On The Formal And Real Domination Of Capital And The Decadence Of Capitalism

A dynamic analysis

Under capitalism, exchange value became the new god on earth, whom all humans have to serve in order to live, to share in the social wealth. But this god established his rule gradually, not instantaneously. The long process through which the law of value penetrated all of society, through which production and consumption and all other major fields of human praxis became capital, absorbed by the market or discarded, inevitably also transformed the proletariat, its living and working conditions, its essence, the framework of its struggle.

‘Formal and Real domination of capital’ or “Formal and Real submission (or subsumption) of labor’ are conceptual tools to understand this process and draw out its consequences. What they describe is thus something essentially dynamic, not two stable phases with a short dynamic transition period between them. Schematically it can be said that formal domination is the process through which capital takes over the world, and real domination is the process through which capital transforms the world into itself (into capital). Although they do describe two distinct historical phases in the development of capitalism, they cannot be divided into two neatly delineated historical periods. To this day, the process of formal domination continues in the periphery of the system where direct producers (peasants), shopkeepers etc., are being proletarianized in low-tech production. This obviously does not mean that they live in a world shaped by formal domination. Real domination is now present everywhere, if not directly then indirectly as the framework determining what’s possible and what’s not. It would be wrong to see formal and real domination as two stages every single capital can and must go through. There is no endpoint to the process of transition to real domination because the inherent contradictions of capitalism brought to life by real domination make the total real submission of labor impossible -- as we will see below.

Formal domination

Money, markets, value and capital existed before capitalism. Capitalist production begins when the law of value goes inside the production process, when labor power becomes a commodity (contrary to the theory according to which a new mode of production arises only when the previous one has exhausted all its development potential and has become stagnant, this new mode of production was made possible by rising productivity in feudal agriculture and by the expansion of trade and consequent rising demand for goods, so that “the production of the guilds is driven beyond its limits by its own momentum and hence converted formally into capitalist production”) (p.1031) (1)

The essential features of this new mode of production are:

This introduces huge changes in the production process: the producer (seller of labor power) becomes dependent on and subordinated to the buyer of labor power, his labor becomes far more continuous, intensive and far more economically employed. But under formal domination, as the term implies, the labor process itself remains essentially the same. “Technologically speaking, the labor process goes on as before, with the proviso that it is now subordinated to capital” (p.1026).

What does this mean? Not that there are no technological improvements. They become more frequent and diverse. But there is not yet a fundamental change in the relation man-technology. As before capitalism, human labor remains the wellspring of social wealth. Capitalism reorganizes the labor process, sweeps away all the barriers that limited the labor of artisans, serfs, slaves, independent peasants, guild and caste-members. Work becomes a job, independent of its content; labor becomes more mobile and versatile. The essential goal of the capitalist is controlling the labor process to squeeze as much surplus labor from it as he can, by employing as many workers as he can and extending the duration of the labor day as much as possible. Adding more hours to the labor day does not change its exchange value, which remains determined by the value of the means of subsistence of the worker, but it obviously expands the value created in that day and thereby increases the surplus value, the profit.

Human labor always had been the wellspring of social wealth; it is precisely for that reason that the law of value became the foundation of exchange. Although the law of value under the formal domination of capital regulated production and commerce only formally (from the outside) and had not yet penetrated them in depth nor spread to many other parts of society, not to mention the vast areas of the world that remained pre-capitalist, it should be noted that in this phase, there was perfect harmony between the law of value and capitalism. Employment and profit grew hand in hand, as did the expansion of real wealth (use values) and capitalist wealth (exchange value). That didn’t mean that there were no crises but these were caused by external factors such as bad harvests or a sudden increase of the money supply due to gold and silver discoveries. The contradiction between capitalist production and the very law on which it is based did not yet surface.

The production of absolute surplus value (2) was the material expression of the formal submission of labor under capital (p.1025). That does not mean that there was no extraction of relative surplus value. If we consider ‘formal and real submission’ not just as abstract theoretical concepts but also as historically descriptive terms, it seems to me that Marx was too schematic, and implicitly contradicted himself, when he wrote that absolute surplus value was the sole manner of producing surplus value under formal domination (p.1021) (3). Because the labor process intensified and the value of labor power slowly declined as growing productivity cheapened the means of subsistence, the same amount of labor time gradually yielded more surplus labor and thus relative surplus value. But as long as the labor process remained essentially unchanged, the growth of productivity remained necessarily very limited. Thus the only way to substantially increase surplus value, was to prolong the working day in absolute terms. The primacy of absolute surplus value reflected the essentially external relation of the law of value to the labor process.

The formal domination of capital expanded relatively fast in what had previously been artisanal production but much less so elsewhere. Until the early part of the 20th century the vast majority of the working population of the world consisted of peasants, serfs and servants. Likewise, the entire distribution sector remained largely non-capitalist. All the parts of society outside the immediate process of production (education, scientific research, culture, warfare, political, social and religious institutions, etc) were outside the market, un-penetrated by the law of value. Even the state, although conquered by the capitalist class, remained largely above and outside the market. More on that further on.

Real Domination

Every major social transformation is the result of a maturation of its necessity and possibility. For real domination, the necessity was the insurmountable limit to the increase of absolute surplus value. The law of marginal utility applies: at a certain point, the further increase of the working day yields zero extra surplus value and then the yield becomes negative, as it results in declining productivity due to exhaustion, sickness, accidents and workers’ resistance. The possibility arises, generally, “when the individual capitalist is spurred on to seize the initiative by the fact that value = the socially necessary labor-time objectified in the product and that therefore surplus value is created for him as soon as the individual value of his product falls below its social value and can be sold accordingly at a price above its individual value” (p. 1023); and, specifically, by the advances of scientific and technological knowledge applicable to production and to the enlargement of the scale of production achieved by formal domination.

Real domination does not of course alter the essential innovation brought about by formal domination (the direct submission of the labor process to capital), “but on this foundation now arises a technologically and otherwise specific mode of production -- capitalist production -- which transforms the nature of the labor process and its actual conditions.” (p. 1034) Its driving force becomes the pursuit of relative surplus value.

What does this mean? Nothing less than the greatest transformation of the labor process in history since man fashioned the first tool: a complete subject-object reversal in the relation man-technology. “In handicrafts and manufacture, the worker makes use of a tool; in the (modern) factory, the machine makes use of him. There, the movements of the instrument of labor proceed from him, here, it is the movements of the machine that he must follow. In manufacture the workers are part of a living mechanism. In the factory we have a lifeless mechanism which is independent of the workers who are incorporated into it as its appendages”. (p.548)

This technology-centered production allows a deep penetration of the law of value into the labor process. Whereas under formal domination, the labor day as a whole is a commodity with a value smaller than the value it creates and the gap can only be widened by lengthening the whole day, in real domination, the uniform motion of the machine is the measuring rod that quantifies every segment of the labor process and thereby subjects that every segment, even every motion, to pressure to squeeze more value from it. One can discern different phases within real domination, from its ‘primitive period’ started by the so-called first industrial revolution, to its maturation in assembly line Fordist mass production and on to post-Fordist, information technology-based production in which the machine takes over not only manual labor but increasingly also non-manual tasks including monitoring, not just other machines but the workers themselves. The most striking red thread in this evolution (or permanent revolution) is the ever-deeper penetration of the law of value into the labor process, resulting in its ever-greater intensification.

Another red thread is the increasing socialization of the labor process, not only in the sense of replacing the more or less isolated labor of individuals by a collective labor process with the machine at its center, but also in the sense that the rigid barriers between different sectors of production break down and later also the barriers between immediate production and sectors that contribute indirectly to the valorization of capital and even between countries, so that “the real lever of the overall labor process is increasingly not the individual worker” but “labor power socially combined”, the international, collective worker, of which a particular worker is merely a limb (and it is quite irrelevant whether his or her task is in direct production, scientific research, teaching, engineering, cleaning or cooking: real domination sweeps away the previous definitions of productive and unproductive labor). Again, we can see the realization of this tendency through the different phases mentioned above.

Compared to real domination, all earlier modes of production, including formal domination, were essentially conservative. Real domination opens an era of permanent revolution in the technical base of production, in the relation between workers and capitalists, in the content of the labor process, in the division of labor in society, in the composition of the working class (and to a lesser degree, of the capitalist class too). Not even crises can halt this tendency. While falling profits diminish the means to realize it, they also provide an extra impetus to it: the more the general rate of profit falls, the more the individual capitalist is spurred on to try to escape from the decline by lowering the individual value of his product under its market value through technological innovation. This makes clear that the hypothesis of capitalism arriving at a point on which it no longer can develop the productive forces, as the ‘classic’ decadence theories claim, betrays a lack of understanding of the very nature of the specifically capitalist mode of production, the real domination of capital.

Again, the gradual nature of the transformation must be stressed. The most common misconception about real domination is to see it as the quasi- instantaneous result of the so-called first industrial revolution. (4) But the transformation is also continuous. The process of real domination not only allows the law of value to penetrate the labor process in depth but also in width: it spreads its rule over all aspects of society and all areas of the world. The latter is clear enough: real domination opens the door to mass production, to an acceleration of the tendency towards an unceasing enlargement of the scale of production that already existed under formal domination, which not only makes it possible for the new mode of production to spread geographically but compels it to, since it requires an ever larger market for specifically capitalist products. Likewise it is fairly obvious that the process entails a continuous extension from industry to industry, at the same time diversifying the spheres and sub-spheres of production. But real domination also implodes the borders between infrastructure and superstructure, between the economic and non-economic spheres of society. In its most developed phase, there is no longer any non-economic sphere, everything is tendentially integrated into the market and operates on the basis of the law of value (that does not mean of course that every activity is productive, is valorizing capital). This inevitably changes both the content and form of all institutions that previously were standing outside the market and occupied a relatively autonomous space. Today, despite all their particularities, all sizable political parties, trade unions, churches, cultural institutions, hospitals, universities, schools, foundations, interest groups, entertainment providers, services of all kinds, operate more or less like capitalist companies or subsidiaries thereof, with the corresponding structures, hierarchical layers and divisions of labor, competing for their share of their respective markets, conquering or protecting their niche in the global market the world has become. The process also entails the emergence of state capitalism, the integration of the state in the market in which it came to play the central, organizing role, which again changed both its function and form. This osmosis of state and economy is a natural product of real domination, rather than a means by which the capitalist class seeks to manage the contradictions of its system (although the state certainly is used for that purpose, but that is not the genesis of state capitalism as we used to think). This process, by which the previously non-economic spheres of society are invaded by the law of value, unfolded gradually over time and unevenly, faster here, slower there. Tragically but inevitably, it conquered also the mass organizations that originated from within the working class, organs of struggle and self-defense as well as expressions of an autonomous proletarian cultural and social life. This loss would have occurred even if the contradictions of capitalism had not come to the surface and made the system socially retrogressive. But it was the explosion of those contradictions that made those previously proletarian organs into arch-enemies of the working class struggle.

Real Domination And Decadence

As soon as machine-centered factory production becomes the dominant mode of production, the contradiction between its inherent tendencies and the law of value begins to manifest itself. Measuring social wealth in labor time (exchange value) when the principal well-spring of wealth is no longer labor, is bound to become increasingly absurd and to create ever growing obstacles in the cycle of capital, for its production as well as its circulation.

To start with the latter: formal domination changes the immediate purpose of production from meeting existing needs to producing as much surplus value as possible, but only under real domination is this tendency fully realized and does it create an obstacle for the return of value into the cycle of capitalist reproduction. “ ‘Production for production’s sake’ -- production as an end in itself -- does indeed come on the scene with the formal subsumption of labor under capital (..)But this inherent tendency of capitalist production does nor become adequately realized -- it does not become indispensable, and that also means technologically indispensable -- until the specific mode of capitalist production and hence the real subsumption of labor under capital has become a reality” (…) instead of the scale of production being controlled by existing needs, the quantity of products made is determined by the constantly increasing scale of production dictated by the mode of production itself. Its aim is that the individual product should contain as much unpaid labor as possible, and this is achieved by producing for the sake of production. This becomes manifest as a law since the capitalist who produces on too small a scale puts more than the socially necessary quantum of labor into his products. That is to say, it becomes manifest as an adequate embodiment of the law of value which develops fully only on the foundation of capitalist production” (p. 1037)

The more real domination develops, the stronger the tendency to expand the productive forces in indifference to the demand generated by its own needs for reproduction. Hence capitalism’s unavoidable tendency to eradicate scarcity, to overflow its own reproductive demand. But the law of value is born out of conditions of scarcity and needs it because without it the value produced cannot be realized. The absence of scarcity under capitalism does not mean abundance but overproduction, crisis. So while the law of value develops fully only on the foundation of real domination, its very development impedes its functioning. The driving force of the capitalist in real domination is to outwit the law of value by reducing the individual value of his product (the quantity of labor it embodies) below its socially determined (market) value. In time, competition pulls down the social value of the product to that individual value, from which the capitalist then again tries to escape by lowering the value of his product further. So real domination entails the tendency towards valueless (and thus profitless) production. The tendency is counter-acted by the growth of the relative surplus value emblematic of real domination. Relative surplus value increases because it requires ever less labor time to reproduce the value of the labor power (the products and services workers buy with their wages) and the labor process is driven to ever-greater intensity. But no matter how much these factors increase the unpaid part of the labor-day versus the paid part, the surplus labor time remains but a part of the whole, and must shrink with it. The tremendous growth of productivity which real domination causes does not solve this problem; it creates it. “The rate of profit does not fall because labor becomes less productive, but because it becomes more productive”. (5) The result is that the more capital develops, the more difficult it becomes to valorize, to make profit that does not evaporate, that is really surplus value.

It’s impossible to understand the history of capitalism without taking into account its metabolism with its non-capitalist environment. And it’s likewise impossible to understand the history of the specifically capitalist mode of production (real domination) without taking into account its metabolism with the labor-intensive, low-tech environment of formal domination in which it developed. Redistribution of value on the market generated huge profits for formal domination in its metabolism with the pre-capitalist world and for real domination in its metabolism with both pre-capitalism and formal domination. Rosa Luxemburg was right in emphasizing its importance, even though her theoretical framework was faulty. In trying to ascertain when and why the above mentioned contradictions gathered the critical weight that changed the global framework for capitalist accumulation, that made the destruction of value an indispensable part of its cycle, that forged an unbreakable link between over-development and underdevelopment, that made it socially retrogressive or decadent, it is essential to see how the development of real domination activated its inherent contradictions, its tendencies to overproduction and valueless production, but also how it closed the escape-valve provided by its metabolism with higher value-creating production modes.

Consider what Marx saw as the hallmark of real domination: the capitalist’s urge to drive the individual value of his product under the social value. That is the motor, the driving force because, as we’ve seen, capital is forced to accumulate but hampered by the physical limitations to increasing absolute surplus value. When a capitalist drives the individual value of his commodity under its social value, he obviously obtains more surplus value: he sells his commodity ‘pretending’ that it has more value than it really does and reaps a surplus profit (= a profit in addition to the surplus value his own workers have created). But in itself, this does not augment the surplus value for capital as a whole. (6) The extra-surplus value of this capitalist is not in his product, it is not produced by his workers. He obtains it on the market. As we saw before, real domination does lead to an increase in the rate of surplus value also, directly, because of the intensification of the labor process, as well as indirectly, because it results in a (relative) decline of the value that goes into the production of the use values that determine the value of labor power. But the redistribution of value on the market, in the circulation process, is not a source of surplus value for capital as a whole; yet because it’s such an important source of surplus value for single capitals, it shapes its development.

Surplus value is redistributed on the market in several ways, as we explored in some detail in our series on the roots of the capitalist crisis (7). First, within sectors through the formation of social (or market) values, based on the value of the commodity resulting from the prevalent conditions of production within each sector. Since that value is above that of the more productive competitors and under that of the less productive ones, this effects a transfer of surplus value from the latter to the former. Because market values are a social construct, expressing what society considers to be the socially necessary labor for any given commodity and formed through countless economic competitive interactions, there is always a time lag between changes in the prevalent conditions of production and the market values’ adaptation to these changes. Therefore, just as a single capitalist who innovates faster than average obtains a surplus profit within his sector, sectors with a higher productivity growth than average, whose commodities decline faster in value than average, score a surplus profit that comes from the surplus value of the rest of the economy.

Later, another redistribution of surplus value occurs between sectors of the same economy through the tendential equalization of the rate of profit. Competing investment capital, moving around, in and out of different sectors in search of a higher rate of profit, pushes the development of each sector as far as the market allows it to go, so that tendentially, the same quantity of invested capital has the same rate of return everywhere. Where the rate of profit rises above the general rate of profit, capital moves in until overcapitalization makes it decline and so on. Market values are thereby converted into prices of production: commodities are no longer sold as c+v+s (the value of the constant capital and of the labor power used to make them, plus the surplus value created by that labor power) but as c+v+p(average profit). It does not mean that market values cease to exist as the underlying basis of prices but they are constantly being converted. This conversion is the result of competition between financial capitals and does not alter the fact that in some sectors more surplus value is created per capital advanced than in others. The sum of surplus value remains equal to the sum of profits but almost never is the profit of a particular capitalist equal to the surplus value he extracted. So this “equal division of the loot”, as Marx called it, tends to eliminate the surplus profits resulting from higher than average productivity but also effects a transfer of surplus value from the sectors with a low organic composition (less technified production that uses relatively more labor power and thus also more unpaid labor power and thus yields a higher rate of profit) to those with a higher one.

Both these forms of redistribution of surplus value on the market affect transfers of value from pre-capitalist producers and formal domination-capital to capitals operating under conditions of real domination. Both take place within countries, consecutively as well as simultaneously. Historically, first market values are formed, first locally, than nationally. When real domination began to develop, its superior productivity enabled it to obtain gigantic surplus profits, every time it invaded a new sector as well as through the metabolism between the sectors in which it was first established with the rest of the economy. “As long as machine production expands in a given branch of industry at the expense of the old handicrafts and manufacture, the result is as certain as is the result of an encounter between an army with (..) rifles and one with bows and arrows. This first period, during which machinery conquers its field of operations, is of decisive importance, owing to the extra-ordinary profits it helps to produce. These profits not only form a source of accelerated accumulation, they also attract into the favored sphere of accumulation a large part of the additional social capital that is constantly being created, and is always seeking out new areas of investment. The special advantages of this initial period of furious activity are felt in every branch when it is newly penetrated by machinery” (p. 579)

This resulted in widely diverging rates of profits. As the productive capacity of real domination increased and internal obstacles to the mobility of capital fell away, these differences could not remain. Investment capital moves to where the surplus profits are but this very movement eliminates them. By following the example of the innovating capitalist, it spread real domination horizontally in all the sectors it entered. Thereby the market value fell and the source of surplus profit within the sector, the difference in productivity between its components, disappeared or at least diminished greatly. As for the surplus profits resulting from the difference in productivity-growth between the sectors where real domination first established itself and those still under formal domination, the movement of capitals tended to make them disappear too, by overaccumulating in the former, thereby provoking overproduction and falling prices and profits, making investment and thus mechinization of other sectors comparatively more attractive. So ineluctably, real domination jumped from sector to sector. The surprise is how long this took. Given the interconnectedness of the different sectors of the economy, one would expect that the technological revolution in one sector would lead rapidly to similar revolutions in all others. Yet for decades, real domination remained largely confined to textile-production. Most of ‘Department I’, the production of constant capital (raw materials, machines and other infrastructure) still operated under conditions of formal domination in the middle of the 19th century. The main reason for this slowness is that the mobility of financial capital was much greater than the mobility of productive capital. The former caused an equalization of the national rate of profit before the latter could lead to a homogenization of the conditions of production. The general rate of profit mirrors the rate of profit resulting from the average conditions of production, and is thus higher than the one resulting from production in sectors with a high organic composition of capital (occ) and lower than that of the ones with a low occ. In other words, the equalization of the profit-rate lowered the profit-rate of sectors that were still under conditions of formal domination, and thereby undercut the incentive to invest in them. So the spread of real domination from sector to sector did not happen so smoothly but with leaps, spurred on by crises of overproduction in overcapitalized sectors and underproduction in undercapitalized ones. The fact that it occurred so unevenly and that especially agriculture remained mostly untouched by real domination throughout the 19th century, meant that there continued to be a domestic source of surplus profit -- surplus value transfer -- to real domination-capital. But it became smaller as the growth of the scale of production of real domination and of the mobility of capital homogenized the conditions of production.

So the driving force of real domination, the urge to drive the individual value of the commodity under the social value, resulted in a horizontal development of capitalism, an homogenization of the conditions of production within countries, spreading real domination. But this homogenization also pulled the general rate of profit down, as the labor-content of the average conditions of production declined. So the incentive to obtain a surplus profit on the market by driving the individual value of the product under its market value, did not diminish. But it became harder to accomplish. The capitalist constantly tries to escape from the general rate of profit because of its tendency to decline, but the more real domination is competing with itself, the less any single capital or sector can deviate from the average, and the shorter the deviation lasts. The most developed capitals try to hold on to their surplus profits by cheating competition, by striving for a monopolistic position on the market. The more the general rate of profit tends to fall, the more incentive to bring new products to the market that are unique or for whom the appearance of uniqueness can be artificially created, or to achieve a monopolistic position through cartelization (agreements with other big capitals in the same market).

Let us now consider the transfer of surplus value between countries. Although international trade was the midwife of the capitalist mode of production, the lack of development of the scale of production, the high costs of transportation and protectionist policies limited it severely in the era of formal domination. When real domination began to emerge, foreign trade increased rapidly. However, until the very end of the 19th century, there was no unified world market. International competition was so limited that prices of internationally traded goods varied greatly depending on where they were sold, just as prices had varied within countries before competition on a national scale made them (tendentially) uniform. What determined the price was the social value that the commodity had (or ‘ideally’ had, in case it wasn’t produced there) on the market where it was sold. So real domination-capitals, when trading with the rest of the world, obtained surplus profits as sellers in countries where the social value of their commodities was determined by local, inferior conditions and was therefore way above their individual value, and again as buyers because market values in the more developed countries are formed on the base of technified and thus lower value production, forcing the exporters from countries where formal domination or pre-capitalism were preponderant to sell their commodities below their individual values. The profits were huge, because the difference in productivity between the two capitalist modes of production is huge. And there could be a lot creamed off because of the high rate of profit of formal domination.

When not competing with real domination-capital, production under formal domination is very profitable. More so than real domination, even though the latter is much more productive. With real domination, the market expands, the rate of exploitation increases (from the same quantity of labor power more (relative) surplus value is extracted), but the rate of profit (before surplus profits are added) goes down, as the base from which it is squeezed, labor power, relatively shrinks. But that high rate of profit means zilch, if you can’t compete, if the market value is pulled under the value of your own product by external, cheap-value producers. As a rule, formal domination capital cannot compete against real domination. So the limitations to the international mobility of capital were a vital condition for real domination to emerge in country after country. That makes it quite understandable why there was so much protectionism in the 19th century and why it strengthened (after a fairly brief interlude of free trade that ended after the crisis of 1873, then called “the great depression”) at a time when railroads and steamships were bringing transportation costs down dramatically and the big real domination-producers were outgrowing their domestic markets. Some of the protectionist policies were clearly counter-productive, especially when part of trade-wars. Others shielded the metabolism between the young modern industry and their environment of pre-capitalism and formal domination from intrusion and allowed the US in the 1880’s and Germany in the first decade of the 20th century to surpass the industrial capacity of Britain.

Financial capital was unhindered by protectionism and the many other obstacles to the export of commodities. Therefore, by investing financial capital in countries with inferior conditions of production, the most developed countries could obtain the rate of return that they could no longer get at home. And by doing this, they continued the horizontal development of capitalism, spreading real domination across borders.

Real domination developed first in England. But as soon as it became dominant, the contradictions of the specifically capitalist mode of production came to the surface. The scale-enhancement of production led to relative saturation of domestic markets and, as a result of the greater mobility of capital, the rate of profit equalized and fell. Falling national production prices reflected the fact that machine production was more and more competing against itself, that its metabolism with formal domination and pre-capitalism rapidly diminished. The price of steel, for instance, fell between 1873 and 1886 to a quarter of its former level. The combination of saturated domestic markets and a falling rate of profit, slowed accumulation considerably: from 1873 to 1913, productivity-growth was zero. Britain by that time had accumulated a huge mass of capital in its abstract value hoard-form; financial capital which, in order to remain value, needed to valorize, to accomplish M-C-M, to lead to the creation of new value. Zero-productivity growth would have cut off a great chunk of British capital from valorization and would have forced a devalorization that would have, because of Britain’s central role, plunged the capitalist world into a deep depression, if its domestic losses were not compensated for by the yield of its capital-exports. British foreign investment, already by far the largest in the world, increased by 75% in the 1870’s and became far larger than its domestic investment. Abroad, British capital repeated the process that had yielded such fabulous profits in its own country, by investing in the development of real domination in countries that were, because of the development of formal domination, ready for take-off. Other countries where real domination developed, followed in England’s footsteps and invested more and more abroad. In the 1880’s, capital-exports took off on a grand scale, though Britain maintained the lead (43% of the world total in 1914, followed by France’s 20% and Germany’s 13%).

It is important to note that what attracted these exports was the high rate of profit under formal domination and the surplus profits obtained by real domination when it starts to take over its formal domination/pre-capitalist environment. That is what British and later other capitals invested in. Consider British investment in Latin America, which grew from less than 25 million pounds in 1825 to almost 1200 million pounds in 1913. Of that last sum, 54% was invested in securities that went to the construction of railroads and other infrastructure. Of the direct investments, the largest recipient was, again, railways, followed by public utilities (gas, electricity, waterworks, telephone and telegraph, tramways) and financial institutions. The production of raw materials came only in fourth place, in glaring contrast to the 20th century, when it became by far the largest recipient of direct foreign investment. In other words, even in Latin America (and more so earlier in Europe and North America) real domination invested in the modernization of the world, in its infrastructure, utilities, banks, in its own extension, not out of compassion but for profit. But the profits were only there because real domination had not yet fully extended the law of value to the world market.

Fostered by the combination of protectionism and foreign investment, real domination became preponderant in Germany, the US, Japan and other countries. By the end of the 19th century they faced the same contradictions as Britain: the scale of their production became too large for their markets, the lower value-content of their commodities pulled their general rate of profit down and this was less and less compensated by surplus profits resulting from trade with pre-real domination, because real domination was killing the goose that laid the golden eggs.

Real domination received a new boost with the wave of inventions and technological innovations (combustion engine, electrification, applied chemistry, etc) at the end of the 19th century and the beginning of the 20th (the so-called second industrial revolution). The new technology improved and cheapened transportation and commodities in general and thereby widened the market and allowed for its deeper penetration. A wave of new technology always means a return to super profits, as it creates ample opportunities to increase productivity, to bring the individual value of a commodity under its market value. The surge of surplus profits attracted capital that stimulated a powerful acceleration of the concentration of capital. It was in this period that most of the giant companies were born that are still the dominating multinationals of our day. But in a unified market with many real domination-competitors, the movement of capital tends to close the gaps in productivity, thereby eliminating the surplus profits. In order to withstand the leveling effect of competition, the most concentrated capitals strive for monopolistic market positions, to hold on to their surplus profits, or for semi-monopolization through the formation of cartels with other dominant players. In Germany, where the latter phenomenon was most pronounced, the number of cartels grew from 4 in 1875 to almost 1000 by 1914.

The same trends of accelerated capital concentration, monopolization and cartel-formation were characteristic of the 1920’s and the present period. Developed capitalism was -- is -- confronted by the same three problems:

The slowing pace of new value creation threatened to cut off a substantial part of that capital from valorization. Therefore capital looked for a safe haven to escape the pressure to devalorize. So the deflationary trend of capital in its commodity-form went hand in hand with an inflationary trend of financial assets, as their prices, or at least those of assets that were seen as most likely to withstand devalorization, were bid up. In the US for instance, the paper value of non-agrarian companies doubled between 1900 and 1912 (while the GDP had an average annual growth of 3,9%). This could not go on. A global bubble of fictitious capital was beginning to form. Few may have noticed but all the elements for real domination’s first global systemic crisis were falling into place.

But why could it not be avoided, or at least shoved into a faraway future, by repeating in country after country the process by which British capital and later others had staved it off, by exporting real domination and thereby reaping the extra-profits that the metabolism of the industrial mode of production with its more primitive environment generated? Why could real domination until the early 20th century spread in a powerful broad, horizontally homogenizing way and then no more? Capitalism continued to expand and develop of course, but now in a glaringly uneven way. While before, the number of countries joining the ranks of developed capitalism had been growing steadily, since then, the gap between the developed and the underdeveloped has remained frozen in place and even widened. An obvious answer is that global capital ran out of countries where formal domination was developed enough to be ready for the leap to real domination. That may be true but it isn’t a sufficient explanation. There was no lack of countries that were at least as developed as England was at the time that formal domination spread there and was very profitable, both as a result of its metabolism with pre-capitalism and because of the high ‘natural’ profit-rate yielded by absolute surplus value. So why couldn’t they follow the same course?

The answer must be sought, not so much in the conditions of the underdeveloped countries, but in a change of the global conditions for valorization. Only in the early 20th century did the specifically capitalist mode of production and circulation become a truly global system, only then did the law of value really establish its rule over the world market. For Marx, the crisis of capitalism was linked to its creation of the world market (8). He explained this as follows:

“The stupendous productivity developing under the capitalist mode of production relative to population, and the increase, if not in the same proportion, of capital-values (not just of their material substance), which grow more rapidly than the population, contradicts the basis, which constantly narrows in relation to the expanding wealth, and for which all this productiveness works. They also contradict the conditions under which this swelling capital augments its value. Hence the crises.”

In other words, the effects of capitalism’s relative contraction of its market (‘population’ in my view is used here as shorthand for all the components of capitalism’s market, pre-capitalism included, in so far as it participates in the cycle of value, but that ‘constantly narrows’) as its tendency to valueless production (‘the conditions under which capital augments its value’) and the growing gulf between the mass of capital-values already created and the narrowing basis of the value-creation that needs to feed it, really come to a climax when the same actions of the law of value that placed real domination before insoluble contradictions on a national scale, were felt on the world scene.

The law of value does not operate automatically; it is enforced by competition. Without competition, there is no reason why the price of a product should be based on its value. Competition imposes uniform market values and prices for the same commodity. The absence of uniform prices on the world market therefore showed how limited international competition and thus also the application of the law of value was in global trade. But with the development of real domination and its growing need for wider markets, international trade had grown tremendously. Despite protectionism, in 1913 foreign trade per capita was more than 25 times higher than in 1800. At the turn of the century, for the first time in human history, international competition imposed uniform prices for the same commodities on the world market. And these prices were falling: the lower value-content of production under real domination imposed itself on the world.

The uniformity of world market prices grew gradually together with competition. As with the formation of market values on the national scene, international market values reward the most productive competitors with a surplus profit. This surplus profit is more permanent because of the greater heterogeneity of the conditions of production and the obstacles to the mobility of capital across borders. There is no equalization of the rate of profit internationally, which explains why countries favored the expansion of foreign trade and capital-export over domestic accumulation.

However, the appearance of uniform and falling world prices showed that production under real domination was now preponderant in Western Europe, the US and Japan, countries that were all increasingly dependent on foreign trade and that were more and more competing among themselves, so that the international values were coming closer to the values of the most productive capitals which therefore saw their surplus profits tendentially melt away. From the point of view of the demand of capital as a whole, the means of production of countries which had not yet made the leap to real domination, represented more and more an excess capacity; consequently their share in world trade has been declining ever since.

Real domination had conquered the globe, not in the sense that it was present everywhere nor that its development was completed, but in that it had fashioned an integrated worldwide system of production and circulation in which the different parts no longer were able to follow their own path to development but were conditioned by their place in the whole. That system would continue to grow but it would grow now as an integrated whole in which the least productive, least competitive parts, were permanently forced to unfavorable specialization in function of the needs of real domination. The permanence of their underdevelopment reflects a permanence of overcapacity, of lack of opportunities to create value. This is an overcapacity of means of production, in the first place of labor power. A permanent overproduction of variable capital whose price consequently permanently falls under its value. The productive capacity of real domination continued to expand and invade sectors in which it was not yet present, thereby changing the world materially in such a way that its own demand was more and more geared towards use values that were themselves specific products of real domination. In other words, the more it was creating a specifically capitalist mode of production and society, the less fitting the products of pre-real domination were in that world and the more the countries which had not made the leap were forced to unfavorable specialization. The world was now connected as never before with all its parts integrated in an international division of labor. But they were connected as non-homogenized parts, and it was their very integration, their connectedness, which determined the lack of homogenization.

In Europe, North America and Japan, capitalism had developed in stages. The maturation of each stage laid the foundations for the next one. First a rise of feudal productivity, original ( so-called ‘primitive’) accumulation of capital from commerce, colonial plunder and the separation of pre-capitalist producers from their means of production (expropriation of agrarian population, etc., see part 8 of Cap, vol.1), laid the foundations for formal domination. The maturation of formal domination, its development of infrastructure and productive capacity, set the stage for the take-off of the machine production of consumer goods; this in turn created the conditions for the spreading of real domination to the production of machines, then on to other sectors, including mining, agriculture, distribution and so on. Each stage was made possible by the previous one and in turn made it possible to move to the next one. But once real domination unified the world market, global conditions blocked the path of capitalist development in countries which would have taken off without them, and whose development would have been a source of profit for foreign capitals investing in it. International competition, and the downward pressure it exerted on values and the rate of profit in the less productive countries, and the consequent diminished incentive for foreign capitals to invest in their development, kept those countries imprisoned in an unfavorable division of labor that kept them not only underdeveloped but made them dependent too. It’s true that this division of labor, geared towards the needs of the industrialized countries, had been prepared by colonial plundering, by a destruction of handicrafts and other local production unable to compete against external machine production, that was already occurring before the unification of the world market. But the limits to international competition and to the productive capacity of even the most advanced producers until then, meant that there was still room for local capitals to make the next step, to climb to the next stage of capitalist development. In the 1860’s for instance, the textile industries of Japan, Italy, Spain and Russia transitioned to real domination, despite the much higher productivity of the British textile industry. The same was true, to a lesser extent, in India and China in the 1890’s. Those centuries of colonial plunder and the subsequent specialization in function of the needs of (external) real domination, asphyxiated the (internal) process of primitive accumulation for industrial capital, while the threshold for capital formation was set continuously higher by the development of real domination abroad, which constantly increased the relative cost of the constant capital required for competitive industrial production.

In short, the horizontal dynamic of capitalist development sputtered and came to an end. This meant that the conditions for valorization for the ever growing mass of capital in real domination could only worsen to the point of requiring a massive devalorization in order to restore them. As we argued before, the point at which the first round of massive destruction of value was undertaken, was not predestinated. World war one was not a mechanical reflex to what was economically brewing. A great number of factors have to be taken into account, including the weight of the past on the capitalist class, of an entire history in which economic gains and territorial conquest went hand in hand, of the recent successes obtained through protectionism which reinforced the idea that if domestic markets became to narrow, they had to be expanded by force. Another factor that should be mentioned briefly is the penetration of real domination in warfare, the technification of both military production and the armies themselves, which greatly enhanced their potential. However, instead of seeing those and other factors as alternative explanations replacing economic necessity, they should be linked to the great subconscious urge to devalorize coming from the maturation of the contradictions inherent in real domination.

An analysis of the further development of real domination over the course of the 20th century and now, falls beyond the scope of this article. IP has written on this before and we will come back to it. The contradictions of real domination, its tendencies to overproduction and valueless production, have been present ever since. The phases of rapid expansion of the world economy since then should be seen in light of mainly three factors:

It was in the period following world war two that these three factors were most powerfully combined. In the recent phase of ‘globalization’, the second and third factors operated and still do, through the use of information-technology to increase the control over workers and impose an ever higher intensity of labor, through the imposition of overtime, tighter work rules, etc, through the massive transfer of industry (real domination) to countries with very low wages as a result of the low value of labor power in countries which have little else to offer (where the commodity labor power is thus overproduced and sold below value, while that value is also low, as its content, the means of subsistence, is defined by an environment of underdevelopment, a society which is, in part, pre-real domination). The increased potential to combine the high productivity and high rate of (relative) surplus value of real domination with this cheap labor power is a powerful counter-acting factor against the falling tendency of the general rate of profit. As during the post- World War Two expansion, the horizontal dynamic of capitalism was restored to some extent which increased the metabolism of real domination with pre-real domination production, and the surplus profit this yielded for the former. This mildly horizontalizing trend will almost surely continue but it does not open a vast new field of expansion for capitalism. It rather affects a shift in the international division of labor, at the expense of workers in the most developed countries; an increased international competition on the labor market, which inevitably exerts a downward pressure on wages. Millions of industrial and now also service jobs have already moved south and east and millions will surely follow. But the global capitalist market remains saturated, so this transfer of industry spreads overcapacity, which is nowhere greater today than in China, the main beneficiary of foreign investment today. Meanwhile, the increasing costs, because of the pressure of new technology, of capital transferred into new commodities, pulls the rate of profit further down. Still, the technological innovations create, as preceding phases of great technological change did, many opportunities for monopoly-profits and for the growth of fictitious capital. But that is where capitalism’s vulnerability is now the greatest. The first factor favoring global expansion, what I called ‘the clearing of the decks’, has not been active in the phase of ‘globalization’. It’s true that war is on the rise and that trillions have been wiped out in stock and other markets and through devaluations, but that has not prevented the bubble of abstract value laying claim on future profits from growing. Meanwhile, in the economy that must feed the bubble, globalization also increased global overcapacity and the tendency to valueless production. The pressure for massive devalorization is building again.



1. All quotes of Marx in this text are from Capital, vol.1, Penguin edition, unless otherwise noted.

2. “I call that surplus value which is produced by the lengthening of the working day, absolute surplus value. In contrast to this, I call that surplus value which arises from the curtailment of the necessary labor time (..) (enabling the capitalist to replace the value of a day’s labor-power by a smaller part of the value of a day’s product -p.530) relative surplus value” (p.432).

3. Productivity-raising, labor-saving technology is not necessarily symptomatic of real domination, or the transition to it. Such technological development existed throughout human history, thus long before capitalism even, not to mention real domination. What characterizes real domination is not technological development perse but the development of technology that reverses the relation worker-tool, that places the machine at the center and makes the worker its appendage and thereby permits the deep penetration of the law of value in the labor process. Marx gives an example of technological development in manufacture in Capital, vol 1, p.460: “In Birmingham alone 500 varieties of hammers are produced, and not only is each one adapted to a particular process, but several varieties often serve exclusively for the different operations in the same process. The manufacturing period simplifies, improves and multiplies the implements of labour by adapting them to exclusive and special functions of each kind of worker.” It’s true that he goes on saying, “it thus creates at the same time one of the material conditions for the existence of machinery, which consists of a combination of simple instruments”, but it is not yet machinery, while it’s undeniably technological development, and technological development that facilitates a more continuous, more intense labor process, and raises productivity, thereby cheapening the commodities made with them, while not yet reversing the relation worker-technology. We can ask ourselves: why did Marx take the trouble to develop the concepts of formal and real subsumption of labor? He had already described the historical process in Capital vol 1 without using them, so they are not really necessary as purely descriptive tools. I think he felt the need for this conceptualization because he realized that there were really two different modes of production, both under the nomer of capitalism, and that they had different implications, more than he probably even imagined, and that is what we are still trying to spell out. 4. See what we wrote in “The formal and real domination of capital and the unions” in Internationalist Perspective #41, p. 12: “That what Marx designated as the transition from the formal to the real subsumption of labor to capital (or the transition from the formal to the real domination of capital) was only at its very inception in historical actuality in the mid-nineteenth century – however prescient was Marx’s theorization of that phenomenon – is clear to economic historians (bourgeois or Marxist). A few citations should suffice. Thus, according to A.E. Musson: “Even as late as 1870 about half the total steam horsepower in manufacturing was in textiles …. In many trades power-driven mechanization had as yet made comparatively little impact. The great majority of industrial workers in 1851 and perhaps in 1871 were not in large-scale factory industry but were still craftsmen in small workshops. The massive application of steam power did not occur until after 1870.” (Musson, “Technological Change and manpower,” History 67, p.240) R. Cameron, in his Economic History of the World, points out that “Agriculture was still the largest employer of labour until as late as 1921, with domestic service second. The textile industries accounted [in 1851] for less than 8 percent of the labor force. Blacksmiths outnumbered workers in the primary iron industry; shoemakers were more numerous than coalminers.” (p.226) Here both Musson and Cameron are speaking of England, by far the most industrialized country in the nineteenth century. Beyond England, with its transition to machinism, at least in the textile industry, in the mid-nineteenth century, the methods and tools of production did not yet fundamentally differ from those that shaped the pre-capitalist workshop, and the transition to the real subsumption of labor to capital had scarcely begun. Thus, as Cameron shows, in France, to take but one case, “as late as the Second Empire [1850’s] handicrafts, artisan and domestic industry accounted for three quarters or more of total ‘industrial’ production.” (p.238) And most laborers did not then work in capitalist industry. Indeed, at the outbreak of World War I, peasants still composed the largest segment of the working population in every country of the world, and a near majority in all the developed countries, except for England and Belgium. For Ernest Mandel: “When Volume I of Capital was first published, capitalist industry, though predominant in a few Western European countries, still appeared as an isolated island encircled by a sea of independent farmers and handicraftsmen which covered the whole world, including the greater part of Europe.” (“Introduction” to Capital, Volume I, Penguin Books, p.11) Even after World War Two much of the world economy was still outside the purview of the real domination of capital: e.g. in 1950, over 20% of the active population in most Western European countries were still independent peasant producers (36 % in France, 24,7 in Germany); in Japan the figure was 46,7%, in Eastern Europe over 50%.

5. Marx, Capital, Vol 3, p.240 (International Publishers edition)

6. In the (until 1933) unpublished chapter of Capital, Volume 1, in which he develops the concepts of formal and real subsumption, Marx writes on “the crucial importance of relative surplus value” that “surplus value is created for him (the capitalist) as soon as the individual value of his product falls below its social value and can be sold at a price above its individual value.” (p.1023) It’s true that he is careful to write: ‘for him’, so he’s not claiming that the mere decline in value of the product creates surplus value for capital as a whole, but in this formulation, the essential distinction between surplus value extracted in the production process and surplus value obtained on the market through competitive advantage, is lost. This potential source of confusion springs from Marx’s working method. As Ernest Mandel writes in the introduction of the Penguin-edition of Capital, “Marx abstracts from the problem of redistribution of surplus value among competing capitalists in Volume 1 in order to isolate and demonstrate the laws of capitalist commodity production in their ‘purest’ most fundamental way.” (p.31) . In Volume 1 all commodities are assumed to be exchanged at their value, not because they are in reality but because Marx needed to explain the underlying fundamentals before dealing with the complications. The chapter on formal and real was conceived as part of Volume 1, therefore the same simplifying abstractions are assumed. The reason why he eventually decided not to include the chapter is not known. But it is possible that Marx saw a problem in the fact that in Volume 1 capitalist production is generally explained from the vantage point of the single capital, while formal and real domination are in fact analyses of capital as a whole, the subject of the Third Volume of Capital. He might have included it there but of course he never got that far; it was Engels who organized Volume 3 out of Marx’ notes and decided what to include and what not.

7. See especially part 3, in Internationalist Perspective #32-33, and part 5, in IP #37.

8. Capital, vol.3, p.266.

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