Archive for the ‘marxism’ Category

Free trade or protectionism? – the Keynesian dilemma

July 11, 2018

The trade war that has broken out has confused mainstream macroeconomics.  The majority still see tariff increases as ‘protectionism’ and ‘free trade’ as the only way to operate. Trump’s measures are generally condemned.  But among the Keynesians, there is confusion and split.

Martin Wolf, the Keynesian economic journalist, who writes for the FT, reckoned that the trade war would be costly for global capital: “Global co-operation would surely be shattered”  Nevertheless, he argued for UK retaliation against Trump’s measures “more because the alternative looks weak than in the belief that it would work. Another thing the rest of the world should do is to strengthen their co-operation.”  On the other hand, he thought Trump’s wild proposal to create tariff-free area (for rich countries only) could be taken up. “Who knows? It might even work.”  He did not explain how cutting tariffs on goods from the 3-4% (that they average now for most advanced countries) to zero would make any difference.

While Wolf looks for ways to ‘save globalisation and free trade’ through retaliation, another Keynesian Dani Rodrik actually advocates protectionism as a good idea for economies with weak domestic growth: “US protectionism surely will generate some beneficiaries as well in other countries.” 

In a contrary view to Wolf, who calls for retaliation to stand up to Trump. Rodrik says Europe and China should “should refuse to be drawn into a trade war, and say to Trump: you are free to damage your own economy; we will stick by policies that work best for us.”  Indeed, he says, domestic industries may benefit from tariffs on their exports to the US – they could sell at home instead. He cites how Boeing could sell more planes in the US and Airbus could do the same in Europe. “Some European airlines favor Boeing over Airbus, while some US airlines prefer Airbus over Boeing. Trade restrictions may result in a total collapse in this large volume of two-way trade in aircraft between the US and Europe. But the overall loss in economic welfare would be small, so long as airlines view the two companies’ products as close substitutes.”  According to Rodrik, “US protectionism surely will generate some beneficiaries as well in other countries.”

The protectionist line has also been peddled by leftist economist Dean Baker.  He points out that not everyone gains from ‘free trade’. He claims that it was free trade that lost manufacturing jobs in the US, echoing the Trumpist argument.  However, there is much evidence that this was not the case.  As I said in a past post on Trump, trade and technology, “the loss of US manufacturing jobs, as it has been in other advanced capitalist economies, is not due to nasty foreigners fixing trade deals.  It is due to the inexorable attempt of American capital to reduce its labour costs through mechanisation or through finding new cheap labour areas overseas to produce.  The rising inequality in incomes is a product of ‘capital-bias’ in capitalist accumulation and ‘globalisation’ aimed at counteracting falling profitability in the advanced capitalist economies. But it is also the result of ”neo-liberal’policies designed to hold down wages and boost profit share.”

Baker claims that trade deficits lose jobs because it reduces “demand” and so reducing the US trade deficit would save jobs.  He makes this argument when the official unemployment rate in the US, the UK and Japan is at an all-time low (yes, I know many are crap jobs)!  Apparently, if everybody ran a trade surplus (impossible by the way) all would be better off.  What he really means is Trump is right to turn the US trade deficit into a surplus and get manufacturing jobs back from the developing world and Europe. It is certainly a weird and confused argument for nationalism.

The Keynesians are confused about whether they favour ‘free trade’ or protectionist/nationalist measures.  That echoes that confusion that Keynes had during the last Great Depression of the 1930s.  He changed his mind from a strong free trader in the late 1920s to a protectionist and advocate of tariffs by the mid-1930s.  This changing view was really an expression of the changing view of British capitalism.  Free trade is fine for those winning in markets; protectionism is better when a national capital loses share.  And that was Britain’s position.

In 1923, Keynes endorsed free trade in no uncertain terms: “We must hold to Free Trade, in its widest interpretation, as an inflexible dogma, to which no exception is admitted, wherever the decision rests with us. We must hold to this even where we receive no reciprocity of treatment and even in those rare cases where by infringing it we could in fact obtain a direct economic advantage. We should hold to Free Trade as a principle of international morals, and not merely as a doctrine of economic advantage.”

But his ‘moral’ position soon dissipated as British capitalism fell into a long depression in the mid-1920s and then in the 1930s.  In his seminal work, The General Theory, published in 1936, he concluded that “the one big (and smart) idea of absolute monarchy was to push exports over imports…..“A favorable balance, provided it is not too large, will prove extremely stimulating; whilst an unfavorable balance may soon produce a state of persistent depression.”

He advocated tariffs on imports into the UK as an alternative way of cutting real wages (by increased import prices) and to boost domestic production.  For Keynes, it was a way for British capital to gain a cost advantage over its rivals by reducing wage costs in real terms.  “I am frightfully afraid of protection as a long-term policy,” he testified to a UK parliamentary commission, “but we cannot afford always to take long views . . . the question, in my opinion, is how far I am prepared to risk long-period disadvantages in order to get some help to the immediate position.” Of course, once capitalism globally had recovered and, with it British capital, then ‘free trade’ could be renewed.

The current confusion in macroeconomics and particularly among modern Keynesians mirrors the changing views of Keynes as the current Long Depression lingers and ‘globalisation’ fails for all.  So now we have Keynesians like Rodrik and Baker supporting tariffs on US imports and pushing for trade surpluses, while calling on Europe and China not to retaliate!  And Wolf calls for retaliation by Europe and Asia.

What is the Marxist view?  Should we support tariffs and other protectionist measures introduced by weaker capitalist nations to ‘stand up’ to Trump’s measures (Wolf)?  Alternatively should we support Trump’s measures as a way of saving US manufacturing jobs (Baker) and perhaps helping other countries to boost their domestic industries (Rodrik)?

Free trade or protection?  I outlined my answer in a previous post.  Free trade has been no great capitalist success.  Capitalism does not tend to equilibrium in the process of accumulation.  As Adam Smith put it, in contrast to Ricardo, “When a rich man and a poor man deal with one another, both of them will increase their riches, if they deal prudently, but the rich man’s stock will increase in a greater proportion than the poor man’s. In like manner, when a rich and a poor nation engage in trade the rich nation will have the greatest advantage, and therefore the prohibition of this commerce is most hurtful to it of the two”. Capitalism does not grow globally in a smooth and balanced way, but in what Marxists have called ‘uneven and combined development’.  Those firms and countries with better technological advances will gain at the expense of those who are behind the curve and there will be no equalisation.

Free trade works for national capitalist states when the profitability of capital is rising (as it was from the 1980s to 2000) and everybody can gain from a larger cake (if in differing proportions).  Then globalisation appears very attractive.  The strongest capitalist economy (technologically and thus competitively in price per unit terms) will be the strongest advocate of ‘free trade’, as Britain was from 1850-1870; and the US was from 1945-2000.  Then globalisation was the mantra of the US and its international agencies, the World Bank, the OECD and the IMF. But if profitability starts to fall consistently, then ‘free trade’ loses its glamour, especially for the weaker capitalist economies as the profit cake stops getting large.

Marx and Engels recognised that ‘free trade’ could drive capital accumulation globally and so expand economies, as has happened in the last 170 years.  But they also saw (as is the dual nature of capitalist accumulation) the other side: rising inequality, a permanently floating ‘reserve army’ of unemployed and increased exploitation of labour in the weaker economies.  And so they recognised that rising industrial capitalist nations could probably only succeed through protecting their industries with tariffs and controls and even state support (China is an extreme example of that).

Engels re-considered the case for free trade in 1888 when writing a new preface on a pamphlet on free trade that Marx had wrote in 1847.  Engels concluded that “the question of Free Trade or Protection moves entirely within the bounds of the present system of capitalist production, and has, therefore, no direct interest for us socialists who want to do away with that system. Whether you try the Protectionist or the Free Trade will make no difference in the end.”

But it is informative to see the Keynesians split over favouring free trade for global capital (Krugman) or protection for national capitals (Rodrik and Baker for the US and Wolf for the UK and Europe).  Sign of the times.


China workshop: challenging the misconceptions

June 7, 2018

The recent workshop on China organised by the China Workshop (poster and programme_05062018) in London asked all the questions, even if it did not resolve them.  What are the reasons for China’s phenomenal growth in the last 40 years and can it last?  What is the nature of the Chinese economy: is it capitalist or not?  What explains under Xi the new emphasis on studying Marxism in China’s universities?  Is China’s export and investment expansion abroad imperialist or not?  How will the trade war between the US and China pan out?

In the opening session, Dr Dic Lo, Reader in Economics at SOAS, London University and Zhu Andong, Vice Dean at the School of Marxism at Tsinghua University, Beijing (representing a delegation from various Chinese universities) were at pains to argue that China is misrepresented in the so-called West and not just through mainstream capitalist views but also from the left.

All the talk from the left, said Lo, was about political repression, labour exploitation, inequality or Chinese ‘imperialism’. But then how to explain China’s phenomenal growth and success in taking over 850m people out of poverty (as defined by the World Bank) and reaching national output second only to the US.  China doubles real living standards every 13 years. It now takes the US and Europe 50 years and Japan even longer.  Is this just fake or illusory and if not, how can this ‘capitalist’ and ‘imperialist’ economy have bucked the trend, when the record of all other capitalist economies (advanced or ‘emerging’) can show no such success? “How can it be possible, in our times, for a late-developing nation to move up the world political-economic hierarchy to become imperialist? Can anyone on the left answer this question?

Dic Lo criticised the majority view of left political economists that China could be characterised as “neoliberal capitalist”, the so-called “Foxconn Model” of labour exploitation. This view was pioneered by Martin Hart-Landsberg and Paul Burkett, made most influential by David Harvey, most systematic by Minqi Li; and politically correct by Pun Ngai.  But were they right?

Zhu Andong also critiqued what he considered was this Western view.  In contrast, far from a Marxist critique disappearing in China, there was growing official support for the study of Marxism in Chinese universities, both in special departments and even increasingly in economics departments, which up to recently had been dominated by mainstream neoclassical economics influenced by Western universities.

In my contribution, I also referred to the dominance of mainstream economic analyses on the nature of China – and such theories also still appeared in China’s own financial institutions like the People’s Bank of China.  A recent striking example is Wang Zhenying, director-general of the research and statistics department at the PBoC’s Shanghai head office and vice chairman of the Shanghai Financial Studies Association. For Wang, Marx has had his day in the theoretical limelight (ie 19th century) and for that matter so had Keynes (20th century).  The recent global financial crisis needs a new theory for the 21st century.  And this apparently was the behavourial economics of ‘uncertainty’, not Marx.

I argued that there are really three models of development that could explain China’s growth miracle and whether it would last.  I deal these in detail in my paper on China for the Leeds IIPPE conference in 2015.  So please consult that for a fuller account than this post can provide.

There is the mainstream neoclassical view that: China went through a primitive industrial expansion using its ‘comparative advantage’ of cheap and plentiful labour and investment in heavy industry.  But now China had reached the ‘Lewis point’ (named after the left economist of the 1950s, Arthur Lewis). Put simply, this is the point at which a developing country stops being able to achieve rapid growth relatively easily, by simply taking rural workers doing unproductive farm labour and putting them to work in factories and cities instead. But once this ‘reserve army of labour’ is exhausted, urban wages rise, incomes reach a certain level and a middle-class emerges.  China is now in a ‘middle-income’ trap like many other emerging economies, from which it cannot escape and become an advanced economy, unless it gets rid of state enterprises and heavy industry and orients towards the consumer and services.

This view is nonsense for several reasons – not least because comparative advantage theory is bogus and unrealistic – after all, China has grown exponentially not just because of cheap labour but also because of massive productive investment promoted and controlled by the state sector.  Actually, as a result of that investment expansion, consumption spending is also growing very fast. Would a switch to capitalist companies serving a middle-class consumer be better?

The second model is the Keynesian.  This recognises that China’s success has been due to massive investment in productive capital, not just the use of cheap labour.  Infrastructure investment directed and controlled by the state was behind the ability of the Chinese economy to avoid the worst effects of global financial crash and the Great Recession where every other economy suffered.  But what the Keynesian model fails to recognise is that China cannot escape the law of value and imbalances and inequalities that value creation through trade and the growing market economy generates.

The Marxist analysis starts from the basic premise that human social organisation aims to raise the productivity of labour to the point that sufficient abundance will make it possible for toil and poverty to be eliminated.  But the drive for higher productivity in capitalism comes into conflict with capital’s requirement for profitability.  Increasingly, the issue for China is whether the capitalist sector of the economy will eventually override the planned public sector, so that profitability will dominate over productivity and crises will appear, leading to stagnation not expansion.

In my view, that point has not yet been reached in China.  The state sector and public investment through one-party dictatorship still control investment, employment and production decisions in China – the private capitalist sector, although growing, is still subject to that control.  See my post here.

Now this is a minority view among Marxian economists, let alone mainstream economics.  Most consider that China is capitalist just like any other capitalist economy, if with a bit more state intervention.  Indeed, it is even imperialist in the Marxist sense.  But, as I have shown in previous posts, 102 big conglomerates contributed 60 per cent of China’s outbound investments by the end of 2016.  State-owned enterprises including China General Nuclear Power Corp and China National Nuclear Corp have assimilated Western technologies—sometimes with cooperation and sometimes not—and are now engaged in projects in Argentina, Kenya, Pakistan and the UK.  And the great ‘one belt, one road’ project for central Asia is not aimed to make profit.  It is all to expand China’s economic influence globally and extract natural and other technological resources for the domestic economy.

This also lends the lie to the common idea among some Marxist economists that China’s export of capital to invest in projects abroad is the product of the need to absorb ‘surplus capital’ at home, similar to the export of capital by the capitalist economies before 1914 that Lenin presented as key feature of imperialism.  China is not investing abroad through its state companies because of ‘excess capital’ or even because the rate of profit in state and capitalist enterprises has been falling.

Indeed, the real issue ahead is the battle for trade and investment globally between China and the US.  The US is out to curb and control China’s ability to expand domestically and globally as an economic power. At the workshop, Jude Woodward, author of The US vs China: Asia’s new cold war?, outlined the desperate measures that the US is taking to try to isolate China, block its economic progress and surround it militarily. But this policy is failing.  Trump may have launched his tariff hikes, but what really worries the Americans is China’s progress in technology. China, under Xi, aims not just to be the manufacturing centre of the global economy but also to take a lead in innovation and technology that will rival that of the US and other advanced capitalist economies within a generation.

There was a theoretical debate at the workshop about whether China was heading towards capitalism (if not already there) or towards socialism (in a gradual way).  Marx’s view of socialism and communism was cited (from Marx’s famous Critique of Gotha Programme) with different interpretations.  For me, I reckon Marx’s view of socialism and/or communism starts from two realistic premises; 1) that communism as a society of super-abundance where toil, exploitation and class struggle have been eliminated to free the individual, is technically possible now – especially with the 21st technology of AI, robots, internet etc; and 2) socialism and/or any transition to communism cannot even start until the capitalist mode of production is no longer dominant globally and instead workers’ power and planned democratically-run (not dictatorships) economies dominate. That means China on its own cannot move (even gradually) to socialism (even as the first stage towards communism) unless the dominant power of imperialism is ended in the so-called West. Remember China may be the second-largest economy in the world in dollar terms but its labour productivity is less than one-third of the US.

China has succeeded in transforming its economy and society since the revolution of 1949 by the removal of capitalist and imperialist power and through state control of the commanding heights of industry and agriculture.  And it is now succeeding in applying new technology to take it forward as a modern urbanised society in this century.  But at the same time, the law of value and capitalism operates within the country.  Indeed, the capitalist sector in the economy is growing; there are many more Chinese billionaires and inequality of income and wealth has risen; while Chinese labour struggles against exploitation in the workplaces.  And the law of value exerts its destructive influence also through international, trade, multi-national companies and capital flows – it was no accident that when China last year relaxed its capital controls on the advice of neoliberal elements in the monetary institutions that the economy suffered serious capital flight.

There is a (permanent) struggle going on within the political elite in China over which way to go – towards the Western capitalist model; or to sustain “socialism with Chinese characteristics”.  After the experience of the Great Recession and the ensuing Long Depression in the West, the pro-capitalist factions have been partially discredited for now.  President for Life Xi now looks to promote ‘Marxism’ and says state control (through party control) is here to stay.  But the only real way to guarantee China’s progress, to reduce the growing inequalities and to avoid the risk of a swing to capitalism in the future will be to establish working class control over Chinese political and economic institutions and adopt an internationalist policy a la Marx.  That is something that Xi and the current political elite will not do.

The fallacy of composition and the law of profitability

May 30, 2018

In mainstream economics, the concept of the ‘fallacy of composition’ is often used.  In a general sense, the fallacy of composition arises when it assumed that the sum of all individual parts will equal the whole.  Sometimes, it does not.  There are many examples: if you stand up at a concert, you can usually see better. But if everyone stands up, everyone cannot see better as it will lead to obscured views for the majority of attendees. Therefore, what might be true for one individual in the crowd is not true for the whole crowd.  This phenomenon happens because the interaction of individual moves can affect the overall result.

The fallacy of composition is often cited in economics.  Paul Samuelson in his ubiquitous Economics textbook for university students reckoned “the fallacy of composition is one of the most basic and distinctive principles to be aware of in the study of economics”. And it is invariably used by Keynesian economists in their advocacy of government spending to boost the economy.  This is the paradox of thrift.  This is the belief that if one individual can save more money by spending less, then society or an economy can also save more money by spending less. But if every household reduces spending, then the overall demand for products and services would decline. This decline would lead to lower sales revenue and profits for businesses. As a result, businesses would have to lower wages or lay off individuals. People would have less income and would save even less. What is true for an individual in the economy is not necessarily true for the whole economy.

The fallacy of composition in this context has been used by Keynesians to attack the view of the neoclassical and Austrian schools that economies are like individual households. Good housekeeping is good economic policy. But it may be good for a household to tighten its belt but not for whole economies.  So the Keynesians say that there is no crime in running budget deficits and avoiding ‘austerity’, even if it means rising public debt levels.

Now I have discussed the issue of whether rising debt (public and private) matters for a capitalist economy in many places.  So I’m not going over that ground again in this post.

What interests me is that the fallacy of composition applies in another area too – in the refutation of one major critique of Marx’s law of the tendency of the rate of profit to fall.  The most famous modern argument against the law is that by Nobuo Okishio, a Japanese Marxist economist.  Okishio argued way back in 1961 that under competitive capitalism, a profit-maximising individual capitalist will only adopt a new technique of production if it reduces the production cost per unit or increases profits per unit at going prices.  So capitalist accumulation must lead to a rise in the rate of profit not a tendency to fall – otherwise why would any capitalist invest in new technology?  And Marx is used to back up this argument: no capitalist ‘ever voluntarily introduces a new method of production … so long as it reduces the rate of profit’. Marx 1978a, p. 264

Yes, no individual capitalist would introduce a new technology unless it contributed to raising profits and market share, the individual rate of profit.  But this is where the fallacy of composition comes in.  The innovating capitalist steals a march on others through lowering the costs of production against the prevailing market price.  Its profits go up.  But that is being achieved by the profits of the other capitalists beginning to fall as they lose competitive advantage.  They must react by introducing the new technology (or even better technology) that lowers their costs too.  But then the productivity of the existing or probably reduced labour force for all the capitalists rises and thus lowers the value per unit of product.  Once all the capitalists have adopted the new technology, the organic composition of capital (the ratio of money spent on equipment versus wages) will have risen and, ceteris paribus, the general rate of profit will have fallen.

Professor Simon Mohun provided an excellent example from game theory to show why innovation under capitalism and competition can lead to fall in average rate of profit, contrary to Okishio.

There are two capitalists: A and B.  Each starts with 3 in profit.  If neither A and B innovate to reduce costs and boost profits, A stays at 3 and B stays at 3.

But if A innovates and B does not; then A gets a higher profit (4) while B loses market share and gets less profit (1).  Alternatively, if A does not innovate and B does, then A gets 1 and B gets 4.  If both innovate, then A gets 2 and B gets 2.

There is a drive to innovate because A or B could raise profit from 3 to 4.  So there cannot be an agreement not to innovate, leaving A on 3 and B on 3.  But if one innovates first to get 4, then the other must do so or its profit will fall to 1.  But with both innovating, they both end up on 2 instead of 3 (if they had done nothing).  So innovation boosts the individual profit of the leader but eventually when both innovate, the profit is lower.

Again, this is over time.  If A and B could simultaneously introduce the innovation (as Okishio assumes), then they may not do so, and stay at 3, rather than fall to 2.  But that would not be reality.  Reality is temporal.

The Okishio theorem is an example of the fallacy of composition.  It simply sums the gain of one individual capitalist to the whole capitalist economy.  But what is good for each individual capitalist is not good for the profitability of the whole capitalist economy.  When everybody does it, overall profitability falls.

Moreover, each individual capitalist is not doing this ‘voluntarily’ after all, but of necessity to compete and not lose market share.  As Marx says, the law of value and profitability operates ‘behind the backs’ of the capitalists – it is not in their conscious control.  For Adam Smith, it is the ‘invisible hand’ of the market, for Marx, it is an ‘invisible Leviathan’, to use Murray Smith’s metaphor (Murray Smith, Invisible Leviathan, Historical Materialism, forthcoming 2018).

Marx and Keynes in Berlin

May 5, 2018

It’s 200 years today since Karl Marx was born.  And it’s just over 100 years since the great 20th century economist John Maynard Keynes wrote about Marx’s contribution.  Keynes wrote then: “how  can I accept the (Communist) doctrine which sets up as its bible above and beyond criticism, an obsolete textbook which I know not only to be scientifically erroneous but without interest or application to modern world”.  I think we can see that Keynes had a low opinion of Marx’s ideas.

And we can see why from the following comment of Keynes.  “How can I adopt a creed which, preferring the mud to the fish, exalts the boorish proletariat above the bourgeoisie and the intelligentsia, who with all their faults, are the quality of life and surely carry the seeds of all human achievement? “

Keynes stood for the preservation of capitalism and its ruling class, for all its faults, over the ‘boorish proletariat’.  This was my opening salvo in my presentation to the Marx 200 conference in Berlin, organised by the Rosa Luxemburg Institute.  My presentation went on to cover where I thought Marx and Keynes differed and why Marx’s ideas were superior as an analysis of capitalism and as a basis for political action.  In my view, it is necessary to spell out these differences because the dominant analysis of capitalism adopted in the labour movements of the major capitalist economies, especially by the leaders of those movements, is Keynesian theory and policy, not Marx.  Marx is ignored or dismissed, on the whole.

However, at the session, Professor Radhika Desai disagreed with me.  For her, the similarities (agreements) between Keynes and Marx were greater than the differences.  It’s a debate that we could have, because in my view expunging the influence of Keynes (a supporter of the ruling class) from his dominant influence in the labour movement is an essential task.  Certainly Keynes was determined to expunge the influence of Marx from the labour movement and from his economics students –as the quotes above show.

But let’s just briefly consider the similarities and differences between these two great political economists of the last 200 years.  First, the agreements as usually presented by those who see them.  Both Marx and Keynes think there is something wrong with capitalism.  Both Marx and Keynes have a falling rate of profit theory.  Both Marx and Keynes wanted the ‘socialisation of investment’.  Both Marx and Keynes wanted and expected the ‘euthanasia of the rentier’ (Keynes’ words), namely the disappearance of finance capital.

From this, it sounds that, despite Keynes’ crude dismissal of Marx, he had a lot in common with Marx’s analysis.  But that would be looking at it very superficially, in my opinion.  In my paper to the conference session, I make a lot of points about how Keynes rejected the labour theory of value (both classical and Marx’s) and stood by marginalist and utility theory.  Berlin 2018  For Keynes, there was no theory of exploitation of labour power that extracted profit from the unpaid labour of the working class.  Profit came from ‘capital’ investing.  Workers got wages for working; bankers got interest from lending and capitalists got profit from investing; each according to his or her own.  This is the standard mainstream ‘factors of production’ theory.  So from the start, Keynes denies that there is exploitation in the capitalist mode of production; the market decides and there is free and fair exchange: profit for capital, wages for workers.

Of course, if you have followed this blog and read Marx’s ideas, you would know that this is nonsense and a mere apologia for the rule of capital.  Where does profit come from in this mainstream theory?  There is no explanation.  Somebody must pay for it and yet there is free and fair exchange of commodities in the market –so there can be no profit in the market, merely an exchange of value (money).  Keynes’ and the mainstream approach really justifies the rule of capital and, for that matter, inequality of income and wealth by denying the reality that a small group controls of the means of production and forces the rest of us to work for a living.  Indeed, Keynes said that: “For my own part, I believe that there is social and psychological justification for significant inequalities of incomes and wealth, but not for such large disparities as exist today. There are valuable human activities which require the motive of money-making and the environment of private wealth-ownership for their full fruition.“

Then there is the rate of profit theory.  Those who reckon Marx and Keynes are allies in their critique of capitalism like to point out that Keynes had a theory of a falling rate of profit as well as Marx.  Indeed, they were the same.  But Keynes’ theory has little to do with Marx’s.  Keynes did see the fluctuation of the rate of profit—or the marginal efficiency of capital (MEC), to use Keynes’s terminology—as the main factor that determines the changes in the phases of industrial cycle: “Now, we have been accustomed in explaining the ‘crisis’ to lay stress on the rising tendency of the rate of interest under the influence of the increased demand for money both for trade and speculative purposes. At times this factor may certainly play an aggravating and, occasionally perhaps, an initiating part. But I suggest that a more typical, and often the predominant, explanation of the crisis is, not primarily a rise in the rate of interest, but a sudden collapse in the marginal efficiency of capital.

But Keynes’ theory of MEC is based on falling ‘marginal productivity’ due to the growing ‘abundance of capital’ and on the psychological expectations of capitalists about the future.  The rate of profit will gradually fall as more and more technology is produced; the more abundant is capital, the less it is wanted and so its marginal value falls.  This is not Marx’s theory.  His depends on the continual drive by capital to replace labour in production with machines.  Individual capitalists compete with each other to drive down costs and in so doing that pushes up the organic composition of capital by shedding labour.  As labour is the only source of profit, not capital (as in Keynes’ theory), the rate of profit tends to fall.  And it is a tendency.

For Keynes, however, the MEC will fall not because insufficient value is being extracted from labour but because capitalists ‘suddenly’ lose their appetite for investment: “that marginal efficiency of capital depends, not only on the existing abundance or scarcity of capital-goods and the current cost of production of capital-goods, but also on current expectations as to the future yield of capital-goods. In the case of durable assets it is, therefore, natural and reasonable that expectations of the future should play a dominant part in determining the scale on which new investment is deemed advisable. But, as we have seen, the basis for such expectations is very precarious. Being based on shifting and unreliable evidence, they are subject to sudden and violent changes.”

So the fall in Keynes’ rate of profit is due to individual capitalists’ subjective views about the future (‘confidence’) not because of an objective change in the conditions of accumulation of capital and production (Marx’s view).  As Paul Mattick Snr commented 50 years ago, “what are we to make of an economic theory, which after all claimed to explain some of the fundamental problems of twentieth-century capitalism, which could declare: ‘In estimating the prospects of investment, we must have regard, therefore, to the nerves and hysteria and even the digestions and reactions to the weather of those upon whose spontaneous activity it largely depends’?

The ‘sudden collapse’ in MEC has caused the slump (because interest rates are now too high compared to profitability and people ‘hoard’ money instead of investing or consuming).  But once that is overcome, we can return to the ‘normal’ capitalist mode of production.  “Economic prosperity is…dependent on a political and social atmosphere which is congenial to the average businessman.”  Unemployment, I must repeat, exists because employers have been deprived of profit. The loss of profit may be due to all sorts of causes. But, short of going over to Communism, there is no possible means of curing unemployment except by restoring to employers a proper margin of profit.”

Then there is this ‘socialisation of investment’.  Keynes called for this (a vague phrase) as a ‘final solution’ to the problem of depression in a capitalist economy.  If monetary easing (cutting interest rates and pumping in money by central banks) or fiscal stimulus (tax cuts and government spending) did not work in reviving the capitalist economy and getting capitalist to invest more, then maybe it would be necessary for the government to step in directly and take over the show. It is not clear, however, that Keynes meant any expropriation of capitalist industry and companies – something he would hate.  He probably meant that state operations and even some plan should be introduced – something similar to Roosevelt’s New Deal projects in the 1930s in the US.  And anyway, it is clear that Keynes saw ‘socialisation of investment’ as just a temporary measure to get capitalism going again (perhaps like the war economy 1940-45 eventually did).  Once the ‘technical malfunction’ (lack of demand) in the capitalist mode of production had been overcome, then we could revert to free markets and investment for profit and end ‘socialised investment’.

In one of his last articles on the capitalist economy as the Great Depression ended and the second world war began, Keynes remarked that “Our criticism of the accepted classical theory of economics has consisted not so much in finding logical flaws in its analysis as in pointing out that its tacit assumptions are seldom or never satisfied, with the result that it cannot solve the economic problems of the actual world. But if our central controls succeed in establishing an aggregate volume of output corresponding to full employment as nearly as is practicable, the classical theory comes into its own again from this point onwards.”

So once full employment is achieved, we can dispense with planning and ‘socialised investment’ and return to free markets and mainstream neoclassical economics and policy: “the result of filling in the gaps in the classical theory is not to dispose of the ‘Manchester System’ (‘free’ markets – MR), but to indicate the nature of the environment which the free play of economic forces requires if it is to realise the full potentialities of production.”

Keynes saw all his policies as designed to save capitalism from itself and to avoid the dreaded alternative of socialism.  “For the most part, I think that Capitalism, wisely managed, can probably be made more efficient for attaining economic ends than any alternative system yet in sight, but that in itself it is in many ways extremely objectionable. Our problem is to work out a social organisation which shall be as efficient as possible without offending our notions of a satisfactory way of life.”  So “the class war will find me on the side of the educated bourgeoisie.”  Fear of revolution was central to Keynes’ policies.  I don’t need to explain that Marx did not see this way at all.

As for the ‘euthanasia of the rentier’, Keynes reckoned that as capitalism expanded, it would, through more technology, create a world of abundance and leisure.  Because of that abundance, the return on lending money to invest would fall as the MEC fell.  So bankers and financiers would no longer be necessary; they could be phased out.  Well, that does not seem to be happening.  Indeed, the very people who claim that Keynes is a ‘progressive’ economist with great similarities to Marx now argue that capitalism is being distorted by ‘financialisation’ and finance capital – and that is the real enemy.  What happened to the gradual phasing out of finance in late capitalism a la Keynes?

In contrast, Marx’s theory of finance capital did not foresee a gradual removal of finance; on the contrary, he describes the increased role of credit and finance in the concentration and centralisation of capital in late capitalism.  Yes, the functions of management and investment become more separated from the shareholders in the big companies, but as I have argued in a previous post, this does not alter the essential nature of the capitalist mode of production – and certainly does not imply that coupon clippers or speculators in financial investment will gradually disappear.

So I reckon that the differences (and there are others in my paper) between Keynes and Marx are fundamental and any superficial similarities pale in comparison.  That is important because it is Keynesian ideas that dominate in the labour movement, not Marx 200 years since his birth.

More on other things at the Berlin conference in another post.

Managers rule, not capitalists?

April 29, 2018

The capitalist mode of production is coming to an end.  But it is not being replaced by socialism. Instead, there is a new mode of production, based on a managerial class that has been forming in the last hundred years.  This managerial class does not exploit the working class for surplus value and its accumulation as capital.  The managers instead use power and control which they exercise through the management of transnationals and finance.  The working class will not be the ‘gravediggers’ of capitalism, as Marx expected.  The ‘popular classes’ instead must press the managerial class to be progressive and modern; and eliminate the vestiges of the capitalist class in order to develop a new meritocratic society. Such is the thesis of a new book, Managerial Capitalism, by Gerard Dumenil and Dominique Levy (D-L), two longstanding and eminent French Marxist economists.

I participated in the launch of the book in London this week.  At the launch, Gerard Dumenil argued that capitalist class (i.e those who own the means of production) have been replaced by managers who control the big companies and take all the decisions that matter.  The capitalist class now is like the fading old feudal class in the early 19th century when Marx came on the scene.  The capitalist class took over then and the feudal class converted themselves into capitalists eventually as well.  Now the managerial class has taken over and the traditional capitalists are increasingly converting themselves into the new managerial class.

Marx was well aware to the separation of functions in capitalism between the owner of capital and the managers of corporate capital.  As he put it in Capital Vol 3: “Joint-stock companies in general (developed with the credit system) have the tendency to separate this function of managerial work more and more from the possession of capital, whether it is owned or borrowed … But since on the one hand the functioning capitalist confronts the mere owner of capital, the money capitalist, and with the development of credit this money capital itself assumes a social character, being concentrated in banks and loaned out by these, no longer by its direct proprietors; and since on the other hand the mere manager, who does not possess capital under any title, neither by loan nor in any other way, takes care of all real functions that fall to the functioning capitalist as such, there remains only the functionary, and the capitalist vanishes from the production process as someone superfluous.”(ibid. p. 512).

D-L spend some time in their book reminding us that Marx was aware of this division.  But Marx did not see this as leading to a new managerial class. The division was merely of appearance. The system had not altered: “producing surplus-value, i.e. unpaid labour, and in the most economical conditions at that, is completely forgotten in the face of the antithesis that interest accrues to the capitalist even if he does not perform any function as capitalist, but is simply the owner of capital; while profit of enterprise, on the other hand, accrues to the functioning capitalist even if he is not the owner of the capital with which he functions. In the face of the antithetical form of the two parts into which pro.t and thus surplus-value divides, it is forgotten that both are simply parts of surplus-value and that such a division can in no way change its nature, its origin and its conditions of existence” (p. 504).

D-L reckon that this view of the relation between outright capitalist families and their managers is out of date.  Managers, not capitalist families, now rule. In the book, D-L back up their thesis with empirical evidence on rising income inequality in the US and other major economies.  The top 1% of income earners in the US, who would usually be regarded as part of the capitalist class, now get 80% of their income as salaries from working as managers and top executives, not from capital income (dividends, interest and profit).  So these top people are managers, not capitalists.  This is why, D-L argue, we must revise the traditional Marxist view that top managers are merely functionaries of the capitalist class.

But the data could be interpreted in another way.  Simon Mohun has done similar empirical work (ClassStructure1918to2011wmf) on where the income of the top layers comes from.  He found that the working class – those who depend on wages alone for their living – still constitute 84% of the working population.  Managers constitute the rest, but only 2% (Qc in graph below) can actually live off rent, interest, capital gains and dividends alone.  They are the real capitalist class.  And that ratio has little changed in 100 years, even if their direct source of income has.

Moreover, this is the group that has gained most during the last 30 years of rising inequality.  The income of this capitalist class (Qc) has risen from about 9 times the average income of the working class to 22 times while managers’ incomes (Lpd in graphs) have risen from 2.5 times to 3.5 times workers income.  So rising inequality is primarily the result of increased exploitation (a rising rate of surplus value) in Marxist terms.

Yes, for the top 1%, since 1980, their ‘labour’ source of income has fluctuated around 60% of total average income (around double what it was in the 1920s). But this top 1% of managers includes investment bankers, corporate lawyers, hedge fund and private equity managers and corporate executives. Moreover, two-thirds of the top 1% are managers only in name, as an increasing proportion of these executive occupations are in so-called ‘closely held businesses’. That means they own their own businesses but pay wages to themselves as the main source of income.  This blurs the distinction between labour and non-labour income.  So the top 1-3%, according to Mohun, are still capitalists as Marx understood it, even if they pay themselves huge salaries and bonuses.

Moreover, as one study shows“The incomes of executives, managers, financial professionals, and technology professionals who are in the top 0.1% of the income distribution are found to be very sensitive to stock market fluctuations. Most of our evidence points towards a particularly important role for financial market asset prices, shifting of income between the corporate and personal tax bases, and possibly corporate governance and entrepreneurship, in explaining the dramatic rise in top income shares.”  So their labour income depends on capitalist stock markets and financial assets.

As for managers in general, by most definitions, they constitute about 17-20% of the workforce, but it seems a jump to suggest that these constitute a new managerial class, when they can vary from Jeff Bezos at Amazon to a supervisor in Walmarts. “While managers supervise, most of them are also supervised, and splitting the distribution into working class and non-working class does not address the question of who has to sell their labour-power and who does not. That is, in no way can managers be considered a homogeneous group, because they are fundamentally divided into those who might sell their labour-power but do not have to do so, and those who do sell their labour-power because they have to do so.” Mohun.

Erik Olin Wright looked the class structure of six advanced capitalist economies and showed that ‘managers’ are a curate’s egg of a group in modern capitalism.  By breaking down the skill factors of managers, he reckoned that most managers are really workers with skills.  The working class proper was still over 70% of the labour force.  Mohun’s tax calculation method finds that the working class is more like 80-85%.

Surely, the real question is: in whose class interest do managers carry out their managerial labour? The very nature of the capitalist economy obliges the managers to manage in the interest of the 1%.  Their jobs depend on the decisions of the shareholders, the company share price and its earnings performance, however highly paid they are.

Moreover, as Marx predicted, the main feature of modern capitalism is a growing concentration and centralisation of wealth (not income).  And that means wealth held in the means of production and not just household wealth.  In 2016, the top 1% of the US population held 40% of total net wealth, while the bottom 80% held just 10%. On the basis of Wright’s class structure analysis, this suggests that the top 1% is a combination of capitalists and expert managers. The next 20% by wealth consists of the remaining capitalists and the top two thirds of the managers. The bottom 80% by wealth consists of the bottom third of the managers and the entire working class (wage workers and supervisors).

Modern capitalism has developed into a huge network of interlocking companies with cross-shareholdings.  Three systems theorists at the Swiss Federal Institute of Technology in Zurich developed a database listing 37 million companies and investors worldwide and analysed all 43,060 transnational corporations and share ownerships linking them.  They discovered that a dominant core of 147 firms through interlocking stakes in others together control 40% of the wealth in the network.  A total of 737 companies control 80% of it all.   This is the concentrated power of capital.  147 control)

At the launch, Gerard Dumenil argued that this concentration of ownership among a small number of global companies, particularly banks, actually proved D-L’s thesis.  It was managers and finance directors who ran these companies and made decisions on mergers etc while the shareholders followed like sheep.  This was proof of ‘managerial capitalism’.  Instead, I would argue that it was proof that, since Marx wrote about joint stock companies 150 years ago,the capitalist mode of production has dominated even more over investment, employment and production globally.

One of the inherent features of the capitalist mode of production is that it generates crises of production, investment and employment at regular and recurring intervals.  This is the consequence of production for profit by individual private owners on a market which runs in contradiction to the needs of society.  This is a unique feature of capitalism. Has this disappeared?  Was Marx not proved right in expecting crises to become more global and damaging?

Dumenil seemed to be suggesting that Marx was wrong about growing crises.  At the launch he claimed that the recent Great Recession had avoided a major depression because of ‘managerialism’.  The crisis had been managed.  Well, the evidence is surely to the contrary –as I have argued at length on this blog and in my book, The Long Depression.

Dumenil, however, was insistent that those of us who stick to Marx’s old analysis and predictions needed to break with dogma and recognise the new mode of production that was upon us.  The political strategy that flowed from this was for the ‘popular classes’ (working classes) to reinvigorate the class struggle – but not for the replacement of capitalism with socialism.  That was not going to happen.  But instead the aim must be to push the ruling (progressive?) managerial class to the left to introduce pro-labour reforms and isolate the small and fading capitalist class.  Well, if the working class is still 80% of the adult population in most advanced economies (let alone elsewhere) and capital is even more concentrated and centralised than ever before, why not overthrow ‘managerial capitalism’ too?

The value (price and profit) of everything

April 25, 2018

Mariana Mazzucato’s new book, The value of everything, seems to have caught the imagination of the liberal wing of mainstream economics.  It has even won the accolade of a review in the UK’s Financial Times by top mainstream Keynesian economic journalist, Martin Wolf and was launched at an event at the London School of Economics.

Mazzucato previously wrote an important book, The Entrepreneurial State, that ‘debunked’ the myth that only the capitalist sector contributes to innovation while the state sector is a burden and cost to growth.  On the contrary, Mazzucato showed that “From the internet to nanotech, most of the fundamental advances – in both basic research but also downstream commercialisation – were funded by government, with businesses moving into the game only once the returns were in clear sight. All the radical technologies behind the iPhone were government-funded: the internet, GPS, touchscreen display, and even the voice-activated Siri personal assistant.”

In that book, she continued: “Apple initially received $500,000 from the Small Business Investment Corporation, a public financing arm of the government. Likewise, Compaq and Intel received early-stage grants, not from venture capital, but via public capital through the Small Business Innovation Research program (SBIR). As venture capital has become increasingly short-termist, SBIR loans and grants have had to increase their role in early-stage seed financing the US Department of Health and the Department of Energy. Indeed, it turns out that 75 per cent of the most innovative drugs owe their funding not to pharmaceutical giants or to venture capital but to that of the National Institutes of Health (NIH). The NIH has, over the past decade, invested $600 billion in the biotech-pharma knowledge base; $32 billion in 2012 alone.”  Mazzucato showed that taxpayer enabled these tech companies to become ‘uber’ rich.

Since then, Mazzucato’s powerful arguments in favour of government investment and the role of the state have led to her becoming an adviser to the UK’s Corbyn Labour leadership and also joint winner of the Leontief prize for advancing the frontiers of economic thought, with inequality expert Branco Milanovic, formerly chief economist at the World Bank.

Now in her new book, she takes on a bigger task: trying to define who (what) creates value in our economies, a subject that has been debated by the greatest economists of capitalism from Adam Smith onwards.  “Who really creates wealth in our world? And how do we decide the value of what they do?”

Her main line in this new book is that 1) government is not recognised in national accounts as adding to value through its contribution to investment and innovation; 2) finance has sneaked into accounts as productive and value-creating when in reality it ‘extracts’ value from productive sectors and breeds speculation and short-termism etc.; and 3) there has been the growth of a monopoly sector in modern capitalism that is ‘rent-seeking’ rather than ‘value-creating’.

Mazzucato argues that “until the 1960s, finance was not widely considered a ‘productive’ part of the economy. It was viewed as important for transferring existing wealth, not creating new wealth. Indeed, economists were so convinced about the purely facilitating role of finance that they did not even include most of the services that banks performed, such as taking in deposits and giving out loans, in their calculations of how many goods and services are produced by the economy. Finance sneaked into their measurements of Gross Domestic Product (GDP) only as an ‘intermediate input’ – a service contributing to the functioning of other industries that were the real value creators.  In around 1970, however, things started to change. The national accounts – which provide a statistical picture of the size, composition and direction of an economy – began to include the financial sector in their calculations of GDP, the total value of the goods and services produced by the economy in question.

So that today “the issue is not just the size of the financial sector, and how it has outpaced the growth of the non-financial economy (e.g. industry), but its effect on the behaviour of the rest of the economy, large parts of which have been ‘financialized’. Financial operations and the mentality they breed pervade industry, as can be seen when managers choose to spend a greater proportion of profits on share buy-backs – which in turn boost stock prices, stock options and the pay of top executives – than on investing in the long-term future of the business.”

Investment is now based on short-term returns which results in less reinvestment of profits and rising burdens of debt which, in a vicious cycle, makes industry even more driven by short-term considerations. “In modern capitalism, ‘value-extraction’ is rewarded more highly than value-creation: the productive process that drives a healthy economy and society. From companies driven solely to maximize shareholder value to astronomically high prices of medicines justified through big pharma’s ‘value pricing’, we misidentify taking with making, and have lost sight of what value really means”.

Now there are many powerful truths in Mazzucato’s theses, and they are very much the kernel of modern post-Keynesian and heterodox economics.  But as such, there are also serious weaknesses with her view of value.  To argue that government ‘creates’ value is to misunderstand the law of value under capitalism.  Under capitalism, production of commodities (things and services) are for sale to obtain profit.  Commodities must have use value (be useful to someone) but they must also have exchange value (make a sale for profit).  From that capitalist perspective, government does not create value – indeed, it can be seen as a (necessary) cost that reduces the profitability of capitalist production and accumulation.  GDP is biased as a measure of value created in an economy for that good reason. It measures much more closely exchange value not the production of all use values, which would include government investment and housework (perhaps even happiness, welfare and trust).

Sure, government creates use value (although it is often use values found in weaponry, nuclear arms, chemicals etc and security forces to protect the interests of capital). But it is not productive of value and surplus value for capital.  For capital, there is not ‘value in everything’.  For capital, it is (exchange) value, not use value that matters in the last analysis.

Mazzucato is right that the finance sector does not create value. Marxist economics says it only circulates value created by labour power in productive sectors (those sectors that increase the productivity of labour power and thus the accumulation of more capital).  Banks and the credit system contribute to reduce the costs of transferring money (taking deposits and making loans) so that businesses can borrow efficiently and keep capital circulating.

Finance and credit is necessary for capital to accumulate, but does not add value itself.  But even this contribution to the circulation of capital has increasingly taken a back seat to the risk-taking role of investing in ‘fictitious capital’ (bonds and stocks trading). In her book, Mazzucato quotes the work of Andy Haldane, now chief economist at the Bank of England.  He estimated what extra value in GDP terms the financial sector actually adds to the wider economy.

He found that in the US, the value-added of financial intermediaries was about $1.2 trillion in 2010 – equivalent to 8% of total GDP. In the UK, the value-added of finance was around 10% of GDP in 2009.  In the US, the share of finance in GDP has increased almost fourfold since the Second World War. But Haldane reckons these contributions really express high risk-taking in lending and investment by banks that eventually come a cropper when a financial or property bubble bursts, as they do periodically.  Echoing Marx’s value theory, Haldane concludes: “The act of investing capital in a risky asset is a fundamental feature of capital markets. For example, a retail investor that purchases bonds issued by a company is bearing risk, but not contributing so much as a cent to measured economic activity. Similarly, a household that decides to use all of its liquid deposits to purchase a house, instead of borrowing some money from the bank and keeping some of its deposits with the bank, is bearing liquidity risk. Neither of these acts could be said to boost overall economic activity or productivity in the economy. They re-allocate risk in the system but do not fundamentally change its size or shape.”  Indeed, an IMF paper has shown that it is not just that banks trigger regular financial collapses, the finance sector has a generally negative (parasitic?) effect on the productive sectors of the capitalist economy over time.

Finance is clearly unproductive.  But it is not just finance that is unproductive.  Real estate, commercial advertising and media and many other sectors are not ‘productive’ because the labour employed does not create new value but instead just circulates and redistributes value and surplus value created.  And it is the profitability of the productive sectors that is key to a capitalist economy, not the overall amount of use values produced.

Moreover, was there nothing wrong with capitalism before finance (and ‘financialisation’) emerged after the 1970s?  Were there no crises of overproduction and investment, no monopolies and rent-seeking before the 1970s?  Was there a wonderful productive, competitive, equal capitalist mode of production existing in the 1890s, 1930s or even in the 1960s? And why did finance suddenly emerge in the 1970s, leading to the GDP measure being altered to account for it?

Mazzucato offers no explanation of why capitalism became increasingly ‘unproductive’ and ‘rent-seeking’.  But Marx’s value theory does.  From the mid-1960s to the early 1980s, there was a sharp fall in the profitability of the productive sectors of all the major capitalist economies.  Capitalism entered the so-called neoliberal period of the destruction of the welfare state, restriction of trade unions, privatisation, globalisation – and financialisation.  Financialisation (looking to make profit from the purchase and sale of financial assets using new forms of financial derivatives) became a major counteracting factor to this fall in profitability.  For capital, it was not a matter of ‘choice’ but necessity to reduce the cost of government and raise profitability, partly through financial speculation and monopoly rent-seeking.

In a Bloomberg TV interview on her new book, Mazzucato was asked by the presenter how she could persuade chief executives of large multinationals to invest productively and innovate rather than buy back their shares to boost their share prices and pay higher dividends to shareholders (ie financial speculation).  Mazzucato replied that it was a matter of choice: some companies were investing more productively and others were not.  So apparently, we have to make these companies see the error of their ways.

Mazzucato argues that government should be “tilting the field in the favour of innovators and true value creators.”  But is that really possible where capital (and monopolies) dominate?  Mainstream economics remains highly unpersuaded that government can add value for capitalism.  In his review of the book, Martin Wolf in the FT commented that: “What I would have liked to see far more of, however, is a probing investigation of when and how governments add value. …How can one ensure that governments do add value rather than merely extract and waste it? In her enthusiasm for the potential role of the state, the author significantly underplays the significant dangers of governmental incompetence and corruption.”

In the launch of her book at the London School of Economics, Mazzucato presented the example of Brazil, where during the global financial crisis under the Lula government, the state banks were directed to invest in projects that would help boost employment and technology even if they were not profitable (at least not in the medium term).  But what happened?  Big business and finance (domestic and international) bitterly attacked this policy and its implementation through the Brazilian state development bank as reducing the profits of the finance sector.  When Lula was gone, the policy was reversed.

Mariana Mazzucato does not call for the replacement of capitalism or even the rent-seeking monopolies but “how we might reform it” in order to replace the current parasitic system with a type of capitalism that is more sustainable, more symbiotic – that works for us all.”  In her TV interview she talked of a “partnership between government, multi-nationals and a ‘third sector’ (presumably social non-profit coops etc).” She made no mention of bringing the ‘parasitic’ finance sector into public ownership, let alone the ‘short-termist’, ‘rent-seeking’ monopolies.  Instead, she seeks a ‘partnership’ of government, finance and monopolies.

It seems to me a utopian illusion to imagine that monopolies can be persuaded to stop being ‘short termist’ and invest for higher productivity and innovation for the long term, if profitability in such productive pursuits seems to them too low compared to finance or real estate (if profitability was higher in productive investment, they would do it anyway).  Surely, a left government must instead look to replace big capital with democratically-run state enterprises in the ‘commanding heights’ of an economy.  This would lay the proper foundation for innovation and enterprise and thus put use-value before value, price and profit.

Marx 200: Carney, Bowles and Varoufakis

April 23, 2018

As the 200th anniversary of Marx’s birth gets closer, a host of conferences, articles and books on the legacy of Marx and his relevance today are emerging – including my own contribution.  The most interesting was a speech last week by the governor of the Bank of England, Mark Carney in his homeland of Canada.

In his speech at a ‘Growth Summit’ to the Public Policy Forum in Toronto, Carney set out to be provocative and headline catching with a statement that Marxism could once again become a prominent political force in the West.  “The benefits, from a worker’s perspective, from the first industrial revolution, which began in the latter half of the 18th century, were not felt fully in productivity and wages until the latter half of the 19th century. If you substitute platforms for textile mills, machine learning for steam engines, Twitter for the telegraph, you have exactly the same dynamics as existed 150 years ago (actually 170 years ago –MR )– when Karl Marx was scribbling the Communist Manifesto.”

Just as the first industrial revolution in early 19th century Britain led to the collapse of traditional jobs and held down real wages for a generation in the first two decades of the 19th century, so in this current Long Depression globally, with the advent of robots and AI, a new industrial revolution threatens to destroy human labour and livelihoods.

In 1845, Engels wrote, The condition of the working class in England, which exposed the misery and poverty engendered by the replacement of manual skills with machines and kept real incomes stagnant.  Now, says Carney, Marxism might again be relevant with a new burst of ‘capital bias’ (ie a rise in machines relative to human labour power).

Automation may not just destroy millions of jobs.  For all except a privileged minority of high tech workers, the collapse in the demand for labour could hold down living standards for decades.

In such a climate, “Marx and Engels may again become relevant”, said Carney.

Without realising it, Carney was reiterating Marx’s general law of capitalist accumulation outlined in Volume One of Capital (Chapter 25), written some 160 years ago, that capitalist accumulation will expand and promote machines to replace human labour but this will not lead automatically to higher living standards, less toil and more freedom for the individual, but mostly to downward pressure on real incomes, not only of those losing their jobs to machines, but in general.  It would also lead to more not less toil for those with jobs, while leaving millions in a state of ‘precarious labour’ – a reserve army for capital to exploit or dispense with as the cycle of accumulation demands. (see Capital Volume One p782-3 and my new book, pp32-37).

Carney’s view of the robot revolution leading to massive job losses has much empirical backing.  However, as Marx pointed out in Capital, it is not a one-sided collapse in jobs.  Technology also creates new jobs and raises the productivity of labour and, depending on the balance of forces in the class struggle between capital and labour over the value created, real incomes can also rise.  This happens in periods when profitability is improving and more labour comes into the market.

Of course, this ‘happy’ side of capitalist accumulation is the one that mainstream economics likes to promote, contrary to Carney’s worries.  For example, Paul Ormerod, commented on Carney’s view of the relevance of Marx. You see, Marx was completely wrong on a fundamental issue.  Marx thought, correctly, that the build up of capital and the advance of technology would create long term growth in the economy.  However, he believed that the capitalist class would expropriate all the gains.  Wages would remain close to subsistence levels – the “immiseration of the working class” as he called it.”

In fact, says Ormerod, “living standards have boomed for everyone in the West since the middle of the 19th century.  Leisure hours have increased dramatically and, far from being sent up chimneys at the age of three, young people today do not enter the labour force until at least 18.”  Apparently prosperity is the order of the day: “every single instance of an economy which enters into the sustained economic growth of the market-oriented capitalist economies, from early 19th century England to late 20th century China.  Once this is over, the fruits of growth become widely shared.”

There are several points here that I have taken up in many previous posts.  First, Marx did not hold to a theory of ‘subsistence wage levels’.  As for the argument that capitalism has taken everybody out of poverty and reduced toil and misery, it is full of holes.  Note that Ormerod talks of “everyone in the West”, thus giving the lie to billions outside ‘the West’ that remain in poverty by any definitions.  See my detailed posts on the level of poverty globally here.

And contrary to Ormerod’s view (as that of Keynes before him), the rise of technology under capitalism has not led to much reduction in toil.  I have shown that most people in “the West” continue to have working lives (in hours per year) much as they did in 1880s or the 1930s; they may work less hours per day on average and get Saturdays and Sundays off (for some), but they still put in over 1800 hours a year and work longer overall (50 years or so).

Ormerod also argues that inequality of incomes and wealth is not getting worse and labour’s share in national income has stopped falling, contrary to Carney.  Well, there is a wealth of evidence that wealth and income inequality is not improving, both globally between nations and within national economies.

Ormerod is right, however, to question Carney’s one-sided model of capitalism.  Labour’s share of total value created can rise and fall in different periods depending on the balance of class forces and impact of accumulation; and Carney’s own graph shows that real wages did not just stagnate in the first industrial revolution or now, but also in the 1850s and 1860s; and in the first quarter of the 20th century.  So there is more to this issue than technology.  The current stagnation in real wages in the UK and the US is more a product of the Long Depression of the last ten years than robots or AI, which have hardly started to have an impact yet (labour productivity growth is low or slowing in most economies).  The profitability of capital itself and the strength of labour in the battle over value created are more relevant.

Unfortunately it is not just mainstream economists who either distort or dismiss Marx’s economic theory.  In an article for Vox, eminent and longstanding Marxist economist Sam Bowles writes on the legacy of Marx’s economic ideas in order to dismiss them.  He agrees with Keynes’ view that Capital is “an obsolete economic textbook [that is] not only scientifically erroneous but without interest or application to the modern world” (Keynes 1925). And he agrees with 1960s mainstream economic guru, Paul Samuelson’s judgement that “From the viewpoint of pure economic theory, Karl Marx can be regarded as a minor post-Ricardian…and who in turn was “the most overrated of economists” (Samuelson 1962).

Bowles considers that Marx’s labour theory of value was “pioneering, but inconsistent and outdated”. According to Bowles, Marx’s labour theory of value as a representation of a general system of exchange and his theory of the tendency of the profit rate to fall “did not resolve the outstanding theoretical problems of his day, but rather anticipated problems that would later be addressed mathematically.”  Bowles reckons that mainstream economics, in particular neoclassical marginalism, went on to sort out Marx’s failures by replacing his value theory.  And this has also led to dropping the idea of social ownership of the means of production to replace the capitalist mode. “Modern public economics, mechanism design and public choice theory has also challenged the notion – common among many latter-day Marxists, though not originating with Marx himself – that economic governance without private property and markets could be a viable system of economic governance.”

Apparently, all that is left of Marx’s legacy is what Bowles calls “despotism in the workplace”, the exploitive nature of capitalist production; which is not due to the exploitation of labour power for surplus value; but the ‘power structure’ where moguls and managers rule the roost over the worker serfs.  Thus we are reduced to a political theory (and even that is not much in common with Marx’s political theory for that matter) as Marx’s economic ideas are ‘outdated’ or false.

Well, all Bowles arguments (and those of Keynes and Samuelson) have been taken up by me in various posts in the past, and more thoroughly in my new book, Marx 200.  In short, we can show that Marx’s value theory is logical, consistent and backed empirically.  It even provides a compelling explanation of relative price movements in capitalism, though that is not its main aim.  Its main aim is to show the particular form that the capitalist mode of production takes in exploiting human labour for profit;  and why that system of exploitation has inherent contradictions that cannot be resolved without its abolition.

Moreover, the Marxist critique of capitalism is based on economics and leads to revolutionary political action; so it is not (just) a moral critique of ‘despotism’ in the workplace or anywhere else.  The market economy (capitalism) cannot deliver the full development of human potential because despotism in the workplace is a product of the exploitation of labour by capital.

Yanis Varoufakis recognises this in his long article on Marx and Engels’ Manifesto of the Communist Party to promote his new introduction to that masterpiece.  Varoufakis writes a colourful, if over flowery, article emphasising one great message of Marx and Engels’ CM: that capitalism is the first mode of production that has become global.  Varoufakis sees this process as only being completed with the fall of the Soviet Union and other ‘communist’ states that blocked globalisation until then. That is probably an exaggeration.  Capitalism from the start aimed to expand globally (as Marx and Engels explain in the CM).  After the end of the depression of the 1870 and 1880s, there was startling expansion of capital worldwide, now named imperialism, based on flows of capital and trade.

While correctly recognising the powerful (happy?) effect of capitalism globally, Varoufakis also emphasises the dark side: of alienation, exploitation, imperialism and despotism: “While celebrating how globalisation has shifted billions from abject poverty to relative poverty, venerable western newspapers, Hollywood personalities, Silicon Valley entrepreneurs, bishops and even multibillionaire financiers all lament some of its less desirable ramifications: unbearable inequality, brazen greed, climate change, and the hijacking of our parliamentary democracies by bankers and the ultra-rich.”

And, contrary to the conventional mainstream view, Varoufakis argues that Marx and Engels were right that class struggle under capitalism can be boiled down to a battle between capital and labour.  “Society as a whole,” it argues, “is more and more splitting up into two great hostile camps, into two great classes directly facing each other.” As production is mechanised, and the profit margin of the machine-owners becomes our civilisation’s driving motive, society splits between non-working shareholders and non-owner wage-workers. As for the middle class, it is the dinosaur in the room, set for extinction.”

And he sees that capitalism must be replaced, not modified or corrected for its faults.  “It is our duty to tear away at the old notion of privately owned means of production and force a metamorphosis, which must involve the social ownership of machinery, land and resources.   Only by abolishing private ownership of the instruments of mass production and replacing it with a new type of common ownership that works in sync with new technologies, will we lessen inequality and find collective happiness.”

Varoufakis recognises the ‘irrationality’ of capitalism as a system for human progress and freedom, but this self-confessed ‘erratic Marxist’ does not present the material explanation for this irrationality, apart from growing inequality and inability to use new technology to benefit all.  Capitalism also suffers from regular and recurrent crises of production that destroy and waste value created by human labour.  These crises are of ‘overproduction’, unique to capitalism and regularly throw human development backwards.  This aspect of capitalism’s irrationality is missing from Varoufakis’ article, although it was expressed vividly by Marx and Engels in the CM.  See the striking passage in CM where Marx and Engels start by explaining “the need of a constantly expanding market for its products chases the bourgeoisie over the entire surface of the globe” and finishes with “paving the way for more extensive and more destructive crises and diminishing the means whereby crises are prevented”.

And a theory of crises is important.  People can live with rising inequality, with relative poverty even, even wars etc, as long as, for them, things improve gradually each year without break.  But gradual improvement in living standards is not possible because capitalism has regular and recurrent slumps in production, investment and employment built into its system, which can last for a generation in depressions – as Carney’s graphs show.  That is a fundamental character of capitalism’s irrationality.

Marx’s economic theories are often trashed or disputed – fair enough in a debate for truth.  But when each critical argument is analysed, it can be found to be weak, in my view.  Marx’s laws of motion of capitalism: the law of value; the law of accumulation and the law of profitability still provide the best and most compelling explanation of capitalism and its inherent contradictions.  And I am leaving out the great contribution that Marx and Engels made to the understanding of human historical development – the materialist conception and the history of class struggle – that lie at the basis of human actions. “Men make their own history, but they do not make it as they please; they do not make it under self-selected circumstances, but under circumstances existing already, given and transmitted from the past.”

As the Manifesto says (and Varoufakis echoes in his article), capitalism has taken the productive forces of human labour to unprecedented heights, but dialectically it has also brought new depths of depravity, exploitation and wars on a global scale.  Marx’s legacy is to show why that is and why capitalism cannot last if human society is to go forward to the “free development of each” as the “condition for the free development of all”.  Marx’s ideas remain even more relevant in the 21st century than the 19th.  But understanding is not enough.  As the epitaph on Marx’s tomb in Highgate cemetery, London inscribes from Marx’s Theses on Feuerbach: “The philosophers have only interpreted the world, in various ways; the point is to change it”.

Marx’s law of value: a debate between David Harvey and Michael Roberts

April 2, 2018

This is going to be a long post, so bear with me.  First, you will have to read a paper (attached below) by Professor David Harvey, then a critique by me below – and finally a reply to my critique by Professor Harvey.  And then it’s up to you readers to see what you make of it: is this like a medieval religious debate about how many angels there are on the head of a pin; or is it a debate that leads to something really worth knowing?

For more on the nature of Marx’s law of value and its relation to crises, see my new book, Marx 200 

David Harvey’s misunderstanding of Marx’s law of value (Michael Roberts)

Recently, Professor David Harvey (DH) sent out an email to several people, including me, attaching a short paper for discussion (see Harvey paper).  The paper outlines DH’s view that Marx’s theory of value in capitalist economies has been badly misunderstood.

Just in case you are unaware (difficult to believe), Professor Harvey is probably the most eminent Marxist scholar alive today with a host of books, papers and educational videos to his name on Marxist economic theory.  The short paper circulated expressed succinctly his view of Marx’s value theory that he has recently outlined more expansively in his latest book, Marx, Capital and the madness of economic reason.[i]

In the paper, entitled Marx’s refusal of the labour theory of value, DH argues that Marx did not have a ‘labour theory of value’ at all.  His theory of value was distinctive from that of the classical economist, David Ricardo.  Instead, according to DH, Marx argued that value was a reflection of labour embodied in a commodity which is only created/revealed in exchange in the market.  As DH puts it: “if there is no market, there is no value”.  If this correct, then it is in the realization of value as expressed in money that value emerges, not in the production process as such.

DH then goes on to argue that if wages are forced down to the minimum or even to nothing, then there will be no market for commodities and thus no value – and this is the “real root of capitalist crises”.  And thus it follows that a policy for capital to avoid crises would be by “raising wages to ensure “rational consumption” from the standpoint of capital and colonizing everyday life as a field for consumerism”.  This is the consequence of a correct view of Marx’s value theory, according to DH.

DH points out that this interpretation of value theory “is far beyond what Ricardo had in mind and equally far away from that conception of value usually attributed to Marx.”  It certainly is.  But is DH right in his interpretation of Marx’s value theory and, even if he is, does such interpretation have any empirical validity?  I would answer both these questions with: ‘no’, ‘non’, ‘nein’, to use Marx’s three best known languages.

DH starts by saying that “It is widely believed that Marx adapted the labour theory of value from Ricardo as a founding concept for his studies of capital accumulation” and “since the labour theory of value has been generally discredited, it is then often authoritatively stated that Marx’s theories are worthless.”  It is not clear who DH is referring to here.  Clearly bourgeois mainstream economists consider Marx’s law of value as discredited.  The neoclassical marginalists have long rejected the concept of labour-value by labelling it ‘metaphysical’.  Neo-Ricardian, post-Sraffian, and post-Keynesian economists, in particular, are also strongly inclined to dismiss any notion of ‘value’ as an ideological mystification.

But most Marxist economists are aware of the distinction between Marx’s value theory and Ricardo’s.  And the difference is not what DH says it is, namely, Ricardo had a ‘labour theory of value’ and Marx did not.  The difference is that Ricardo had a theory of (use-) value based on ‘concrete labour’ (physical amounts of labour) measured in labour time.  Marx’s law of value was based on ‘abstract labour’ (value measured in labour time when ‘socially’ tested on the market).

Under capitalism, human labour power itself is a commodity to be sold on the market.  Indeed, this is a key characteristic of the capitalist mode of production where the majority has no means of production and so must sell their labour power to the owners of the means of production.  So, just as with other commodities, labour has a dual property. On the one hand, it is useful labour, that is, expenditure of human labour in a concrete form and for a specific purpose and with this property creates use values. On the other hand, it is abstract labour, that is, expenditure of human ‘labour power’ without specific characteristics which creates the value of the commodity in which it is represented.  Thus Marx made the distinction between labour and labour power, a distinction that is absolutely crucial for the understanding of the source of profit.

This was the great advance in Marx’s law of value. The labour time embodied in the commodities normally purchased by the worker for the reproduction of himself and his family in a day is less than the labour time that a worker actually offers to the owner of capital during the same time period. The result is that for any given time period, the worker produces more value than the wage equivalent which is paid by the owner of capital for the use of the labour power. This difference, Marx calls “unpaid labour” and “surplus labour”- or surplus value.  Marx’s value theory of abstract labour exposes the exploitative nature of the capitalist mode of production, while neither Ricardo’s nor Adam Smith’s labour theory of value does.

DH mentions just once (and in passing) this vital discovery of Marx (i.e. abstract labour) that distinguishes Marx’s law from the classical labour theory of value.  And that is because DH wishes to press on to his interpretation of Marx’s theory as one where value is created/realized only in exchange, and not in the process of production using labour power.  DH says that “value is initially taken to be a reflection of the social (abstract) labour congealed in commodities.”  But “as a regulatory norm in the market place, value can exist, Marx shows, only when and where commodity exchange has become “a normal social act.” So, without money, there is no value.

Yes, but the value of a commodity is still the labour contained in it and expanded during the production process before it gets to market.  Value is expended physical and mental human labour which is then abstracted by the social process of production for the market.  Value is not a creature of money – on the contrary.  Money is the representation or exchange value of labour expended, not vice versa.  I think Marx is clear on this crucial point.  He says in Capital Volume One: ‘The value of a commodity is expressed in its price before it enters into circulation, and it is therefore a pre-condition of circulation, not its result.”[ii]

Murray Smith in his new and forthcoming edition of his book, Invisible Leviathan[iii], provides a concise explanation of the difference between Marx’s law of value and DH’s interpretation.  Marx said that: “Money as the measure of value is the necessary form of appearance of the measure of value which is immanent in commodities, namely labour-time.” Smith comments that this “is certainly inconsistent with the idea that value can be created in the act of exchange. ..It is precisely because exchange effects a process of ‘equalisation of products of lab our on the market’ (that is, involves a real abstraction) that production oriented toward exchange must take account of the fact that ‘physiological labour’ is both utility-shaping and value-creating – that is, both concrete and abstract at one and the same time. To try and argue that that value is created ‘not in production but at the articulation of production and circulation’ is a notion replete with circular reasoning and requiring the most robust of mental gymnastics to entertain…. The problem with this approach is that if one accepts that abstract associated labour has no substantial existence apart from the value form, money, then commodity values appear to be severed entirely from any determination in the conditions of their production, and the way is paved for an effective identification of value and price.”

Instead, Marx’s law of value is based on the view that the labour involved in the production of commodities produces value, while exchange realises it in money-form. It is only because of this that Marx can distinguish between the amounts of value and surplus-value created in commodity production, and the generally different amounts realised through exchange.

Contrary to the view of the mainstream and neo-Ricardian economists, there is no ‘mystification’ here.  Value is objective and real and not just expressed in money.  Marx’s law of value, where abstract labour (measured in labour time) explains exchange value and prices, can be empirically validated.[iv]

There is reason behind DH’s interpretation.  If value is created only at the moment of exchange for money and ‘money rules’, then it will be (effective) demand that will decide whether capitalism smoothly accumulates without recurring crises.  To show this, DH describes in some detail the impact of capitalist accumulation on the conditions and living standards as capitalists strive to raise relative surplus value through the introduction of machinery.  He uses some of the graphic examples provided Marx in Chapter 25 of Volume One.  DH emphasises that capitalist accumulation aims to minimize the value of labour power – even to the point of pauperism.

DH concludes that “If this is a typical outcome of the operation of the capitalist law of value accumulation, then there is a deep contradiction between deteriorating conditions of social reproduction and capital’s need to perpetually expand the market.  As Marx notes in Volume 2 of Capital, the real root of capitalist crises lies in the suppression of wages and the reduction of the mass of the population to the status of penniless paupers.”  So the ‘real root of crises’ is found in the “suppression of wages” and the “reduction of the mass of population to the status of penniless paupers”.  This is an underconsumptionist theory of crises.

There are several points here.  First, Chapter 25 entitled, The general law of capitalist accumulation, does not just refer to the pauperization of the working class.  DH leaves out a very important aspect of that general law: the tendency for the organic composition of capital to rise[v].  This is what drives up relative surplus value but is also a key factor in the tendency of the rate of profit to fall (developed in Volume 3), ‘the most important law of political economy’[vi], which lays the basis for Marx’s theory of crises.  DH ignores this aspect.

But DH goes further in his underconsumptionist interpretation.  “Value depends on the existence of wants, needs and desires, backed by ability to pay in a population of consumers……It also means that the diminution of wages to almost nothing will be counterproductive to the realization of value and surplus value in the market. Raising wages to ensure “rational consumption” from the standpoint of capital and colonizing everyday life as a field for consumerism are crucial for the value theory.”  Thus DH argues that capitalism goes into crises because wages are suppressed; and so raising wages, ensuring ‘rational consumption’, would provide the ‘ability to pay’ and so end the crisis.

This underconsumptionist interpretation of Marx’s crisis theory has been firmly dismissed – by Marx himself – in the famous note in the same Volume 2 that DH refers to (underlines are my emphasis).

It is sheer tautology to say that crises are caused by the scarcity of effective consumption….That commodities are unsaleable means only that no effective purchasers have been found for them.   But if one were to attempt to give this tautology the semblance of a profounder justification by saying that the working-class receives too small a portion of its own product and the evil would be remedied as soon as it receives a larger share of it and its wages increase in consequence, one could only remark that crises are always prepared by precisely a period in which wages rise generally and the working-class actually gets a larger share of that part of the annual product which is intended for consumption. From the point of view of these advocates of sound and ‘simple‘ (!) common sense, such a period should rather remove the crisis.”[vii]

In my view, Marx rejected both the law of value as DH interprets it and also the conclusion that crises caused by an inability to pay for the ‘wants, need and desires’ of people.  But Marx could be wrong and DH right on the cause of crises.  Empirical evidence does not support DH, however.

Let me cite just three facts.  The first is that workers’ consumption is not the largest sector of ‘demand’ in a capitalist economy; it is productive capital consumption.  Gross domestic product or expenditure is a measure of annual demand for ‘wants, needs and desires’.  In the US, consumption would seem to constitute 70% of GDP.  However, if you look at ‘gross product’ which includes all the intermediate value-added products not counted in GDP, then consumption is only 36% of the total product; the rest constitutes demand from capital for parts, materials, intermediate goods and services.  It is investment by capitalists that is the swing factor and driver of demand, not consumption by workers.

This is shown in the second fact.  If we analyse the changes in investment and consumption prior to each recession or slump in the post-war US economy, we find that consumption demand has played little or no leading role in provoking a slump.  In the six recessions since 1953, personal consumption fell less than GDP or investment on every occasion and does not fall at all in 1980-2.  Investment fell by 8-30% on every occasion.

Percentage change in US real personal consumption (PC), investment and GDP

The third fact relates directly to wages and DH’s claim that raising them would help capital.  Carchedi finds that of the 12 post-WWII crises, 11 have been preceded by rising wages and only one by falling wages (the 1991 crisis)[viii].  That confirms Marx’s view in the note in Volume 2  above.

I conclude from DH’s short paper that he aims to establish an argument that class struggle is no longer centred or decided between labour and capital at the point of production of surplus value. Instead in ‘modern’ capitalism, it is to be found in other places in his ‘circuit of capital’ that he presents in latest book and in various presentations globally.  For DH, it is in the point of realisation (ie over rents, mortgages, price gouging by pharma firms etc) or in distribution (over taxes, public services etc) that the ‘hotspots’’ of class struggle are now centred.  The class struggle in production is now less important (even non-existent).

In my view, to support this, DH presents a series of theoretical confusions in this paper.  First, Marx did not have a labour theory of value.  Second, value is only created in exchange (in realisation). Third, the rate of profit (or even profit alone) is irrelevant to crises: what matters is the driving down of the value of labour power to the minimum (or even zero!) so that workers are unable to meet their ‘wants, desires, etc’.  This becomes a crude underconsumption theory – cruder than Keynes.

DH deliberately ignores the difference (and duality) between concrete and abstract labour, and its counterpart, use value and exchange value.  The dual nature of value in a commodity, as Marx discovered, is reduced by Harvey to the lack of the ability of workers to buy their use values.  Use value (wants and desires) is the key, not exchange value in value, for DH.  Marx’s theory of crisis (based on insufficient surplus value) is replaced with insufficient use values for workers as consumers.   Overaccumulation is replaced by underconsumption.  The class struggle becomes not workers versus capitalists; but consumers versus capitalists or taxpayers versus governments.

It’s not Marx’s view.  More important, the whole approach is confusing to a class analysis and strategy for the working class struggle.

And now here is David Harvey’s response to my critique of his paper on Marx’s value theory.

The misunderstandings of Michael Roberts (David Harvey)

There are, obviously, some serious points for discussion over Marx’s value theory and I hope that some dialogue with Michael Roberts can help clarify them.  Before getting to them, I need to remove a number of misreadings and misrepresentations of my position in Roberts’ response.  Let me be clear. Value is always created in the act of production.  But it is realized in the moment of market exchange. I therefore think of value in terms of what Marx calls “the contradictory unity of production and realization.”  Value cannot be produced through market exchange. But it cannot be realized outside of market exchange.  Marx is clear enough about that.

The essence of value is abstract labour or, as I prefer to refer to it, “socially necessary labour time”.  Roberts is obviously correct to say that Marx’s definition is entirely different from the concrete labour time that Ricardo postulated.  No matter whether we say “abstract labour” or “socially necessary”, however, the onus then falls on how the abstraction is made and how socially necessary is to be understood. The answer to such questions has to be grounded in material processes and not constructed through idealist exercises.  So by what materialist process is value constructed if it is not “immanent” in commodities but historically created.

The answer is given in Marx’s starting point in Capital which is the idealized material act of commodity exchange.  If the capitalist takes a commodity to market and there is no want, need or desire for it, then the labour congealed in it is socially unnecessary and it therefore has no value (this is what Marx says at the end of the first section of Capital – p.131 in Penguin/Vintage edition).  This does not mean that value is created in the market (which Roberts incorrectly accuses me of saying). But – and here this may be my peculiar way of looking at it – I take the value created in production to be only a potential value until it is realized.  An alternative way would be to say that the value is produced but then the value is lost if there is no demand for it in the market.  In which case, we would need to construct a strong theory of devaluation to account for what happens in the market place. Devaluation rarely appears in Roberts’ accounts and has no role in his response.  Given my interest in the relation between value and not-value or anti-value this latter formulation might also work for me.  But in either case I think it undeniable that the state of wants, needs and desires backed by ability to pay has an important role to play in sustaining the circulation of capital. This does not mean, as Roberts again and again infers, that this is the only relevant factor in crisis formation.  I have gone out of the way many times to say that this is just one important moment in the circulation of capital where devaluations (sometimes but not always of crisis proportions) can occur.

But again and again Roberts loves to relegate me into that pejorative category of underconsumptionist whenever I mention such matters.  It was Marx, not me, who said “the real root of crises” lies in the diminished purchasing power of the working classes and if I cite Marx on that point it is because it is a neat antidote to all those who endlessly cite the falling rate of profit.  Crises come in many shapes and forms, I have argued.  The falling rate of profit or the collapse of consumer demand are two of many other explanations (I note in passing that Marx in his comments on the crises of 1847- and 1857 – crises that had an uncanny resemblance to 2007-8 – described the crises as commercial and financial crises without any mention of either falling profit rates or insufficient consumer demand).

My objection to any exclusionary productivist interpretation (to cite a matching pejorative characterization!) is that it casts to one side the whole history of creation of wants, needs and desires (let alone the mechanics of ensuring an ability to pay) in the history of capital accumulation.  I think we should pay much more attention to this aspect of things. This does not mean I downplay, deny or refute all the work that has been done on the labour process and the importance of the class struggles that have occurred and continue to occur in the sphere of production.  But these struggles have to be put in relation to struggles over realization, distribution (e.g. rental extractions, debt foreclosures), social reproduction, the management of the metabolic relation to nature and the free gifts of culture and nature. These have all figured large in recent anti-capitalist movements and I insist that we take them all seriously along with the more traditional focus on the Marxist left favoring class struggle at the point of production as the key moment for struggle.  This is why I think the diagram I offer of circulation and the definition of capital as value in motion is so important.  Strange to have it all dismissed in the citation from Murray Smith as “circular reasoning”!!

This perspective opens up some interesting lines of enquiry and points of difference.  Marx’s account over struggles over the working day and the forces that drive technological and organizational changes in the search for relative surplus value all depend upon the “coercive laws of competition”.  That term comes up at various key points in Marx’s argument throughout Capital.  Where is this force mobilized and most clearly felt?  In the market of course!  We cannot understand what goes on in the realm of production (or social reproduction for that matter) without market forces playing their part. It is the coercive laws of competition in the market that mandate capitalist reinvestment and the lengthening of the working day etc.

But this tracks back to how Marx sets up how the abstraction of value – which, by the way, is in Marx’s view, a social relation hence “immaterial but objective” and not “immanent” and “real” as the quote from Murray Smith proposes (“not an atom of matter enters into the objectivity of commodities” says Marx in Capital– p.138).  Value arises not as a product of thought but as a product of a historical material process.  Marx’s study of equivalent and relative forms of value leads into the generalization of exchange which underpins the rise of value as a regulatory norm operating in the market and it is this regulatory norm of value that then returns to dominate behaviors not only in the market but also in the realm of production and social reproduction.  This is a very dialectical move that Marx make but quite commonly encountered in Marx’s work.  Only in this way, for example, can we understand how it is that workers make the capital which then returns to dominate them and how we can all become prisoners of our own products (academics beware!!).

Finally, let me comment on the empirical example on which Roberts reduces final demand to 30 from 70 percent.  To be sure, there is a complicated question of how to deal with value relations across commodity chains (there is an interesting piece by Starosta on Commodity Chains and Marx’s Value Theory in Antipode for 2011).  But imagine a situation where iron ore is mined and the mining company produces value and surplus value that is realized through a sale to a company that produces steel which realizes more value and surplus value through a sale to an auto company that produces yet more value and surplus value that is realized by a sale of autos to final consumers who want and need an auto and have the money to buy one.  The value of the auto is all the accumulated past abstract labour applied.  Suppose for some reason the final consumers cannot pay or get fed up with autos. Then all the accumulated value is lost (devalued).  In practice, as Marx observed, the chain of payments might take a while to work through but when it does then all value production in the chain disappears.

Of course, all sorts of other scenarios can be imagined.  But the point here is that no one apart from crazy people and speculators will want to accumulate steel in the absence of a market for it.  So what happens to value in all of this becomes problematic and Robert’s account makes it seem as if investment in the production of means of production is independent of final demand and can occur without any mind for final market conditions.  Of course, there are certain kinds of investments with all sorts of time lags (fixed capital and infrastructures) like the Chinese overproduction of cities funded by doubling down on indebtedness, where things get very complicated (as I outlined in the final chapter of the madness of economic reason book).  But Roberts’ empirical example makes no sense to me whatsoever as an elucidation as to why realization and the politics of realization are irrelevant or at best a sidebar to the main action at the point of production.

All this and we have yet to get to the thorny questions of money and the politics of distribution along with the circulation of interest-bearing capital in relation to value theory.  Can banks produce value?  They are clearly producing representations of value hand over fist…..Are they a mere side-bar too?

For more on the nature of Marx’s law of value and its relation to crises, see my new book, Marx 200 



[ii] Capital Volume One, p260 trans. Ben Fowkes, New York: Vintage 1977

[iii] Murray Smith, Invisible Leviathan, Historical Materialism, forthcoming 2018

[iv] Cockshott and Cottrell broke down the economy into a large number of sectors to show that the monetary value of the gross output of these sectors correlates closely with the labour concurrently expended to produce that gross output.  Anwar Shaikh also did something similar.  He compared market prices, labour values and standard prices of production calculated from US input-output tables and found that on average labour values deviate from market prices by only 9.2 per cent and that prices of production (calculated at observed rates of profit) deviate from market prices by only 8.2 per cent. Lefteris Tsoulfidis and Dimitris Paitaridis investigated the question of price-value deviations using the input-output Table of Canada. They found for the Canadian economy the results are consistent with Marx’s law of value. And G Carchedi, in a recent paper, showed that the validity of Marx’s law of value can be tested with official US data, which are deflated money prices of use values.  He found that money and value rates of profit moved in the same direction (tendentially downward) and tracked each other very closely.

[v] “The accumulation of capital, though originally appearing as its quantitative extension only, is effected, as we have seen, under a progressive qualitative change in its composition, under a constant increase of its constant, at the expense of its variable constituent.”  Capital Vol 1, Chapter 25

[vi] Grundrisse p748

[vii] Capital Volume 2, Chapter 20


Marx 200 – a new book

March 27, 2018

My new book is ready.  Called Marx 200 – a review of Marx’s economics 200 years after his birth, it is published by Lulu and is now available on Lulu’s site.

With the 200th anniversary of Karl Marx’s birthday on 5 May, I thought it might be useful to attempt to explain Marx’s economic ideas and their relevance to modern economies 200 years after his birth.

So in this short book, I argue that Marx developed three key laws of motion of capitalism, around which a clear analysis of the nature of modern economies can be understood. From these laws, we can understand why capitalism cannot escape being subject to regular and recurring slumps; causes vicious rivalry among national states that leads to perpetual wars; and engenders uncontrolled and wasteful use of natural resources that now threatens the destruction of the planet itself.

Marx’s laws also tell us that capitalism is not here for eternity but has a finite existence. The question before us, 200 years after Marx’s birth, is what would replace it as a mode of production and social organisation for human beings on this planet?

The development of Marx’s economic thought can be divided into four parts: his childhood; as a young man; as a mature man; and the old Marx.

In his teenage years, he was under the influence of his father and his father’s friend, Count Von Westphalen. They were both men of the enlightenment, followers of the ideals of the French philosophers and revolution. Marx was born just after the end of the so-called Napoleonic wars and at the start of a gradual economic recovery in the petty German statelets. When Marx went to university in the late 1830s, he was a radical democrat in opinion, one of the ‘Young Hegelians’, who were philosophically opposed to religious superstition and autocracy.

The period of Marx as a young man from the point of him leaving university and without an academic post was one of radical upsurge in ideas and political action in Europe. Britain was in the midst of the ‘industrial revolution’ with all its expansion of machinery and goods and the accompanying dark exploitation of labour. The Reform Act of 1832 had given the middle classes the vote but now there was pressure from the Chartist working class movement for full franchise. In Germany, workers in the towns were organising for the first time and peasants in country were growing restive. Economically, in 1840 there was the establishment of the German Customs Union, the Zollverein, which brought an end to trade barriers within the Prussian sphere of influence and began a huge economic upsurge.

On leaving university, Marx became a radical journalist with a growing materialist conception of class struggle. Marx started to take an interest in economic developments under the encouragement of his new and eventually lifetime friend, Friedrich Engels. Engels lived in the heart of Capital, Britain’s industrial Manchester, and was already writing on the economic and social consequences of capitalist development. Marx and Engels became communists, an ideology designed to replace capitalism as a mode of production and social organisation with communal control, with the working class as the ‘gravediggers’ of capitalism to deliver this. They wrote the Communist Manifesto in 1848 (Marx was 29 years old), just before the outbreak of the revolutions against autocracy across Europe. The manifesto intuitively recognised the nature of capitalism, but without expounding any economic laws of motion.

The defeat of the 1848 revolutions and Marx’s eventual exile to Britain began the period of mature Marx (aged 32 in 1850) that lasted until the defeat of the Paris Commune in 1871 (aged 53). This turned out to be the period of the long boom in the European economies. Britain was the dominant economic and political power and thus the best placed to study the economics of capitalism. The boom revealed to Marx and Engels that there was no short-cut to revolution and capitalism still had some way to go in its spread across the globe. The first international slump in 1857 did not lead to the collapse of capitalism or to revolution. Marx concentrated on organising the first international party of the working class (the International Working Men’s Association) and on writing his main economic work, Capital.

The defeat of the Paris Commune in 1871, followed by the financial panic and crash of 1873 in the US, which spread to Europe, set the final phase of Marx’s life. It was also the start of what was eventually called the (first) Great Depression, where the major capitalist economies struggled to recover from crashes and became subject to a series of slumps. This was a vindication of Marx’s laws of motion. Marx died in 1883, in the depth of the latest slump in Britain.

Marx remained an obscure figure in economic and political thought after his death, except in the circles of the leaders of the burgeoning social democratic parties of Europe after the Great Depression came to an end. In this new period of economic recovery of the 1890s, unskilled workers formed trade unions and working class organisations built mass political parties with increasing voting power. Marx’s ideas now became more widespread. The victory of the ‘Bolshevik’ (majority) social democrats in the Russian revolution in 1917 then placed the works of Marx and Engels on the world stage through the 20th century.

The book will look back at Marx’s economic ideas and see just how relevant they are for 21st century.

Trump’s trade tantrums – free trade or protectionism?

March 19, 2018

Today, the finance ministers of the top 20 economies (G20) meet in Buenos Aires, Argentina, and the big topic for discussion is trade protectionism and the possibility of an outright trade war between the US and other major economics areas, particularly China.

There is a real concern that all the blustering by President Trump is finally turning into reality and ‘The Donald’ is now going to honour his promise to ‘make America great again’ by introducing a range of tariffs, quotas and bans on various imports from Europe and Asia into the US.  Trade protectionism is coming back after decades of ‘free trade’ and globalisation.

Up to now, Trump has only imposed tariffs (taxes or enforced price rises) on steel and aluminium imports.  But he has also pulled the US out of the Trans-Pacific Partnership (TPP) and demanded a re-negotiation of the terms of North Atlantic Free Trade Area (NAFTA). But there is talk of more measures, including action to stop the free exchange of intellectual property rights by US companies and other countries.

The steel and aluminium tariffs (facilitated by an old GATT loophole, allowing countries to enact barriers for reasons of ‘national security’ (US defence spending consumes 3% of US steel output) are really small beer on their own.  In 2002 when the US last imposed steel tariffs, the US produced almost as much steel as today. But now it produces it with a small fraction of the 2002 workforce. Technology has boosted productivity and created products that use less steel.  So direct job gains for US workers are likely to be small, if any.

Back in 2002, President Bush signed into law tariffs for certain steel products following a spate of mill closures and surging imports. The net effect on employment in the steel production industry was minimal. But, according to a Trade Partnership Worldwide study, businesses that consumed steel products shed approximately 200,000 jobs, compared to the 180,000 employed in steel production.  The pain was born principally by smaller manufacturing firms (smaller than 500 employees), which had limited room to negotiate on prices and similarly restricted space to pass costs on due to price competition. The Bush barriers were only in place for a little over a year, but the impact was immediate as price distortions squeezed end users.

If the impact on the employment figures of effectively raising the cost of steel was uppermost in Trump’s mind, he should have considered the potential net loss of jobs in the car industry, the aviation industry and the countless other manufacturers that depend on cheap steel as a raw material. These companies are expected to pass on the extra cost to their customers and suffer the usual consequences – lower demand and a profit squeeze.

Moreover, since 2002, US steel mills have moved south and west, where unions are weak and labour is cheaper.  But now the industry has fewer workers because it is increasingly automated. The Trump tariffs will not bring any new jobs and certainly not in the old steel ‘smokestack’ regions that looked to him for help. The real hit will be on many emerging economies.  Canada and Mexico are exempt from the tariffs because they are part of NAFTA.  But Brazil is a big exporter to the US.  Canada and Brazil account for around one-third of US steel imports, while China accounts for no more than 3%.  With Canada exempt and China unimportant, Trump’s ‘steel’ protectionist move is both weak and misdirected.

Anyway, Trump’s claimed objective to ‘make America great again’ by boosting steel production and other traditional industries means rolling back the advance of technology to recreate smokestack industries.  It can’t and won’t happen.  Trump’s claim that American workers have been losing jobs in traditional ‘smokestack’ industries because of unfair trade by other countries is bogus.  The loss of US manufacturing jobs has been replicated in other advanced capitalist economies over the last 30 years.  This decline is not due to nasty foreigners fixing trade deals.  It is due to the inexorable attempt of American capital to reduce its labour costs through mechanisation or through finding new cheap labour areas overseas to produce.

The rising inequality in incomes is a product of ‘capital-bias’ in capitalist accumulation and ‘globalisation’ aimed at counteracting falling profitability in the advanced capitalist economies. But it is also the result of “neo-liberal’ policies designed to hold down wages and boost profit share.  Trump cannot and won’t reverse that – on the contrary – with all his bluster because to do so would threaten the profitability of America capital.

Nevertheless, it seems that Trump and his new ‘protectionist’ advisers are going to launch a series of measures against the imports of other countries – particularly against China.  But in the last 20 years, China has moved up the value-added ladder from basic industries into higher and higher tech products.  Indeed, much of the global flow of technological innovation is now coming from China, not the US.

Efforts to punish China with tariffs could quicken this trend. Typically, such businesses are highly adaptable in the face of restrictions, shifting investment and capacity overseas. And China is already moving in this direction with a huge rise in outward FDI. China now ranks second only below the US in terms of outward investment. Its stock of direct investment assets has been growing 25% annually hitting a value of $1.3trn (see graph below). Two thirds of this outflow is directed towards Asia (blue line). China is also pushing aggressively into ‘the belt’ countries of its ‘one road’ project. That’s reflected in its exports, with sales to these states double those to the US. So any restrictive measures taken by the Trump administration against China can only accelerate this reallocation process.

Also, while Trump and his new ‘protectionist’ advisers want to take action against China and other ‘unfair’ trading nations, European and Asian economies, along with the international agencies, want to hold the line for ‘globalisation’ and ‘free trade’.  The rest of the world is still trying to lower barriers. The EU completed free trade agreements with both Canada and Japan at the end of last year. Meanwhile Japan, Canada, Australia, New Zealand, Mexico, Malaysia, Vietnam, Peru, Chile, Brunei and Singapore ratified a revised TPP without the US.

And what Trump forgets is that now in world capitalism, it is not so much trade, or even services trade rather than goods trade, that matters; it is capital flows.  And any full trade war would seriously threaten US foreign investment just at a time when China is expanding its overseas flows.

Foreign trade now contributes relatively little to US corporate profits. Back in the 1940s, foreign subsidiaries of US-based corporations accounted for only 7% of all US profits – the same proportion as exports. Globalisation of US corporate operations and capital investment has changed that in the last 35 years. In 2016, the share of domestic profits has shrunk to 48% of total profits, while the shares of foreign operations and exports have grown to 40% and 12%, respectively.

Stimulated by Trump’s protectionist talk, the debate in mainstream economics over whether free trade is better for every country and the people living in them has also revived.  The longstanding neoclassical view is based on David Ricardo’s law of comparative advantage.  In his book On the Principles of Political Economy and Taxation (1817), now over 200 years old, Ricardo argued that, although Portugal could produce both cloth and wine with less amount of labour than England, both countries would benefit from trade with each other. Because the comparative advantage for Portugal with England is greater in the production of wine than in cloth, it would still make sense for Portugal to produce excess wine and trade that for English cloth. England in turn would benefit from this trade, because while it still costs the same to produce cloth, the price for wine would fall considerably.  So free trade is a win-win situation.

And yet the historical evidence for this ‘law’ is the opposite.  Over the last 30 years or so, the world capitalist economies have move closer to ‘free trade’ with sharp reductions in tariffs, quotas and other restrictions – and many international trade deals.  But economic growth since the 1980s has been slower than in the 1960s.

Another conclusion of the mainstream theory is that free trade will eventually lead to harmonisation and equilibrium in trade balances through the adjustments in international exchange rates and production costs.  And yet there has been little such harmonisation.  The US has continually run a goods and services trade deficit over the last 30 years; and so have many supposedly ‘comparatively advantaged’ emerging economies.

And as for harmonisation of incomes and employment, inequality of incomes and wealth between countries and within them has worsened in the last three decades, while 1.5bn workers globally are still without a regular job or income.

Free trade has been no great capitalist success.  And now globalisation seems to have paused or even stopped. World trade ‘openness’ (the share of world trade in global GDP) has been declining since the end of the Great Recession.

This has led to various mainstream voices suggesting that maybe protectionist policies by individual countries might better for them.  Dani Rodrik has been pushing this line; reminding us that the US itself protected its domestic industry in the 1870s onwards to get it going; and Germany did similarly in the 1890s, while Japan and other Asians followed suit in the post-war period.

Rodrik, Stiglitz and other ‘leftist’ mainstream economists who now denounce the failure of globalisation really do so from the point of view that free markets are fine as long as they are really free.  But they are not and so governments must intervene to reduce monopoly and other distortions and to control and regulate financial speculation.  And internationally, you need proper and ‘fair’ agreements on trade to protect the weaker national economies.  Apart from this being a utopian aim, this ‘alternative’ to unbridled ‘free trade’ is really an admission that Ricardo’s win-win theory is faulty and disproved, even if there were fully ‘free trade’.

Capitalism does not tend to equilibrium in the process of accumulation.  As Adam Smith put it, in contrast to Ricardo, “When a rich man and a poor man deal with one another, both of them will increase their riches, if they deal prudently, but the rich man’s stock will increase in a greater proportion than the poor man’s. In like manner, when a rich and a poor nation engage in trade the rich nation will have the greatest advantage, and therefore the prohibition of this commerce is most hurtful to it of the two”. Capitalism does not grow globally in a smooth and balanced way, but in what Marxists have called ‘uneven and combined development’.  Those firms and countries with better technological advances will gain at the expense of those who are behind the curve and there will be no equalisation.

Free trade works for national capitalist states when the profitability of capital is rising (as it was from the 1980s to 2000) and everybody can gain from a larger cake (if in differing proportions).  Then globalisation appears very attractive.  The strongest capitalist economy (technologically and thus competitively in price per unit terms) will be the strongest advocate of ‘free trade’, as Britain was from 1850-1870; and the US was from 1945-2000.  Then globalisation was the mantra of the US and its international agencies, the World Bank, the OECD and the IMF.

But if profitability starts to fall consistently, then ‘free trade’ loses its glamour, especially for the weaker capitalist economies as the profit cake stops getting larger.  ‘Populism’ and nationalism rears its head and mainstream economists opposed to ‘free trade’ become more prominent.  That was the situation in the 1870s and 1880s.  That was the situation in the 1930s Great Depression.  That is the situation since the early 2000s and especially since the end of the Great Recession.

US capitalism has lost ground relatively, not only to Europe and Japan, but even more worryingly to the rising economic juggernaut that is China, where foreign investment is strictly controlled and subservient to the state sector and to an autocratic Communist elite.  The US is now in the same position as the UK was in the 1880s, only worse.  Trump is the consequence of that.

Marx and Engels recognised that ‘free trade’ could drive capital accumulation globally and so expand economies, as has happened in the last 170 years.  But they also saw (as is the dual nature of capitalist accumulation) the other side: rising inequality, a permanently floating ‘reserve army’ of unemployed and increased exploitation of labour in the weaker economies.  And so they recognised that rising industrial capitalist nations could probably only succeed through protecting their industries with tariffs and controls and even state support (China is an extreme example of that).

But is free trade or protectionism better for labour and the working class?  It depends.  Perhaps the answer is best summed up by Robert Tressell in famous book, The Ragged Trousered Philanthropist, written in 1910 in the UK: “We’ve had Free Trade for the last fifty years and today most people are living in a condition of more or less abject poverty, and thousands are literally starving. When we had Protection things were worse still. Other countries have Protection and yet many of their people are glad to come here and work for starvation wages. The only difference between Free Trade and Protection is that under certain circumstances one might be a little worse that the other, but as remedies for poverty, neither of them are of  any real use whatever, for the simple reason that they do not deal with the real causes of poverty”.

American workers can expect nothing from Trump’s trade tantrums – indeed it can make things worse.