[OPE] Mastering Marxian Economics

From: glevy@pratt.edu
Date: Sat Jul 26 2008 - 16:55:28 EDT

Unintentionally humorous.

In solidarity, Jerry


Myspace.com Blogs - Mastering Marxian
Economics - Socialist Party Of Great Britain MySpace Blog 

[17 Dec 2007 | Monday] 

Mastering Marxian Economics 

>From Socialist Standard, Centenery Issue (June 2004). 

Members of the Socialist Party wishing to be able to speak
officially for the Party in a formal debate against a representative of
another political group have had to pass a speakers' test. This has
included such questions as "do peasants create surplus value?"
and "what is the difference between value, exchange value and use

Rival political groups may have mocked us for
this but at the same time they were aware that Party speakers knew their
Marxian economics. Many learned the hard way that, when debating with the
Socialist Party, it was better not to claim to be a Marxist and talk about
capital as a thing, or of workers selling their labour, or of commodities
existing in socialism. 

Admittedly, there is a certain irony in
us priding ourselves on understanding the economics of capitalism when we
want to see an end to economics €“ the study of the
relationships that arise when goods are produced for sale
€“ since we want to see production directly for use
replace production for the market. But we have always taken the view that
it is important to understand the way capitalism works since this explains
how it can never be reformed to work in the interest of the working class.
Economic theory underlies our case against reformism. 

labour theory of value 
The labour theory of value is, rightly,
regarded as the cornerstone of Marxian economics. Its importance to
socialists is that it explains how the working class is economically
exploited under capitalism. 

In its Marxian form, it says that
the value of a commodity is determined by the amount of labour time that
has to be spent on producing it from start to finish under average
conditions of production (what Marx called "socially necessary"
labour). The classical economist David Ricardo (1772-1823) explained that
it is not just the labour expended at the last stage of a commodity's
production €“ during which it is transformed into the
finished product €“ that is relevant: 

"In estimating the exchange value of stockings, for example,
we shall find that their value, comparatively with other things, depends
on the total quantity of labour necessary to manufacture them, and bring
them to market. First, there is the labour necessary to cultivate the land
on which the raw cotton is grown; secondly, the labour of conveying the
cotton to the country where the stockings are to be manufactured, which
includes a portion of the labour bestowed in building the ship in which it
is conveyed, and which is charged in the freight of the goods; thirdly,
the labour of the spinner and weaver; fourthly, a portion of the labour of
the engineer, smith, and carpenter, who erected the buildings and
machinery, by the help of which they are made; fifthly, the labour of the
retail dealer, and of many others, whom it is unnecessary further to
particularize. The aggregate sum of these kinds of labour, determines the
quantity of other things for which these stockings will exchange" 
(Principles of Political Economy and Taxation , Chapter I, Section III).

Marx's specific contribution to the theory was to point out
that what workers sold to a capitalist employer was not, as had been
supposed by earlier exponents of the theory such as Ricardo, their labour
(i.e. the work they did) but their "labour power", by which he
meant their capacity to work. This, like any other commodity being bought
and sold, had its value determined by the amount of socially necessary
labour that had to be expended to produce it from start to finish, i.e.
essentially by the value of the things workers had to consume to maintain
their capacity to do work of a particular kind and to raise a family to
replace them when they would no longer be capable of working. 

This might amount to, say, 5 hours worth of socially necessary
labour-time. The value of what the workers produced, when put to work by
the capitalist in his workplace on materials supplied by him, depended on
how much socially necessary labour-time was expended in the process. If it
was 10 hours of socially necessary labour then 10 hours worth of value
would be added. Naturally, an employer was only going to employ workers if
they produced more than what he had to pay for the value of their
labour-power, otherwise there would be nothing in it for him. 

The period of time workers spent replacing the value of their labour
power (in our example, 5 hours) Marx called "necessary labour";
the period of time spent beyond this he called "surplus labour"
and the value created during it "surplus value", the source of
the employer's profit. Capitalism was thus based on the exploitation of
the working class for surplus value. This was later shared out amongst the
capitalist class as ground rent (for the landowners) and interest (for
banking capital), leaving the rest as industrial and commercial profit for
the capitalist employer. 

Taxes not a burden on the working
Before the First World War, the Socialist Party had to spend
much time arguing that it followed from the labour theory of value that
taxes were not a burden on the working class but on the surplus value
already extracted from them by the capitalist class. 

workers leave their workplace they have already been exploited for
everything over and above the value of their labour power; nothing more
can be extracted from them without reducing what they have to live on
below the value of their labour power. Workers do sometimes physically pay
taxes in the sense of handing over money from their wages to the
tax-collecting authority. But to the extent that this becomes generalised
it becomes part of the cost of production of labour power, so that wages
are going to have to increase to compensate for it if the employers are to
get the same quality labour power as before. Workers may pay taxes, but
taxation does not fall on the working class as a class. In the end, it
falls on surplus value. 

That any taxes on wages would be
passed on to the buyer of labour (power), i.e. the capitalist employer,
had been recognised by Ricardo who made this specific point in chapter XVI
of his book. Its socialist political implication was that taxation issues
were no concern of the working class since they were essentially arguments
amongst sections of the capitalist class as to how to share out the cost
of running their state. 

The same Marxian argument applies
against so-called 'secondary exploitation' which some pre-WWI writers on
Marxian economics claimed workers suffer when they came to buy what they
needed. Workers can certainly be overcharged or sold adulterated goods by
cheating shopkeepers, but if this practice becomes widespread then, again,
if the capitalist employer is to receive the same quality labour power as
before wages will have to rise to compensate for this. The same argument
applies the other way too: subsidised prices and rents tend to keep wages
down and have often been introduced for just this reason. 

course, the suggestion here is not that taxes, rip-off prices, or
subsidies have an automatic and immediate effect on wages. We are talking
about an effect that takes time to come about, through the operation of
labour market forces, including the struggle of workers to push up wages
and €“ in the case of price subsidies and state payments
to workers €“ of employers to push them down. 

The political conclusion €“ since these were not mere
academic discussions €“ was that, while capitalism
lasts, workers should concentrate on exerting maximum pressure on the
wages front and not be diverted into struggling for lower taxes, price
controls, subsidies or other such reformist measures. 

Capitalism won't collapse 
Between the two world wars the main
economic issue was the slump. Here the Socialist Party applied Marxian
economics to refute two fallacies. First, that the slump represented the
final breakdown of capitalism and, second, that the way to avoid slumps
was for governments to overcome a chronic shortage of purchasing power
that was said to be built into capitalism. 

The first view
€“ that capitalism was collapsing €“
was put forward by critics of capitalism who wanted it to be true. The two
main 'defects' that were identified to explain why capitalism would
eventually collapse as an economic system were that it wouldn't be able to
find enough markets to keep pace with rises in productivity and output,
and that the rate of profit would fall so low that investment could dry

Detailed works had been written to argue both points of
view, backed up by quotes from Marx. Most of them were in German and were
not translated into English at the time so that they had little impact on
political discussions in Britain. The Party's 1932 pamphlet Why Capitalism
Will Not Collapse did not deal directly with these theories, but pointed
out that capitalism had gone into big slumps before and that it had always
recovered from them due to the internal dynamics of the system that made
it cyclical in nature; there was no reason to suppose that the then
current slump would not turn out to be a phase of capitalism's business
cycle too, unless, that is, the working class organised consciously and
politically to end capitalism. 

The Marxian economic analysis
once again led to a political conclusion: that capitalism would stagger on
from crisis to crisis until the working class decided to replace it with
socialism, hence the importance of getting the working class to do this
rather than counting on them being pushed into action by the automatic
collapse of capitalism as an economic system. 

and the cause of crises 
Perhaps the most common theory amongst
critics of capitalism €“ including the Party in its
early years €“ as to why capitalist crises occurred was
that "the workers can't buy back all of what they produce" and
that as the capitalists cannot use all their revenue for personal
consumption the result is that stocks of unsold goods eventually pile up
and production stalls until these have been cleared. The theory that
capitalism suffers from this particular type of 'underconsumption' ignores
the fact that what the workers can't buy the capitalists can, or could,
out of their profits. 

Demand under capitalism is not made up
simply of the demand for goods for personal consumption, but also of
demand for means of production coming from capitalists wanting to
re-invest their profits, which is also a form of spending. Crises occur,
in which there appears to be a shortage of purchasing power, not because
there is not enough money to buy what is produced but because some of the
capitalist holders of money choose not to spend it because profit
prospects are not attractive enough. Crises, in other words, are not
caused by the inability of the working class to buy back the entire
product of industry. 

The Socialist Party became increasingly
critical of this "can't buy back" view in the 1930s but it was
not until the 1950s, in a series of articles by Ted Wilmott ('E.W') that
appeared in the Party's internal discussion journal of the time, Forum,
and then in the Socialist Standard, that the Party definitively committed
itself to the alternative view that capitalism's cyclical crises were due
to the anarchy of production leading to one sector of the economy
expanding disproportionately faster than the other sectors. This initial
sectoral overproduction, through its knock-on effects, would then be
transmitted to other sectors of the market economy leading to the
appearance of a more general crisis. 

Banks and credit creation

One particularly crude type of underconsumptionist theory that the
Party regularly had to deal with in the 1930s was that of the Social
Credit movement started by Major Douglas. His argument was that there was
a 'chronic shortage of purchasing power' due to the issue of money being
in the hands of banks that had a vested interest in keeping money in short
supply so as to be able to command a higher rate of interest on the money
they lent out. Although, according to Douglas, banks had the power to
create credit with the stroke of a pen they generally chose not to do so;
this power should therefore be taken from them and vested in some public
body which would make this extra purchasing power, supposedly needed to
ensure the full use of productive capacity, available to all in the form
of 'social credit'. 

Among other things what this theory
overlooked from its deficiency of purchasing power standpoint was that
interest charged by banks to capitalist firms is not an additional amount
that is added to prices and which therefore cannot be paid for out of
current income (wages and profits) generated in production. It is instead
a part of the surplus value which the industrial capitalist has to hand
over to the banking capitalist for the loan of their money and so is
already included in total purchasing power. 

In any event, as a
series of articles in the Socialist Standard during the 1930s mainly by
Edgar Hardcastle ('Hardy' or 'H') €“ which were
developed from the arguments of both Marx and Edwin Cannan (1861-1935),
the last of the classical economists €“ pointed out,
banks do not have the power to create credit out of nothing by a mere
stroke of the pen. They are essentially financial intermediaries that can
only lend out money that has first been deposited with them. Of course,
not all money deposited with a bank has to be retained as cash, but when a
bank is said to have a cash ratio of 10 percent this does not mean that it
can lend up to 9 times the cash deposited with it €“ a
common currency crank view €“ it merely means that it
can loan out 90 percent of the cash deposited with it. 

make their profits from the difference between the rate of interest they
pay depositors and the rate they charge borrowers. There is nothing
special about them; they are not wicked finance capitalists against whom
the anger of workers should particularly be directed, just capitalists
with their capital invested in a particular line of business, no more nor
less reprehensible than the rest of the capitalist class. 

Modern economics textbooks no longer claim that a single bank can create
credit. They now attribute this power to the banking system as a whole,
but this is just playing with words. Their argument merely demonstrates
that they assume that money is continually re-deposited within the system,
thus tacitly accepting that what banks can lend out is restricted by what
has been deposited with them. 

Enter and exit Keynes 
Keynes, it used to be claimed in the 1950s and 1960s, had saved
capitalism by showing how slumps could be avoided by state intervention.
When a slump threatened, he taught, what the government should do was to
increase its spending and/or run a budget deficit and take measures aimed
at increasing investment and personal consumption. 

agreed with those critics of capitalism who argued that, if left to
itself, capitalism would tend to overproduce in relation to available
market demand (he was a bit of an underconsumptionist in this respect, or
at least was sympathetic towards underconsumptionist theorists). The
solution he proposed of state intervention was welcomed with open arms by
the Labour Party as it provided a theoretical justification for their
reformist practice. In fact, Keynesianism can be said to have been the
economic theory of modern reformism. 

It wasn't until the
post-war boom, which had been caused by other factors than state
intervention, came to an end in the early 1970s that Keynesian theories
were put to the test. They failed miserably: state spending (which had to
come out of taxes that in the end fell on profits) could not make up for
the fall in investment due to the diminished profit prospects; indeed, by
increasing the tax burden on profits it tended to make matters worse. 

In the end, governments everywhere were forced to abandon
Keynesian policies. As James Callaghan, the then Labour Prime Minister,
told his party's conference in 1976: 

"We used to
think that you could just spend your way out of a recession and increase
employment by cutting taxes and boosting government spending. I tell you,
in all candour, that that option no longer exists and that in so far as it
ever did exist, it only worked on each occasion since the war by injecting
bigger doses of inflation into the economy, followed by higher levels of
(Times, 29 September 1976). 

confirmed the Marxian view we had been expressing that what drove the
capitalist economy was not state spending but profits and that any
government had to take this into account or risk making matters worse. 

Governments had to allow capitalism to function as the profit
system it is. The economic theory on which reformism had based itself had
been shown in practice, as well as in theory, to be wrong. 

Non-stop inflation 
As Callaghan hinted, the only lasting legacy of
Keynesian economic policy has been continuous inflation. Keynes famously
said, on one occasion, don't bother about currency policy, concentrate on
tax policy and let the currency look after itself. The Bank of England
(and its equivalents in other countries) took this literally and allowed
the supply of currency (notes and coins), which had long since ceased to
be convertible on demand into a fixed amount of gold, to increase at will.
The result had been predicted by Marx himself: 

the paper money exceeds its proper limit, which is the amount in gold
coins of the like denomination that can actually be current, it would,
apart from the danger of falling into general disrepute, represent only
that quantity of gold, which, in accordance with the laws of the
circulation of commodities, is required, and is alone capable of being
represented by paper. If the quantity of paper money issued be double what
it ought to be, then, as a matter of fact, £1 would be the
money-name not of 1/4 of an ounce, but of 1/8 of an ounce of gold. The
effect would be the same as if an alteration had taken place in the
function of gold as a standard of prices. Those values that were
previously expressed by the price of £1 would now be
expressed by the price of £2." 
(Capital, Volume I,
Chapter 3, section 2(c)). 

What, in 1867, was only a
theoretical possibility or an exception is today the general rule. All
currencies are inconvertible paper currencies which have to be managed by
governments and/or central banks but most governments and central banks
have over-issued such currencies, with the result that Marx, basing
himself on the labour theory of value, had predicted. In articles by Hardy
and others, the Socialist Standard, with rising prices becoming a major
political and economic issue especially by the 1960s and 70s, hammered
home the Marxian explanation of inflation, while at the same time making
the point that capitalism without inflation was no better than capitalism
with inflation. Once again, the important thing was the political
conclusion: that inflation was not caused by excessive wage increases but
by government action to tinker with capitalism and that therefore workers
would be misguided to soft-peddle the industrial struggle and agree to
wage restraint €“ as often urged by governments of the
period, especially Labour ones. 

Finally, by the way, the
answer €“ for any reader thinking of joining us and
becoming a Socialist Party speaker €“ is that peasants
do not create surplus value. 


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