalism (e.g., the U.S. Tennessee
Valley Authority). To some extent the modern welfare state (like social
democracy) contributes to the production of surplus-value by legitimating
capitalism and its work relations. In these cases, the societal division of
labor is fuzzy compared to classical liberal capitalism, so that taxes are
not simply a deduction from (redistribution of) surplus-value.

On the other hand, the state is "relatively autonomous": that is, it is not
under complete capitalist control and does not always serve the interests of
the capitalist class. It might serve only a fraction of that class, or there
may be a P/A problem, this time with the state bureaucracy as the agent. As
Friedman would be the first to point out, the state may go "too far" in the
collection of taxes, feathering the government bureaucrats' nests with no
obvious benefit to the capitalists or anyone else besides these parasites.

Third, and finally, the working class's political activity can (and
sometimes does) succeed in winning benefits from the state in excess of the
taxes they pay. While this also contributes to the system's legitimation
and, as noted above, can thus raise the amount of surplus produced, to some
extent workers can reduce the surplus left over for capitalists. In fact,
these two effects may work together (as in Sweden for decades), where the
state works to both increase the surplus through legitimation and decrease
the surplus via distribution to workers, without hurting and perhaps
actually helping profits. But in the end, as argued, social democracy cannot
escape the laws of motion of capitalism.

H. Conclusion.

The point of this chapter is to reconstruct Marx's theory of exploitation,
improving on previous efforts in this vein, applying his surplus
problematic, institutionalist perspective, and political-economic vision to
restate his theory in modern terms. The most profound type of exploitation,
the one explained by Marx, involved not simply the redistribution of
existing assets but the creation of new ones. The basic theory is bothproduction) creates the cost of job loss and the conditions allowing
microeconomic subjection. Finally, there must be ideological submission by
workers: capital's institutional coercion of labor must be legitimated in
the eyes of the workers if it is to continue. Further, severe economic
crises must be avoided. As fits with Marx's emphasis on the nature of
capitalism as historically limited, the persistence of exploitation is not
guaranteed.

The discussion of secondary exploitation leads to the conclusion that the
institutions allowing purely redistributive exploitation can be mixed up
with and can sometimes even reinforce the production of surplus-value.

Though it goes far beyond Marx's methodological framework, Roemer's
normative definition cannot be avoided. Any kind of criticism of "capitalist
exploitation" seems somewhat futile if there exists no alternative, not only
non-capitalist but non-exploitative, way of organizing production beyond
reversions to precapitalist modes of production or to Stalinist economics.
Given the importance of conscious consent, this is not just an academic
matter: the absence of an alternative is clearly one of the factors that
legitimates capitalist exploitation and allows its perpetuation.

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