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DOI: 10.1177/002234337801500102

1978 15: 3Journal of Peace ResearchJon Elster

Exploring Exploitation

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Exploring ExploitationJON ELSTER

Department of History, University of Oslo

Both Marxist and neo-classical theories of income distribution agree that the worker is

exploited if he gets less than he produces. They differ over the imputation to the worker ofhis product, Marxists using the average and neoclassical theorists the marginal product. Inorder to bring out the deeper reasons behind this difference, the following notions andtheories are invoked: the fallacy of composition, permitting the capitalist to treat eachworker as if he were the marginal worker; the alienation of the worker from the capitalgoods which are the product of past labour; the capital controversy and the doubts thathave been raised about the notion of aggregate capital; and Robert Nozicks distinctionbetween end-result principles and historical principles in ethical theory.Pre-capitalist societies and advanced capitalist societies require a different conceptual frame-work than the exploitation theory developed by Marx for classical capitalism. In these

societies power relations and strategic interaction are more important than the anonymousexploitation through the market mechanism. Kelvin Lancasters view of capitalism as adifferential game between workers and capitalists provides an insight into modern capitalismthat is more adequate than the Marxist model.

In the Critique of the Gotha Program, Marxlaid down two principles that were to governthe distribution of welfare under socialism

and communism respectively: to each ac-

cording to his work, to each according to hisneeds. Exploitation may quite generally bedefined as a state of affairs where neither

of these principles obtains; a person is ex-

ploited if (i) he does not enjoy the fruitsof his own labour and (ii) the difference be-

tween what he makes and what he gets can-not be justified by redistribution accordingto need. Now both of the principles in ques-tion lend themselves to several distinct inter-

pretations, which makes for a correspondingambiguity in the notion of exploitation. Inthis article I shall deal mainly with the first

principleand its vicissitudes, but for back-

ground and contrast some remarks upon thesecond - and its relation to the first -

may be useful.

Different needsTo receive according to ones needs maybe interpreted in three ways: as satiation of

needs, as equalization of welfare levels, or as

equalization of marginal welfare. The first

interpretation, which is sometimes sug-

gested byMarx, presupposes either extreme

material affluence or an ascetic want-struc-

ture ; I state without argument that the for-mer is unrealistic and the latter undesirable.

The second interpretation is based uponthe intuitively appealing idea that inequal-ities in consumption may be required forequalization of welfare, so that persons withlow capacity for consumption, in the senseof getting less enjoyment out of a givenamount of material goods and services,should receive more of these goods and ser-vices. The snag here is that we must presup-

pose some interpersonal comparability ofwelfare levels, the meaningfulness of whichremains in doubt despite the recent work ofStrasnick and others.

The third interpretation is the second tur-ned upon its head: here we assume that lar-

ger amounts of goods and services shouldbe given to the persons most capable of turn-

ing them into enjoyment, by the kind ofMatthew effect that has long governed theallocation of resources for investment.2 Per-

verse as the idea is from a substantial pointof view, it is perfectly acceptable as an inter-pretation of the phrase to each according tohis needs.

Now why did Marx think that distribution

according to needs would take place only inthe

higherand definitive

stageof com-

munism, whereas the society immediately


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emerging from the womb of capitalismwould have to base itself upon distribution

according to effort? Three distinct argumentsare more or less clearly stated by Marx and

his successors. In the first place there is theproblem of work motivation. Under cap-italism hard work is forthcoming only by the

promise of a corresponding reward; if therewas no link between individual effort and

individual reward, a community of indi-viduals imbued with the capitalist work ethoswould find itself in a Prisoners Dilemma

where everyone would opt for being a freerider.A new work ethos can emerge only inthe higher stage of communism, where not

only property arrangements, but man him-self has been transformed.

Amartya Sen3 has suggested that in thisstage the work ethos could take the form ofwhat he calls anAssurance Game: everyoneis willing to do his share of the hard work,provided that everyone else does the same.

A more Utopian and (to my mind) lessappealing idea would be that hard workcould be a dominant strategy under com-

munism, just as a low level of effort wouldbe a dominant strategy under capitalism ifthere were no link between effort and re-

ward.

In the second place, Marx suggests thatthe principle of distribution according toneeds can come into its own only when amaterial basis has been created, i. e. whenthe springs of affluence are so abundant thata complete satisfaction of needs is possible.Unlike the first argument, this idea presup-poses that distribution according to needs istaken in the sense of satiation of needs. If

instead the principle is understood in thesense of giving more to those less capable oftransforming consumption into enjoyment,we arrive at the opposite conclusion, for it is

precisely in conditions of great scarcity thatsuch compensation becomes important.

In the third place, later Marxists haveoften hinted at the idea that communist man

will have a lower level of aspiration, becausehe will have rid himself of the artificial de-

sires that are continuously generated under

capitalism and that prevent complete satis-faction of needs. The argument is valid tothe extent that it refers to externalities in

consumption such as envy, but it is harder

to sustain in the version where some sub-stantial theory of human nature and of whatman really needs is presupposed.

Equal needsNow as stated above, in what follows I shallabstract from all considerations of need.

I shall assume, for simplicity, that all per-sons are equally needy and equally capableof work. In real societies this is not true, as

we all know. In a society governed by the

principle of distribution according to effort,invalids, for example, would come out badlyon two counts: they produce (and therefore

get) less, and they are less efficient in trans-

forming what little they get into enjoyment.By abstracting from such difficulties we candiscuss in its conceptual purity a situationwhere a class of workers-nonowners con-

fronts a class of owners-nonworkers. We

shall then see that the principle of distribu-tion according to effort lends itself to two

very different readings: one interpretationwhere it excludes the possibility of incomeaccruing to nonworkers and one interpreta-tion which permits this. Not surprisingly thefirst notion is implied by the Marxist theoryof exploitation, whereas the second followsfrom the neoclassical theory of exploitation.The exposition and confrontation of theMarxist and the neoclassical approach formthe core of the present article.

The relation between capitalists and wor-kers in classical capitalism can be brieflycharacterized by two features. ( 1 ) Theeconomic power of the capitalists over theworkers was reinforced by political domina-tion.4 (2) The exploitation took placethrough the impersonal mechanism of themarket. These features interacted so as to

generate a maximum of asymmetry in therelation between the two classes. By con-trast the first feature is lacking in modern

capitalist societies and the second in pre-capitalist economies. In advanced capitalist

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economies the economically weak now havethe political power, which makes for com-

plex game-theoretic aspects of the class

struggle. In pre-capitalist societies (of which

slave societies will be taken as a typicalexample) the exploitation was mediatedthrough personal relationships, in which the

exploited had some power over the explo-iters. I shall argue that the notion of ex-

ploitation developed by Marx has a lessuniversal relevance than is often thought;while it fitted as hand in glove to the cap-italism of Marxs time, it does not capturethe essential features of class conflict of ear-

lier and later periods.

The Marxist theoryThe Marxist notion of exploitation is a verysimple one: the worker is exploited if hereceives less than his average product. (IIhere assume simple reproduction, i. e. no netinvestment. This restriction is lifted below.)Obviously if all workers get the equivalentof their average product, nothing is left fornonworkers.

When we take a closer look at the Marxist

idea as it can be worked out in concrete

analyses, two distinctions are useful. Firstly,there is an interesting and rather strangeanalytical difference between Marxs analysisof exploitation in agriculture and the cor-

responding theory of industrial production.Secondly, there are as many variants of the

theory as there are institutional property ar-

rangements defining the rights and obliga-tions of owners-nonworkers and workers-

nonowners.A few of the variants are ex-

plored below.In his analysis of capitalist agriculture,

Marx assumed diminishing marginal returnsto labour. From this assumption, togetherwith the assumptions of perfect competitionand profit-maximizing tenants, we immedi-

ately deduce that the number of workers ona given piece of land is so chosen as to

equalize wages and marginal product. Theimportant point of this ultrasimple piece ofanalysis is that the idea of profit-maximiza-tion is here set to some work: for the conclu-

sion to come out, this assumption must be

put in. With different behavioural assump-tions, different conclusions follow, as willbe seen below.

By contrast, Marxs treatment of industrial

capitalism does not rely on the notion of

profit-maximization, except in the trivialsense that capitalists are assumed not to usemore of any given factor than is necessary.(What this means is made clear below.)Marx assumed that in agriculture it was

possible to increase the amount of final pro-duct by increasing unilaterally one factor ofproduction, keeping all others constant; evenif the marginal product of (say) labour was

diminishing, it remained positive over a widerange. Surprisingly this intuitively compel-ling idea is not found in the Marxist analysisof industrial production. Here Marx as-sumed5 what is today called fixed coeffi-cients of production, i. e. an assumption that

among all the factor combinations capableof producing a given amount of a givengood, there is one that is unambiguouslybetter than all the others, in the sense of not

using more of any factor and strictly less ofat least one factor than all the other com-

binations. If this uniquely defined combina-tion is the one actually in use, a unilateralincrease in the amount of one factor can

give no increase in the amount of final pro-duct, whereas a unilateral decrease of onefactor implies a proportional decrease in theamount of final product. Capitalists are then

permitted to be profit-maximizers in thesense of preferring to use 3 units of factorI and 2 units of factor II in the productionof one unit of goodA rather than 4 unitsof factor I and 2 units of factor II, but theyare not permitted to be profit-maximizers inthe sense of having a choice between 3 unitsof factor I and 2 units of factor II on the

one hand, and 2 units of factor I and 3units of factor II on the other hand.

Something must be said about the causes

(or reasons) and the consequences of this

strange postulate.As for motivation, it is

probable that Marx wanted his economic

theory to be objective and structural,6 in the



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sense of not assigning a crucial role to the

subjective choice of the actors. Producershave no choice between input combinations,and workers no choice between commodity

bundles. If such choices are admitted, thelabour theory of value can no longer besustained. If producers have a choice be-tween such input-combinations as mentionedat the end of the preceding paragraph, theycan only be guided by the relative factor

prices, which means that prices, technologyand labour values are determined simultane-

ously, contrary to the (Hegelian) interpreta-tion of the labour theory of value which re-

quires that values should be determined in-

dependently of prices but not vice versa.If consumers have a choice as to how they

will spend their wages, they may choose tospend more money on goods with a highlabour value relative to prices, which willhave an impact upon the value of labour

power, the rate of surplus value, the rate of

profits and finally upon relative prices, con-

trary to the (Ricardian) interpretation of thelabour theory of value which requires thatprices should be independent of the compo-sition of final demand.7

On the more or less conscious level, suchconsiderations must have been important inMarxs choice of assumption concerning thetechnical nature of production. In additionto these intended (or at any rate acceptable)consequences of the assumption, there arealso a number of rather disturbing conclu-sions that can be drawn. In the first place,the assumption of profit-maximizing is vir-tually idling, at least at the micro-economiclevel. (It does have a function at the macro-economic level, viz. in determining the capi-tal flows that bring about the equalization ofthe rate of profits.) The use of factor com-binations in industrial production will be thesame in any economic system, whatever themotivations of the agents. This is a rather

paradoxical conclusion: on the one handMarx repeatedly stressed that capitalists aremotivated solely by hunger for profits, andon the other hand it turns out that theywould have chosen identically whatever their

motivation. There is no formal inconsistencyhere, but on a priori grounds one would ex-

pect Marxists to prefer (ceteris paribus) a

theory that brings the assumption of profit

maximization to bear upon the process ofproduction itself.

In the second place, and this is the more

important point for the present purpose, the

asumption of fixed coefficients is incom-

patible with the stated aim of Marx to ex-

plain bourgeois political economy as ideo-logical (and in a sense correct) rather thanas false. The neoclassical theory of exploita-tion (of which more below) states thatthe worker is exploited if he receives lessthan his marginal product. On the assump-tion of fixed coefficients, this theory beco-mes either absurd or identical with the

Marxist theory. If we define the marginalproduct by the right derivative, which is

zero, the neoclassical definition becomes ab-

surd ; if we use the left derivative which

equals the average product, it coincides withthe Marxist definition. These consequences

may appear to strengthen the Marxist posi-tion, but to my mind they do not.An impor-tant task for Marxist theory must be to

analyse why the neoclassical definition issuperficially and intuitively compelling,even if false at a deeper level. This, ob-

viously, cannot be done through a theorythat makes the neoclassical theory come outas absurd even at the surface level.

The crucial idea is the following. To each

worker, the capitalist entrepreneur may saywith some appearance of truth: if you leave

the production process, production will becurtailed by an amount X; it is impossiblefor me, therefore, to pay you more than the

equivalent of X. This argument can be usedfor all workers, and can therefore justify thecapitalist retaining for himself what is leftafter all workers have been paid the amountX. On the assumption of fixed coefficients,exactly nothing would be left; on the alter-native assumption of a diminishing and pos-itive marginal product of labour there willbe something left for profits. This meansthat i f we accept that each worker can be



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treated as if he were the marginal worker,then the existence of profits receives anatural and compelling justification.On the one hand this is certainly a case

of the fallacy of composition, but on theother hand the institutional arrangements ofclassical capitalism (Anti-CombinationActsetc.) were designed precisely to create and

perpetuate the isolation of the workers from

each other that permits individual wagenegotiations based on this fallacy. In myopinion this analysis of the link betweeneconomic institutions and economic theoryis much more true to the spirit of Marxthan the rather simplistic analysis which fol-

lows from the letter, i. e. from the assump-tion of fixed coefficients which would not

even permit the appearance of validity forthe neoclassical theory of exploitation.

It should perhaps be added that the dis-cussion in the preceding paragraphs doesnot offer any argument against the assump-tion of fixed coefficients. Such argumentsare easily forthcoming when we take a closerlook at how the production process actuallyoperates; it is just as true in industry as in

agriculture that we can often get more out ofthe process by increasing unilaterally theamount of one factor of production, such aslabour, raw materials, energy etc. I have

only tried to convey the point that from the

assumption several conclusions can be de-duced, one of which (the priority of valuesover prices) is a desideratum of the theory,while two others (the reduced importanceof profit-maximizing and the triviality of

bourgeois economics) run counter to what Isee as important strands in the same theory.As observed above, the concrete content

of exploitation also varies with the institu-tional property arrangements in which ittakes place. Three alternatives to capitalistexploitation will be briefly considered: slaveeconomies, pure sharecropping, and share-

cropping with indebtedness. I do not thinkthat these pre-capitalist relations are adequa-tely described by the quantitative measureof exploitation. This measure tells us some-

thing about the relationships, but for a full

understanding we must also take account ofthe qualitative features that follow from the

personal and direct confrontation betweenmaster and slave. Nevertheless it will be

useful to see how changes in the institutionalsetting will induce differences in the use offactor combinations and in the rate of ex-

ploitation, defined as the ratio of surplusproduct to wages (or the commodity equi-valent to wages). In all cases we shall assumethat we are dealing with agricultural produc-tion on a given piece of land, only the num-ber of workers and the productive tech-

nology being subject to variation.

As the logic of slave economies is discus-

sed in more detail later on, here I shall onlystate that in recent discussions two main alter-

natives to profit-maximizing have been pro-posed. One is that slaveowners tended tolook at slaves as being simultaneously pyro-ductive assets and objects of prestige (con-spicuous consumption), which implies a ten-dency to hold more slaves than would beoptimal for profit-maximizing.A secondalternative - the more interesting one, tomy mind

- is that the slaveowners con-

sumption was a function not of net income,but of gross income; more precisely a func-tion of the number of slaves used in produc-tion. This alternative has no immediate im-

plications for the number of slaves em-

ployed. It is easy to see that with diminish-

ing returns to labour the rate of exploitationis a decreasing function of the number of

slaves; it is equally obvious that this shouldnot imply that slaveowners who tor reasonsof conspicuous consumption use more slavesthan the optimal number somehow treattheir slaves better than rational (profit-maximizing) slaveowners.

In a share-cropping economy with over-

population8 the logic of exploitation requires(1) that the owner should increase the num-ber of tenants up to the point where mar-

ginal productivity becomes zero, and (2)that the total share of the tenants should

suffice for subsistence. That is, with a givenpercentage share of the owner in the total

produce it is always in his interest to increase



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the number of tenants up to the point of zero

marginal productivity, but at the same timethe percentage must be adjusted so as to

permit the survival of the tenants. It then

follows that the rate of exploitation is smal-ler than under capitalism; more importantlyit follows that a larger number of labourerswill be employed at subsistence than undercapitalism. The transition from sharecrop-ping to capitalism may therefore be a badbargain from the point of view of employ-ment.

If to sharecropping we add indebtedness,9we get a more complicated set-up, where theincome of the landowner is made up of two

parts, of which the very existence of the se-cond is a condition for the frist. That is, the

landowner receives both his share of the har-

vest and interest on the consumption loansaccorded to the tenant; these loans, in addi-tion to their income-generating function, alsohave the effect of perpetuating the depen-dence relationship that is a condition for themaintenance of the sharecropping arrange-ment. (It is easy to see the analogy betweenthis situation and the predicament of former

colonies which are maintained in informal

dependence through their indebtedness tothe former colonizers.) One implication isthat the land-owner will not accept improve-ments in technology that will permit thetenant to liberate himself from the permanentdebt, even if the share of the landowner afterthe productivity increase would exceed thesum of his share and interest on the con-

sumption loans before the increase. Eco-

nomically such improvements would be to

the advantage of the landowner, but polit-ically they might be so explosive as tothreaten the very base of the exploitation.

The neoclassical theoryI now turn to the neoclassical theory of ex-

ploitation. In order to prevent misunder-

standings, it should be stated at the outsetthat very few neoclassical economists would

accept a marginal productivity theory of justincome as a general principle.10 They are

quite aware of the need for some redistribu-

tion of income to the poor, to the disabled,to the farmers and peasants or to whatever

group is singled out by the social welfarefunction. Nevertheless I think that in our

simplified model, where a homogeneousclass of workers-nonowners confronts a

homogeneous class of owners-nonworkers,most neoclassical economists would tend to

accept marginal productivity as a criterionof just income.

Actually the neoclassical theory of justincome for workers is but a special case ofthe more general neoclassical tenet that allfactors of production should be rewardedaccording to their marginal productivity.This tenet again rests upon the thesis thatall factors can be rewarded (simultaneously)according to their marginal productivity. Themathematical rationale for this thesis is

found in Eulers theorem for homogeneousfunctions of first order. If the productionfunction is written as f(K,L), where K is

capital and L is labour, then neoclassical

theory typically requires that f be continu-

ously differentiable in both variables andthat f(tK,tL) = t f(K,L) for all t (constantreturns to scale). If these requirements are

satisfied, then Eulers theorem states that

f(K,L) - fx(K,L)K-f-fL(K,L)L whereand fL are the partial derivatives with respectto capital and labour. In words, the theoremstates that if there are constant returns to

scale, then rewarding both capital and labour

according to their marginal products will

exactly exhaust the total product: a beautifulexpression of class harmony in mathematical

language.I have spoken about the neoclassical

notion of exploitation, but actually I thinkthat two distinct notions can be found, moreor less clearly stated, in the neoclassical

writings on the subject. The primary idea

certainly is that a factor of production is

exploited if it receives less than (the valueof) its marginal product.A secondary idea,that is not without some importance, is that

exploitation (of both factors jointly) takes

place if there is some pure entrepreneurialprofit left after both factors have been re-



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9

warded. If there are decreasing returns to

scale, we have exploitation in the secondarysense without exploitation in the primarysense. If we assume constant returns to scale,

perfect competition and profit-maximizingentrepreneurs, there can be no exploitationin either sense.

This is a central idea of neoclassical

theory: exploitation can only occur in im-

perfect capitalism, most importantly becauseof imperfect competition. On the Marxistnotion, on the other hand, exploitation takes

place in all capitalist economies, however

perfect. (This is even close to being adefinition of capitalism in Marxist theory,but I shall argue below that even in theabsence of exploitation there may be fea-tures in the economy that would justifythe term capitalism.) It should be clear

enough that for purely analytical purposesboth the neoclassical and the Marxist notions

of exploitation may have their uses. When,for example, workers revolt against the

system, we may say that they revolt againstexploitation in the Marxist sense; when theyrevolt within the system against abuse of the

system, they revolt against exploitation inthe neoclassical sense. The controversial

issue is found along the normative dimen-sion : should workers revolt against or withinthe system?

Exploitation of workers may result from

monopoly (in the product market), monop-sony (in the labour market) or cartelliza-tion. The last case may be briefly exploredin order to exhibit the multiplicity of notionsof exploitation that may apply in a givensituation. It is well known that the main

problem in cartel formation is the tempta-tion, for each individual cartel member, tobe a free rider and exploit the high pricescreated by the restriction of production. Ifone cartel member maximizes individually,whereas all the other members curtail pro-duction in order to maximize collective pro-

fits, then it is surely not an abuse of languageto say that the free rider is exploiting the

others, in a sense that differs both from the

Marxist one and either of the neoclassical

ones. The free rider, however, would not be

(neoclassically) exploiting his workers, asthe cartel members would be doing, butwould be exploiting his workers in the

Marxist sense.

ConfrontationIn the preceding pages I have sketched thebare bones of the Marxist and neoclas-

sical theories of exploitation. Here I turn tothe task of staging a critical confrontationbetween the two approaches, a task thatseems to be of some importance because

bourgeois economists so often misunderstandthe Marxist notion of exploitation.llAs a

starting point for the discussion we may ob-serve that if the apparent symmetry of cap-ital and labour in the function f(K,L) is areal one, then the neoclassical definition of

exploitation is the more appropriate one. If

capital and labour are on a par as factors of

production, then they also have an equalright to rewards, so that we should rejectany theory implying that a just reward to onefactor excludes any reward at all to the

other. Or to put the matter positively, thestate of affairs where no factor is exploitedshould at least be logically possible. These

objections to the Marxist theory will ofcourse be countered by denying that capitaland labour are symmetrical factors. Specif-ically Marx himself argued that capital reallyis nothing but congealed labour, so that oncloser analysis the production function haslabour as its only argument. This idea canbe made more precise by stating that the

production process should be represented bya functional Pet) = F(L(t) ), where P(t)and L (t) are the time profiles of output andof labour input respectively, and not by thefunction P = f ( K,L) . If the production pro-cess is represented by this functional, all

justification for a reward to capital evap-orates ; capital just does not have any role to

play at all.Now I agree with this conclusion, but

submit that some care must be taken in

arguing for it. Four distinct issues are in-volved here: the so-called capital contro-



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versy ; the problem of hysteresis in thesocial sciences; the problem of historical

principles vs. end-result principles in eth-ical theory; and finally the ideological ele-ment in economic theory. Starting with thefirst issue, it is by now generally accepted 12that under many plausible circumstances the

process of production cannot analytically be

represented by a function f (K,L) . This is sobecause (under these same circumstances) it

may be impossible to define any notion of

aggregate capital that behaves as a factor of

production should do, e. g. exhibit dimin-

ishing marginal productivity. From this factat least one author explictly,13 and many

implicitly, have drawn the following con-clusions. Firstly, since the form f(K,L) is

inadequate, only the form F(L(t) ) can be

adequate. Secondly, since only this latterform is adequate, capital cannot claim anyreward. In my opinion both of these de-ductions are fallacious. The second is fal-

lacious on the elementary grounds thatnormative conclusions cannot be deduced

from analytical premises; the first because

presently existing effects must have presentlyoperating causes.

The point about presently operating causes

probably is the least familiar one, so thatsome space is required to explain it. 14 If an

explanation of the value of some variable attime t appeals to values of the same or ofother variables at time t-2 or earlier, thenwe have a case of hysteresis. If, on the other

hand, no appeal is made to values earlierthan t-1, the explanation uses state variables

only.(For

simplicitydiscrete time is as-

sumed ; with continuous time, state variable

explanations would be in the form of simul-taneous differential equations.) For generalmetaphysical reasons hysteresis cannot be afeature of the real world, only of our the-ories about it. If past causes could have an

impact upon present phenomena over andabove the influence that is mediated by thetraces left by the past in the present, thenwe would have a case of temporal action ata distance that is

surely justas abhorrent to

the mind as spatial action at a distance. The

explanatory ideal of science must always beto conceptualize the traces left by the pastin the present into state variables, so as toreflect the currently operating causes.

On the other hand this may prove difficult

in some cases, and then an appeal to pastvalues of some variables may be an altern-

ative. If, for example, it turns out that thetransition probabilities governing social

mobility do not depend solely upon presentoccupation, then we may either look forother present factors such as income or

race, or we may make the vector of transi-

tion probabilities a function of occupationin one or more past periods. The fact thatmost studies of social mobility have chosenthe latter approach, does not imply that theformer is inherently impossible. Similarly thefact that the process of production can be

represented by a functional F ( L ( t ) ) , doesnot imply that a state-variable explanationcannot be found. Even if the particular state-variable explanation f(K,L) has been shownto be inadequate, some explanation of theform f (K1,K2, .. Kn,L) will surely do the

job, where each

K;represents capital at some

less aggregate level (or perhaps at the levelof no aggregation at all, so that each K;would be a qualitatively distinct type ofcapital good).Thus all we can prove is the possibility of

representing the process of production in amanner where capital is absent, not the

indispensability of this representation. Byitself this possibility does not imply a con-clusion to the effect that only labour has a

rightto a reward, but if taken

togetherwith

the principle to each according to his worksuch a conclusion does follow. Because the

working class as a whole, viewed as a se-

quence of generations of workers, generatesthe entire product, viewed as a continuousstream of output, it is entitled, on this prin-ciple, to the whole net product and nothingis left for the capital owners.The term of entitlement is used here delib-

erately, to show up the formal similaritybetween the Marxist

theoryof

exploitationand Robert Nozicks theory of justice.15 In



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11

Nozicks terminology, his own theory isbased upon a historical principle of justice:information about the past is needed in

order to determine what is a just distribution

of income in the present. That is, two statesmay be indistinguishable in all factual

respects (including memories about the

past) and nevertheless have different nor-mative implications, viz. if the states are theend results of different historical processes.We may talk, perhaps, of a moral hysteresisthat is a more substantial phenomenon thanthe causal hysteresis discussed above. Incontrast, most theories of justice have usedend-result principles, in the sense of re-

quiring only information about the presentin order to determine what is a just distribu-tion in the present. The neoclassical prin-ciple to each according to his marginal pro-ductivity clearly is an end-result principlein this sense.

I believe that the Marxist notion of aliena-

tion is very closely related to the notion ofend-result principles.Alienation means thatthe product of mans own activity takes onan independent and reified form, and evencan be turned against man himself. Similarly,alienation can be abolished only if man takes

possession of his own history and recognizesin his present environment (including thecapital goods with which he is working) theresult of his own past activities. The workeris alienated to the extent that he sees present

capital goods as the property of presentcapitalists rather than as the product of pastworkers, one implication of this being thathe accepts that the product of his own activity( e. g. the future capital goods ) belongs in partto the capitalist class and can be used to legit-imate the exploitation of future workers. 16

It should be clear from these remarks that

solidarity between all workers at a givenmoment of time is not sufficient for the crea-

tion of a revolutionary movement; in addi-tion solidarity across the generations is re-

quired. To the extent that workers are iso-lated from each other temporally as well as

spatially, the neoclassical theory of incomedistribution is totally compelling. Individual

wage negotiations can then, as explained inPart II above, bring about a reward accord-

ing to marginal productivity with an appear-ance of legitimacy and even of inevitability.

The formation of labour unions and thetransition to collective bargaining is a neces-

sary but not a sufficient condition for the

workers appropriation of the whole net pro-duct. If workers remain alienated, i. e. acceptthat the capital owners have a right to somereward for their contribution to the processof production, then the bargaining process isdefined as a bilateral monopoly where theoutcome may be according to the Nash-Zeuthen solution117 or to one of the other

solution concepts that have been proposedfor two-person cooperative games. Whenthe working class as a whole negotiates withthe capitalist class as a whole, there is noinherent necessity of wages coinciding withthe value of marginal product. The unionsmay quite well be able to impose a packagesolution of higher wages and no dismissal ofworkers, which implies (in the short term, atleast) that wages are above marginal pro-duct. What is excluded by the rules of the

ame, however, is that wages should exhaustthe whole net product.The last issue singled out for discussion

here belongs to the sociology of knowledge.Even if we agree that the acceptance or re-

jection of any particular representation ofthe process of production should not have

any normative implications, we may askwhether this is how science actually works.It has been insinuatedi8 that the form f (K,L)is used because it has the effect or function

of legitimating a reward to capital. The pro-blem with all such statements is that it is

hard to see what kind of feedback loop fromeffect to cause could be invoked to explainthe use of the representation f (K,L). 19 To

my mind a more plausible conjecture (whosetruth remains to be proved) is that the linkbetween capitalism and the form f (K,L) iscausal rather than functional. That is to sayI believe that the existence of an aggregateclass of capital owners may have had a partin the process that led to the use of a pro-



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12

duction function involving the notion of

aggregate capital, but from this nothingwould follow concerning the legitimatingeffects of this production function. Or to putthe matter in still another way, from the factthat a certain theory causally springs from acertain class we should not conclude (norexclude) that the theory is to the benefit ofthat class; a point that has been beautifullyillustrated in the recent work of Albert

Hirschmann on 17th and 18th centuryeconomic thought2 and also made by Marxin his observation that the physiocratic doc-

trine, even if stemming from the landowningclass, actually was to the benefit of the

emerging capitalist class.21

Exploitation and investmentThe upshot of the confrontation was essenti-

ally that (given the crucial condition of nonet investment) the Marxist notion of ex-

ploitation should be preferred to the neoclas-sical one. The appearance of a legitimate re-ward to capital owners is dispelled as an illu-sion once the process ofproduction is seen ina longitudinal or historical perspective or,what amounts to the same thing, once work-ing class solidarity is extended from the

intra-generational to the inter-generationaldimension.22 Once we take account of net

investment, however, the problem appearsin a different light. If exploitation is under-stood literally as the existence of a gap be-tween wages and average product, thenworkers are exploited in any society, cap-italist or communist, where net investment

take place. In order to improve the defini-

tion so as to prevent this unwanted implica-tion, it would be tempting to say that wor-kers are not exploited if the sacrifices (i. e.

investment) of the present generation ofworkers are made to the benefit of later

generations of workers; or that workers are

exploited only to the extent that the invest-ment ultimately benefits capitalist consump-tion. One might distinguish, that is, betweentwo measures of the rate of exploitation:

The first rate measures the exploitation inthe classical Marxist sense, as the ratio of

what is taken away from the workers to

what is left. The second rate takes account

of the fact that part of what is taken from

the workers may be returned to them later

on, when the investment comes to fruition.23

The two definitions coincide in the case of

no net investment, but one might argue thatthe second is the more appropriate onewhere some net investment occurs.

Tempting as it is, I believe that this lineof

argumentshould be

rejected.It would

have the consequence that very little exploi-tation is going on in modem capitalisteconomies, where U2 typically is rather small.Even if much is taken from the workers,most of it is returned to them later on (withinterest!). Does this mean that all (or almost

all) is to the best in the best of all possibleworlds? I do not think so, for the fact re-

mains that the workers themselves do not

have the right to decide what is to be donewith the

part ofthe net

productthat is taken

from them. In modem capitalist economiesthe notion of exploitation should be linkedto the lack of power over investment deci-

sions rather than to the fact (or to the pos-sibility) of capitalists having a high level of

consumption at the expense of the workers.I shall now go on to make this idea more

precise, using a model of capitalism as adifferential game proposed by Kelvin Lan-caster.24 I believe that for modern capitalisteconomies this model is more

appropriatethan the traditional Marxist view of lookingat class relationships, and that it shouldindeed supplant that view. (I also believe,but this is of less interest, that it is the kindof model that Marx himself would have

developed if he had been confronted with therecent development of capitalism.)

In Lancasters model it is assumed that

capitalism is a differential game betweenworkers and capitalists, each class havingits own control variable whose time

profileit can determine within certain limits. The



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13

control variable of the working class is therate of working class consumption out ofcurrent production; the power over thisvariable can be direct (through wage nego-tiations) or indirect (through taxes on pro-fits). The control variable of the capitalistclass is the rate of investment out of profits,i. e. out of what is left after working class

consumption. We shall set x~ for the controlvariable of the working class, X2 for the con-trol variable of the capitalist class, and a,for the upper limit to xl. In modern cap-italist economies, a, is very close to 100 percent; the workers have the power to con-

sume all of the current output should theyso desire. The division of powers between

the classes may be described by saying thatthe workers have the political power andthe capitalists the economic power, the wor-kers the power over the present and the

capitalists the power over the future.

Before we go on to look at the solution to

this game, we may briefly characterize earliereconomic systems in the terms definedabove. Pre-capitalist economies had a low a,and a low X2- Workers did not have the

power to raise their standard of living above

subsistence, and owners did not have anydesire to invest part of the surplus. Earlycapitalism had a low a, and a high x2: wor-kers were still at subsistence, but the rein-vestment process had started up. One mightask whether ul. or U2 is the most appropriatemeasure of exploitation in this case. I be-lieve that ul should be preferred, because theinvestments did not have the effect of raisingthe consumption level of the

existingwor-

kers or their descendants, only of permittingever larger number of workers to live atsubsistence. From the point of view of theindividual worker, everything happened as ifa large part of his produce was taken fromhim irrevocably; the fact that it was trans-formed into bread for more workers rather

than into caviar for the capitalists matteredless than the fact that it was not transformed

into butter for himself.

In modern

capitalismthe situation is

rather characterized as one of high a1, low

xl, and high X2-As observed by Lancaster, each of thetwo classes finds itself in a dilemma. The

workers dilemma is the following: if theyconsume maximally now, nothing will beleft for investment and future increases in

consumption, but if they leave something forinvestment they have no guarantee that the

capitalists will use this for investmentrather than for their own consumption.The capitalists dilemma is this: if they

consume the entire profit now, nothing willbe left for investment and future increases in

consumption, but if they invest out of pro-fits they have no guarantee that the workerswill not retain for themselves the increase in

consumption thereby generated. Adding asuitable number of assumptions to thismodel, it can be shown that the game has a

solution, i. e. a uniquely defined pair oftime profiles of the control variables thatare optimal against each other, with two

interesting properties. In the first place thesolution is discontinuous: both classes con-

sume minimally up to some point and then

maximally from that point onwards; in thesecond place it is suboptimal, in the senseof giving to each class a smaller total con-

sumption than would have been possiblewith some other pair of strategies (whichwould not, however, be optimal againsteach other).It is hard to say whether these features have

any relevance for the real world, or whether

they are artificial products of the formal set-

up. To my mind the importance of themodel does not

dependupon this issue, but

resides rather in the way in which it capturesthe power relationship that characterizesclass conflict in advanced capitalist societies.Even if the measure ul is inadequate fromthe point of view of consumption, it canserve as a measure of the lack of power over

investment decisions. Even if workers are

not exploited in a quantitative sense, theyare exploited in the qualitative sense of not

being able to decide where and how to invest.Even if workers consume most of what con-

sumption commodities are produced, others



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14

decide for them which commodities are to

be produced and consumed. This analysis,obviously, applies also to a number of so-cialist countries where the power of invest-

ment is concentrated in the hands of a few.

Slave economics

In the model just explored capitalists andworkers mutually have some power overeach other, due to the separation of savingsdecision and investment decisions, or of

political and economic power. I shall now

briefly explore a model of pre-capitalist classrelationships where the feature of reciprocalpower can also be found, even if linked to a

very different institutional arrangement.This

is what may be called the Hegel-Genovesemodel of slave economies.25 Here the crucial

feature making for mutual dependence is the

contradictory attitude of the master towardsthe slave: on the one hand the master wants

to be confirmed in his power by treating theslave as an inanimate object, but on theother hand this confirmation is worthless

unless it emanates from an independentconsciousness:

Take heed of hating me,Or too much triumph in the victory.Not that I shall be mine own officer,

And hate with hate again retaliate;But thou wilt lose the style of conqueror,

If I, thy conquest, perish by thy hate.Then, lest my being nothing lessen thee,If thou hate me, take heed of hating me. 26

The slaveowner or master, that is, has the

contradictory desire of being recognized byanother whom he does not himself recog-nize. (To see how absurd this wish really is,it is sufficient to imagine the farcical idea ofa nation seeking diplomatic recognition fromone of its own colonies.) From this psy-

chological stance a number of consequencesfollow. In the first place we should expectthat each slaveowner would be oscillatingbetween paternalistic and sadistic attitudestowards his slaves, as one or the other side

of the contradiction gets the upper hand ;27

conversely we would be inclined to reject theidea that slaveowners can be divided into

two kinds, one of which is consistently pater-nalistic and the other consistently sadistic.28In the second place the masters dependenceupon recognition from the slaves would in asense have turned them into the slaves oftheir slaves, as observed by Donne in thefour middle lines of the above stanza or in

the following remark from a recent book byGenovese: The masters desperately neededthe gratitude of their slaves in order todefine themselves as moral human beings.The slaves, by withholding it, drove a dag-ger into their masters self-image.29 In thethird place we should expect the slave-owners to have maximization of consump-

tion rather than of profits as their mainobjective.As noted by Hegel, the masters

power over the slave is mediated through his

conspicuous consumption of the objects pro-duced by the slave; the more slaves he has inhis possession, the greater the socially neces-

sary consumption.I would not in any way try to draw an

idyllic picture of life on the plantations, nor

suggest that the slaves, because of theirhold on the masters, were in a better positionthan the free workers who had no compar-able hold on their employers; nor, finally,am I suggesting that the reciprocal depen-dence relationship between master and slavewas in the least similar to the mutual power

relationship formalized by Lancaster in hismodel of modern capitalism. The main pointof the brief remarks above was to substant-

iate the assertion that the quantitativemeasure of exploitation is not very helpfulfor the understanding of societies other thanthose based on classical capitalism. For thatshort period in human history class conflictcan be succinctly characterized by sayingthat one class stole some of the goods pro-duced by the other, this robbery gaining an

apearance of legitimacy from the alienatedstate of mind in which the genesis of the

capital goods was hidden. In earlier andlater periods the class conflict has beenembedded in more ambiguous institutionswhich cannot be reduced to the simple factof theft.



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NOTES

1. Cp.Arrow (1977) and Sen (1976) for surveysand discussions.

2. Sen (1973), p. 16-17. He assumes innate dif-

ferences in the individual capacities for turning

consumption into enjoyment.A similar idea isfound in the writings of Leibniz (Elster 1975,p. 152 ff.), who argues, however, that the differ-ences stem from economies of scale in consump-

tion. Giving more to those who are already betteroff may be justified, that is, either by assumingthat for all levels of consumption they are betterat turning it into enjoyment, or by assuming thattheir superior efficiency stems from the fact that

they are at a higher level already.3. Sen (1973), p. 96 ff.

4.Actually this is a rather gross simplification.Marx and most other writers on 19th century

England have stressed that the actual governmentwas done by the landowning aristocracy, while theindustrial capitalists were rather passive in politics.This fact has been interpreted in a number of

ways. Marx thought that the capitalist class

deliberately refrained from taking the politicalpower, because this would have made the economic

opposition between exploiter and exploited coin-cide with the political opposition between rulerand ruled, and so sharpen the class struggle to apoint where the existence of the system wouldhave been threatened. Others have seen the retreatof the bourgeoisie from power as an act of abdica-

tion similar to Ulysses binding himself to the mastand issuing instructions that his future instructionsshould not be followed (Elster 1977 a), because itwas in the long-term interest of the capitalist classto have a government that could not be swayed bythe short-term interest of that class. Both of these

ingenious interpretations suffer from a lack of

empirical evidence; a more plausible notion is thatthe aristocracy was free to maximize its owninterest with a reasonable rate of profit on capitalas one of the constraints. Nevertheless the power

residing in the constraints that limit the feasibleset may be as important as or more importantthan

the powerto

define which member of thatset shall be realised, for which reason the assertionin the text would not seem to be too far off themark.

5. Samuelson (1957) questions whether Marx

actually made this assumption; Maarek (1975) andElster (1972) give detailed textual evidence tosubstantiate the imputation of this assumption toMarx.

6. Thus I am in complete agreement with the

following statement by Bronfenbrenner (1965):The besetting weakness of the Marxian system,omissions apart, is to this writer what many

another critic considera

pillarof

strength.This is

its structuralism, which is to say, its tendency to

take important relations as technically determinedbehind the back of the price system, leaving thatlatter with few functions beyond equating profits.

7. I first stated the distinction between the

Hegelian and the Ricardian interpretations in a

small and non-technical introduction to Marxisteconomics (Elster 1969); it is restated in matrix

algebra and discussed in some detail by Hoel

(1974).8. I am relying here upon Georgescu-Roegen

(1960), reprinted with addenda in Georgescu-Roegen (1976).

9. The following is a resum of the work ofBhaduri (1973).

10. Clark (1899) is usually cited as the locusclassicus for the marginal productivity theory ofjust income. With important reservations the workof Robert Nozick (1974) can be seen as an exten-

sion of this line of argument.11. Two examples shall be given of this mis-

understanding. In a recent discussion of thestandard of living during the Industrial Revolutionin Britain, R. M. Hartwell and S. Engerman (1975,p. 210) challenge the Marxist idea (represented bythe work of Thompson 1968) that there was inten-sified exploitation during the period in question.This idea they interpret as an assertion that wageswere kept below marginal value product, an asser-tion which is refuted by pointing to the absence ofeither cartellization or monopsony in the labour

market. Only a complete lack of understanding of

the Marxist idea of exploitation (i. e. a totalneglect of the distinction between average productand marginal product) can explain this interpreta-tion. Engerman is also involved in the second

example of this confusion, to be found in his andRobert Fogels recent work onAmerican negroslavery (Fogel and Engerman 1974, especially vol.

II, p. 125 ff.). Their by-now famous or notoriousstatement that slaves were exploited only at therate of 12 per cent, and that they received over

their lifetime about 90 per cent of what theycreated during their lifetime, is derived in the

following manner. In the first place Fogel and

Engerman define the extent of exploitation of agiven slave in a given year as the difference be-tween the value of his marginal product and the

value of the goods required for his maintenance.In the second place the stream of amounts ex-

ploited from the slave is then reduced to the

value at birth by using a discount rate of 10 percent. In the third place this value at birth (thebirthright) is divided by the similarly discountedvalue of the stream of marginal product generatedby the slave, in order to get the rate of exploita-tion. Now Fogel and Engerman are aware of thefact that a Marxist theory of exploitation woulddiffer from theirs on the second and third of

these counts; on the second because a Marxist



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16

would use the undiscounted sum rather than the

discounted one; on the third because the marxist

measure of exploitation would divide the value bythe maintenance costs rather than by the gross

product. They seem quite unaware, however, of the

incongruity between the first element of theirderivation and the Marxist definition. In the

Marxist theory constructed by Fogel and Enger-man, slaveowners would have an indisputable rightto profits on all other capital goods than slaves,which is of course absurd.

12.A fairly good understanding of the issuescan be obtained by reading Harcourt (1973), Bliss

(1975) and the articles reprinted in Harcourt and

Laing (1971) and in Hunt and Schwartz (1972).For a short, lucid and extremely instructive intro-

duction, see Sen (1974).13. Nuti (1970).

14. Cp. Elster (1976 a) for details.15. Nozick (1974), especially p. 153 ff.16. With unsurpassable clarity this is phrased as

follows by Nuti (1970): Attention is focused noton past labour but on the present value of the

embodiment of past labour, and its current pro-ductiveness can be taken to provide a justificationfor the attribution of the surplus of current outputover the wage bill to those who have appropriatedthe embodiment of past labour, thereby providingthe current basis of future appropriation.

17. Cp. Luce and Raiffa (1957), Ch.6 for adiscussion of this and other solution-concepts for

cooperative games.18. I use this term deliberately rather than aneutral term such as suggested, because I thinkthat the Marxist participants in the debate have

only hinted at the importance of ideology without

sticking their neck out to the extent of committingthemselves to empirical (and falsifiable) proposi-tions about how this is supposed to have influencedthe development of neoclassical theory; for spe-cimens see Nuti (1970) and Harcourt (1973).

19. Cp. Elster (1977 b) for further analysis ofthe logic of functional analysis. Briefly stated the

argument is the following. Either the legitimatingeffects of neoclassical theories of production areintended or they are unintended. If the former,then chapter and verse should be cited to provethat neoclassical theorists have in fact harboured

these intentions; if the latter, then a feedback loopfrom the unintended but beneficial (to the capitalist

class) effects of these theories to their continued

use should be demonstrated. This feedback loop

might either assume the form of an artificial selec-

tion if it could be demonstrated that extra-scientific

institutions had the desire and the power to select

certain theories at the expense of others, as shown

by Glantz andAlbers (1974) for the case of mili-

tarily financed research, or the form of a natural

selection, if it could be demonstrated that theeffects maintain their cause even if neither inten-

ded nor recognized. Of these three possibilities allseem to me equally implausible.

20. Hirschman (1977), p. 4, p. 41, and passim.21. Marx (1862-63), Part I, p. 38 ff.

22. Elsewhere (Elster 1977 b) I argue that thisinter-generational solidarity is also crucial if a

revolutionary class is to steer the correct middlecourse between reformism and activism.

23.Actually the temporal measure of exploita-tion should be defined by the ratio of one infiniteseries to another, i. e. the sum of the amounts of

consumption made available to all future capi-talists through a given amount of work todaydivided by the sum of the amounts of consumptionmade available to all future workers through thesame amount of work. It can be shown, however,that this measure coincides with the measure U2.

24. We may observe in passing that the samemodel might also be applied to the relation be-tween multinational companies (controlling therate of reinvestment out of profits in the operatingcountry) and the operating country (controllingthe rate of taxes on profits).

25. For this model see Hegel (1807), Cp. 4;Genovese (1965, 1969, 1971, 1974); and Elster(1976 b).

26. John Donne, The Prohibition; see alsoElster (forthcoming), Ch. 4.

27. Genovese (1974, p. 96) characterizes theslaveowners in these terms: They were tough,

proud, and arrogant; liberal-spirited in all that didnot touch their honor; gracious and courteous;generous and kind; quick to anger and extra-ordinarily cruel; attentive to duty and careless of

any time and effort that did not control their

direct interests.

28. Canarella and Tomaske (1975) suggest this

idea. I do not imply that it can be refuted a

priori; the choice between their conception and

Genoveses is a matter of empirical research.

29. Genovese (1974), p. 146.

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Bronfenbrenner, M. 1965. Das Kapital for Modern

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Canarella, C. & J. Tomaske, 1975. The Optimal

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Clark, J. M. 1899. The Distribution of Wealth.New York: Macmillan.

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Fogel, R. & S. Engerman. 1974. Time on the Cross.Boston. Little, Brown.

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Journal of Peace Research 1978 Elster 3 17

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