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Lecture Eight

Lecture Eight. Marx: Classical Economics, Capitalism and Revolution. Classical economists Smith, Say, Malthus, Ricardo pro-capitalist, anti-feudal Theories used to promote capitalism against feudalism Main class-conflict of the time against feudal class, landlords

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Lecture Eight

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  1. Lecture Eight Marx: Classical Economics, Capitalism and Revolution

  2. Classical economists Smith, Say, Malthus, Ricardo pro-capitalist, anti-feudal Theories used to promote capitalism against feudalism Main class-conflict of the time against feudal class, landlords By 1840, industrial capitalism dominant severe economic downturns A new class conflict: Capitalist vs Worker Classical economics turned against capitalism by... From Defenders to Critics Karl Marx

  3. Marx • German Philosopher/poet, trained in Hegelian “dialectics” • Brilliant (but sometimes also turgid) writer and thinker • Radicalised as completed PhD • Denied academic post in feudal Prussia, became journalist • Supported peasants/workers against Prussian state • Exiled to France, later again exiled to England • Began study of Political Economy in France with view understanding society, leading to revolution to better society • Many contributions! Key ones arguably: • Sophisticated revival of systemic (“macro”) thinking of Physiocrats • Economic analysis grounded in Dialectical philosophy

  4. Dialectics • Philosophy of Dynamics, developed by Hegel • Sought to explain processes of social change • Any Unity (person, thing, etc.) exists in society • Society focuses on some aspects of unity; brings to foreground • Forces other aspects into background • But unity cannot exist without background aspects • Dynamic tension created between foreground/background aspects • Tensions can transform unity/society itself

  5. Dialectics Society • A visual model of dialectics: • After PhD, radicalised Marx denied academic posts • Worked for left-wing newspapers instead • Covered dispossession of peasants from Black Forest • Beginnings of capitalist farming in Prussia Fore-ground Back-ground Unity Dialectical Tension • Felt philosophy didn’t help him understand what was happening • Decided to study economics instead • Did so while exiled from Prussia to France

  6. In a Parisian garret in 1844… • Took copious notes of Smith, Ricardo, Say • Subsequently published as “Economic & Philosophical Manuscripts of 1844” • Like having your notes for an essay published as a book • Initial notes showed tentative development of his economics • Began with comments on Smith that contradict “Labour theory of value”: • “The capitalist thus makes a profit, first, on the wages, and secondly, on the raw materials advanced to him.” (p. 79). • Shifts towards belief that labour is the only source: • “The greater the human share in a commodity, the greater the profit of dead capital.” (p. 81)

  7. In the garret in 1844… • Clearly starts by disbelieving and disliking economics: • “This political economy begins by seeming to acknowledge man”; but • “it must throw aside this hypocrisy in the course of its further development and come out in its complete cynicism. • And this it does… by developing the idea of labour much more one-sidedly, …, as the sole essence of wealth; • by proving the implications of this theory to be anti-human in character, in contrast to the other, original approach.” (p. 129) • Still occasionally thinks “like a philosopher”:

  8. In the garret in 1844… • "The one side (Lauderdale, Mathus, etc.) recommends luxury and execrates thrift. The other (Say, Ricardo, etc.) recommends thrift and execrates luxury. • But the former admits that it wants luxury in order to produce labour (i.e., absolute thrift); and the latter admits that it recommends thrift in order to produce wealth (i.e., luxury)…” • Criticises Ricardo and Say for forgetting that: • “there would be no production without consumption; it forgets that as a result of competition production can only become more extensive and luxurious. • It forgets that it is use that determines a thing's value, and that fashion determines use. It wishes to see only `useful things' produced, but it forgets that production of too many useful things produces too large a useless population. • Both sides forget that extravagance and thrift, luxury and privation, wealth and poverty are equal.” (pp. 150-151). • Right…

  9. Becoming a classical economist in 1845… • But gradually becomes a convert to Ricardo’s method • Trashes a fellow (French) philosopher and radical Proudhon: • “‘The economists have very well explained the double character of value; but what they have not set out with equal clearness if its contradictory nature;… • It is a small matter to have signalised in utility-value and exchange value this astonishing contrast, in which the economists are accustomed to seeing nothing but the most simple matter; it is necessary to show how this pretended simplicity hides a profound mystery which it is our duty to penetrate… • In technical terms use-value and exchange value are in inverse ratio the one to the other.” (Proudhon, The Philosophy of Poverty, p. 37) • Oh yeah?, says Marx:

  10. Ricardo’s advocate in 1846… • “Ricardo shows us the real movement of bourgeois production which constitutes value. • M. Proudhon makes abstraction of this movement, ‘struggles’ to invent new processes in order to regulate the world according to a professedly new formula which is only the theoretical expression of the real existing movement so well propounded by Ricardo.… • The determination of value by labour-time is for Ricardo the law of exchange value; • for M. Proudhon it is the synthesis of use-value and exchange value.” • (Marx, The Poverty of Philosophy, pp. 52-53.) • From 1845-1857, developed Classical Political Economy as a critique of capitalism

  11. Marx the Classical Revolutionary • Took classical economics of Smith & Ricardo, but made it critical of capitalism rather than supportive • many “Ricardian socialists” preceded Marx • argued that since labour is the source of value, worker should receive all output: capitalists just “exploit” workers by paying them less than their value • Marx far more sophisticated • argued profit derived even though workers paid their value • critiqued capitalism on basis of its • tendencies to crises, ultimate collapse • dehumanising, alienating impact of market society • Solved many dilemmas of classical analysis • First: where does profit come from if all things exchange at their value (“cost of production”)?

  12. Marx the Classical Revolutionary • Commodities exchange “at their value” • Value normally “labour-time (LT) taken to produce them” • includes LT in machinery, as per Ricardo • Ability to work a commodity under capitalism: “Labour-power” (LP) • Labour-time needed to produce labour-power = subsistence wage • Capitalist buys Labour—actual work • Say 5 hours work needed to produce subsistence bundle • Actual work lasts for 10 hours • Difference is “surplus value”: source of profit • “SV=LT-LP” • Surplus value only source of profit

  13. Marx the Classical Revolutionary • Focus is on unique aspects of labour with respect to all other commodities • Only commodity with difference between “commodity” and “commodity-power” • A corollary: if labour only source of value, then capital merely contributes stored labour-value to product • “However useful a given kind of raw material, or a machine, or other means of production may be, though it may cost £150, or, say 500 days' labour, yet it cannot, under any circumstances, add to the value of the product more than £150.” [Capital I p. 199] • contribution of machine to output equivalent to its depreciation…

  14. Marx the Classical Revolutionary • Consequences: • Ideological: labour only source of profit, capitalism based on exploitation • Predictions: • increasing use of capital over time due to forces of competition between capitalists • Collective rate of profit would fall, even though technical change might initially advantage capitalist who introduced it • Fall in profit leads to class conflict • capitalists pay workers below value, to restore profits • Class conflict leads to overthrow—socialism • Socialism inevitable product of contradictions of capitalism

  15. Marx the Classical Revolutionary • Marx’s radicalism expressed in Communist Manifesto (1848): • “A spectre is haunting Europe—the spectre of communism. • All the powers of old Europe have entered into a holy alliance to exorcise this spectre: Pope and Tsar, Metternich and Guizot, French Radicals and German police-spies. • Where is the party in opposition that has not been decried as communistic by its opponents in power? • Where is the opposition that has not hurled back the branding reproach of communism, against the more advanced opposition parties, as well as against its reactionary adversaries? • Two things result from this fact: • I. Communism is already acknowledged by all European powers to be itself a power. • II. It is high time that Communists should openly, in the face of the whole world, publish their views, their aims, their tendencies, and meet this nursery tale of the spectre of communism with a manifesto of the party itself…”

  16. Marx the Classical Revolutionary • Manifesto quite complimentary to capitalism & its agents: • “The bourgeoisie cannot exist without constantly revolutionizing the instruments of production, and thereby the relations of production, and with them the whole relations of society…” • But also saw capitalism as deepening social antagonisms: • “The history of all hitherto existing society is the history of class struggles… • the epoch of the bourgeoisie, possesses, however, this distinct feature: it has simplified class antagonisms. • Society as a whole is more and more splitting up into two great hostile camps, into two great classes directly facing each other—bourgeoisie and proletariat.” • Great wealth for the capitalists, but also unforeseen consequences…

  17. Marx the Classical Revolutionary • “Modern bourgeois society, … that has conjured up such gigantic means of production and of exchange, is like the sorcerer who is no longer able to control the powers of the nether world whom he has called up by his spells… • the history of industry and commerce is but the history of the revolt of modern productive forces against … the property relations that are the conditions for the existence of the bourgeois…. • In these [commercial] crises, a great part … of the previously created productive forces, are periodically destroyed. • there breaks out an epidemic that, in all earlier epochs, would have seemed an absurdity—the epidemic of over-production… • it appears as if a famine … had cut off the supply of every means of subsistence… • Because there is too much civilization, too much means of subsistence, too much industry, too much commerce… • And how does the bourgeoisie get over these crises?… by paving the way for more extensive and more destructive crises, and by diminishing the means whereby crises are prevented.”

  18. Marx the Classical Revolutionary • Crises, and splitting of society into two antagonistic classes, leads to revolution: • “the proletariat … becomes concentrated in greater masses… • The various interests and conditions of life within the ranks of the proletariat are more and more equalized, in proportion as machinery obliterates all distinctions of labor, and nearly everywhere reduces wages to the same low level… • The increasing improvement of machinery … makes their livelihood more and more precarious; • the collisions between individual workmen and individual bourgeois take more and more the character of collisions between two classes. .. • workers begin to form combinations (trade unions) against the bourgeois; they club together in order to keep up the rate of wages…”

  19. Marx the Classical Revolutionary • And it’s all inevitable… • “The essential conditions for the existence and for the sway of the bourgeois class is the formation and augmentation of capital; the condition for capital is wage labor… • The advance of industry … replaces the isolation of the laborers, due to competition, by the revolutionary combination, due to association. • The development of Modern Industry, therefore, cuts from under its feet the very foundation on which the bourgeoisie produces and appropriates products. • What the bourgeoisie therefore produces, above all, are its own grave-diggers. • Its fall and the victory of the proletariat are equally inevitable.”

  20. And behind the politics, the economics… • Basis of “inevitability” of social & political change was Marx’s view of forces of economic change • Labour only source of profit • But competition forces capitalists to undercut each other via technological development • Causes rising ratio of machinery to labour • Falling rate of profit… • Ultimately, workers revolt and usher in socialism… • Argument posed in terms of rate of surplus value, rate of profit, and organic composition of capital:

  21. Marx Pre-1857: the Labour Theory of Value • Three key variables • v: Value of labour-power • v for “variable” since labour alone, according to Marx, added new value • If worker’s weekly means of subsistence take 20 hours to make, and a chair takes a working week to make, then the chair contains 20 hours of v • c: value of machinery used up in production • c for “constant”, since according to Marx, machinery merely transfers its value to output • adds to value of output what it loses in depreciation • If machinery which took 10 hours to make wears out in making the chair, then the chair contains 10 hours of c

  22. Marx Pre-1857: the Labour Theory of Value • s: Surplus-value • difference between what worker is paid (v) and the number of hours worker actually works • If working week is 60 hours (common in Marx’s day), then s=60-(v+c)=30 • Three variables determine rate of surplus value and rate of profit:

  23. Problem: Tendency for rate of profit to fall • Capital to labour ratio tends to rise over time • Increased technology • Labour-saving inventions as response to struggle over income distribution. According to LTV: • as c rises relative to v, • rate of profit will fall • since surplus s proportional to v and independent of c. • This will cause class conflict, leading to socialism… • Marx lists many “countervailing tendencies”; nonetheless • No conclusive empirical evidence of tendency • Collapse of socialist states back into capitalist contradicts “inevitability of socialism”

  24. But there’s more to Marx than that… • Many aspects of Marx’s thought unaffected by correctness or otherwise of “inevitability of socialism” arguments: • Reproduction schema analysis of production (development and elaboration of Quesnay’s Tableau) • Theory of cycles • Cycles in capitalism caused by struggle over distribution of income • Critique of Say’s Law • Say’s Law ignores both capitalists and investment

  25. Reproduction Schema • Industry divided into 3 sectors: • I: Capital goods • II: Consumption goods • III: Capitalist consumption goods • Inter-sectoral dynamics considered • For balance, • wage bill of 3 sectors must equal output of II • investment plans of 3 sectors must equal output of I • Continued ideas of Physiocrats • Basis for 20th century input-output analysis

  26. Reproduction Schema Simple Reproduction: No accumulation Investment demand just equals capital output Wages+ capitalist spending just equal commodity output

  27. Reproduction Schema Expanded Reproduction: Accumulation & Growth Investment output exceeds capital use Wages+ capitalist spending equal commodity output, as before Extra 500 accumulated & reinvested

  28. Reproduction Schema • Prices (not shown) based on cost of production • Prices just cover costs in simple reproduction • Prices allow for re-investment of surplus in expanded reproduction • Schema is: • incompatible with LTV (transformation problem); • but can be used independently of LTV • Foundation of modern “input-output” analysis developed by Nobel Laureate Wassily Leontief

  29. Trade Cycle Theory • Heavily based on empirical observation of 19th century cycles • Also class-based model (Ch 25 Capital I) : • High wages  low investment • Low investment  low growth • Low growth  rising unemployment • Rising unemployment  falling wage demands • Falling wage demands  increased profit share • Increased profit share  rising investment • Rising investment  high growth • High growth  high employment • High employment  High wages: cycle continues • Made into mathematical model by Goodwin (covered in Dynamics lecture)

  30. Critique of Say’s Law • Two circuits in capitalism: • Commodity  Money  Commodity (C  M  C) • Objective to increase UV • EV constant, UV (qualitative) increased • Say’s Law applies • Money  Commodity  Money+ (M  C  M+) • Objective to increase exchange-value • UV irrelevant, EV increased, surplus produced • Say’s Law invalid in an economy with accumulation • Capitalists: “conceal” money • Seek money, not commodities, contra Say

  31. Critique of Say’s Law • “It must never be forgotten, that in capitalist production what matters is not the immediate use-value but the exchange-value, and, in particular, the expansion of surplus-value. • This is the driving motive of capitalist production, and it is a pretty conception that—in order to reason away the contradictions of capitalist production—abstracts from its very basis and depicts it as a production aiming at the direct satisfaction of the consumption of the producers.” (Theories of Surplus Value II, s 17.6)

  32. Marx Pre-1857: the Labour Theory of Value • Problem I: the “Transformation problem”: • If labour only source of surplus, then profit should be proportional to labour employed; • hence low capital/labor ratio industries should have higher rate of profit than high K/L industries.: s proportional to v c contributes nothing to profit only source of surplus Rate of profit “organic composition of capital”

  33. Marx Pre-1857: the Labour Theory of Value • But capitalists motivated by rate of profit • So for equilibrium, profit rate must be same across all industries • So prices must equalise rates of profit • High surplus-value in labour-intensive industries must somehow be moved to capital-intensive industries to equalise profit rates • “Value” therefore diverges from price

  34. Marx Pre-1857: the Labour Theory of Value • Problem of “transforming” values into prices. A 2 commodity economy example • Industry A: • 1000 hours labour + 1000 hours capital • Rate of surplus value 100% • Profit in value terms = 500 hours • Industry B: • 100 hours labour + 1900 hours capital • Rate of surplus value the same (100%) • Profit in value terms = 50 hours

  35. Marx Pre-1857: the Labour Theory of Value • BUT • competition tends towards uniform rate of profit: • 500/1500 + 50/1950 = 550/3450 = 13% • So price system must be consistent with • (1000 + 1000) x 1.13 = price value of output of A • ( 100 + 1900) x 1.13 = price value of output of B • Profit in money terms thus 13% in both industries • Prices thus differ from values and must cause transfer of value from labour-intensive to capital-intensive industries if Labour Theory of Value valid • Prices of labour-intensive industries must be below value • Prices of capital-intensive industries must be above value

  36. Marx Pre-1857: the Labour Theory of Value • The “transformation problem”: transformation of values into prices • 1,000s of “solutions” to transformation problem—none satisfactory

  37. The Transformation Problem • Steedman Marx After Sraffa gives definitive treatment: • Take hypothetical economy with 3 goods: Iron, Gold, Corn • Take hypothetical wage (in terms of corn) • Convert physical data into labor-values according to Marx’s rule that labor is the only source of surplus • Then impose equilibrium condition that price competition equalises rates of profit across industries • Outcome will be a set of prices which are • inconsistent • prices don’t enable industries to buy their inputs • superfluous • prices can be derived directly from input-output data without having to work out labor-values

  38. The Transformation Problem • Steedman’s example economy: • Assume total wage equals 5 units (e.g., bushels) of corn • Net (surplus commodities) output is then • 3 units of corn • 48 units of gold • Call the value of one unit of labor input “1”. Then 3 simultaneous equations determine “labor values” of one unit of iron, gold, & corn:

  39. The Transformation Problem • For Iron: For Gold: For Corn: Value of labor (subsistencewage) = 5 units of corn: Surplus Value=Total labor minus V: Rate of Surplus Value same across all industries So 3/4 of labor input is v, 1/4 is s:

  40. The Transformation Problem • Converting physical data to value terms: Now apply uniform rate of profit to work out prices: Per unit prices of iron, gold & corn are supposedly:

  41. The Transformation Problem • But these “output prices” differ from “input prices” initially worked out (of iron=2, gold=1 & corn=4) • Even if both inputs and outputs “transformed”, “prices” differ from those calculated straight from raw input/output data:

  42. The Transformation Problem • Marx’s “labor theory of value” prices are • inconsistent • don’t enable each industry to buy its inputs • Marx’s rate of profit (45.5%) inconsistent with rate worked out from basic input-output data (52.1%) • superfluous • prices can be derived from direct input/output data • and these prices are consistent

  43. Marxism Today: the Labour Theory of Value • Current status of Marxian economics: • In crisis after fall of communism • Minority of adherents, still trying to solve technical problems • Allegiance based on Marx’s grand vision, rather than analytic strengths • Marxism no longer taken seriously by most economists (though still popular with radical groups) • So if this was all there was to Marx’s economics, it doesn’t look good for Marx… • BUT…

  44. Marx Post-1857 • There is an alternative Marx… • Without the labour theory of value • Coherent alternative to neoclassical economics • Pre-1857, accepted Smith/Ricardo on use-value & exchange-value • Exchange-value determines price • Use-value pre-requisite for exchange • “Utility then is not the measure of exchangeable value, although it is absolutely essential to it” [Ricardo OREF I] • No role for use-value beyond pre-requisite to exchange • Post 1857, a whole new interpretation of use-value • Continued next lecture…

  45. Recap/Overview Post-1857 Marx • Classicals: labour measure of value • Marx pre-1857: labour only source of value • Logical problems: • Failed predictions • Falling rate of profit • Inevitable revolt into socialism • Technical Flaws: “Transformation problem” • Essentially insoluble • But a neglected “revolution” in Marx’s thought • Completed classical theory of value • Transcended LTV & its problems

  46. Marx Post-1857 • Pre-1857, accepts Ricardo on UV & EV • EV determines price • UV pre-requisite for exchange: • “Utility then is not the measure of exchangeable value, although it is absolutely essential to it” [Ricardo OREF 131] • But no role for UV beyond pre-requisite • 1857, writing “rough draft” of Capital • Re-read Hegel • Insight: dialectics and economics, a role for UV

  47. Dialectic of the commodity • 1857, revelation: re-read Hegel and considered application of dialectics to commodity • "Is not value to be conceived as the unity of use-value and exchange value? In and for itself, is value as such the general form, in opposition to use-value and exchange value as particular forms of it?” [OREF 210] • Capitalism brings exchange-value to fore, pushes use-value into background (accumulation of money wealth the “aim of the game”, not ) • Price based on Exchange-value (EV) • Use-value (UV) irrelevant to price, as for Ricardo • But: dynamic tension between UV & EV. UV not irrelevant to economics:

  48. Society Fore-ground Back-ground Unity Dialectical Tension Dialectics of the Commodity Application to “centralunity” in capitalism, thecommodity: General principle CapitalistSociety Use-Value Exchange-Value Commodity Dialectical Tension Applied to economics...

  49. Dialectics of labour • EV of work brought to fore: EV of worker: subsistence wage • UV of worker in background: irrelevant to wage • But UV of worker: ability to produce commodities for sale • Gap between (objective, quantitative) UV and EV of worker is source of surplus-value (SV): • “The past labour that is embodiedin the labour power, and the living labour that it can call into action; the daily cost of maintaining it, and its daily expenditure in work, are two totally different things. The former determines the exchange valueof the labour power, the latter is its use-value.” [Capital I, 199]

  50. Dialectics of Labor CapitalistSociety Foreground: Exchange-Value determines (subsistence) wage Background: Use-Value (ability to produce commodities for sale) Labor Dialectical Tension: a source of surplus value

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