Journal of

Peace Research
http://jpr.sagepub.com/

Exploring Exploitation
Jon Elster
Journal of Peace Research 1978 15: 3
DOI: 10.1177/002234337801500102
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Exploring Exploitation
JON 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 of
his product, Marxists using the average and neoclassical theorists the marginal product. In
order to bring out the deeper reasons behind this difference, the following notions and
theories are invoked: the fallacy of composition, permitting the capitalist to treat each
worker as if he were the marginal worker; the alienation of the worker from the capital
goods which are the product of past labour; the capital controversy and the doubts that
have been raised about the notion of aggregate capital; and Robert Nozicks distinction
between end-result principles and historical principles in ethical theory.
Pre-capitalist societies and advanced capitalist societies require a different conceptual framework than the exploitation theory developed by Marx for classical capitalism. In these
societies power relations and strategic interaction are more important than the anonymous
exploitation through the market mechanism. Kelvin Lancasters view of capitalism as a
differential game between workers and capitalists provides an insight into modern capitalism
that is more adequate than the Marxist model.

In the Critique of the Gotha Program, Marx

laid down two principles that were to govern
the distribution of welfare under socialism
and communism respectively: to each according to his work, to each according to his
needs. Exploitation may quite generally be
defined as a state of affairs where neither
of these principles obtains; a person is exploited if (i) he does not enjoy the fruits
of his own labour and (ii) the difference between what he makes and what he gets cannot be justified by redistribution according
to need. Now both of the principles in question lend themselves to several distinct interpretations, which makes for a corresponding
ambiguity in the notion of exploitation. In
this article I shall deal mainly with the first
principle and its vicissitudes, but for background and contrast some remarks upon the
and its relation to the first
second
may be useful.
-

Different needs
To receive according to ones needs may
be interpreted in three ways: as satiation of

equalization of welfare levels, or as

equalization of marginal welfare. The first
interpretation, which is sometimes suggested by Marx, presupposes either extreme

needs,

as

material affluence

or an

ascetic want-struc-

ture ; I state without argument that the foris unrealistic and the latter undesirable.
The second interpretation is based upon
the intuitively appealing idea that inequalities in consumption may be required for
equalization of welfare, so that persons with
low capacity for consumption, in the sense
of getting less enjoyment out of a given
amount of material goods and services,
should receive more of these goods and services. The snag here is that we must presuppose some interpersonal comparability of
welfare levels, the meaningfulness of which
remains in doubt despite the recent work of
Strasnick and others.
The third interpretation is the second turned upon its head: here we assume that larger amounts of goods and services should
be given to the persons most capable of turning them into enjoyment, by the kind of
Matthew effect that has long governed the
allocation of resources for investment.2 Perverse as the idea is from a substantial point
of view, it is perfectly acceptable as an interpretation of the phrase to each according to
his needs.
Now why did Marx think that distribution
according to needs would take place only in
the higher and definitive stage of communism, whereas the society immediately
mer

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4
from the womb of capitalism
would have to base itself upon distribution
according to effort? Three distinct arguments
are more or less clearly stated by Marx and
his successors. In the first place there is the
problem of work motivation. Under capitalism hard work is forthcoming only by the
promise of a corresponding reward; if there
was no link between individual effort and
individual reward, a community of individuals imbued with the capitalist work ethos
would find itself in a Prisoners Dilemma
where everyone would opt for being a free
rider. A new work ethos can emerge only in
the higher stage of communism, where not
only property arrangements, but man himself has been transformed.
Amartya Sen3 has suggested that in this
stage the work ethos could take the form of
what he calls an Assurance Game: everyone
is willing to do his share of the hard work,
provided that everyone else does the same.
A more Utopian and (to my mind) less
appealing idea would be that hard work
could be a dominant strategy under communism, just as a low level of effort would
be a dominant strategy under capitalism if
there were no link between effort and reward.
In the second place, Marx suggests that
the principle of distribution according to
needs can come into its own only when a
material basis has been created, i. e. when
the springs of affluence are so abundant that
a complete satisfaction of needs is possible.
Unlike the first argument, this idea presupposes that distribution according to needs is
taken in the sense of satiation of needs. If
instead the principle is understood in the
sense of giving more to those less capable of
transforming consumption into enjoyment,
we arrive at the opposite conclusion, for it is
precisely in conditions of great scarcity that
such compensation becomes important.
In the third place, later Marxists have
often hinted at the idea that communist man
will have a lower level of aspiration, because
he will have rid himself of the artificial desires that are continuously generated under

emerging

and that prevent complete satisfaction of needs. The argument is valid to

the extent that it refers to externalities in
consumption such as envy, but it is harder
to sustain in the version where some substantial theory of human nature and of what
man really needs is presupposed.

capitalism

Equal needs
Now as stated above, in what follows I shall
abstract from all considerations of need.
I shall assume, for simplicity, that all persons are equally needy and equally capable
of 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 badly
on two counts: they produce (and therefore
get) less, and they are less efficient in transforming what little they get into enjoyment.
By abstracting from such difficulties we can
discuss in its conceptual purity a situation
where a class of workers-nonowners confronts a class of owners-nonworkers. We
shall then see that the principle of distribution according to effort lends itself to two
very different readings: one interpretation
where it excludes the possibility of income
accruing to nonworkers and one interpretation which permits this. Not surprisingly the
first notion is implied by the Marxist theory
of exploitation, whereas the second follows
from the neoclassical theory of exploitation.
The exposition and confrontation of the
Marxist and the neoclassical approach form
the core of the present article.
The relation between capitalists and workers in classical capitalism can be briefly
characterized by two features. ( 1 ) The
economic power of the capitalists over the
workers was reinforced by political domination.4 (2) The exploitation took place
through the impersonal mechanism of the
market. These features interacted so as to
generate a maximum of asymmetry in the
relation between the two classes. By contrast the first feature is lacking in modern
capitalist societies and the second in precapitalist economies. In advanced capitalist

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5
economies the economically weak now have
the political power, which makes for complex game-theoretic aspects of the class
struggle. In pre-capitalist societies (of which
slave societies will be taken as a typical
example) the exploitation was mediated
through personal relationships, in which the
exploited had some power over the exploiters. I shall argue that the notion of exploitation developed by Marx has a less
universal relevance than is often thought;
while it fitted as hand in glove to the capitalism of Marxs time, it does not capture
the essential features of class conflict of earlier and later periods.
The Marxist theory
The Marxist notion of exploitation is a very
simple one: the worker is exploited if he
receives less than his average product. (II
here assume simple reproduction, i. e. no net
investment. This restriction is lifted below.)
Obviously if all workers get the equivalent
of their average product, nothing is left for

nonworkers.
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 strange
analytical difference between Marxs analysis
of exploitation in agriculture and the corresponding theory of industrial production.
Secondly, there are as many variants of the
theory as there are institutional property arrangements defining the rights and obligations of owners-nonworkers and workersnonowners. A few of the variants are explored below.
In his analysis of capitalist agriculture,
Marx assumed diminishing marginal returns
to labour. From this assumption, together
with the assumptions of perfect competition
and profit-maximizing tenants, we immediately deduce that the number of workers on
a given piece of land is so chosen as to
equalize wages and marginal product. The
important point of this ultrasimple piece of
analysis is that the idea of profit-maximization is here set to some work: for the conclu-

sion to come out, this assumption must be

put in. With different behavioural assumptions, different conclusions follow, as will
be seen below.
By contrast, Marxs treatment of industrial
capitalism does not rely on the notion of
profit-maximization, except in the trivial
sense that capitalists are assumed not to use
more 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 product by increasing unilaterally one factor of
production, keeping all others constant; even
if the marginal product of (say) labour was
diminishing, it remained positive over a wide
range. Surprisingly this intuitively compelling idea is not found in the Marxist analysis
of industrial production. Here Marx assumed5 what is today called fixed coefficients of production, i. e. an assumption that
among all the factor combinations capable
of producing a given amount of a given
good, there is one that is unambiguously
better than all the others, in the sense of not
using more of any factor and strictly less of
at least one factor than all the other combinations. If this uniquely defined combination is the one actually in use, a unilateral
increase in the amount of one factor can
give no increase in the amount of final product, whereas a unilateral decrease of one
factor implies a proportional decrease in the
amount of final product. Capitalists are then
permitted to be profit-maximizers in the
sense of preferring to use 3 units of factor
I and 2 units of factor II in the production
of one unit of good A rather than 4 units
of factor I and 2 units of factor II, but they
are not permitted to be profit-maximizers in
the sense of having a choice between 3 units
of factor I and 2 units of factor II on the
one hand, and 2 units of factor I and 3
units 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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6
of not assigning a crucial role to the
subjective choice of the actors. Producers
have no choice between input combinations,
and workers no choice between commodity
bundles. If such choices are admitted, the
labour theory of value can no longer be
sustained. If producers have a choice between such input-combinations as mentioned
at the end of the preceding paragraph, they
can only be guided by the relative factor
prices, which means that prices, technology
and labour values are determined simultaneously, contrary to the (Hegelian) interpretation of the labour theory of value which requires that values should be determined independently of prices but not vice versa.
If consumers have a choice as to how they
will spend their wages, they may choose to
spend more money on goods with a high
labour value relative to prices, which will
have an impact upon the value of labour
power, the rate of surplus value, the rate of
profits and finally upon relative prices, contrary to the (Ricardian) interpretation of the
labour theory of value which requires that
prices should be independent of the composition of final demand.7
On the more or less conscious level, such
considerations must have been important in
Marxs choice of assumption concerning the
technical nature of production. In addition
to these intended (or at any rate acceptable)
consequences of the assumption, there are
also a number of rather disturbing conclusions that can be drawn. In the first place,
the assumption of profit-maximizing is virtually idling, at least at the micro-economic
level. (It does have a function at the macroeconomic level, viz. in determining the capital flows that bring about the equalization of
the rate of profits.) The use of factor combinations in industrial production will be the
same in any economic system, whatever the
motivations of the agents. This is a rather
paradoxical conclusion: on the one hand
Marx repeatedly stressed that capitalists are
motivated solely by hunger for profits, and
on the other hand it turns out that they
would have chosen identically whatever their
sense

motivation. There is

no formal inconsistency
but
on
a
here,
priori grounds one would exMarxists
to
pect
prefer (ceteris paribus) a
that
theory
brings the assumption of profit
maximization to bear upon the process of

production itself.
In the second

place, and this is the more

for
the present purpose, the
important point
of
fixed
coefficients is incomasumption
patible with the stated aim of Marx to explain bourgeois political economy as ideological (and in a sense correct) rather than
as false. The neoclassical theory of exploitation (of which more below) states that
the worker is exploited if he receives less
than his marginal product. On the assumption of fixed coefficients, this theory becomes either absurd or identical with the
Marxist theory. If we define the marginal
product by the right derivative, which is
zero, the neoclassical definition becomes absurd ; if we use the left derivative which
equals the average product, it coincides with
the Marxist definition. These consequences

may appear to strengthen the Marxist position, but to my mind they do not. An important task for Marxist theory must be to
analyse why the neoclassical definition is
superficially and intuitively compelling,
even if false at a deeper level. This, obviously, cannot be done through a theory
that makes the neoclassical theory come out
as absurd even at the surface level.
The crucial idea is the following. To each
worker, the capitalist entrepreneur may say
with some appearance of truth: if you leave
the production process, production will be
curtailed by an amount X; it is impossible
for me, therefore, to pay you more than the
equivalent of X. This argument can be used
for all workers, and can therefore justify the
capitalist retaining for himself what is left
after all workers have been paid the amount
X. On the assumption of fixed coefficients,
exactly nothing would be left; on the alternative assumption of a diminishing and positive marginal product of labour there will
be something left for profits. This means
that i f we accept that each worker can be

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7
treated as if he were the marginal worker,
then the existence of profits receives a
natural and compelling justification.

understanding we must also take account of

the qualitative features that follow from the
personal and direct confrontation between

On the one hand this is certainly a case

of the fallacy of composition, but on the
other hand the institutional arrangements of
classical capitalism (Anti-Combination Acts
etc.) were designed precisely to create and
perpetuate the isolation of the workers from
each other that permits individual wage
negotiations based on this fallacy. In my
opinion this analysis of the link between
economic institutions and economic theory
is much more true to the spirit of Marx
than the rather simplistic analysis which follows from the letter, i. e. from the assumption of fixed coefficients which would not
even permit the appearance of validity for
the neoclassical theory of exploitation.
It should perhaps be added that the discussion in the preceding paragraphs does
not offer any argument against the assumption of fixed coefficients. Such arguments
are easily forthcoming when we take a closer
look at how the production process actually
operates; it is just as true in industry as in
agriculture that we can often get more out of
the process by increasing unilaterally the
amount of one factor of production, such as
labour, raw materials, energy etc. I have
only tried to convey the point that from the
assumption several conclusions can be deduced, one of which (the priority of values
over prices) is a desideratum of the theory,
while two others (the reduced importance
of profit-maximizing and the triviality of
bourgeois economics) run counter to what I
see as important strands in the same theory.
As observed above, the concrete content
of exploitation also varies with the institutional property arrangements in which it
takes place. Three alternatives to capitalist
exploitation will be briefly considered: slave
economies, pure sharecropping, and sharecropping with indebtedness. I do not think
that these pre-capitalist relations are adequately described by the quantitative measure
of exploitation. This measure tells us something about the relationships, but for a full

master and slave. Nevertheless it will be

useful to see how changes in the institutional

setting will induce differences in the use of

factor combinations and in the rate of exploitation, defined as the ratio of surplus
product to wages (or the commodity equivalent to wages). In all cases we shall assume
that we are dealing with agricultural production on a given piece of land, only the number of workers and the productive technology being subject to variation.
As the logic of slave economies is discussed in more detail later on, here I shall only
state that in recent discussions two main alternatives to profit-maximizing have been proposed. One is that slaveowners tended to
look at slaves as being simultaneously pyroductive assets and objects of prestige (conspicuous consumption), which implies a tendency to hold more slaves than would be
optimal for profit-maximizing. A second
alternative
the more interesting one, to
is that the slaveowners conmy mind
sumption was a function not of net income,
but of gross income; more precisely a function of the number of slaves used in production. This alternative has no immediate implications for the number of slaves employed. It is easy to see that with diminishing returns to labour the rate of exploitation
is a decreasing function of the number of
slaves; it is equally obvious that this should
not imply that slaveowners who tor reasons
of conspicuous consumption use more slaves
than the optimal number somehow treat
their slaves better than rational (profitmaximizing) slaveowners.
In a share-cropping economy with overpopulation8 the logic of exploitation requires
(1) that the owner should increase the number of tenants up to the point where marginal productivity becomes zero, and (2)
that the total share of the tenants should
suffice for subsistence. That is, with a given
percentage share of the owner in the total
produce it is always in his interest to increase
-

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8
the number of tenants up to the point of zero
marginal productivity, but at the same time
the percentage must be adjusted so as to
permit the survival of the tenants. It then
follows that the rate of exploitation is smaller than under capitalism; more importantly
it follows that a larger number of labourers
will be employed at subsistence than under
capitalism. The transition from sharecropping to capitalism may therefore be a bad
bargain from the point of view of employment.
If to
we

sharecropping we add indebtedness,9

get
complicated set-up, where the
a more

income of the landowner is made up of two

parts, of which the very existence of the second is a condition for the frist. That is, the
landowner receives both his share of the harvest and interest on the consumption loans
accorded to the tenant; these loans, in addition to their income-generating function, also
have the effect of perpetuating the dependence relationship that is a condition for the
maintenance of the sharecropping arrangement. (It is easy to see the analogy between
this situation and the predicament of former
colonies which are maintained in informal
dependence through their indebtedness to
the former colonizers.) One implication is
that the land-owner will not accept improvements in technology that will permit the
tenant to liberate himself from the permanent
debt, even if the share of the landowner after
the productivity increase would exceed the
sum of his share and interest on the consumption loans before the increase. Economically such improvements would be to
the advantage of the landowner, but politically they might be so explosive as to
threaten the very base of the exploitation.
The neoclassical theory
now turn to the neoclassical theory of exploitation. In order to prevent misunderstandings, it should be stated at the outset
that very few neoclassical economists would
accept a marginal productivity theory of just
income as a general principle.10 They are
quite aware of the need for some redistribuI

tion of income to the poor, to the disabled,

to the farmers and peasants or to whatever
group is singled out by the social welfare
function. Nevertheless I think that in our
simplified model, where a homogeneous
class of workers-nonowners confronts a
homogeneous class of owners-nonworkers,
most neoclassical economists would tend to

accept marginal productivity

of

as a

criterion

just income.
Actually the

neoclassical theory of just

income for workers is but a special case of
the more general neoclassical tenet that all
factors of production should be rewarded
according to their marginal productivity.
This tenet again rests upon the thesis that
all factors can be rewarded (simultaneously)
according to their marginal productivity. The
mathematical rationale for this thesis is
found in Eulers theorem for homogeneous
functions of first order. If the production
function is written as f(K,L), where K is
capital and L is labour, then neoclassical
theory typically requires that f be continuously differentiable in both variables and
that f(tK,tL) = t f(K,L) for all t (constant
returns to scale). If these requirements are
satisfied, then Eulers theorem states that

f(K,L) - fx(K,L)K-f-fL(K,L)L where

and fL are the partial derivatives with respect
to capital and labour. In words, the theorem
states that if there are constant returns to

scale, then rewarding both capital and labour

to their marginal products will
exactly exhaust the total product: a beautiful
expression of class harmony in mathematical
language.

according

I have spoken about the neoclassical

notion of exploitation, but actually I think
that two distinct notions can be found, more
or 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 value
of) 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 entrepreneurial
profit 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 secondary
sense without exploitation in the primary
sense. If we assume constant returns to scale,
perfect competition and profit-maximizing
entrepreneurs, there can be no exploitation
in either sense.
This is a central idea of neoclassical
theory: exploitation can only occur in imperfect capitalism, most importantly because
of imperfect competition. On the Marxist
notion, on the other hand, exploitation takes
place in all capitalist economies, however
perfect. (This is even close to being a
definition of capitalism in Marxist theory,
but I shall argue below that even in the
absence of exploitation there may be features in the economy that would justify
the term capitalism.) It should be clear
enough that for purely analytical purposes
both 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 against
exploitation in the Marxist sense; when they
revolt within the system against abuse of the
system, they revolt against exploitation in
the neoclassical sense. The controversial
issue is found along the normative dimension : should workers revolt against or within
the system?
Exploitation of workers may result from
monopoly (in the product market), monopsony (in the labour market) or cartellization. The last case may be briefly explored
in order to exhibit the multiplicity of notions
of exploitation that may apply in a given
situation. It is well known that the main
problem in cartel formation is the temptation, for each individual cartel member, to
be a free rider and exploit the high prices
created by the restriction of production. If
one cartel member maximizes individually,
whereas all the other members curtail production in order to maximize collective profits, then it is surely not an abuse of language
to say that the free rider is exploiting the
others, in a sense that differs both from the
Marxist one and either of the neoclassical

rider, however, would not be

(neoclassically) exploiting his workers, as
the cartel members would be doing, but
ones.

The free

would be exploiting his workers in the

Marxist sense.

Confrontation
In the preceding pages I have sketched the
bare bones of the Marxist and neoclassical theories of exploitation. Here I turn to
the task of staging a critical confrontation
between the two approaches, a task that
seems to be of some importance because

bourgeois economists so

often misunderstand
the Marxist notion of exploitation.ll As a
starting point for the discussion we may observe that if the apparent symmetry of capital and labour in the function f(K,L) is a
real 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 equal
right to rewards, so that we should reject
any theory implying that a just reward to one
factor excludes any reward at all to the
other. Or to put the matter positively, the
state of affairs where no factor is exploited
should at least be logically possible. These
objections to the Marxist theory will of
course be countered by denying that capital
and labour are symmetrical factors. Specifically Marx himself argued that capital really
is nothing but congealed labour, so that on
closer analysis the production function has
labour as its only argument. This idea can
be made more precise by stating that the
production process should be represented by
a functional Pet) = F(L(t) ), where P(t)
and L (t) are the time profiles of output and
of labour input respectively, and not by the
function P = f ( K,L) . If the production process is represented by this functional, all
justification for a reward to capital evaporates ; 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 involved here: the so-called capital contro-

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10
the problem of hysteresis in the
social sciences; the problem of historical
principles vs. end-result principles in ethical theory; and finally the ideological element in economic theory. Starting with the
first issue, it is by now generally accepted 12
that under many plausible circumstances the
process of production cannot analytically be
represented by a function f (K,L) . This is so
because (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 diminishing marginal productivity. From this fact
at least one author explictly,13 and many
implicitly, have drawn the following conclusions. Firstly, since the form f(K,L) is
inadequate, only the form F(L(t) ) can be
adequate. Secondly, since only this latter
form is adequate, capital cannot claim any
reward. In my opinion both of these deductions are fallacious. The second is fallacious on the elementary grounds that
normative conclusions cannot be deduced
from analytical premises; the first because
presently existing effects must have presently

versy ;

operating causes.
The point about presently operating causes
probably is the least familiar one, so that
some space is required to explain it. 14 If an
explanation of the value of some variable at
time t appeals to values of the same or of
other variables at time t-2 or earlier, then
we have a case of hysteresis. If, on the other
hand, no appeal is made to values earlier
than t-1, the explanation uses state variables
only. (For simplicity discrete time is asstate variable
in
form
of simulwould
be
the
explanations
taneous differential equations.) For general
metaphysical reasons hysteresis cannot be a
feature of the real world, only of our theories about it. If past causes could have an
impact upon present phenomena over and
above the influence that is mediated by the
traces left by the past in the present, then
we would have a case of temporal action at
a distance that is surely just as abhorrent to
the mind as spatial action at a distance. The

sumed ; with continuous time,

explanatory ideal of science must always be

to conceptualize the traces left by the past
in the present into state variables, so as to
reflect the currently operating causes.
On the other hand this may prove difficult
in some cases, and then an appeal to past
values of some variables may be an alternative. If, for example, it turns out that the
transition probabilities governing social
mobility do not depend solely upon present
occupation, then we may either look for
other present factors such as income or
race, or we may make the vector of transition probabilities a function of occupation
in one or more past periods. The fact that
most studies of social mobility have chosen
the latter approach, does not imply that the
former is inherently impossible. Similarly the
fact that the process of production can be
represented by a functional F ( L ( t ) ) , does
not imply that a state-variable explanation
cannot be found. Even if the particular statevariable explanation f(K,L) has been shown
to be inadequate, some explanation of the
form f (K1,K2, .. Kn,L) will surely do the
job, where each K; represents capital at some
less aggregate level (or perhaps at the level
of no aggregation at all, so that each K;
would be a qualitatively distinct type of

capital good).
prove is the possibility of
the process of production in a
manner where capital is absent, not the
indispensability of this representation. By
itself this possibility does not imply a conclusion to the effect that only labour has a
right to a reward, but if taken together with
the principle to each according to his work
such a conclusion does follow. Because the
working class as a whole, viewed as a sequence of generations of workers, generates
the entire product, viewed as a continuous
stream of output, it is entitled, on this principle, to the whole net product and nothing
is left for the capital owners.
The term of entitlement is used here deliberately, to show up the formal similarity
between the Marxist theory of exploitation
and Robert Nozicks theory of justice.15 In
Thus all

we can

representing

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11

Nozicks terminology, his own theory is

based 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 states
may be indistinguishable in all factual
respects (including memories about the
past) and nevertheless have different normative implications, viz. if the states are the
end results of different historical processes.
We may talk, perhaps, of a moral hysteresis
that is a more substantial phenomenon than
the causal hysteresis discussed above. In
contrast, most theories of justice have used
end-result principles, in the sense of requiring only information about the present
in order to determine what is a just distribution in the present. The neoclassical principle to each according to his marginal productivity clearly is an end-result principle
in this sense.
I believe that the Marxist notion of alienation is very closely related to the notion of
end-result principles. Alienation means that
the product of mans own activity takes on
an independent and reified form, and even
can be turned against man himself. Similarly,
alienation can be abolished only if man takes
possession of his own history and recognizes
in his present environment (including the
capital goods with which he is working) the
result of his own past activities. The worker
is alienated to the extent that he sees present
capital goods as the property of present
capitalists rather than as the product of past
workers, one implication of this being that
he accepts that the product of his own activity
( e. g. the future capital goods ) belongs in part
to the capitalist class and can be used to legitimate the exploitation of future workers. 16
It should be clear from these remarks that
solidarity between all workers at a given
moment of time is not sufficient for the creation of a revolutionary movement; in addition solidarity across the generations is required. To the extent that workers are isolated from each other temporally as well as
spatially, the neoclassical theory of income
distribution is totally compelling. Individual

wage negotiations can then, as explained in

Part II above, bring about a reward according to marginal productivity with an appearance of legitimacy and even of inevitability.
The formation of labour unions and the
transition to collective bargaining is a necessary but not a sufficient condition for the
workers appropriation of the whole net product. If workers remain alienated, i. e. accept
that the capital owners have a right to some
reward for their contribution to the process
of production, then the bargaining process is
defined as a bilateral monopoly where the
outcome may be according to the NashZeuthen solution117 or to one of the other
solution concepts that have been proposed
for two-person cooperative games. When
the working class as a whole negotiates with
the capitalist class as a whole, there is no
inherent necessity of wages coinciding with
the value of marginal product. The unions
may quite well be able to impose a package
solution of higher wages and no dismissal of
workers, which implies (in the short term, at
least) that wages are above marginal product. What is excluded by the rules of the
ame, however, is that wages should exhaust
the 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 rejection of any particular representation of
the process of production should not have
any normative implications, we may ask
whether 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 problem with all such statements is that it is
hard to see what kind of feedback loop from
effect to cause could be invoked to explain
the use of the representation f (K,L). 19 To
my mind a more plausible conjecture (whose
truth remains to be proved) is that the link
between capitalism and the form f (K,L) is
causal rather than functional. That is to say
I believe that the existence of an aggregate
class of capital owners may have had a part
in 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 nothing

would follow concerning the legitimating
effects of this production function. Or to put
the matter in still another way, from the fact
that a certain theory causally springs from a
certain class we should not conclude (nor
exclude) that the theory is to the benefit of
that class; a point that has been beautifully
illustrated in the recent work of Albert
Hirschmann on 17th and 18th century
economic thought2 and also made by Marx
in his observation that the physiocratic doctrine, even if stemming from the landowning
class, actually was to the benefit of the
emerging capitalist class.21

Exploitation and investment

The upshot of the confrontation was essentithe crucial condition of

ally

that

net

investment) the Marxist notion of

(given

no

ex-

ploitation should be preferred to the neoclassical one. The appearance of a legitimate reward to capital owners is dispelled as an illusion once the process of production is seen in
a longitudinal or historical perspective or,
what amounts to the same thing, once working class solidarity is extended from the
intra-generational to the inter-generational
dimension.22 Once

we

take account of net

investment, however, the problem appears

in a different light. If exploitation is understood literally as the existence of a gap between wages and average product, then
workers are exploited in any society, capitalist or communist, where net investment
take place. In order to improve the definition so as to prevent this unwanted implication, it would be tempting to say that workers are not exploited if the sacrifices (i. e.
investment) of the present generation of
workers are made to the benefit of later
generations of workers; or that workers are
exploited only to the extent that the investment ultimately benefits capitalist consumption. One might distinguish, that is, between
two measures of the rate of exploitation:

The first rate measures the exploitation in

the 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 that
the second is the more appropriate one
where some net investment occurs.
Tempting as it is, I believe that this line
of argument should be rejected. It would
have the consequence that very little exploitation is going on in modem capitalist
economies, where U2 typically is rather small.
Even if much is taken from the workers,
most of it is returned to them later on (with
interest!). Does this mean that all (or almost
all) is to the best in the best of all possible
worlds? I do not think so, for the fact remains that the workers themselves do not
have the right to decide what is to be done
with the part of the net product that is taken
from them. In modem capitalist economies
the notion of exploitation should be linked
to the lack of power over investment decisions rather than to the fact (or to the possibility) 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 a
differential game proposed by Kelvin Lancaster.24 I believe that for modern capitalist
economies this model is more appropriate
than the traditional Marxist view of looking
at class relationships, and that it should
indeed supplant that view. (I also believe,
but this is of less interest, that it is the kind
of model that Marx himself would have
developed if he had been confronted with the
recent development of capitalism.)
In Lancasters model it is assumed that
capitalism is a differential game between
workers and capitalists, each class having
its own control variable whose time profile
it can determine within certain limits. The

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13
control variable of the working class is the
working class consumption out of
production; the power over this
variable can be direct (through wage negotiations) or indirect (through taxes on profits). The control variable of the capitalist
class 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 control
variable of the working class, X2 for the control variable of the capitalist class, and a,
for the upper limit to xl. In modern capitalist economies, a, is very close to 100 per
cent; the workers have the power to consume all of the current output should they
so desire. The division of powers between
the classes may be described by saying that
the workers have the political power and
the capitalists the economic power, the workers 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 earlier
economic systems in the terms defined
above. 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 any
desire to invest part of the surplus. Early
capitalism had a low a, and a high x2: workers were still at subsistence, but the reinvestment process had started up. One might
ask whether ul. or U2 is the most appropriate
measure of exploitation in this case. I believe that ul should be preferred, because the
investments did not have the effect of raising
the consumption level of the existing workers or their descendants, only of permitting
ever larger number of workers to live at
subsistence. From the point of view of the
individual worker, everything happened as if
a large part of his produce was taken from
him irrevocably; the fact that it was transformed into bread for more workers rather
than into caviar for the capitalists mattered
less than the fact that it was not transformed
into butter for himself.
In modern capitalism the situation is
rather characterized as one of high a1, low

rate of
current

xl, and

high X2As observed by Lancaster, each of the

two classes finds itself in a dilemma. The
workers dilemma is the following: if they
consume maximally now, nothing will be
left for investment and future increases in
consumption, but if they leave something for
investment they have no guarantee that the
capitalists will use this for investment
rather than for their own consumption.
The capitalists dilemma is this: if they
consume the entire profit now, nothing will
be left for investment and future increases in
consumption, but if they invest out of profits they have no guarantee that the workers
will not retain for themselves the increase in
consumption thereby generated. Adding

suitable number of assumptions to this

model, it can be shown that the game has a
solution, i. e. a uniquely defined pair of
time profiles of the control variables that
are optimal against each other, with two
interesting properties. In the first place the
solution is discontinuous: both classes consume minimally up to some point and then
maximally from that point onwards; in the
second place it is suboptimal, in the sense
of giving to each class a smaller total consumption than would have been possible
with some other pair of strategies (which
would not, however, be optimal against
each 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 setup. To my mind the importance of the
model does not depend upon this issue, but
resides rather in the way in which it captures
the power relationship that characterizes
class conflict in advanced capitalist societies.
Even if the measure ul is inadequate from
the point of view of consumption, it can
serve as a measure of the lack of power over
investment decisions. Even if workers are
not exploited in a quantitative sense, they
are exploited in the qualitative sense of not
being able to decide where and how to invest.
Even if workers consume most of what consumption 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 socialist countries where the power of investment is concentrated in the hands of a few.
Slave economics
In the model just

explored capitalists and

workers mutually have some power over
each other, due to the separation of savings
decision and investment decisions, or of
political and economic power. I shall now
briefly explore a model of pre-capitalist class
relationships where the feature of reciprocal
power can also be found, even if linked to a
very different institutional arrangement. This
is what may be called the Hegel-Genovese
model of slave economies.25 Here the crucial
feature making for mutual dependence is the
contradictory attitude of the master towards
the slave: on the one hand the master wants
to be confirmed in his power by treating the
slave as an inanimate object, but on the
other hand this confirmation is worthless
unless it emanates from an independent
consciousness:
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 by
another whom he does not himself recognize. (To see how absurd this wish really is,
it is sufficient to imagine the farcical idea of
a nation seeking diplomatic recognition from
one of its own colonies.) From this psychological stance a number of consequences
follow. In the first place we should expect
that each slaveowner would be oscillating
between paternalistic and sadistic attitudes
towards his slaves, as one or the other side
of the contradiction gets the upper hand ;27
conversely we would be inclined to reject the
idea that slaveowners can be divided into

two

kinds, one of which is consistently pater-

nalistic and the other consistently sadistic.28

In the second place the masters dependence
upon recognition from the slaves would in a
have turned them into the slaves of
their slaves, as observed by Donne in the
four middle lines of the above stanza or in
the following remark from a recent book by
Genovese: The masters desperately needed
the gratitude of their slaves in order to
define themselves as moral human beings.
The slaves, by withholding it, drove a dagger into their masters self-image.29 In the
third place we should expect the slaveowners to have maximization of consumption rather than of profits as their main
objective. As noted by Hegel, the masters
power over the slave is mediated through his
conspicuous consumption of the objects produced by the slave; the more slaves he has in
his possession, the greater the socially necessense

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 their
hold on the masters, were in a better position
than the free workers who had no comparable hold on their employers; nor, finally,
am I suggesting that the reciprocal dependence relationship between master and slave
was in the least similar to the mutual power
relationship formalized by Lancaster in his
model of modern capitalism. The main point
of the brief remarks above was to substantiate the assertion that the quantitative
measure of exploitation is not very helpful
for the understanding of societies other than
those based on classical capitalism. For that
short period in human history class conflict
can be succinctly characterized by saying
that one class stole some of the goods produced by the other, this robbery gaining an
apearance of legitimacy from the alienated
state of mind in which the genesis of the
capital goods was hidden. In earlier and
later periods the class conflict has been
embedded in more ambiguous institutions
which cannot be reduced to the simple fact
of theft.

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15
NOTES
1. Cp. Arrow (1977) and Sen (1976) for surveys
and discussions.
2. Sen (1973), p. 16-17. He assumes innate differences in the individual capacities for turning
consumption into enjoyment. A similar idea is
found in the writings of Leibniz (Elster 1975,
p. 152 ff.), who argues, however, that the differences stem from economies of scale in consumption. Giving more to those who are already better

off may be justified, that is, either by assuming

that for all levels of consumption they are better
at turning it into enjoyment, or by assuming that
their 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 government
was done by the landowning aristocracy, while the
industrial 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 political
power, because this would have made the economic
opposition between exploiter and exploited coincide with the political opposition between ruler
and ruled, and so sharpen the class struggle to a
point where the existence of the system would
have been threatened. Others have seen the retreat
of the bourgeoisie from power as an act of abdication similar to Ulysses binding himself to the mast
and issuing instructions that his future instructions
should not be followed (Elster 1977 a), because it
was in the long-term interest of the capitalist class
to have a government that could not be swayed by
the short-term interest of that class. Both of these
ingenious interpretations suffer from a lack of
empirical evidence; a more plausible notion is that
the aristocracy was free to maximize its own
interest with a reasonable rate of profit on capital
as one of the constraints. Nevertheless the power
residing in the constraints that limit the feasible
set may be as important as or more important
than the power to define which member of that
set shall be realised, for which reason the assertion
in the text would not seem to be too far off the
mark.
5. Samuelson (1957) questions whether Marx
actually made this assumption; Maarek (1975) and
Elster (1972) give detailed textual evidence to
substantiate the imputation of this assumption to
Marx.
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 consider a pillar of strength. This is
its structuralism, which is to say, its tendency to

take important relations as technically determined

behind the back of the price system, leaving that
latter 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 Marxist
economics (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 GeorgescuRoegen (1976).

9. The following is a resumé of the work of
Bhaduri (1973).
10. Clark (1899) is usually cited as the locus
classicus for the marginal productivity theory of
just income. With important reservations the work
of Robert Nozick (1974) can be seen as an extension of this line of argument.
11. Two examples shall be given of this misunderstanding. In a recent discussion of the
standard of living during the Industrial Revolution
in Britain, R. M. Hartwell and S. Engerman (1975,
p. 210) challenge the Marxist idea (represented by
the work of Thompson 1968) that there was intensified exploitation during the period in question.
This idea they interpret as an assertion that wages
were kept below marginal value product, an assertion which is refuted by pointing to the absence of
either cartellization or monopsony in the labour
market. Only a complete lack of understanding of
the Marxist idea of exploitation (i. e. a total
neglect of the distinction between average product
and marginal product) can explain this interpretation. Engerman is also involved in the second
example of this confusion, to be found in his and
Robert Fogels recent work on American negro
slavery (Fogel and Engerman 1974, especially vol.
II, p. 125 ff.). Their by-now famous or notorious
statement that slaves were exploited only at the
rate of 12 per cent, and that they received over
their lifetime about 90 per cent of what they
created during their lifetime, is derived in the
following manner. In the first place Fogel and
Engerman define the extent of exploitation of a
given slave in a given year as the difference between the value of his marginal product and the
value of the goods required for his maintenance.
In the second place the stream of amounts exploited from the slave is then reduced to the
value at birth by using a discount rate of 10 per
cent. In the third place this value at birth (the
birthright) is divided by the similarly discounted
value of the stream of marginal product generated
by the slave, in order to get the rate of exploitation. Now Fogel and Engerman are aware of the
fact that a Marxist theory of exploitation would
differ 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 by
the maintenance costs rather than by the gross
product. They seem quite unaware, however, of the
incongruity between the first element of their
derivation and the Marxist definition. In the
Marxist theory constructed by Fogel and Engerman, slaveowners would have an indisputable right
to profits on all other capital goods than slaves,
which is of course absurd.
12. A fairly good understanding of the issues
can 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 introsee 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 not
on past labour but on the present value of the
embodiment of past labour, and its current productiveness can be taken to provide a justification
for the attribution of the surplus of current output
over the wage bill to those who have appropriated
the embodiment of past labour, thereby providing
the current basis of future appropriation.
17. Cp. Luce and Raiffa (1957), Ch.6 for a
discussion of this and other solution-concepts for

duction,

cooperative

games.

18. I use this term deliberately rather than a

neutral term such as suggested, because I think
that the Marxist participants in the debate have
only hinted at the importance of ideology without
sticking their neck out to the extent of committing
themselves to empirical (and falsifiable) propositions about how this is supposed to have influenced
the development of neoclassical theory; for specimens see Nuti (1970) and Harcourt (1973).
19. Cp. Elster (1977 b) for further analysis of
the logic of functional analysis. Briefly stated the
argument is the following. Either the legitimating
effects of neoclassical theories of production are
intended or they are unintended. If the former,
then chapter and verse should be cited to prove
that neoclassical theorists have in fact harboured
these intentions; if the latter, then a feedback loop
from 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 selection 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 and Albers (1974) for the case of militarily financed research, or the form of a natural
selection, if it could be demonstrated that the
effects maintain their cause even if neither inten-

ded

recognized. Of these three possibilities all

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 this
inter-generational solidarity is also crucial if a
revolutionary class is to steer the correct middle
nor

seem

to

me

between reformism and activism.

23. Actually the temporal measure of exploitation should be defined by the ratio of one infinite
series to another, i. e. the sum of the amounts of
consumption made available to all future capitalists through a given amount of work today
divided by the sum of the amounts of consumption
made available to all future workers through the
same amount of work. It can be shown, however,
that this measure coincides with the measure U
.
2
24. We may observe in passing that the same
model might also be applied to the relation between multinational companies (controlling the
rate of reinvestment out of profits in the operating
country) and the operating country (controlling
the rate of taxes on profits).
25. For this model see Hegel (1807), Cp. 4;
Genovese (1965, 1969, 1971, 1974); and Elster
course

(1976 b).
26. John Donne, The Prohibition; see also
Elster (forthcoming), Ch. 4.
27. Genovese (1974, p. 96) characterizes the
slaveowners in these terms: They were tough,
proud, and arrogant; liberal-spirited in all that did
not touch their honor; gracious and courteous;
generous and kind; quick to anger and extraordinarily 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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