In order to make more money, money must be transformed into capital, i.e., workplaces, machinery and other “capital goods.” By itself, however, capital (like money) produces nothing. While a few even talk about “making money work for you” (as if pieces of paper can actually do any form of work!) obviously this is not the case — human beings have to do the actual work. As Kropotkin put it, “if [the capitalist] locks [his money] up, it will not increase, because [it] does not grow like seed, and after a lapse of a twelve month he will not find £110 in his drawer if he only put £100 into it. [The Place of Anarchism in Socialistic Evolution, p. 4] Capital only becomes productive in the labour process when workers use it:

“Values created by net product are classed as savings and capitalised in the most highly exchangeable form, the form which is freest and least susceptible of depreciation, — in a word, the form of specie, the only constituted value. Now, if capital leaves this state of freedom and engages itself, — that is, takes the form of machines, buildings, etc., — it will still be susceptible of exchange, but much more exposed than before to the oscillations of supply and demand. Once engaged, it cannot be disengaged without difficulty; and the sole resource of its owner will be exploitation. Exploitation alone is capable of maintaining engaged capital at its nominal value.” [System of Economical Contradictions, p. 291]

Under capitalism, workers not only create sufficient value (i.e. produced commodities) to maintain existing capital and their own existence, they also produce a surplus. This surplus expresses itself as a surplus of goods and services, i.e. an excess of commodities compared to the number a workers’ wages could buy back. The wealth of the capitalists, in other words, is due to them “accumulating the product of the labour of others.” [Kropotkin, Op. Cit., p. 3] Thus Proudhon:

“The working man cannot … repurchase that which he has produced for his master. It is thus with all trades whatsoever… since, producing for a master who in one form or another makes a profit, they are obliged to pay more for their own labour than they get for it.” [What is Property, p. 189]

In other words, the price of all produced goods is greater than the money value represented by the workers’ wages (plus raw materials and overheads such as wear and tear on machinery) when those goods were produced. The labour contained in these “surplus-products” is the source of profit, which has to be realised on the market (in practice, of course, the value represented by these surplus-products is distributed throughout all the commodities produced in the form of profit — the difference between the cost price and the market price). In summary, surplus value is unpaid labour and hence capitalism is based on exploitation. As Proudhon noted, “Products, say economists, are only bought by products. This maxim is property’s condemnation. The proprietor producing neither by his own labour nor by his implement, and receiving products in exchange for nothing, is either a parasite or a thief.” [Op. Cit., p. 170]

It is this appropriation of wealth from the worker by the owner which differentiates capitalism from the simple commodity production of artisan and peasant economies. All anarchists agree with Bakunin when he stated that:

“what is property, what is capital in their present form? For the capitalist and the property owner they mean the power and the right, guaranteed by the State, to live without working … [and so] the power and right to live by exploiting the work of someone else … those … [who are] forced to sell their productive power to the lucky owners of both.” [The Political Philosophy of Bakunin, p. 180]

It is the nature of capitalism for the monopolisation of the worker’s product by others to exist. This is because of private property in the means of production and so in “consequence of [which] … [the] worker, when he is able to work, finds no acre to till, no machine to set in motion, unless he agrees to sell his labour for a sum inferior to its real value.” [Peter Kropotkin, Anarchism, p. 55]

Therefore workers have to sell their labour on the market. However, as this “commodity” “cannot be separated from the person of the worker like pieces of property. The worker’s capacities are developed over time and they form an integral part of his self and self-identity; capacities are internally not externally related to the person. Moreover, capacities or labour power cannot be used without the worker using his will, his understanding and experience, to put them into effect. The use of labour power requires the presence of its ‘owner’… To contract for the use of labour power is a waste of resources unless it can be used in the way in which the new owner requires … The employment contract must, therefore, create a relationship of command and obedience between employer and worker.” So, “the contract in which the worker allegedly sells his labour power is a contract in which, since he cannot be separated from his capacities, he sells command over the use of his body and himself… The characteristics of this condition are captured in the term wage slave.” [Carole Pateman, The Sexual Contract, pp. 150–1]

Or, to use Bakunin’s words, “the worker sells his person and his liberty for a given time” and so “concluded for a term only and reserving to the worker the right to quit his employer, this contract constitutes a sort of voluntary and transitory serfdom.” [The Political Philosophy of Bakunin, p. 187] This domination is the source of the surplus, for “wage slavery is not a consequence of exploitation — exploitation is a consequence of the fact that the sale of labour power entails the worker’s subordination. The employment contract creates the capitalist as master; he has the political right to determine how the labour of the worker will be used, and — consequently — can engage in exploitation.” [Pateman, Op. Cit., p. 149]

So profits exist because the worker sells themselves to the capitalist, who then owns their activity and, therefore, controls them (or, more accurately, tries to control them) like a machine. Benjamin Tucker’s comments with regard to the claim that capital is entitled to a reward are of use here. He notes that some “combat… the doctrine that surplus value — oftener called profits — belong to the labourer because he creates it, by arguing that the horse… is rightly entitled to the surplus value which he creates for his owner. So he will be when he has the sense to claim and the power to take it… Th[is] argument . . is based upon the assumption that certain men are born owned by other men, just as horses are. Thus its reductio ad absurdum turns upon itself.” [Instead of a Book, pp. 495–6] In other words, to argue that capital should be rewarded is to implicitly assume that workers are just like machinery, another “factor of production” rather than human beings and the creator of things of value. So profits exists because during the working day the capitalist controls the activity and output of the worker (i.e. owns them during working hours as activity cannot be separated from the body and “[t]here is an integral relationship between the body and self. The body and self are not identical, but selves are inseparable from bodies.” [Carole Pateman, Op. Cit., p. 206]).

Considered purely in terms of output, this results in, as Proudhon noted, workers working “for an entrepreneur who pays them and keeps their products.” [quoted by Martin Buber, Paths in Utopia, p. 29] The ability of capitalists to maintain this kind of monopolisation of another’s time and output is enshrined in “property rights” enforced by either public or private states. In short, therefore, property “is the right to enjoy and dispose at will of another’s goods — the fruit of an other’s industry and labour.” [P-J Proudhon, What is Property, p. 171] And because of this “right,” a worker’s wage will always be less than the wealth that he or she produces.

The surplus value produced by labour is divided between profits, interest and rent (or, more correctly, between the owners of the various factors of production other than labour). In practice, this surplus is used by the owners of capital for: (a) investment (b) to pay themselves dividends on their stock, if any; (c) to pay for rent and interest payments; and (d) to pay their executives and managers (who are sometimes identical with the owners themselves) much higher salaries than workers. As the surplus is being divided between different groups of capitalists, this means that there can be clashes of interest between (say) industrial capitalists and finance capitalists. For example, a rise in interest rates can squeeze industrial capitalists by directing more of the surplus from them into the hands of rentiers. Such a rise could cause business failures and so a slump (indeed, rising interest rates is a key way of regulating working class power by generating unemployment to discipline workers by fear of the sack). The surplus, like the labour used to reproduce existing capital, is embodied in the finished commodity and is realised once it is sold. This means that workers do not receive the full value of their labour, since the surplus appropriated by owners for investment, etc. represents value added to commodities by workers — value for which they are not paid nor control.

The size of this surplus, the amount of unpaid labour, can be changed by changing the duration and intensity of work (i.e. by making workers labour longer and harder). If the duration of work is increased, the amount of surplus value is increased absolutely. If the intensity is increased, e.g. by innovation in the production process, then the amount of surplus value increases relatively (i.e. workers produce the equivalent of their wage sooner during their working day resulting in more unpaid labour for their boss). Introducing new machinery, for example, increases surplus-value by reducing the amount of work required per unit of output. In the words of economist William Lazonick:

“As a general rule, all market prices, including wages, are given to the particular capitalist. Moreover, in a competitive world a particular capitalist cannot retain privileged access to process or product innovations for any appreciable period of time. But the capitalist does have privileged access to, and control over, the workers that he employs. Precisely because the work is not perfectly mobile but is dependent on the capitalist to gain a living, the capitalist is not subject to the dictates of market forces in dealing with the worker in the production process. The more dependent the worker is on his or her particular employer, the more power the capitalist has to demand longer and harder work in return for a day’s pay. The resultant unremunerated increase in the productivity of the worker per unit of time is the source of surplus-value.

“The measure of surplus-value is the difference between the value-added by and the value paid to the worker. As owner of the means of production, the industrial capitalist has a legal right to keep the surplus-value for himself.” [Competitive Advantage on the Shop Floor, p. 54]

Such surplus indicates that labour, like any other commodity, has a use value and an exchange value. Labour’s exchange value is a worker’s wages, its use value their ability to work, to do what the capitalist who buys it wants. Thus the existence of “surplus products” indicates that there is a difference between the exchange value of labour and its use value, that labour can potentially create more value than it receives back in wages. We stress potentially, because the extraction of use value from labour is not a simple operation like the extraction of so many joules of energy from a ton of coal. Labour power cannot be used without subjecting the labourer to the will of the capitalist — unlike other commodities, labour power remains inseparably embodied in human beings. Both the extraction of use value and the determination of exchange value for labour depends upon — and are profoundly modified by — the actions of workers. Neither the effort provided during an hours work, nor the time spent in work, nor the wage received in exchange for it, can be determined without taking into account the worker’s resistance to being turned into a commodity, into an order taker. In other words, the amount of “surplus products” extracted from a worker is dependent upon the resistance to dehumanisation within the workplace, to the attempts by workers to resist the destruction of liberty during work hours.

Thus unpaid labour, the consequence of the authority relations explicit in private property, is the source of profits. Part of this surplus is used to enrich capitalists and another to increase capital, which in turn is used to increase profits, in an endless cycle (a cycle, however, which is not a steady increase but is subject to periodic disruption by recessions or depressions — “The business cycle.” The basic causes for such crises will be discussed later, in sections C.7 and C.8).

It should be noted that few economists deny that the “value added” by workers in production must exceed the wages paid. It has to, if a profit is to be made. As Adam Smith put it:

“As soon as stock has accumulated in the hands of particular persons, some of them will naturally employ it in setting to work industrious people, whom they will supply with materials and subsistence, in order to make a profit by the sale of their work, or by what their labour adds to the value of the materials … The value which the workmen add to the materials, therefore, resolves itself in this case into two parts, of which one pays their wages, the other the profits of their employer upon the whole stock of materials and wages which he advanced. He could have no interest to employ them, unless he expected from the sale of their work something more than what was sufficient to replace his stock to him.” [The Wealth of Nations, p. 42]

That surplus value consists of unpaid labour is a simple fact. The difference is that non-socialist economists refuse to explain this in terms of exploitation. Like Smith, David Ricardo argued in a similar manner and justified surplus value appropriation in spite of this analysis. Faced with the obvious interpretation of non-labour income as exploitation which could easily be derived from classical economics, subsequent economists have sought to obscure this fact and have produced a series of rationales to justify the appropriation of workers labour by capitalists. In other words, to explain and justify the fact that capitalism is not based on its own principle that labour creates and justifies property. These rationales have developed over time, usually in response to socialist and anarchist criticism of capitalism and its economics (starting in response to the so-called Ricardian Socialists who predated Proudhon and Marx and who first made such an analysis commonplace). These have been based on many factors, such as the abstinence or waiting by the capitalist, the productivity of capital, “time-preference,” entrepreneurialism and so forth. We discuss most rationales and indicate their weaknesses in subsequent sections.