Letters from Tomis

An ongoing series of reflections on Marxist economics after reading What is Marxism: An Introduction into Marxist Theory by Rob Sewell and Alan Woods. The thoughts, opinions, and any errors are mine alone.

Introduction

In the annals of political economy, few questions have proven as contentious and illuminating as the origin of profit under capitalism. Karl Marx famously posed the problem in stark terms: how is it that money, once invested, returns with an added increment – a surplus – without breaking the rules of fair exchange? Classical economists had long observed that capitalists somehow end up with more value than they put in, yet their theories offered only polite evasions or circular reasoning to explain this mystery. Marx’s answer, rooted in his critique of classical political economy, was as uncompromising as it was elegant: the sole source of this surplus value is labor. In what follows, we will defend the Marxist theory of surplus value, explaining where surplus value comes from and why it cannot originate in the mere circulation of capital. Engaging with Marx’s analysis in Capital and drawing on Marxist economists like David Harvey and Ernest Mandel, we will argue – in appropriately acerbic and erudite fashion – that labor alone breathes life into capital’s profits, and that without the unpaid labor of workers, capital would have nothing to accumulate.

The Classical Conundrum of Profit

Before Marx, even the best minds in classical political economy struggled to demystify profit. Thinkers like Adam Smith and David Ricardo recognized that labor was a chief source of value, yet they could not consistently explain how, under conditions of equal exchange, capitalists extract a residual gain. Some resorted to quaint just-so stories – profit as a reward for the capitalist’s thrift or risk, or as the fruit of buying cheap and selling dear. But these explanations ring hollow under scrutiny. If every seller simply marked up prices, who would be the dupe on the other end? In a competitive market of notional equals, no capitalist can reliably sell above value unless another sells below it; one man’s win is another’s loss, and society as a whole sees no net creation of wealth. As Marx pointed out, exchange by itself only shifts value around; it is a zero-sum game that cannot expand the total value in circulation.

Classical economists were thus ensnared in a contradiction. Either commodities exchange at their true values – in which case where is the extra value for profit? – or someone gets fleeced in exchange – in which case profit is merely a redistribution of existing value, not a new creation. Marx gleefully seized on this dilemma. In Capital he formulates the general formula of capital as M–C–M′ (Money transformed into Commodity and back into an increased sum of Money). The increase M′ > M cries out for explanation. Yet “if equivalents are exchanged, no surplus value results, and if non-equivalents are exchanged, we still have no surplus value” Marx observes bluntly. In other words, cheating a trading partner might enrich one capitalist at another’s expense, but it creates no new value in aggregate. Surplus value cannot be created by circulation alone – a fact Marx underscores with merciless logic . The bourgeois economists’ polite fiction of profit arising from exchange thus collapses under Marx’s critique.

Into this theoretical breach steps Marx with a radical insight. The origin of profit must lie outside the realm of simple circulation. “It was left to Marx to unravel” how profit, interest, and rent arise from “an honest-to-God act of exchange, without any cheating or plotting,” notes Ernest Mandel, highlighting Marx’s solution to a puzzle that had flummoxed his predecessors. Marx’s breakthrough was to locate surplus value in the sphere of production – in the hidden abode where capital meets labor. Here, at last, the enigma can be resolved: capital can only expand its value by harnessing a special commodity whose use creates more value than its cost. That commodity is the labor-power of the worker.

Surplus Value and the Limits of Circulation

Before turning to Marx’s positive solution, it is worth emphasizing why mere circulation of capital cannot generate surplus value. Marx devoted Chapter 5 of Capital (“Contradictions in the General Formula of Capital”) to demolishing the illusions of profit through exchange. In a series of scathing arguments Marx dispatches various fallacies. Could it be that sellers systematically overcharge buyers? If so, in a market of capitalists selling to one another, they would each overcharge and be overcharged in turn – a comic exchange of the same coin that leaves no one better off in the end. Circulation, by its very nature, is an egalitarian leveler of values, not a magic pudding that grows with each transaction. If everything is bought at its value and sold at its value, profit seems impossible; and if things are not sold at their values, any gain by Smith is a loss to Jones. The aggregate value in society remains fixed. As Marx dryly quips, calling such shuffling of wealth “profit” would be like saying one can become richer by trading dollar bills in a circle – an absurdity that classical economists wisely avoided asserting outright.

The very form of capital – M–C–M′ – shows that the capitalist’s goal is not the commodity’s use-value but the augmentation of exchange-value. The “restless, never-ending process of profit-making” is the capitalist’s sole aim. But that profit cannot come from the act of exchange itself. Marx even considers the “cheating and stealing” explanation: perhaps cunning merchants trick buyers or plunder colonies to realize a profit . He concedes that force or fraud may enrich certain capitalists (a nod to the looters and plunderers of history), yet even these predations only redistribute existing wealth. They do not explain the routine, lawful surplus generated in ordinary capitalist production. Thus, Marx concludes, if surplus value is not lurking in the marketplace, it must emerge “in the background” – within the production process itself . Classical political economy had reached the limit of what circulation could tell us about profit. To go further required peering behind the veil of the labor market and production process, where a very peculiar exchange occurs: capital purchases labor-power.

Labor-Power: The Hidden Source of Value

Marx’s great discovery – the secret of how money “begets” money – lies in the distinction between labor and labor-power. Labor-power is the worker’s capacity to work, which the capitalist buys for a wage; labor is the actual effort exerted, which produces value. When the capitalist buys labor-power at its value, he pays a wage equivalent to the worker’s subsistence needs (the cost to reproduce the worker’s living for another day – food, shelter, and other necessities). For example, suppose a worker’s daily wage represents 5 hours of socially necessary labor (the labor embodied in those necessities). Once employed, however, that worker might labor for 8, 10, 12 hours in the factory. The use-value of labor-power to the capitalist is that during those hours of work, the labor-power creates new value in the form of commodities. Crucially, the worker can produce more value in a day than the value of her wage. As David Harvey succinctly explains, “the labour power employed congeals more value in the commodity than is required to pay for the value of the labour power itself.” In plainer terms, the worker spends part of the day covering the cost of her own wage (let’s say 5 hours to produce value equal to that wage), and then the rest of the working day creating value for the capitalist. That excess value – produced in hours 6 through 10, for instance – is surplus value, which the capitalist appropriates without equivalent compensation.

Under this arrangement, profit is finally explained without magic or fraud. The capitalist started with money (M), bought a commodity – labor-power (C) – at its value, and put that labor-power to work producing new commodities. When those commodities are sold for money (M′), the value of M′ exceeds the original M by precisely the value of the unpaid labor expended by the worker. In Marx’s formulation, surplus value is nothing but the monetary expression of unpaid labor. It is, as Ernest Mandel puts it, “that part of the worker’s production which he surrenders to the owner of the means of production without receiving anything in return.” We can therefore say, in strictly economic terms, that surplus value is the difference between the value created by the worker and the value of the labor-power (wage) paid to the worker. Labor-power, by its nature, has this unique property: its use-value to the buyer is greater than its exchange-value. The worker’s capacity to labor (exchange-value) is bought at a price, but when put to use it yields a greater quantity of value than that price. No other commodity behaves this way. A machine, however fancy, transfers only its own value to the product as it wears out; it cannot mystically multiply that value. As Marxist theory emphasizes, constant capital (machinery, raw materials) merely transmits its pre-existing value to the new output, whereas variable capital (wages expended on labor-power) is “variable” precisely because it produces value beyond its own cost. Human labor is the active agent that adds new value in production, above and beyond the value of the inputs used.

By locating surplus value in the purchase and productive consumption of labor-power, Marx solved the classical conundrum. Profit is grounded in production, not circulation. The hidden abode of production – usually glossed over by economists enthralled with markets – turns out to be where the action is. Here, capital quietly absorbs the surplus labor of workers. It is an exploitation veiled by the ordinary trappings of a labor contract. On the surface, as Marx wryly notes, the worker appears to sell his labor in a fair day’s work for a fair day’s pay, “identical to that of a small artisan or a farmer” exchanging products . The social relation of capital and labor masquerades as a mere market transaction between equals. Yet, just as the slave or the serf must yield unpaid labor to their masters, so too the wage-worker yields unpaid labor – only here it is concealed within the wage system itself  . Marx’s analysis lays bare what conventional economics preferred not to see: that capitalist profit is rooted in the expropriation of labor’s product, in a manner no less real for being shrouded in contracts rather than enforced by whips.

Labor as the Sole Source of Surplus Value

From Marx’s theory it follows that labor is the sole source of surplus value. Only human labor can create new value above the cost of its own reproduction; capital by itself is sterile. This is a cornerstone of Marxist economics. As one commentator summarizes, “workers are the source of the products that have value and capitalism systematically forces them to surrender some of that value to the boss.” All the various forms that surplus value takes – profit, interest, rent – are ultimately divisions of this one fund of unpaid labor. After the worker has produced surplus value, the capitalist class and its allies carve it up: industrial capitalists take profit, bankers take interest, landlords take rent, and so on. But none of these claimants add a penny of new value through the act of exchange or ownership alone. They are, in effect, splitting the spoils of labor’s excess product. Marxist scholar David Harvey emphasizes that once surplus value is realized as profit, it is distributed to various factions – “to industrial producers as profits, to merchant capitalists as…sales [facilitation] fees, to bankers as interest on their loans, to landlords as rent,” etc. – yet all these flows trace back to the surplus value congealed by labor power in production. No matter how complex the capitalist economy’s accounting, with its dividends, interest rates, and ground rents, it is ultimately living labor that generates the increment of value those incomes represent.

It is worth stressing what Marx’s theory does not imply. It does not mean that capitalists somehow break the rules of exchange or deceive workers about their wages; on the contrary, the power of the theory is that exploitation happens even when wages are “fair” by market standards. The capitalist pays the worker the full value of labor-power (the going rate necessary to sustain the worker) and still emerges with profit, because the value of what the worker produces exceeds the value of what the worker is paid. This is a system of structural exploitation, not contingent on fraud or coercion in each instance. As Marxist philosopher G. A. Cohen and others have noted, the injustice (if one wishes to moralize it) is built into the very framework of wage labor: workers must work part of the day for themselves and part for their employer, if the system is to run. In Marx’s unsentimental terminology, the rate of exploitation is the ratio of surplus labor (unpaid) to necessary labor (paid). But one need not dive into moral debates to grasp the essential point: labor produces the surplus, capital consumes it.

Marx, with a flair for drama that any Hitchensian writer could admire, often described this dynamic in vivid, biting metaphors. Perhaps the most famous is the image of the vampire. “Capital is dead labour, which, vampire-like, lives only by sucking living labour, and lives the more, the more labour it sucks,” he writes, imbuing the dry bones of economics with Gothic horror. The capitalist, in Marx’s portrayal, grows richer not by his own toil or thrift, but precisely in proportion to how much unpaid labor he can extract from his workforce. It is a pitiless process: “so long as there is a muscle, a nerve, a drop of blood to be exploited,” the vampire of capital will not loosen its hold. Such fiery language underscores a fundamental reality: without the worker, without the effort and time expended by human labor, capital would cease to expand. The entire edifice of profit, interest, and rent would come crashing down if labor stopped providing the life-blood. In Marx’s analysis, this is not rhetoric but literal truth – a truth later Marxist economists have continually reinforced with more formal analysis and empirical illustration. For instance, Ernest Mandel reminds us that if we calculate “the difference between the value of the social product and the value used up…in producing that product,” what remains is precisely the surplus generated by living labor and captured by capital. Human labor is the active ingredient in the economic alchemy of capitalism; everything else is an inert catalyst at best.

Conclusion

Karl Marx’s theory of surplus value remains, even today, a powerful lens through which to understand capitalist profit. In defending this theory, we have traced the argument from first principles: surplus value cannot arise from the circulation of commodities alone, but finds its source in the production process, in the gap between what labor produces and what labor is paid. The classical economists scratched their heads at profit’s source, but it was Marx who revealed the answer hidden in plain sight – the unpaid labor time of the working class. By rigorously showing that labor is the sole creator of net new value, Marx turned the ideology of “profit as owner’s due” on its head. Profit is not a reward for abstinence or a premium on clever trading; it is, at bottom, the appropriation of labor’s product without equivalent. Modern Marxist economists from David Harvey to Ernest Mandel have only strengthened this view, elucidating how the firm’s balance sheets and the economy’s national accounts all point back to the same reality Marx unveiled in Capital: capital grows by consuming the energy of labor.

One might say that Marx’s surplus value theory delivers a jolt of clarity, cutting through pious apologias for capitalism much as Hitchens’s polemics sliced through cant and hypocrisy. It invites us to look behind the euphemisms of “job creators” and “entrepreneurial genius” to see the bedrock truth that without workers, not a single wheel would turn nor a single dollar of profit would be made. Far from being an arcane 19th-century doctrine, the Marxist account of surplus value clarifies everyday realities – from the overwork of employees to the padding of corporate profits – in plain economic terms. It tells us where that extra dollar in the capitalist’s pocket comes from: the sweat of someone else’s brow. In sum, Marx’s theory of surplus value endures because it pierces the mystifications of capital and reveals the brute fact at the core of the system: labor is the substance of value, and exploitation its modus operandi. The sooner we acknowledge this, the sooner we dispel the myth that capital’s gains arise from its own clever shuffle, and recognize instead the living labor that truly drives the accumulation of wealth. To paraphrase a certain famous thesis: the point, once understood, is to decide what to do about it.