Marx on the Increasing Intensity of Labour in Industrial Capitalism: I Refute Him Thus

In the videos below.

But first let us look at Marx’s theory. It is that capitalists aim at increasing their theft of surplus value from workers.

They can do this in three ways:

(1) by increasing the length of the working day while holding down the real wage to a subsistence level (that is, increasing absolute surplus value);

(2) decreasing the price of the basic commodities making up the value of the maintenance and reproduction of labour by automation, and thus reducing the real subsistence wage when the working day is held constant (that is, increasing relative surplus value);

(3) given a stable working day, using machines to increase the intensity and speed of work by labourers and so increasing the socially necessary labour time worked per hour, while holding down the real wage to a subsistence level (that is, increasing relative surplus value).

It is method (3) that concerns us here.

Marx says clearly that one of the primary effects of machines in factory work is as follows:

“It is self-evident, that in proportion as the use of machinery spreads, and the experience of a special class of workmen habituated to machinery accumulates, the rapidity and intensity of labour increase as a natural consequence.” (Marx 1906: 447).

“The shortening of the hours of labour creates, to begin with, the subjective conditions for the condensation of labour, by enabling the workman to exert more strength in a given time. So soon as that shortening becomes compulsory, machinery becomes in the hands of capital the objective means, systematically employed for squeezing out more labour in a given time. This is effected in two ways: by increasing the speed of the machinery, and by giving the workman more machinery to tend. Improved construction of the machinery is necessary, partly because without it greater pressure cannot be put on the workman, and partly because the shortened hours of labour force the capitalist to exercise the strictest watch over the cost of production.” (Marx 1906: 450).

“There cannot be the slightest doubt that the tendency that urges capital as soon as a prolongation of the hours of labour is once for all forbidden, to compensate itself, by a systematic heightening of the intensity of labour, and to convert every improvement in machinery into a more perfect means of exhausting the workman, must soon lead to a state of things in which a reduction of the hours of labour will again be inevitable.” (Marx 1906: 456).

So the general effect of machines in capitalism is to make workers labour with more and more intensified work and faster speed per hour of work.

Marx’s world of increasing intensity of labour may as well be the factory imagined by Charlie Chaplin in the movie Modern Times (1936), as below.



Marx even quotes with approval the bizarre idea of John Stuart Mill that it was “questionable if all the mechanical inventions yet made have lightened the day’s toil of any human being” (Marx 1906: 405).

While Marx certainly could point to some evidence of an intensifying of factory labour in the 1810s to 1850s, as a general tendency of developed capitalism even in the 19th century or in the long-run history of Western capitalism, it is a most absurd perversion of the truth. It is a piece of communist propaganda.

Let us look at human labour in the videos below in some modern factories where more and more machines have been introduced.





Look carefully at the workers in these videos. Is their work more labour intensive and faster than the work required before machines were introduced? The very idea is absurd.

In video 2, most of the factory work has been reduced to visual inspection and overseeing of machine work, not physical labour.

In video 1, the work has manifestly been made less intense and less arduous given the massive use of robots, machine tools, conveyer belts, and load-bearing technologies, and certainly in relation to how the cars were manufactured in past decades.

Marx’s central claim that machines, generally speaking, are an unmitigated evil in capitalism whose primary effect to increase the intensity and speed of work by labourers is an outrageous falsehood – a perversion of history and reality. If true, it would imply that advanced industrial capitalism would have increased the intensity of work so much that an individual worker would be moving at the rapidity of Speedy Gonzales.

Even worse, Marx himself even in Chapter 15 of volume 1 of Capital on machines badly contradicted himself, because he let slip the reality that large-scale industry can result in a “lightening of the labour” for workers (Marx 1906: 462) and then refers to the “light character of the labour” in the factory system (Marx 1906: 505).

These days even some Marxists realise that Marx’s theory on this point is rubbish: e.g., the Marxist Harry Cleaver admits that, in the long run in capitalism, the “general tendency has been for a reduction in intensity” of labour (see here under Section 3. Working Class Response).

And once we admit that the third and last element in Marx’s theory of increasing exploitation of workers based on extraction of surplus labour value cannot be sustained, the whole theory collapses like a house of cards because the first two are false as well.

BIBLIOGRAPHY
Marx, Karl. 1906. Capital. A Critique of Political Economy (vol. 1; rev. trans. by Ernest Untermann from 4th German edn.). The Modern Library, New York.

Paul Bairoch on the Industrial Revolution, Imperialism and Capitalism

The economic historian Paul Bairoch (1930–1999) subjected some Marxist myths about Western capitalism and imperialism to critical scrutiny in his now classic book Economics and World History: Myths and Paradoxes (New York and London, 1993).

First, was the Western industrial revolution dependent on energy from the Third World?

Bairoch (1993: 59) notes that right up until the post-WWII era the West was almost completely self-sufficient in energy, and as late as the 1930s much of the developed world had an export surplus in products used to create energy, such as coal (Bairoch 1993: 59). The energy-dependence of the First World on the Third World arose after WWII long after the industrial revolution, so one cannot claim that energy imports by imperialism were a necessary condition for the West’s industrialisation.

Production and use of oil as a source of energy for Western industrial civilisation only really began in the late 19th century, but it remained a tiny percentage of total energy consumption right up until WWI, and even here the West was mostly self-sufficient (Bairoch 1993: 61–62). An often forgotten fact is that US consumption of energy petroleum only rose above domestic production in 1957 (Bairoch 1993: 61), so that industrialisation in the US was not dependent on imports of oil.

What about iron ore? Iron ore was crucial for Western industry, since as late as 1910 iron ore represented 95% of all metal production (Bairoch 1993: 63). However, the West was almost wholly self-sufficient in iron ore too: most production occurred in Europe where in around 1914 Europe produced 28 million of the 32 million tons in global production (Bairoch 1993: 63). In 1914, the West only depended for 2% of its total metal ore consumption on Third World production – an extraordinarily low figure which means that 98% of metal ores were produced domestically (Bairoch 1993: 65).

In production of glass, cement, paper and clay products the West was almost completely independent and not reliant on imports (Bairoch 1993: 68).

Even in raw materials that were imported from the Third World, we can note that textile fibres were mostly produced domestically in Western countries and imports from the Third World only accounted for about 22% of domestic consumption as late as the 1909–1913 (Bairoch 1993: 67).

Bairoch (1993: 68) estimates that in terms of value the West was about 94–96% self-sufficient even in raw materials around 1913.

Of the raw materials that did need to be imported from the Third World such as rubber, fertilisers, and phosphates, their total value in relation to Western exports was not large, and could easily have been obtained by international trade and paid for through export earnings: there was simply no economic need for imperialist conquest of the Third World to obtain these goods.

Bairoch’s conclusion is very important:

“… if in fact from 1955 onwards the large dependence on raw materials from the Third World was a reality, before that period it was a complete myth. The developed countries were thus able to reach a very high level of industrialization on the basis of local raw materials and also on the exploitation of their local workforces …. .” (Bairoch 1993: 70).

In other words, the vulgar Marxist explanation of Western imperialism as motivated largely or ultimately by an evil capitalist need to plunder the Third World and steal raw materials and energy necessary for industrialisation is a myth.

Now what about the Marxist and Leninist thesis that Western imperialism – especially after the 1880s – was driven by the need to find new markets for Western manufactured commodities and that this was the primary economic cause of imperialism? This was the famous thesis of Lenin’s Imperialism, the Highest Stage of Capitalism (1982 [1917]).

Once again, Bairoch demonstrates that this is a myth. Of total exports from the West from 1900 to 1938, Bairoch estimates that about 17% of exports were sent to the Third World and only 9% to actual Western colonial territories (Bairoch 1993: 72).

And – even more catastrophically for Marxist ideology – the export sector accounted for only about 8–9% of GNP of most developed nations, and total exports to the Third World were as low as 1.3 to 1.7% of the total volume of production. Exports to actual Western colonial territories accounted for as little as 0.6 to 0.9% of the total volume of production (Bairoch 1993: 73).

Throughout the 19th century, for example, the United States only exported about 0.5–0.9% of its total GNP to the Third World (Bairoch 1993: 73).

Even Great Britain – the colonialist superpower of the 19th century – exported only about 4–6% of its total production (Bairoch 1993: 73), and not all of that to its colonies, a figure which remains a low percentage. At most, Bairoch notes, exports to the Third World might have helped certain given UK sectors for limited periods of time (such as textiles), but this hardly vindicates Marxism, since it does not follow at all that this was a necessary condition for the British industrial revolution nor that British imperialism had a fundamental and underlying economic motive.

Did Western manufacturing need a captive Third World market from imperialism? The evidence shows that it did not. For a period where the data is very good, Bairoch estimates that from 1899–1938 manufacturing exports to the Third world accounted for about 5–8% of total Western manufacturing production (Bairoch 1993: 74): but this was a marginal outlet compared with domestic markets.

Even for the 19th century as a whole, Bairoch’s research suggests that perhaps on average 10% of Western manufacturing output was exported to the Third World (Bairoch 1993: 74).

Now it is true that free trade policies imposed on the Third World in the 19th century caused de-industrialisation in a number of countries, but none of this was necessary for Western capitalist development:

“… the damage caused to Third World industries by colonialism through the influx of manufactures did not in fact have a correspondingly large positive effect on the developed countries. Taken as a whole, access to Third World markets was no more than a small stimulus to the developed countries’ industries.” (Bairoch 1993: 74).

So in reality the industrial revolution and economic development of the West right up until the mid-20th century did not require as a necessary condition Western imperialism.

Without empires, the West would still have industrialised and its per capita wealth would still have spectacularly soared above the rest of the world: the miracle of capitalism would still have happened. At most, real capita GDP would have been slightly lower, but not by much.

BIBLIOGRAPHY
Lenin, Vladimir Il’ich. 1982. Imperialism, the Highest Stage of Capitalism. Progress, Moscow.

Bairoch, Paul. 1993. Economics and World History: Myths and Paradoxes. Harvester Wheatsheaf, New York and London.

The Long-Run Tendency of Capitalism is to Decrease the Rate of Exploitation

This follows quite clearly from (1) the logic of Marx’s own theory in volume 1 of Capital and (2) the empirical history of capitalism.

Let us run through the steps:

(1) Let us assume that the concept of abstract socially necessary labour time is valid (even though the concept is incoherent, cannot be properly defined and is empirically irrelevant). But, as I note, let’s assume – for the sake of argument – that it is coherent and empirically relevant.

(2) For Marx, the total working day is divided into two parts of the working day as follows:

(1) necessary labour-time, which is “determined by the working time required for the reproduction of the labour-power of the labourer himself” (Marx 1906: 256), and

(2) the surplus labour-time (Marx 1990: 341).

The capitalists only tend to pay for the value of labour-power and steal the value of surplus labour-time (or surplus value s). The necessary part of the working day is determined by the value of variable capital v bought by the capitalist (Marx 1990: 326), which is value of labour-power. The rate of surplus value is s/v (Marx 1990: 324; Brewer 1984: 43), which is also the rate of exploitation.

(3) Exploitation for Marx, in its most important sense, arises from the (alleged) manner in which capitalists tend to pay only a wage equal to the value of labour-power, which is the value of reproduction and maintenance of workers, and so this allows the capitalist to steal the value of surplus labour time.

Capitalists can increase this exploitation by increasing the total working day to extend the surplus labour time of workers (and so gain more absolute surplus value) or decreasing the real wage equal to the value of reproduction and maintenance of workers (which is called by Marx relative surplus value). For Marx, the rate of surplus value is the rate of exploitation.

(4) but the long-run trajectory of capitalism in first world countries is to decrease the working day, so that capitalists have not in the long run been able to increase extraction of surplus value by relentlessly increasing the working day.

(5) furthermore, the crux of Marx’s argument is that workers tend only to be paid a wage equal to the value of reproduction and maintenance of workers (a type of subsistence wage), so that this in turn is equal to that part of the working day necessary only for the reproduction and maintenance of labour-power: the hours of the working day beyond this represent the surplus labour time, whose value is surplus labour value extracted from labour.

(6) but the long-run tendency of capitalism is to increase the real wage, even for workers. The real wage – even for workers – has, generally speaking, soared in the past 160 years and has soared well above subsistence level.

(7) even worse for Marx, the long-run tendency of capitalism is to make work less intense and arduous in many industries through use of machines and automation, so that, for example, the socially necessary labour time needed to build a house is far less today than it was 100 years ago, because of machine tools. So therefore many types of workers have seen a rising real wage and a less arduous working day with respect to the same type of work people did 100 years ago, even while their working day has remained stable or even declined.

(8) it follows directly that capitalists cannot be succeeding in stealing more relative surplus value by holding down the real wage to subsistence levels.

(9) if the working day is stable or falling in the long run, and the real wage has a long-run tendency to rise, then it follows that people are being paid more and more above subsistence level, and that they are being paid more and more for their surplus labour time, sometimes for all their surplus labour, and in some cases perhaps even more than their surplus labour time.

The conclusion is clear: under the logic of Marx’s own theory, capitalism has historically had a tendency to reduce the rate of exploitation. Marx should have been talking about the glorious tendency of capitalism to reduce its exploitation of the working class!

Had Karl Marx only lived another 30 years, the old fraud may even have been forced to recognise that his central claim in volume 1 of Capital – that capitalism only ever increases the extraction of unpaid surplus labour value – was false, given the soaring real wages even of workers.

BIBLIOGRAPHY
Brewer, Anthony. 1984. A Guide to Marx’s Capital. Cambridge University Press, Cambridge.

Marx, Karl. 1906. Capital. A Critique of Political Economy (vol. 1; rev. trans. by Ernest Untermann from 4th German edn.). The Modern Library, New York.

Marx, Karl. 1990. Capital. A Critique of Political Economy. Volume One (trans. Ben Fowkes). Penguin Books, London.

Would Capitalism necessarily be destroyed if Human Labour fell towards Zero?

In a word: no.

Why? Because an economy with more and more automation based on private enterprise and private capitalist production could still sell its output and obtain money profits, if a government managed the demand-side of the economy by providing a guaranteed income (with, say, taxes on consumption, property, and ownership of financial and real assets and returns from those assets, with the shortfall covered by central bank money creation). As long as the balance of payments functioned successfully, a type of capitalism could continue.

That is, such an economy would still be a variety or type of capitalism: it would not be a command economy or the type of socialism envisaged by Marx.

Any Marxist response to this depends on Marx’s definition of capitalism. If one wants to define capitalism merely as a system of private production based on employment of free human wage labourers, then of course capitalism would cease once employment of free human labour ceased.

But this is just playing with words: setting up a narrow analytic definition of capitalism (true by definition), and ignoring other obvious real world aspects of capitalist systems of production.

If capitalism is to be defined in any empirically-defensible sense, it would need to use the following criteria:

Capitalism is a system of production as follows:
(1) where the vast majority of all capital goods are owned privately and where there is a high degree of private property (in land, houses, private possessions, etc.) and rights to private property;

(2) where the vast majority of all decisions on investment and production of commodities are made by private agents (though this does not exclude certain public goods);

(3) where there exists a class of free human beings who work for a wage, either from the private or public sector (though mostly in the private sector).

Now if (3) fell and fell or even ceased to happen in an economy where production is increasingly done by machines, then it would still leave us with criteria (1) and (2).

The new system of nearly fully or fully automated production would in essence still be a type of capitalism, because it would still have traits (1) and (2), which clearly lie at the heart of what capitalism is.

In short, it would not be a system where all business is owned by the state or where the state plans all economic activity, and there is no necessary reason why a capitalist mode of production must end even if human wage labour falls towards zero.

More on Engels’ Supplement to Volume 3 of Capital

It was in the spring of 1895 that Engels wrote his supplement to volume 3 of Capital (Howard and King 1989: 48), a small essay which clarifies how Engels understood Marx’s law of value at the end of Engels’ life (Engels died on August 5, 1895).

This was written in May 1895 for the Neue Zeit (Marx 1991: 1027, n.), which is available as the “Supplement and Addendum” to Volume 3 of Capital in Marx (1991: 1027–1047).

This supplement was partly inspired by the critical reviews of volume 3 of Capital by Werner Sombart and Conrad Schmidt and the private (and more hostile) letters of these men to Engels, but also by the need to defend Marx’s theory of value from other critics and the perception that it was incoherent.

The essence of Engels’ conclusion is expressed here:

To sum up, Marx’s law of value applies universally, as much as any economic laws do apply, for the entire period of simple commodity production, i.e. up to the time at which this undergoes a modification by the onset of the capitalist form of production. Up till then, prices gravitate to the values determined by Marx’s law and oscillate around these values, so that the more completely simple commodity production develops, the more do average prices coincide with values for longer periods when not interrupted by external violent disturbances, and with the insignificant variations we mentioned earlier. Thus the Marxian law of value has a universal economic validity for an era lasting from the beginning of the exchange that transforms products into commodities down to the fifteenth century of our epoch. But commodity exchange dates from a time before any written history, going back to at least 3500 B.C. in Egypt, and 4000 B.C. or maybe even 6000 B.C. in Babylon; thus the law of value prevailed for a period of some five to seven millennia. We may now admire the profundity of Mr Loria in calling the value that was generally and directly prevalent throughout this time a value at which commodities never were sold nor could be sold, and which no economist will ever bother himself with if he has a glimmer of healthy common sense!” (Engels 1991 [1895]: 1034–1038).

So, according to Engels, the law of value in volume 1 was empirically true until about the 15th century. Elsewhere, however, Engels implies that it continued until the 19th century in Germany (Engels 1991 [1895]: 1035, 1044; Howard and King 1989: 49). At any rate, it is clear that Engels envisaged this as being prior to the emergence of prices of production in modern capitalism.

Now what, according to Engels, overthrew the “law of value” in pre-capitalist commodity production?

It was the following factors:

(1) the rise of money as a medium of exchange and in particular foreign imported gold whose socially necessary labour time was unknown;

(2) the rise of the international merchant trader and merchant capitalism, and

(3) the rise of manufacturing capitalism.

For Engels, the merchant traders of the early modern period came to have an average or equal rate of profit, and this was often high (Engels 1991 [1895]: 1039–1040). Engels even saw the guild-like merchant traders as engaging in a type of “monopoly trade with monopoly profit” and competitive forces equalised the profit rate inside and between nations (Engels 1991 [1895]: 1040). This continued with the discovery of the new world and the rise of trading companies.

With the rise of industrial capitalism, handicraft production and independent workers owning their own means of production gave way to capitalism. Up until this point in domestic retail trade commodities produced by independent handicraft workers still tended to exchange at their labour values (Engels 1991 [1895]: 1041).

This began in shipping, mining and textiles, but continued as merchant traders also came to hire artisans and other independent workers as contractors (Engels 1991 [1895]: 1042–1044).

Large-scale industrial capitalism put the handicraft and independent workers out of business and so became universal (Engels 1991 [1895]: 1044). This new capitalism was also characterised by intense competition and so there was a tendency to the equalisation of profit rates (Engels 1991 [1895]: 1044). It was at this point that prices of production became universal too, and a tendency to an average profit rate (Engels 1991 [1895]: 1044).

Engels ended his thoughts with the observation that the stock market had by the 1880s taken on a fundamental and overwhelming role in modern capitalism, and allowed the growing class of idle rentiers to soar, and the rise of limited liability corporations and banks (Engels 1991 [1896]: 1046).

BIBLIOGRAPHY
Engels, F. 1991 [1895]. “Supplement and Addendum” to Volume 3 of Capital,” in Karl Marx, Capital. A Critique of Political Economy. Volume Three (trans. David Fernbach). Penguin Books, London.

Howard, Michael Charles and John Edward King. 1989. A History of Marxian Economics. Volume I, 1883–1929. Princeton University Press, Princeton.

The Failed End of Capitalism Prediction by Marx

This is made at the end of volume 1 of Capital in the “Historical Tendency of Capitalist Accumulation” chapter:

“ As soon as this process of [sc. capitalist] transformation has sufficiently decomposed the old society from, top to bottom, as soon as the labourers are turned into proletarians, their means of labour into capital, as soon as the capitalist mode of production stands on its own feet, then the further socialisation of labour and further transformation of the land and other means of production into socially exploited and, therefore, common means of production, as well as the further expropriation of private proprietors, takes a new form. That which is now to be expropriated is no longer the labourer working for himself, but the capitalist exploiting many labourers. This expropriation is accomplished by the action of the immanent laws of capitalistic production itself, by the centralisation of capital. One capitalist always kills many. Hand in hand with this centralisation, or this expropriation of many capitalists by few, develop, on an ever extending scale, the co-operative form of the labour-process, the conscious technical application of science, the methodical cultivation of the soil, the transformation of the instruments of labour into instruments of labour only usable in common, the economising of all means of production by their use as the means of production of combined, socialised labour, the entanglement of all peoples in the net of the world-market, and this, the international character of the capitalistic regime. Along with the constantly diminishing number of the magnates of capital, who usurp and monopolise all advantages of this process of transformation, grows the mass of misery, oppression, slavery, degradation, exploitation; but with this too grows the revolt of the working-class, a class always increasing in numbers, and disciplined, united, organised by the very mechanism of the process of capitalist production itself. The monopoly of capital becomes a fetter upon the mode of production, which has sprung up and flourished along with, and under it. Centralisation of the means of production and socialisation of labour at last reach a point where they become incompatible with their capitalist integument. This integument is burst asunder. The knell of capitalist private property sounds. The expropriators are expropriated.” (Marx 1906: 836–837).

Whatever you think about the tendency of capitalism towards monopoly, it is the passage at the end that is relevant here.

According to Marx, the historical progress of capitalism – asserted here as a form of historical necessity or historical law – is allegedly that the (1) working-class always increases in numbers, and (2) so does the “mass of misery, oppression, slavery, degradation, [sc. and] exploitation; but with this too grows the revolt of the working-class.”

Except it didn’t happen like this. Even 19th century capitalism was increasing living standards and there arose a new middle class of professionals, lawyers, management, teachers, technocrats and others. The size of the working class as a percentage of the population eventually stabilised.

Highly developed and advanced Western capitalist states like Britain and the US proved the most resistant to communism and Marxism, and when communist revolutions broke out it was in backward Russia and China. Even the communist outbreaks in Germany and Italy at the end of the First World War were more the result of the collapse of those nations under the strain of war, and not in line with the vision Marx had predicted.

BIBLIOGRAPHY
Marx, Karl. 1906. Capital. A Critique of Political Economy (vol. 1; rev. trans. by Ernest Untermann from 4th German edn.). The Modern Library, New York.

Marx on Mass Immigration and Capitalism

Just for all you Marxists out there.

Here are Marx’s comments on mass immigration into Britain in the 19th century in a letter to Sigfrid Meyer and August Vogt in 1870:

“But the English bourgeoisie has also much more important interests in the present economy of Ireland. Owing to the constantly increasing concentration of leaseholds, Ireland constantly sends her own surplus to the English labour market, and thus forces down wages and lowers the material and moral position of the English working class.

And most important of all! Every industrial and commercial centre in England now possesses a working class divided into two hostile camps, English proletarians and Irish proletarians. The ordinary English worker hates the Irish worker as a competitor who lowers his standard of life. In relation to the Irish worker he regards himself as a member of the ruling nation and consequently he becomes a tool of the English aristocrats and capitalists against Ireland, thus strengthening their domination over himself. He cherishes religious, social, and national prejudices against the Irish worker. His attitude towards him is much the same as that of the “poor whites” to the Negroes in the former slave states of the U.S.A.. The Irishman pays him back with interest in his own money. He sees in the English worker both the accomplice and the stupid tool of the English rulers in Ireland.

This antagonism is artificially kept alive and intensified by the press, the pulpit, the comic papers, in short, by all the means at the disposal of the ruling classes. This antagonism is the secret of the impotence of the English working class, despite its organisation. It is the secret by which the capitalist class maintains its power. And the latter is quite aware of this.

But the evil does not stop here. It continues across the ocean. The antagonism between Englishmen and Irishmen is the hidden basis of the conflict between the United States and England. It makes any honest and serious co-operation between the working classes of the two countries impossible. It enables the governments of both countries, whenever they think fit, to break the edge off the social conflict by their mutual bullying, and, in case of need, by war between the two countries.

England, the metropolis of capital, the power which has up to now ruled the world market, is at present the most important country for the workers’ revolution, and moreover the only country in which the material conditions for this revolution have reached a certain degree of maturity. It is consequently the most important object of the International Working Men’s Association to hasten the social revolution in England. The sole means of hastening it is to make Ireland independent. Hence it is the task of the International everywhere to put the conflict between England and Ireland in the foreground, and everywhere to side openly with Ireland. It is the special task of the Central Council in London to make the English workers realise that for them the national emancipation of Ireland is not a question of abstract justice or humanitarian sentiment but the first condition of their own social emancipation.”
Letter of Karl Marx to Sigfrid Meyer and August Vogt, 9 April 1870
https://www.marxists.org/archive/marx/works/1870/letters/70_04_09.htm

There are two fundamental points here. First, I have some brief thoughts on it, and, secondly (and more importantly), I want to see Marxists apply this analysis to modern capitalism.

Personally, I think the argument here is exaggerated, even if there is some truth to some aspects of what Marx says. Marx and Engels were clearly very angry that the most industrialised nation in the world – England – was at the same time highly impervious to communism.

So the passage above is Marx’s rationalisation of this.

What is true here? I suspect that it is probably true that Irish immigration had some tendency to hold down real wages in Britain. It is no doubt true that this Irish immigration exacerbated some ugly and disgusting ethnic tensions in the 19th century UK, sometimes fueled by a reactionary press. But as the major explanation of why the revolution never happened in England? I think it is grossly exaggerated.

I think Marx and Engels just couldn’t face the fact that after 1848 violent revolutionary movements died off in Britain and even with the labour violence of the 1880s and 1890s the Marxists and other extreme left-wing agitators could never build up enough support. The English labour movement was reconciled to some degree to capitalism by the increased living standards and even by the granting of the vote to some of them in the Representation of the People Act 1867.

Moreover, Marx enters into conspiracy theory territory in these ideas:

But the evil does not stop here. It continues across the ocean. The antagonism between Englishmen and Irishmen is the hidden basis of the conflict between the United States and England. It makes any honest and serious co-operation between the working classes of the two countries impossible. It enables the governments of both countries, whenever they think fit, to break the edge off the social conflict by their mutual bullying, and, in case of need, by war between the two countries.

Even worse for Marxism, it was eventually the British Labour Party, which emerged just as much from Fabian socialism, that was to capture the British working class vote.

But, anyway, let us move on to my second point.

A question for Marxists: can any of you modern Marxists apply Marx’s analysis above to mass immigration in modern capitalism, especially in the European Union? I’d be very interested to see it.

Appendix
There are of course other passages in Marx’s writings that mention the issue of immigration.

Here is another from with an interview with Marx in the New York World, July 18, 1871 on strikes and immigration:

“To give an example, one of the commonest forms of the movement for emancipation is that of strikes. Formerly, when a strike took place in one country it was defeated by the importation of workmen from another. The International has nearly stopped all that. It receives information of the intended strike, it spreads that information among its members, who at once see that for them the seat of the struggle must be forbidden ground. The masters are thus left alone to reckon with their men. In most cases the men require no other aid than that. Their own subscriptions or those of the societies to which they are more immediately affiliated supply them with funds, but should the pressure upon them become too heavy and the strike be one of which the Association approves, their necessities are supplied out of the common purse. By these means a strike of the cigar makers of Barcelona was brought to a victorious issue the other day.”
Marx, “Our Aims Should Be Comprehensive,” interview with New York World, July 18, 1871
https://www.marxists.org/archive/marx/works/1871/07/18.htm

Where in the ABCT are Stock Market Bubbles supposed to be the Mechanism by which Capitalist Economies are destabilised?

It is a crucial point: Austrians complain about asset bubbles, but their Austrian business cycle theory (ABCT) or economic theory in general does not focus on stock market speculation or asset bubbles as a fundamental and inherent means by which an economy is destabilised.

For example, in the ABCT it is real and unsustainable higher-order capital investment that is supposed to wreck the economy, not debt-financed asset speculation.

The Austrians today are falsely claiming that they have some kind of prescient theory explaining the recent stock market gyrations or asset bubbles. This is rubbish.

Karen I. Vaughn in her excellent book Austrian Economics in America: The Migration of a Tradition hits the nail on the head:

“Mises never discusses the possibility of systematic speculative error except in the context of his trade cycle theory, in which speculators-investors are misled by improper monetary signals emanating from a fractional reserve banking. Yet if the future cannot be predicted, or as Shackle would say, if the future is created out of the actions of the past, why is it not least conceivably possible for speculative activity to be on net incorrect at least some of the time? Certainly, we have the empirical evidence of speculative bubbles that are endogenous to markets as an example of market instability. One would think that the extent and potential limiting factors that affect such endogenous instabilities would be of great importance for fully understanding market orders, yet it is an issue surprisingly missing in the Austrian literature. Hence, although, we can appreciate the force of Mises’ argument as far as it goes, it seems that a crucial part of the case for the effective functioning of a market economy is missing.” (Vaughn. 1994: 87–88).

Vaughn is entirely correct: the Austrians’ trade cycle theory is flawed by failing to take into account asset bubbles in a systemic theoretical way.

When we add to this the failure to understand and apply to economic theory the concepts of fundamental uncertainty, subjective expectations, debt deflation, and wage and price rigidities, as well as their commitment to bankrupt ideas like loanable funds theory, we have one deeply defective and unsound theory.

BIBLIOGRAPHY
Vaughn, K. I. 1994. Austrian Economics in America: The Migration of a Tradition, Cambridge University Press, Cambridge and New York.

Paul Mason on “Is Capitalism Dead?”

The English journalist Paul Mason speaks below on neoliberalism and his belief that capitalism has had its day. He is the author of the new book Postcapitalism: A Guide to Our Future (2015).



Frankly, I think the debate is very confused and misses important points. Also, Mason’s book appears to base its analysis on the idea of the Kondratieff wave and Marxism (Chapter 3 of the book is even called “Was Marx Right?”). Unfortunately, I think these theories are nonsense.

In my opinion, the whole debate cannot proceed until one has defined “capitalism” carefully. What is the essence of capitalism?

I think these are the core and essential attributes of capitalism:

(1) where there are strong (if often limited or circumscribed) private property rights;

(2) where most capital goods are privately owned and where most investment decisions are made privately.

Defined in this sense, it is obvious that capitalism can come in many forms.

Here is just a small set of possible capitalist systems:

(1) a Rothbardian capitalist system where no government exists and where everything is privatised including justice;

(2) a Misesian or Hayekian Classical liberal capitalist system, where there is a minimal night-watchman state with basic public infrastructure (under Hayek’s system it might have some minimal social and economic interventions);

(3) a neoliberal capitalist system where governments attempt to control macroeconomics by monetary policy and varying degrees of government intervention (such as public infrastructure spending, regulation, social security, basic social services, and welfare), but where labour markets are deregulated, governments try to balance budgets, and involuntary unemployment is often a serious problem;

(4) a capitalist system where a Keynesian state maintains full employment by fiscal policy, strongly regulates businesses, and provides extensive social services (such as health care, education, and unemployment benefits) and welfare, strong public infrastructure spending, but where nationalisation of certain industries/services is minimal or non-existent;

(5) a capitalist system where a Keynesian state maintains full employment by fiscal policy, strongly regulates businesses, has strong public infrastructure, provides generous social services (such as health care, education, and unemployment benefits) and generous welfare, and where some industries are nationalised (e.g., the commanding heights of the economy).

I do not see any substantive problem with capitalism when it comes in form (4) or (5). (4) and (5) are what we would call the social democratic mixed economies of the post-WWII era.

The problem with capitalism is when it comes in forms (1), (2), or (3) (or anything in between).

Just because neoliberalism is badly flawed, it does not follow that the left should totally reject capitalism in the sense I have defined it above. We can still have a social democratic mixed capitalist economy, and all the evidence suggests that this is the best and most successful economic system modern industrialised economies can have.

Fractional Reserve Banking is a Fundamental Part of Capitalism

Updated

This is true, despite the ignorant views of Austrians, such as this:

Frank Hollenbeck, “Confusing Capitalism with Fractional Reserve Banking,” Mises Daily, August 6, 2014.

Consider this Austrian “history” of banking:

“Most, if not all, booms and busts originate with excess credit creation from the financial sector. These respondents, incorrectly, assume that this financial system structured on fractural reserve banking is an integral part of capitalism. It isn’t. It is fraud and a violation of property rights, and should be treated as such.

In the past, we had deposit banks and loan banks. If you put your money in a deposit bank, the money was there to pay your rent and food expenses. It was safe. Loan banking was risky. You provided money to a loan bank knowing funds would be tied up for a period of time and that you were taking a risk of never seeing this money again. For this, you received interest to compensate for the risk taken and the value of time preference. Back then, bankers who took a deposit and turned it into a loan took the risk of shortly hanging from the town’s large oak tree.

During the early part of the nineteenth century, the deposit function and loan function were merged into a new entity called a commercial bank.”
Frank Hollenbeck, “Confusing Capitalism with Fractional Reserve Banking,” Mises Daily, August 6, 2014.

There is very little evidence to support these assertions.

First of all, throughout Western civilisation the essence of banking has always been the mutuum contract, not the bailment (or depositum regulare).

There is very little evidence that, when banks arose either in the ancient world or the Middle ages and early modern period, their main activity was mere bailment, and that they had to steal their depositors’ money to engage in lending.

On the contrary, the bankers always had recourse to the mutuum contract, where money is lent to a banker and the money becomes the banker’s property. The client of the banker gets an IOU in return and the debt can be recalled (1) on demand, (2) in stipulated payments, or (3) on a certain date (as in a fixed term loan).

The free banker George Selgin has demonstrated that Rothbard’s view of the origin of fractional reserve banking in Britain under the goldsmiths cannot be accepted as true (Selgin 2011).

Two major pieces of evidence that even these early English goldsmiths were mostly engaged in mutuum lending are that (1) they paid interest and (2) the earliest British goldsmiths’ notes are IOUs or negotiable debt instruments payable on demand (Selgin 2011: 11), which explicitly demonstrates to us that these were debt records and the underlying contract a mutuum, not bailment.

For example, if we turn to Henry Dunning Macleod, one of the outstanding historians of banking in Great Britain, we find that this is exactly how he explains the origin of banking under the London goldsmiths:

“It was during the great civil war, as we have already explained, that the goldsmiths of London first began to receive the cash of the merchants and country gentlemen for safe custody, on condition of repaying an equal sum on demand, and to discount bills of exchange with their own promissory notes; that commenced the business of banking. Now, this money was not placed in their hands to be locked away in their cellars, as plate and jewelry are often given into the custody of a banker for mere safe custody as a depositum, and to be restored in specie. The money was sold to the banker to become his actual property, according to the well-understood custom of bankers; that is, it was a mutuum or creditum; and was to be restored only in genere. The goldsmith bankers agreed not only to repay the money on demand, but also to pay six per cent, interest upon it. Consequently, in order to make a profit, they were obliged to trade with it.” (Macleod, in Macleod et al. 1896: 203).

Although there were “banks of deposit” in mainland Europe in the early modern era (although even here it is not straightforwardly clear whether the relation between client and banker was a strict bailment: Macleod, in Macleod et al. 1896: 201–202), the idea that modern banking only emerged because “deposit bankers” who simply held money as a bailment had to steal their clients’ funds has little evidence to support it.

Nor is this true:

“During the early part of the nineteenth century, the deposit function and loan function were merged into a new entity called a commercial bank. Of course, very quickly these new commercial banks realized they could dip into deposits, essentially committing fraud, as a source of funding for loans. Governments soon realized that such fraudulent activity was a great way to finance government expenditures, and passed laws making this fraud legal. A key interpretation of law in the United Kingdom, Foley v. Hill, set precedence in the financial world for banking laws to follow …”
Frank Hollenbeck, “Confusing Capitalism with Fractional Reserve Banking,” Mises Daily, August 6, 2014.

In reality, commercial banking by means of mutuum lending had been known and conducted since Roman times (see Andreau 1999: 40–41; Reden 2007: 286–290; Harris 2006: 10–12; Harris 2011: 236; Verboven 2009: 116–117).

The Austrians’ false belief that in the 19th century the “deposit function and loan function were merged into a new entity called a commercial bank” is derived from an ignorant and shoddy reading of legal history by Murray Rothbard. Rothbard thought the Carr v. Carr and Foley v. Hill cases in England legalised theft by banks of depositors’ bailments.

But neither of these cases set any such “precedent” imagined by Austrians.

In fact, in Foley v. Hill the primary issue was the relevance of the “statute of limitations” to the defence of the defendants in the case, not whether the relationship between banker and client was a debt–credit relation.

Of course, although Foley v. Hill confirmed that it was a debt–credit relation, this was not some innovation.

Finally, nor did Carr v. Carr set the precedent Austrians allege.

In Carr v. Carr, the issue was whether a mutuum contract could be changed into a bailment contract simply because the bank client wanted to interpret it so at the time he made a will.

What totally destroys the Austrian reading of Carr v. Carr is that even the lawyers Hart and Wetherell, acting for the defendant, admitted that, strictly speaking, the cash balance at the bank was legally a debt, and not a bailment.

Far from being some “fraud” or unnatural system grafted onto capitalism, fractional reserve banking is a fundamental part of capitalism, and the Austrian view of it is a travesty both history and economics.

Further Reading
“Mutuum versus Bailment in Banking,” July 24, 2014.

“Rothbard on ‘Deposit’ Banking: A Critique,” July 22, 2014.

“Carr versus Carr (1811) and the History of Fractional Reserve Banking,” July 23, 2014.

“Foley versus Hill and the History of Fractional Reserve Banking,” July 29, 2014.

“A Critique of Murray Rothbard on the Origins and Legal Basis of Fractional Reserve Banking,” July 30, 2014.

“Coggs v. Bernard and the History of English Bailment Law,” July 31, 2014.

BIBLIOGRAPHY
Andreau, J. 1999. Banking and Business in the Roman World (trans. J. Lloyd). Cambridge University Press, Cambridge and New York.

Harris, William V. 2006. “A Revisionist View of Roman Money,” Journal of Roman Studies 96: 1–24.

Harris, William V. 2011. Rome’s Imperial Economy. Twelve Essays. Oxford University Press, Oxford.

Macleod, Henry Dunning, Horn, Antoine E. and John P. Townsend. 1896. A History of Banking in all the Leading Nations (vol. 2). Journal of Commerce and Commercial Bulletin, New York.

Reden, Sitta von. 2007. Money in Ptolemaic Egypt: From the Macedonian Conquest to the End of the Third Century BC. Cambridge University Press, Cambridge.

Reden, Sitta. 2012. “Money and Finance,” in Walter Scheidel (ed.), The Cambridge Companion to the Roman Economy. Cambridge University Press, Cambridge. 266–286.

Selgin, G. “Those Dishonest Goldsmiths,” revised January 20, 2011
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1589709

Verboven, K. 2009. “Currency, Bullion and Accounts Monetary Modes in the Roman World,” Belgisch Tijdschrift voor Numismatiek en Zegelkunde / Revue Belge de Numismatique et de Sigillographie155: 91–121.

Robert Skidelsky on Capitalism, Government and the Good Society

Though the talks and discussion afterwards involve many people, Robert Skidelsky gives his opinions from 21.50. This was a Liberty Fund event at Butler University on April 10, 2013 (not long after the death of Margaret Thatcher).

Greg Hill on “The Moral Economy: Keynes’s Critique of Capitalist Justice”

Hill (1996) is an important article on the fundamental economic issues in Keyes’s General Theory, and it set off an epic debate with the Austrian economist Steve Horwitz that can be read in Horwitz (1996), Hill (1996a), Horwitz (1998), and Hill (1998).

I will concentrate below on Keynes’s view of saving and loanable funds theory.

Hill (1996: 34) points out that, while Keynes certainly was a supporter of capitalism in the general sense of allocating scarce factor inputs to provide consumer goods, he argued that capitalist economies do not necessarily provide a high enough level of private investment and employment, nor that all income distribution generated by capitalism is just.

Thus Keynes’s argument for managed capitalism is both an economic and a moral case.

At the heart of Walrasian neoclassical economics is the price system. Walras’s metaphor for modeling a capitalist economy is that of the auctioneer who can announce quantities and prices of goods, and adjust prices in the process of tâtonnement until a set of market clearing prices is discovered to achieve equilibrium (Hill 1996: 35). The metaphor is utterly unrealistic, since the auctioneer must have perfect or near perfect information about different plans and trades, all expectations are fulfilled, the process is almost timeless, and stripped of the fundamental uncertainty which characterises economic life.

Under such a theoretical framework, neoclassical economics envisages a just earning of all wages, profits, and interest from all work, investment, and thrift respectively (Hill 1996: 36).

Keynes strongly challenged this paradigm.

First, the link between saving and investment. It is assumed in the neoclassical theory that saving will induce capital goods investment (Hill 1996: 38). Real resources “saved” in the sense of not being used to make consumption goods consumed today will be used in capital goods projects to make goods in the future.

But the link is not automatic nor reliable. Hill quotes a classic a passage on the general theory on the reality of any act of saving:

“An act of individual savings means –so to speak – a decision not to have dinner to-day. But it does not necessitate a decision to have dinner or to buy a pair of boots a week hence or a year hence or to consume any specified thing at any specified date. Thus it depresses the business of preparing to-day's dinner without stimulating the business of making ready for some future act of consumption.” (Keynes 1936: 210).

There is no necessary reason why an act of saving of money today must entail a future act of consumption (Hill 1996: 40), either in nominal money terms or real purchasing power terms. Money income may be spent on (1) goods and services, (2) second hand assets (whether real or financial), or (3) hoarded.

Certainly as a person’s income rises, they are more likely to spend money on (2), rather than (1).

Furthermore, the inducement to investment is complex and a function of demand, expected demand and expectations. Saving may well result in reduced demand and expected demand, and in reduced capital expenditures.

Of course, loanable funds theory gives capitalist apologists an imagined escape hatch here, as Hill notes:

“Neoclassical and Austrian economists reject this deflationary interpretation of the act of saving. In their version of Keynes’s parable, when someone reduces his consumption spending (e.g., by no longer dining out), the total supply of savings rises, and the rate of interest falls. This reduction in the cost of borrowing increases the number of profitable investment projects, and, in response, entrepreneurs increase their level of investment spending. In short, the act of saving supplies the wherewithal necessary for investment, and the falling rate of interest, which signals the public’s desire to trade current for future consumption, assures a commensurate increase in investment.” (Hill 1996: 40).

Keynes’s own critique of this was, firstly, that an individual act of saving may in fact decrease the aggregate level of savings: one saving decision reduces the incomes and hence saving of a business, and then has knock-on effects as that business reduces its own spending and hence savings of other businesses (Hill 1996: 40).

This brings out the well known fallacy of composition called the paradox of thrift: if everyone increases their savings, then the aggregate effect may be in fact decreased income and ultimately saving and investment (Hill 1996: 40).

A secondary criticism is the alleged coordinating role of interest rates in loanable funds:

“suppose that there is a flow of saving per year, and a flow of investment per year, and that the rate of interest adjusts so as to bring these two flows into balance. Now, if the interest rate were only required to equilibrate these flows of new lending and borrowing, it might well be able to perform the coordinating role assigned to it by the neoclassical school. There is, however, another important dimension to the problem, for the market in which new bonds are issued is the same market in which existing bonds are traded. And the very same scheme of interest rates that must balance the supply and demand for new bonds must also balance the supply and demand for old bonds. What would happen, then, if there were a conflict between 1) the rate of interest that would balance the flows of new saving and investment and 2) the rate of interest that would balance the supply and demand for existing bonds? According to Keynes’s account, the outcome will be determined by decisions concerning the existing stock of bonds because, at any given moment in time, the quantity of old bonds that can be released onto the market dwarfs the quantity of new bonds entering the market, just as the stock of money being held in anticipation of a fall in bond prices dwarfs the quantity of new additions to savings. Against the massive, preexisting stocks of old bonds and of money poised to enter the market in response to a change in the interest rate, the relatively small flows of new lending and borrowing can have little effect. It is because the rate of interest must balance these great stocks of existing wealth that it cannot, at the same time, effectively coordinate the flow of saving and investment.” (Hill 1996: 41–42).

The crucial issue here is the way interest rates in a real world capitalist economy involve much more than just some equating of investment with saving. There is vast stock of money and a vast stock of secondary financial assets bought with money as well as lending for capital goods projects.

Once one adds to this the possibility that business expectations can be shattered, it follows that lowering interest rates will not necessarily induce sufficient investment to create high employment and growth. A better solution is increasing demand and expected demand by greater spending.

In short, Keynes “turned the virtue of thrift on its head” (Hill 1996: 43) and undermined the classical argument for inequality of wealth.


BIBLIOGRAPHY
Hill, Greg. 1996. “The Moral Economy: Keynes’s Critique of Capitalist Justice,” Critical Review 10: 411–434.

Hill, Greg. 1996a. “Capitalism, Coordination, and Keynes: Rejoinder to Horwitz,” Critical Review 10: 373–387.

Hill, Greg. 1998. “An ultra-Keynesian Strikes Back: Rejoinder to Horwitz,” Critical Review 12: 113–126.

Horwitz, S. 1996. “Keynes on Capitalism: Reply to Hill,” Critical Review 10.3: 353–372.

Horwitz, S. 1998. “Keynes and Capitalism One More Time: A Further Reply to Hill,” Critical Review 12: 95–111.

Keynes, J. M. 1964 [1936]. The General Theory of Employment, Interest, and Money. Harvest/HBJ Book, New York and London.

Coercion is the Basis of all Market Societies

This is a simple point, but important. All capitalist systems or systems based on markets – or indeed human society of any sort – require law and order and ultimately force and coercion to back up the law and the enforcement of the law. That is why a “pure” laissez faire society or economy in the strict sense is impossible, because it would reduce to a system without law, rules or the enforcement of law. It would be a literal anarchy with no rules. At a minimum, there needs to be respect for the law, property rights and the enforcement of non-fraudulent contracts when one party violates the contract or breaches a contract.

Even Rothbardianism, the most extreme laissez faire system dreamed up by libertarians, has as its foundation a private law code and private justice system, which would still ultimately require coercion and force to enforce and maintain that order. The only difference between a state-based system and a Rothbardian system is that in the latter the coercion and force is done by competing private protection agencies and a private justice system.

Obviously to decide what institutions (such as government) and practices are necessary, defensible and moral in any society in a prescriptive sense requires an ethical theory. At that point, debates about the ultimate basis of how a society enforces its laws and how and what laws it passes collapse into debates about philosophy of ethics.

Degrees of Laissez Faire

Certain Austrians wish to reserve the phrase “laissez faire” for their fantasy vision of capitalism called Rothbardian anarcho-capitalism.

That is deeply mistaken, and in fact the idea that Rothbardian anarcho-capitalism is some “pure” form of laissez faire capitalism is also deeply flawed.

Many different types of economic theories support various forms of “laissez faire.”

Essentially, one might list economic theorists who advocate degrees of “laissez faire” policy prescriptions as follows:

(1) Rothbardian anarcho-capitalists;

(2) followers of David D. Friedman’s anarcho-capitalism.

(3) Misesian minimal state capitalists;

(4) Hayekian minimal state capitalists;

(5) advocates of economies envisaged by Classical Political Economists (or Classical economics), e.g., Adam Smith, Ricardo, James Mill.

(6) free bankers;

(7) followers of Robert Nozick’s libertarianism;

(8) other non-Austrian libertarians (e.g., Tom Palmer, Bryan Caplan and Tyler Cowen);

(9) advocates of New Classical economics;

(10) monetarists, whether Old Monetarists, Friedmanite monetarists, or market monetarists;

(11) “conservative” New Keynesians;

(12) mainstream neoclassical supporters of the New Consensus, New Neoclassical Synthesis, or New Consensus macroeconomics.

It is true enough that the degree of intervention increases as one goes down that list, e.g., Misesian capitalists support a minimal state and (like Mises) could use utilitarian ethics to justify certain interventions if these were deemed morally justifiable.

Towards the end, we have monetarists and conservative New Keynesians, who support the existence of a central bank to expand the money supply, but even they strongly oppose most other government interventions. Monetarism is certainly less “laissez faire” than, say, Misesian minimal state capitalism, but it still has a strong belief in the self-correcting power of free markets.

I put “Rothbardian anarcho-capitalism” as the first on my list, but in reality its position there is questionable. Why? The reason is that Rothbardianism opposes even private capitalist fractional reserve banking, but its arguments for doing so are utterly flawed, wrong or just plain ignorant. In its opposition to fractional reserve banking, Rothbardianism is actually profoundly anti-capitalist and (on its own principles!) would require coercive violations of private property rights and free contract.

A “laissez faire” economy is obviously a form of capitalism, but capitalism is itself a broader term that includes more economic systems than just “laissez faire” ones. If capitalism is defined as a system where all or most commodities are produced privately, with mostly privately owned capital goods, private profit and loss, but with some varying degrees of government interventions, then even an economy run with Post Keynesian economics would be “capitalist.”

I would place the dividing line between “laissez faire” capitalism and “interventionist” capitalism with “left” New Keynesianism, though others might dispute this, given New Keynesianism’s general and deep neoclassical foundations and assumptions. The highly neoclassical (or what might be called “conservative”) New Keynesianism of N. Gregory Mankiw and others that doubted even the effectiveness of fiscal policy is probably to be regarded as a type of laissez faire monetarism.

Hence “interventionist” capitalists can be conceived as follows.

(1) left New Keynesians;

(2) old neoclassical synthesis Keynesians (Old Keynesians);

(3) Post-Walrasians

(4) some old American Institutionalists (such as John Kenneth Galbraith);

(5) Post Keynesians (including modern Sraffians, Kaleckians, post-WWII Cambridge Post Keynesians, etc.);

(6) Modern Monetary Theorists.

Once we get to economists who advocate central planning of most or all goods and services and government ownership of most or all capital goods, we have crossed over from capitalism into command economy socialism. These economists include the various types of Marxists.

The problem with mainstream economics since the mid-1970s has been that it shifted from old neoclassical synthesis Keynesianism back towards more “laissez faire” neoclassical theory such as Friedmanite monetarism, New Classical economics, “conservative” New Keynesianism and the strange neoclassical hybrid that emerged in the 1990s we call the “New Consensus,” “New Neoclassical Synthesis,” or “New Consensus macroeconomics.”

This consensus neoclassical theory has gone by the name of “globalization,” “neoliberalism,” or the “Washington consensus.” Its spectacular failure has been seen in the financial crisis of 2008, the resulting global great recession and continuing economic malaise. Long before this, however, it was wreaking havoc in the Third World, with the exception of China and East Asia, which has generally (though not completely) rejected the strong form of neoliberalism.

Steve Keen on the Instability at the Heart of Capitalism

Steve Keen has written two articles here on the issue of stability in modern capitalism:

Steve Keen, “Instability may not be Optional,” Business Spectator, 23 April, 2013.

Steve Keen, “When Stability goes Belly Up,” Business Spectator, 29 April, 2013.

At the rotten heart of neoclassical economics (even the New Keynesian models) is the notion that, if only prices and wages were flexible enough, the economy would converge back to full employment equilibrium. Neoclassical economics thinks self-correction and a type of stability is a real world trait of market economies, but it is a false view.

I think Geoffrey M. Hodgson also makes an insightful observation about neoclassical economics:

“It really concedes too much to neoclassical theory to suggest that it has an adequate theoretical foundation upon which to build any pro- (or anti-) market policy. Neoclassical theory is essentially neither pro-market nor anti-market, because it has no adequate theory of markets at all. Instead of associating it with markets, it would be more accurate to say that neoclassical theory was blind to real markets, and consequently to their virtues or vices.” (Hodgson 2000: 321).

Finally, I am rather more optimistic than Keen is about the role of financial regulation in overcoming the dangers posed by financial systems.

BIBLIOGRAPHY
Hodgson, Geoffrey M. 2000. “What Is the Essence of Institutional Economics?,” Journal of Economic Issues 34.2: 317–329.

Mises on Mixed Economies and Socialism: He is Incoherent

In a rather stunning passage, we get this statement in Human Action:

“The market economy must be strictly differentiated from the second thinkable—although not realizable—system of social cooperation under the division of labor: the system of social or governmental ownership of the means of production. This second system is commonly called socialism, communism, planned economy, or state capitalism. The market economy or capitalism, as it is usually called, and the socialist economy preclude one another. There is no mixture of the two systems possible or thinkable; there is no such thing as a mixed economy, a system that would be in part capitalistic and in part socialist. Production is directed by the market or by the decrees of a production tsar or a committee of production tsars.

If within a society based on private ownership by the means of production some of these means are publicly owned and operated—that is, owned and operated by the government or one of its agencies—this does not make for a mixed system which would combine socialism and capitalism. The fact that the state or municipalities own and operate some plants does not alter the characteristic features of the market economy. These publicly owned and operated enterprises are subject to the sovereignty of the market. They must fit themselves, as buyers of raw materials, equipment, and labor, and as sellers of goods and services, into the scheme of the market economy. They are subject to the laws of the market and thereby depend on the consumers who may or may not patronize them. They must strive for profits or, at least, to avoid losses. The government may cover losses of its plants or shops by drawing on public funds. But this neither eliminates nor mitigates the supremacy of the market; it merely shifts it to another sector. For the means for covering the losses must be raised by the imposition of taxes. But this taxation has its effects on the market and influences the economic structure according to the laws of the market. It is the operation of the market, and not the government collecting the taxes, that decides upon whom the incidence of the taxes falls and how they affect production and consumption. Thus the market, not a government bureau, determines the working of these publicly operated enterprises.

Nothing that is in any way connected with the operation of a market is in the praxeological or economic sense to be called socialism. The notion of socialism as conceived and defined by all socialists implies the absence of a market for factors of production and of prices of such factors.” (Mises 1998: 259-260).

Did you get that? There is no such thing as a mixed economy. I do not find this convincing, but its logical implications are interesting.

According to Mises, a market economy even with some degree of government owned and operated industry still does not make an economy “socialist.” What makes an economy “socialist” is the “absence of a market for factors of production and of prices of such factors.”

So what on earth were the mixed economies of the golden age of capitalism (1945 to 1973) with their Keynesian fiscal policies, financial regulation, and central banks? Mises published the first edition of Human Action in 1949 when he observed all around him the reality of Western mixed economies with nationalised industries and Keynesian fiscal policies. He must have looked in horror as this system produced unprecedented economic growth, low unemployment and economic stability. Was this his justification of why the system he saw around him was working and prospering?

Curiously, no. He appears to have declared most of the capitalist West “socialist” after 1945!

But the trouble is that Mises is simply astonishingly inconsistent and incoherent on this subject. Having defined “socialism” as an economy without markets “for factors of production and of prices of such factors,” Mises then tells us that Britain and other nations after 1945 were in fact socialist but for different reasons:

“Marching ever further on the way of interventionism, first Germany, then Great Britain and many other European countries have adopted central planning, the Hindenburg pattern of socialism. It is noteworthy that in Germany the deciding measures were not resorted to by the Nazis, but some time before Hitler seized power by Bruning, the Catholic Chancellor of the Weimar Republic, and in Great Britain not by the Labor Party but by the Tory Prime Minister Mr. Churchill. The fact has been purposely obscured by the great sensation made in Great Britain about the nationalization of the Bank of England, the coal mines, and other enterprises. However, these seizures were of subordinate importance only. Great Britain is to be called a socialist country not because certain enterprises have been formally expropriated and nationalized, but because all the economic activities of all citizens are subject to full control by the government and its agencies. The authorities direct the allocation of capital and of manpower to the various branches of business; they determine what should be produced and in what quality and quantity, and they assign to each consumer a definite ration. Supremacy in all economic matters is exclusively vested in the government. The people are reduced to the status of wards. To the businessmen, the former entrepreneurs, merely quasi-managerial functions are left. All that they are free to do is to carry into effect the entrepreneurial decisions of the authorities within a neatly delimited narrow field.” (Mises 1998: 855).

Something stinks in Human Action: it is basic standards of argument, consistency and factual accuracy.

First, factual accuracy. According to Mises, the UK after 1945 was a “socialist country,” because the government (allegedly) planned all investment and consumption! Now, while it is true that the UK even after 1945 did (for example) have rationing for some years, the idea that Britain was a total planned economy is so bizarrely factually incorrect that it boggles the mind.

In the UK, the reality is that rationing for clothing and furniture was abolished in 1948 (before Human Action was published), and all other limited rationing by 1954. There was indeed some nationalisation of certain industries in the UK after 1945 (the “commanding heights”), but we have already seen above that Mises specifically denies that some limited nationalised industries can make a country socialist. Nor did the use of Keynesian fiscal policy involve planning of production or consumption. And most capital goods in the UK were privately owned, most production was private and conducted for profit, and to satisfy consumer preferences. Mises was utterly ignorant or delusional when he declared that in Britain “all the economic activities of all citizens are subject to full control by the government and its agencies.”

Second, let us turn to consistency of argument. The UK without any doubt had money prices and markets for factor inputs after 1945, so according to Mises’s fundamental criterion expressed above in the first passage from Human Action the UK cannot have been a socialist country.

Yet mysteriously Mises declares that it was a “socialist country,” blatantly contradicting himself. The whole inconsistency is made much worse by the strident statement in Human Action (on the page after my last quotation) that most of the post-1945 Western European countries were now also socialist too! (Mises 1998: 856). Yet there is no doubt that these nations (like the UK) also had money prices for factors of production. So how can they have been socialist? We have an astonishing contradiction here.

Moreover, if Western European nations really were socialist and lacked economic calculation, then a central element of Mises’s whole economic theory comes crashing down. Why didn’t the UK or “socialist” Western Europe collapse into chaos after 1945 if they were incapable of rational economic calculation?

Well, Mises does have an answer. We suddenly read in Human Action (Mises 1998: 856) that in fact Western Europe was still able to calculate, and these economies were still based on economic calculation — despite the fact that Mises declares them “socialist” and his definition of “socialism” is an economy that lacks economic calculation. The main reason (according to Mises) was that the market economy of the United States allowed Western Europe to engage in economic calculation, even though in reality (though it never filtered through to Mises’s brain) the economy of the United States was subject to almost the same degree of government intervention (apart from nationalised industry, which, as we have already seen, is irrelevant anyhow) as any Western European nation!

Finally, let us be charitable and assume that Mises was thinking of the UK during WWII when he wrote the passage above. In WWII, there was indeed a moderate command economy in Britain (as in the US, Canada, Australia and New Zealand) where a considerable amount of (mainly military) production was planned by the government. But even during the war money prices and markets for factor inputs still existed, so the UK cannot have been a socialist country even in these years. So, by Mises’s own logic, even Western wartime command economies cannot really have been “socialist” systems at all — even though those command economies really were the only real historical instance when the Western economies was run rather like planned, communist systems.

Just reading Human Action on these issues, it is astonishing to me that anyone can ever declare that Mises was the greatest economist who ever lived (as some Austrians actually do). On this subject, Mises was an ignorant and muddle-headed idiot, and it is not surprising that after 1945 he was ignored by serious economists.

I can just imagine economists reading these passages of Human Action and then throwing the book in the dustbin as they moved on to more important matters.


BIBLIOGRAPHY
Mises, L. 1998. Human Action: A Treatise on Economics. The Scholar's Edition. Mises Institute, Auburn, Ala.

Capitalism has Two Fundamental Sectors

Those sectors are as follows:

(1) markets for newly produced goods and services, further divided into:

(1.1) markets for final goods and services (consumption goods), and,

(1.2) markets for factor inputs, whether durable or non-durable capital goods (circulating capital) or labour;

(2) markets for second hand goods and assets, as follows:

(2.1) markets for financial assets* and instruments on secondary financial asset markets. Financial assets in general have a relatively low or zero elasticity of production;

(2.2) markets for real assets as second hand goods, further divided into:

(2.2.1) second-hand real assets with a relatively low or zero elasticity of production, often bought as an investment or as a “resting place” for savings (though sometimes for consumption);

(2.2.2) second-hand real goods with a moderate to high elasticity of production, bought for consumption (though sometimes for investment purposes), e.g., second hand book stores, used cars, etc.

* Sometimes financial assets are called “capital assets,” but I find this very confusing, as that latter term is better left for real capital goods considered as assets.

Goods and services in (1) are normally reproducible, which means that demand for such goods and services induces more employment and output in a market economy.

Assets in (2.1) and (2.2.1) are generally non-reproducible: that is, businesses do not hire a significant number of workers or factor inputs when demand for these assets rises.

Asset bubbles normally occur in asset classes (2.1) and (2.2.1), but housing seems to be an important exception. Asset class (2.2.1) includes things like gold, antiques, or famous works of art.

Financial assets on secondary financial asset markets (2.1) have a low elasticity of production. When demand rises for stocks and shares, businesses do not employ workers to make more stocks and shares: demand changes frequently and significantly for these assets, but the supply is more or less fixed (hence the price volatility).

The question of real estate and houses is a curious one: one could think of real estate as having a low or moderate elasticity of production, depending on the economy, time and place. For example, one could probably argue that urban real estate in Japan during the bubble of the 1980s to early 1990s had a relatively low elasticity of production. But in a nation or region where there is a substantial amount of land (private or public) land that can be subdivided, developed and sold off (involving some degree of increase in employment), one might (possibly) say that real estate has a moderate elasticity of production.

Housing, I suspect, can be said to have a high elasticity of production. Occasionally, of course, you can have other asset bubbles in (2.2.2): think of the Dutch Tulipmania (1636–1637).

A further crucial idea is this: a good could have a zero (or near zero) elasticity of production, but an elastic supply: e.g., fiat money and private credit money.


Further Reading

“Keynes on the Special Properties of Money,” May 8, 2011.

“Gold as Commodity Money and its Elasticity of Production,” November 18, 2011.

“More on the Gross Substitution Axiom,” July 28, 2011.